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Cobra Electronics (NASDAQ:COBR)

Q4 2013 Earnings Call

February 19, 2014 11:00 am ET

Executives

James R. Bazet - Chairman and Chief Executive Officer

Robert J. Ben - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary

Sally A. Washlow - President

Analysts

James Fronda - Sidoti & Company, LLC

Bruce C. Baughman - Franklin Templeton Variable Insurance Products Trust - Franklin Small Cap Value Securities Fund

Bruce C. Baughman - Franklin Advisory Services, LLC

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cobra Electric -- Electronics Corporation Fourth Quarter 2013 Investor Conference Call. [Operator Instructions] This conference is being recorded today, February 19, 2014, and I would now like to turn the conference over to Mr. Jim Bazet, Chairman and Chief Executive Officer. Please go ahead, sir.

James R. Bazet

Thank you, operator, and welcome to the Cobra Electronics fourth quarter results conference call. With me today, I have Bob Ben, Senior Vice President and Chief Financial Officer; and Sally Washlow, our President. Each of them will have an opportunity to address our results shortly, and I'll be able to respond to any of your questions at the conclusion of our call.

I will now ask Bob Ben to give some opening remarks regarding today's call.

Robert J. Ben

Before we begin, please keep in mind that our call today will include certain forward-looking statements, and that actual results could differ materially from the results projected in the forward-looking statements. We refer you to our Forms 10-K and 10-Q, especially the Risk Factors, for information that could cause actual results to differ materially from the results projected in the forward-looking statements. Please also keep in mind that this conference call is being simultaneously broadcast over the Internet and a replay will be available on the Cobra website for 30 days.

Now I'd like to turn the call back to Jim Bazet to share his thoughts on our fourth quarter performance.

James R. Bazet

Thanks, Bob. I'd like to provide some highlights and thoughts on our performance for the fourth quarter. This morning, we reported to our shareholders a 42.2% increase in net income over Q4 of 2012. Net income was $1.9 million or $0.29 per share for the fourth quarter of 2013, compared to net income of $1.4 million or $0.21 per share in the fourth quarter of 2012. In addition, there was operating income of $1.8 million for the current quarter, compared to an operating income of $1.4 million in the same quarter last year. For the year which included the Fleming patent litigation cost, Cobra reported a net loss of $1.1 million or $0.17 per share as compared to a net income of $3.2 million or $0.48 per share in the prior year, and an operating loss of $1.7 million as compared to an operating income of $3.3 million in fiscal year 2012.

I'd like to spend some time reviewing the fourth quarter net sales results and the key drivers. First, consolidated net sales for the fourth quarter of 2013 were $35 million as compared to $35.7 million in the fourth quarter of 2012, due to a drop in the Cobra reporting segment. Cobra segment net sales were $1.5 million or 4.5% lower than that of prior year's fourth quarter. The drop in these sales for the Cobra segment resulted from lower domestic sales, primarily of Detection and Truck Navigation products. The decrease in sales of Detection products reflected reduced sales of 2 large retailers experiencing lower sell-through, in part due to the shift towards online sales. The lower sales of Truck Navigation products resulted from lower sell-through experienced by travel centers generally and increased competition. However, these decreases were partially offset by a 27% increase in European sales of radar detectors and new Marine Radios, as well as sales of Dash Cams and a new category.

PPL segment sales were $724,000 or 25.4% higher than the prior year's fourth quarter. This sales increase was attributable to a more than 40% increase in sales of Truckmate Navigation products.

Turning to the sales of new products in the fourth quarter. Sales of Dash Cams included the introduction of a new model at the very end of the fourth quarter. In addition, the all-new 8500 PRO Truck Navigation model was introduced at the very end of the fourth quarter. Sally will talk more about these exciting new products shortly.

Finally, as part of our growth initiatives, we have many innovative new products, which were on display at the Consumer Electronics Show in January and will be introduced throughout 2014. Sally will also talk about these in more detail and about CES a little later on.

Turning to our outlook for the first quarter of 2014 and our entire year. As noted in our press release this morning, we expect a seasonal operating loss in the first quarter of 2014 to be substantially smaller than the first quarter of 2013. In addition, the company anticipates a significantly improved level of operating income in 2014 due to the introduction of many exciting and innovative new products, many of which were well-received at the recent Consumer Electronics Show, as well as planned geographic expansion of our distribution and increased penetration into the online sales channels.

In conclusion, we believe that our company will show a significant improvement in 2014 and is positioned for future quarters for the following reasons: First and always, our strong brand name and growing brand equity and our company has been in business for more than 50 years. The Cobra brand products are sold in more than 75 countries and 55,000 storefronts today and growing. In addition to beginning expansion into South America, I'm pleased to announce new sales distribution in China, which will begin in 2014. We are also rolling out a new expansion plan for Europe. Last quarter, we discussed the newly redesigned Cobra website. I am pleased that online sales on cobra.com and sales of Cobra products through other online stores continue to expand at a very rapid rate. Again, Sally will discuss these new developments and these channels in a minute. We will continue to use this expanding network to be more promotionally oriented to increase the sell-through of our products and plan to make further improvements in order to increase sales in the first quarter of 2014 and well beyond.

Finally, we continue to introduce and develop exciting, award-winning new products to take advantage of our marketing and distribution channels and also, to target a younger consumer. We are also continuing to work at a fast pace on these growth initiatives.

At this point, let me turn the call over to Bob, and then Sally will discuss with you our sales, marketing and product initiatives, including the highly successful Consumer Electronic Show. We will then open the call for questions. Bob?

Robert J. Ben

Thanks, Jim, and good morning, everyone. As Jim noted earlier, Cobra reported a net income for the fourth quarter of $1.9 million or $0.29 per share as compared to net income in the prior year's fourth quarter of $1.4 million or $0.21 per share. The higher net income, compared to the fourth quarter of 2012, resulted from significantly reduced selling, general and administrative expenses, higher other income and a lower cash provision.

The company achieved net sales of $35 million in the current quarter, which was a 2% drop from the fourth quarter of 2012. Consolidated gross margin for the fourth quarter of 2013 was 28.3%, compared to 28.8% for the fourth quarter of 2012, primarily as a result of a less favorable sales mix and certain seasonal promotions in the PPL segment.

For the Cobra segment, the gross margin was 28.1%, compared to a 28.0% in the fourth quarter of last year due to the introduction of new higher-margin Citizens Band radio model in South America. PPL's gross margin decreased to 30.8% from 38.9% in the fourth quarter of last year, which reflected mainly more close-out sales at reduced margins and seasonal promotions for certain products.

Turning to selling, general and administrative expenses. This decreased to $8.1 million from $8.9 million in the prior year's fourth quarter. Variable selling expenses declined consistent with net sales. Fixed expenses decreased as well as a result of lower legal and management incentive expenses and the implementation of expense reduction measures.

Interest expense for the fourth quarter of 2013 was $263,000, compared to $271,000 in the same quarter of 2012, which reflected lower average debt during the quarter. Other income was $482,000, compared to other income of $337,000 in the prior year's quarter, primarily due to a higher gain on the cash surrender value of life insurance that the company owns for the purpose of funding deferred compensation programs for certain current and former officers of the company.

And finally, a tax provision of $46,000 was recorded in the current quarter as compared to an $83,000 cash provision in the fourth quarter last year, mainly due to a drop in the U.K. tax rate for PPL.

Looking at fiscal year 2013 and comparing it to fiscal year 2012, net sales were $111.2 million as compared to $118.9 million in 2012, primarily due to a significant drop in sales to travel centers in the U.S. The gross margin for 2013 was 27.2%, a decrease of nearly 2 points from last year's gross margin, which was primarily due to a less favorable product mix as a result of lower sales to travel centers.

SG&A expenses increased to $32.0 million from $31.2 million in 2012 due to significant expenses for the Fleming patent litigation in the first 2 quarters of 2013. As a result, the company reported net loss for the year of $1.1 million or $0.17 a share, compared to a net income of $3.2 million or $0.48 per share in the prior year.

Moving to a review of the December 31 balance sheet. Accounts receivable at the end of the quarter were $19.3 million, compared to $20.9 million 1 year earlier, due to lower sales in the Cobra segment. In addition, day sales outstanding decreased to 65 days, compared to 67 days in the prior year's fourth quarter. Inventories at the end of the fourth quarter decreased to $35.8 million from $38.1 million at December 31, 2012, as a result of tighter inventory management. As a result, Cobra had interest bearing debt of $20.7 million, compared to $20.3 million at December 31, 2012, and cash of $3.1 million at the end of 2013, compared to cash of $1.8 million at December 31, 2012. This excess cash was primarily due to timing of foreign cash receipts.

Now I'd like to turn the call over to Sally to provide you with an update on our markets and products. Sally?

Sally A. Washlow

Good morning. As part of the fourth quarter earnings call, I will review the results of the Consumer Electronics Show, CES, several new products and our sales and marketing initiative. CES was held in Las Vegas in the second week of January. Attendance at CES was strong, and unaudited numbers are indicating over 150,000 attendees, with over 35,000 attendees from 150 countries outside of the United States. Cobra representatives were on hand throughout the week to preview all of our leading-edge consumer electronics innovation for the driver enthusiasts, professional driver, outdoor recreationists and boating customers.

I will begin our product overview with the Detection category. Cobra's latest in Radar Detection technology, the supercharged SPX 7800BT, was a CES Design and Engineering Award honoree presented by the CEA. This prestigious award was given to the detector that is groundbreaking in size as the world's smallest radar detector and offers more than double the detection range and performance of previous models. The SPX 7800BT also provides access to the Cobra iRadar community for live speed trap, red light camera and other hazardous alerts. The SPX 7800BT has a retail price of $259.

The Cobra iRadar also received another prestigious award and was named a silver winner for the Cobra iRadar ATOM in the Best in Biz Awards, the only independent business award program judged by members of the press and industry analysts. Best in Biz Awards 2013 honors were presented in more than 50 categories, with more than 500 entries received this year, including a wide array of public and private companies of all sizes and from a variety of industries and geographic regions in the -- along the U.S. and Canada.

The iRadar ATOM is one of the smallest and most powerful radar/laser/camera detection systems ever developed. When the ATOM pairs to the iRadar app, traffic alerts can be shared in real-time with other iRadar users, including warnings on speed and red light cameras, speed traps, dangerous intersections and live police location. In addition, when the ATOM detects a radar or laser alert, it automatically shares this data with the rest of the community and notifies users when entering high-threat areas. The Cobra iRadar ATOM has a suggested retail of $199.

As Jim mentioned, we developed a series of Drive HD Dash Cams to deliver peace of mind, security and even some entertainment for drivers. Cobra's series of Drive HD cams record everything drivers see in full 1080P video. Drive HD Dash Cams are the perfect solution to continuously report your surroundings and keep you and your vehicle safe and secure. An embedded G-Sensor automatically saves clips where an impact has been detected, and the high-end model, the CDR 830, includes GPS to simulcast video and your precise location on a Google Map. The Drive HD Dash Cams range in price from $119 to $159.

The professional driver has been a core customer of Cobra. To further our commitment to this customer, Cobra introduced, at the end of December, the 8500 PRO HD Navigation System. The 8500 PRO HD is Cobra's most advanced GPS navigation device for professional drivers, with a completely redesigned intuitive user interface and software with an enhanced map and graphics. Added features include exclusive, live diesel fuel prices, live weather from Velocity Weather, Google Search via Wi-Fi, Junction View with Lane Assist, state mileage logs, trip cost calculator and hours-of-service service timers, along with lifetime access to Cobra's AURA Database of speed and red light cameras. With an ultra-bright 7-inch touchscreen display, this model offers the sharpest display on the market. The 8500 PRO has a suggested retail of $399.

Furthermore, to support the professional driver, we have been working closely with our channel partners to drive business through unique promotions, such as bundle product offerings and coordinating key product launches to maximize fit.

Turning to another strong and developing category for us that utilizes Bluetooth wireless technology is the Cobra AirWave Series. The Cobra AirWave 360 is a portable 8-inch Bluetooth surround-sound speaker that features Apple's Siri Voice enablement and gesture control for enhanced 360 sound quality and up to 20 hours of music playback. The Cobra AirWave 360 has a suggested retail of $149.

Additional Cobra AirWave model designed for rugged use are the Cobra AirWave Mini and the Cobra AirWave Box. The Cobra AirWave Mini features a weatherproof resistant exterior, and the Cobra AirWave Box utilizes a rugged floating waterproof design for complete immersion in water. Both models feature up to 10 hours of playback time and up to 120 hours of standby time. The Cobra AirWave Mini has a key suggested price point of $39, and the AirWave Box is at $79.

Turning to marine products, we introduced the Cobra HH450 DUAL All-Terrain-Radio for year-round multipurpose use. This rugged and compact floating radio features both VHF and GMRS technology. The unit also provides both short- and long-range communication and includes a SAME weather radio to provide access to nearby weather alerts.

Further expanding upon our products with weather radios, not only do many of Cobra's 2-way radios have normal weather radio alerts. Cobra has introduced a standalone all-hazards alert radio with a TORNADO button that limits unwanted interruption and only notifies users of tornado-related warnings. This rugged radio also has a built-in LED light and can also charge other electronic devices via micro-USB. The CWR will ship at the end of this quarter with a suggested retail of $39.

We also have expanded our power products category beyond power inverters, and we are proud to introduce a new line of power packs with unique features at key price points. The first series of expanded products utilize solar panel energy to create long-lasting power. Both models, the CPP 100 and CPP 300, integrate high-efficiency solar panels and allow users to charge their mobile devices multiple times. Both models feature a 6,000 milliamps lithium ion battery and can be charged using both the solar panel and USB port. The CPP 100 includes a 2.1 Amp Outlet and LED Battery Status Indicator. The CPP 300 features an LCD Battery Status Indicator. The suggested retails range from $49 to $99.

The other and very exciting new offering from Cobra is the Cobra JumPack. This is both an extension of our jump starter and our power products. So this ground-breaking jump starter is smaller than most tablets. The Cobra JumPack is a dual-purpose jump starter and portable power pack. The JumPack is an ideal emergency power for a home, vehicle or outdoors. Featuring a 200-amp starting current and 400-amp peak current, 2.1-amp USB output and a 7,500 milliamp lithium cobalt battery with an LED Battery Status Indicator, the CPP 7500 offers users the reliability and convenience to charge multiple devices during low battery levels and is ideal for travelers and multipurpose users. The CPP 7500 was unveiled at CES and will be available in the second quarter at a suggested retail of $129.

Turning to new market. At the end of the year, we shipped a new line of Citizens Band radio to South America and expect further growth and expansion in the region. We are also in the process of setting up expanded distribution throughout Asia and are attending key trade shows with our partners to establish a market and product programs. We will be updating you in the future on the results of these efforts. This concludes my overview of our recent efforts, and we remain excited and optimistic regarding our future and we look forward to sharing our results with you.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of James Fronda with Sidoti & Company.

James Fronda - Sidoti & Company, LLC

I was under the impression we'd see some revenue growth during the quarter from new products. Were there new products in the mix during the quarter? Can you just talk a little bit about that?

Sally A. Washlow

There were -- this is Sally. There were some products that shipped at the very end of the quarter. One was the new Truck Navigation unit that's really just hitting the stores in January, February time frame, along with some of our Dash Cam shipped at the very end of the quarter as well.

James Fronda - Sidoti & Company, LLC

Okay. And I guess, just for the SG&A expense for 2014, do you expect it to be lower or relatively in line from a year ago?

Robert J. Ben

James, it's Bob Ben. We do expect some increase in SG&A because we are forecasting an increase in sales and a significant increase in operating income. So there -- there's expenses that are variable with sales, and we can't grow the businesses that we are planning to without any increase in SG&A.

Operator

And our next question comes from the line of Bruce Baughman with Franklin Templeton.

Bruce C. Baughman - Franklin Templeton Variable Insurance Products Trust - Franklin Small Cap Value Securities Fund

Regarding -- the release refers to an operating loss substantially smaller than the first quarter of 2013 in 2014. Is that expectation based on the revenue increase that you're talking about, or are there other factors like mix, gross margin, operating expense?

Robert J. Ben

Bruce, it's Bob Ben. As I just said to James, for 2014, and this is true for the first quarter as well, we are expecting a sales increase and -- as well as controlling SG&A expenses. And so we expect that will contribute to the substantially smaller seasonal operating loss. As you know, historically, in the first quarter, the company has reported a seasonal operating loss, but it was substantially smaller in the first quarter of 2014 than in the first quarter of 2013.

Bruce C. Baughman - Franklin Templeton Variable Insurance Products Trust - Franklin Small Cap Value Securities Fund

Jim, are you expecting the lower operating expense beyond what you'll save by not having the Fleming litigation? If you back out the Fleming litigation from last year, do you still expect to have a lower SG&A?

Robert J. Ben

Bruce, it's Bob, again. Slightly, again -- remember, there's a component of SG&A that's variable with sales, and so when you have a substantial increase in sales, you're going to have some increase for that. And yes, we are planning to control expenses, but we also are making investments, as we mentioned, the new products, the geographic expansion. And that doesn't come at the same level of expenses, but they will be smaller, certainly, than they were in the first quarter in 2013.

James R. Bazet

Bruce, this is Jim. We also sit down monthly and quarterly and review our operating expenses to be sure that we're not having death by 1,000 cuts and beginning to add back unnecessary expenses that is not necessarily driving business, so we say stay on top of this quarterly.

Bruce C. Baughman - Franklin Templeton Variable Insurance Products Trust - Franklin Small Cap Value Securities Fund

Okay. I just want to be real clear, though. Are you expecting lower expenses for the quarter -- for the first quarter and for the full year 2014 apart from not having the litigation and settlement for the Fleming litigation?

Robert J. Ben

Well, again, [indiscernible] variable expense. So I would have to say, overall, the expenses are going to increase in 2014, but sales are going to increase as well, and so you have to keep all that in mind.

Bruce C. Baughman - Franklin Advisory Services, LLC

Okay. So even without the Fleming litigation, expenses will increase?

Robert J. Ben

That's correct.

Operator

[Operator Instructions] And our next question comes from the line of Timothy Stabosz with private investor.

Timothy Stabosz

Just read the release here. I just got in on the call a short while ago, so just really wet behind the ears here. Are we all fine now on any aspects of liquidity or -- not that we had a liquidity problem, but I thought we were tight on the covenant at one point or had to get a waiver. Are we going to be fine, do we think? Are we fine now or are we going to be fine throughout the calendar year here on that?

Robert J. Ben

Tim, it's Bob Ben. Yes, I'm confident that we will receive a waiver for the fourth quarter in that compliance soon. And in addition, we're also working with our bank on some additional flexibility on the covenant -- quarterly covenant going forward, so yes [indiscernible].

Timothy Stabosz

Is it too soon and impertinent to be -- considering the context of the situation -- be talking or asking a question about stock buybacks or dividends by the end of -- by the -- later this year in a turnaround, Jim?

James R. Bazet

A little early, Tim, but I think it deserves addressing, and there's a couple of things we have to keep in mind. We review different elements of financial engineering such as stock buybacks and other things on a quarterly basis in terms of whether or not these things make sense for us and whether or not we can do them, quite frankly. Right now, coming out of -- coming off of a year that was -- has been disappointing because of primarily the Fleming matter, we are not going to do any stock buybacks at this point in time, and we have to be sure that the use of our capital for our shareholders is to increase revenue and operating profit for the company. And then we -- I go back to the other situation, too, as we do have some restrictions in our credit agreement about these things. It doesn't mean we would never do them, and certainly it doesn't mean we would never consider them. But right now, we're trying to focus on returning to a stable performance.

Timothy Stabosz

Do we have disclosed in the press release here or will there be, in the K, a disclosure of what the actual expense was in 2013 for Fleming?

James R. Bazet

No, Tim, there won't. Unfortunately, we have to -- we have an agreement signed them, a nondisclosure agreement, on all of the facts surrounding this matter.

Timothy Stabosz

And so we're allowed based upon requirements of GAAP disclosure to just lump that in SG&A, or is pretty much the way it works?

Robert J. Ben

Yes, Tim. It's -- for accounting purposes or reporting purposes, it's not deemed as significant as to have to break out separately.

Operator

[Operator Instructions] And I'm showing no further questions at this time. I would like to turn the call back over to Mr. Bazet. Please go ahead, sir.

James R. Bazet

Thank you, operator. As always, we certainly appreciate your participation today. As with our industry and some other industries, we have experienced somewhat inconsistent sales. However, at the same time, we feel we're well positioned overall. Our plan to introduce exciting new products and categories and expand distribution in several key geographic areas and online is and will continue to enable Cobra to become more profitable in 2014 and beyond. We will not cut back on product development or other growth initiatives as it represents our future.

As we noted in our press release this morning, we expect a substantially smaller seasonal operating loss in the first quarter of 2014 than in the first quarter of 2013. And in addition, we anticipate significant level of operating income above 2013 in the fiscal year of 2014. Also, we have a strong balance sheet and a value priced stock.

Please do not hesitate to call anyone if we can be of any further assistance from this call. And finally, again, thank you for your continued support of Cobra Electronics. Operator, this concludes our 2013 Fourth Quarter Investor Conference Call.

Operator

Thank you. Ladies and gentlemen, this does conclude the conference for today. Thank you for your participation. You may now disconnect.

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