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Executives

Charles Stoehr - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Director

Glenn Wiener -

Patrick Lavelle - Chief Executive Officer, President and Director

Analysts

Gary North

Thomas Kahn - Kahn Brothers

Audiovox (VOXX) Q4 2010 Earnings Call May 17, 2010 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Audiovox Fiscal Year 2010 Conference Call. My name is Noelia, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Glenn Wiener. Please proceed, sir.

Glenn Wiener

Welcome to Audiovox's Fiscal 2010 Fourth Quarter and Year-End Results Conference Call. As you know, today's call is being webcast on our site, www.audiovox.com, and can be accessed in the Investor Relations section. With us today are Patrick Lavelle, President and CEO; Michael Stoehr, Senior Vice President and CFO; and John Shalam, Chairman of the Board.

Before we begin, I'd quickly like to remind everyone that except for historical information contained herein, statements made on today's call and webcast that would constitute forward-looking statements may involve certain risks and uncertainties. All forward-looking statements made are based on currently available information, and the company assumes no responsibility to update any such forward-looking statements. Risk factors associated with our business are detailed in the company's Form 10-K for the fiscal year ended February 28, 2010.

This time, I'd like turn the call over to Pat Lavelle. Pat?

Patrick Lavelle

Thanks, Glenn, and good morning, everyone. We released, for our fourth quarter and fiscal year, on Friday after the market closed, reporting net income of $22.5 million or earnings per share of $0.98, compared to a net loss of $71 million or $3.11 per share last fiscal year. This rather dramatic swing to the positive side is the result of several factors: We improved gross margins despite lower sales; we made smart overhead reductions that had made us leaner, but, at the same time, have not affected services we provide our customers; we have made some very strategic acquisitions, which have helped our core businesses enter in these difficult economic times; we're continually realigning operations to drive synergies throughout the company, which contributed to our profitability; and we had a positive tax adjustment, which Mike will address when he speaks to you in a few minutes.

For the year, sales were 8.7% lower than fiscal 2009, despite lower volume we reported and almost 300-basis point improvement in our gross margins. And excluding the 2009 fiscal year charges for impact of goodwill and intangible asset impairment, our core overhead was down more than $11 million, and this includes the additional expenses from the SCHWAIGER and Invision operations.

Fourth quarter sales were up almost 30% over last year, led by sales from acquisitions, increased satellite radio sales, improvements in the OEM automotive sector and the launch of new FLO TV programs in both the automotive and consumer. Margins came in at over 20% for the quarter, the highest level they have been in several years. But I fully expect them to settle in the 18% to 19% range based on the projected product mix for this year, which includes increased fulfillment sales that traditionally carry lower gross margins.

As I look back at the year, I believe we took the necessary steps to weather some of the most difficult economic issues that this company or, for that matter, the U.S. economy has had to face. Our retail partners have been hit hard by lower consumer spending and inventory overhead. New products that we planned to introduce were delayed, as we waited for retailers to clear stocks. The automotive industry was dealing with major bankruptcies and significantly lower-cost sales. Viewerships were closing across the country.

All of these factors hurt our sales. We had to react quickly and aggressively to realign our business to return the company to profitability, and I am pleased with what we were able to accomplish. Our cost-cutting initiatives, which began in fiscal '09, continued throughout the year. And we lowered our core overhead, even while adding acquisition expenses. We expect that as business improves, some of the costs that were temporarily will come back this year. But overall, loss costs were permanent. And as a result, we are operating lean and positioned for profitability.

We kept new product development programs at pre-recession levels to ensure we would continue to maintain our reputation for state-of-the-art technology and cutting-edge, higher-margin products.

In our Consumer group, our consumer electronic sales posted better fourth quarter results than in fiscal 2009. And we are hopeful that this trend will continue. In Accessories, our number one antenna market share helped us capitalize on the transition from analog to digital TV, with strong RCA and Terk antenna sales. Additionally, we have launched a number of new high-end remote controls and wireless accessory products, which helped fuel Accessories sales growth by over 14%.

On the Mobile side, we have counter-depressed car sales by delivering exciting products, like FLO TV and our Sony PlayStation rear-seat entertainment system. Also, in Mobile, we have made strategic moves to strengthen our core business by taking over exclusive distribution for Omega security products, adding SIRIUS satellite radio products to our mix and acquiring Invision this past February.

The Invision acquisition is significant because we believe the OE sector has great upside potential for our company. We already count the OEs as customers through programs with our security, remote start and video products. With the addition of Invision, we not only pick up additional sales and broaden our engineering capability, but we also will be able to use this acquisition to expedite new rolling programs like FLO TV. We expect fiscal 2011 OE sales to exceed $100 million. And we are now supplying customers such as GM, Ford, Chrysler, Nissan, Toyota, Hyundai, Kia, Subaru, Mazda, Porsche and BMW and expect to win a few more during the year.

We have been able to expand our engineering capabilities to meet these taxing development requirements of the OEs. We've added key project management, and we have the financial resources to provide the level of support required for OE programs. With this acquisition, we also believe we now have the broadest IT portfolio in the rear-seat entertainment space.

As we look to fiscal 2011, there is no question that the economy will continue to play a role in sales and profit levels. With that said, I believe we are positioned for top line growth and continued profits. The addition of Invision, SCHWAIGER and Omega strengthens our product lines and broadens our distribution further. We have great retail accounts, the best aftermarket automotive distribution in the industry, and an increased focus on OEs and A+ partners, i.e, QUALCOMM, Sony, Barnes and Noble and SIRIUS XM to name a few.

The U.S. economy appears to be stabilizing, but discretionary spending and unemployment are still concerns. Some retailers are reporting better numbers, but no one is predicting robust growth. So we remain vigilant in our buying programs, and will not take on any undue exposure in our inventory positions. This strategy paid off in 4Q, and I believe will aid us and re-emerge from this recession.

The automotive industry is improving year-over-year, but it's not yet stabilized. April sales were up 20% over the last year, but down 9% on a more robust March. Companies such as Ford, GM, Chrysler and Toyota all reported strong months, and the industry is now predicting over 11 million cars this year, which is up over half a million cars since I spoke with you last quarter. If the industry hits projections, we can expect our core Automotive business to increase over last year.

I expect our Mobile business to be positively impacted by higher sales in FLO TV, as they grow in concert with increased consumer awareness to the certs. We are currently supplying FLO TV systems for the car, as well as distributing the FLO Personal TV [FLO TV Personal] at retail. And in the coming months, we intend to launch other FLO-enabled and FLO-ready products.

As I just mentioned, we expect growth in our OE business as a result of new contracts recently awarded, strong remote start sales and rear-seat entertainment sales.

In our Consumer Electronics group, we will deliver our first e-Reader, complete with Barnes & Noble content. And while this is becoming a crowded marketplace, it is also explosive. And we believe our various brands will help us secure market position as one of the top suppliers in the category.

In Accessories, we have just launched voice-activated remotes under the RCA brand. And we'll follow with July delivery of the One-For-All Smart Remote line. Identical products that expand the use of your Blackberry and iPhones control other functions in your home is scheduled for the summer. We have major promotions scheduled for wireless products this summer on QVC and in-store at Lowe's and Myers. And as the primary accessory supplier to hhgregg, we are enjoying good growth as they continue to expand their market share.

International sales improved this past year driven by SCHWAIGER. And although we have projected overall growth in our international operations, we are concerned with the sovereign debt issue in Europe and the volatility that has created, as well as the uncertainty in the Venezuelan market. We have factored most of these issues into projections, and we will be looking at these operations closely and making the necessary adjustments to respond to the changing economic landscape.

In closing, fiscal 2010 was a challenge, but it ended with improving results. Our cash position is strong even after recent acquisitions. Currently, our cash position is $89 million. And we will continue to see acquisitions that will strengthen our core business and allow us to leverage existing overhead. We operate this business with its long-term success as our primary objective. And we will continue to focus our intention on increasing shareholder value, while we continue to grow Audiovox.

Michael will cover our financial results in detail now, and then we'll open it up for questions. Thank you. Mike?

Charles Stoehr

Thanks, Pat. Good morning, everyone. Let's start with our annual performance. We reported $550.7 million in sales, a decrease of 8.7% compared to $603 million last fiscal year; accessory sales were $175.7 million, an increase of 14.3%; and electronic sales were $375 million, or 16.6%.

Within Accessories, we had several new products come to market under the RCA, Terk and Acoustic Research and new customers, which helped the overall business. Additionally, during the first half of the year and first quarter, in particular, we benefited from higher sales of antenna products related to the transition from analog to digital TV. Additional sales from our recent acquisition of SCHWAIGER were $13.4 million for the fiscal year.

The decline in our Electronics group, as we have previously discussed, was anticipated due to the difficulties of the automakers and lower car sales, as well as the inventory overhang at retail, which impacted our first and second quarter performance. Retail buying was very slow during these periods, and we adjusted our buying programs and inventory accordingly.

We also chose not to participate in a number of seasonal promotions due to lower margins in portable DVD and select digital product lines, programs we did participate in during the prior fiscal year. Lastly, we closed out several product lines in fiscal 2009, which were not included in this past year's results, such as flat-panel TVs, portable navigation and GMRS radios.

Lower-cost sales in the first half also hurt our Electronics group, though we were able to offset some of these declines with higher sales of satellite radio products and the introduction of FLO TV and one month of sales from our recent acquisition of Invision of approximately $4 million.

Consolidated gross margins for the year increased 280 basis points to 19.4% versus 16.6% in fiscal 2009. This increase for fiscal 2010 resulted to newer, higher products being introduced, improvements in our inventory positions. Additionally, margins were aided by our acquisition of SCHWAIGER.

Finally, we were able to obtain better freight costs this year. Margins came in slightly above our projections at the beginning of the year, primarily due to product mix as Accessories represented a larger percentage of our overall sales.

Overhead for fiscal 2010 declined by $50.8 million. Fiscal 2009 operating expenses included $38.8 million of goodwill intangible asset charges, as well as a $1 million one-time charge related to overhead reduction programs and cost containment efforts and a charge of $2.6 million for systems breach.

Excluding the impact of these charges, our overhead for fiscal 2010 was down for the comparable fiscal years. We also note that fiscal 2010 overhead included approximately $6.8 million incremental costs associated with the issuance of stock options and warrants, and operating expenses for our acquisition of SCHWAIGER and Invision. Our employee headcount was reduced by 18% prior to acquisitions, and we realized additional savings in advertising occupancy costs, employee benefits, professional fee and T&E [travel and entertainment].

As Pat mentioned in the prior call, some of the temporary expense reductions would come back. And in the fourth quarter of fiscal 2010, we'll return the 10% salary reduction to employees below 80 in executive management. This took place in the fourth quarter and the amount was $2.5 million. We continue to evaluate our cost structure and adjust where needed to drive profits to the bottom line.

Other income increased approximately $9.9 million as a result of a $5.4 million marketing purchase gain due to our SCHWAIGER acquisition and the absence of charges associated with a vendor bankruptcy in prior fiscal year, and a gain recorded on foreign change contracts used for our U.S. dollar purchases in Germany. This was partially offset by the other-than-temporary impairment on the equity investment of the company. Interest and bank charges decreased due to reduction of debt in our international subsidiaries and equity income of our equity investees increased due to higher inequity income of ASA.

Pre-tax income was $11.2 million compared to a pre-tax loss of $56 million from the prior fiscal year. During fiscal 2010, we recorded income tax benefits of approximately $11.3 million. These benefits were the results of the Worker Home Ownership and Business Assistance Act of 2009, which allowed us to record an income tax benefit of $10.1 million in connection with carryback of certain operating losses and recognition of $3.2 million of uncertain tax positions, as a result of expiration of various tax implementation, offset by a $2 million payment in foreign and state taxes.

We posted net income of $22.5 million, or earnings per share of $0.98, versus a net loss of $71 million, or a loss of $3.11 a share for fiscal 2009.

For the fourth quarter, our sales were $150.3 million versus $115.7 million, an increase of 29.9%. Included in the quarter sales were sales of $11.5 million related to our recent SCHWAIGER and Invision acquisitions. The increase in revenue was principally in the Electronics group. Gross margins were 20% versus 12% last year. This is a result of increased international sales as a result of the SCHWAIGER acquisition, the lower inventory write-offs and write-downs, better freight costs and better margins in our Mobile Electronics Group. Offsetting this increase was pre-production charges for a contract that we have with Bosch Motors.

On a go-forward basis, we anticipate margins will come back to the 80% to 90% range for the reason that Pat has outlined earlier. Overhead was $30.4 million, which includes $2.5 million temporary payroll reduction return versus $66.9 million last year's quarter, which included a $38.8 million impairment charge of $1 million reduction expense and $2.6 million provision for systems breach. Operating expenses for fourth quarter fiscal 2010 relate to SCHWAIGER and Invision acquisitions for $2.9 million.

Net income was $6.6 million, which includes $5.4 million from bargain purchase and family charges of $1 million on one of our investments. For fiscal 2010 fourth quarter, EPS was $0.29 a share versus $3.06 of loss last year.

Operating activities provided cash of $28.2 million; financing activities use of $1.2 million, primarily to repay bank obligations, offset by $25 million in investing activities to the cash payments related to the purchase of SCHWAIGER and Invision; CapEx expenditures; and an investment in bonds for our Venezuelan operation previously explained, partially offset by distributions from an equity of that state.

We had working capital of $239.8 million, which includes cash, short-term investments of $69.5 million compared to working capital of $21.1 million, and cash and short-term investments of $69.5 million last fiscal year. Our cash position is $55.5, despite cash payments of $14.6 million related to our recent acquisitions.

Essentially, use of cash has been to increase accounts receivable, as we increased sales in the fourth quarter, offset by declines in inventory and vendor receivables. Our turns of both AR and inventory are good. We continue to be prudent in our buying programs and are watching our expenses and markets closely. Cash today, as Pat mentioned, is $89 million, after we have paid down a bank loan that we had gotten from the Invision acquisition for $5 million.

In March, the company entered into a three-year, $15 million line of credit. This line is principally used for purchases of product under letters of credits or standby LCs. Our inventory positions are much better this time last year. We are still cautious, and the global economy will be a key factor in the extent of our growth in products.

Let me turn the call back to Pat. Pat?

Patrick Lavelle

Thank you, Mike. And we're ready for any questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Thomas Kahn with Kahn Brothers.

Thomas Kahn - Kahn Brothers

Pat, I had a question on the systems breach. Could you explain that to me? And also, could you explain is FLO TV going to be used in the back of cars and the screens in the back of cars?

Patrick Lavelle

Okay. First one is, the systems breach, that had to do with our Batteries.com subsidiary. When we were changing over the system, moving to a new system, we had a breach there. We have subsequently changed the system out completely. And we have become compliant for all the credit card companies, so we have put that past us. In the case of FLO TV, yes, it is designed for rear-seat entertainment. We do have modules that will hook up with any factory or any aftermarket system, so that you can get that live TV in your rear seat.

Thomas Kahn - Kahn Brothers

On FLO TV, what is your license cover? I know it covers certain things, but maybe excludes, if there's a telephone in the device, could you tell us what it covers and what it's exclusive or non-exclusive to, please?

Patrick Lavelle

Well our exclusivity covers as for the 12-volt product that we supply to the aftermarket and what we're supplying to the OEMs at this point. This is a module that will receive the FLO information and off-convert it to a larger screen, up to about 10-inch screen, which is about as big as you're going to see in the rear seat of the car. So that device is what we have our exclusivity on. We also have an arrangement with QUALCOMM under a fulfillment contract, where we will supply to retail the handheld, portable FLO TV device. And that's a distribution agreement that we have with them.

Thomas Kahn - Kahn Brothers

And that has the QUALCOMM name on it, or the Audiovox?

Patrick Lavelle

It has the FLO TV name on it.

Operator

[Operator Instructions] Your next question comes from the line of Gary North with GS North Company.

Gary North

I was just wondering how you're progressing on the Wi-Fi charger you're planning to introduce later this year?

Patrick Lavelle

We show [indiscernible] our device -- we showed it at the Consumer Electronic Show and the CTIA show, primarily to get feedback from the customers as to whether or not we were on the right track. We are in product development at this particular point. We expect that later in the year, that we will be introducing the device. And we will have a special press release at that time to review all the features and our business planning around that.

Gary North

Do you have any plans to combine like an e-Reader with the FLO TV device?

Patrick Lavelle

No, not with an e-Reader. But we will be introducing later in the year a portable DVD player with a FLO built in.

Operator

[Operator Instructions] And there are no questions in the queue at this moment.

Patrick Lavelle

Okay, if there are no more questions, I want to thank you for your interest in Audiovox, and want to thank you for being on the call today. And have a good week. Thank you.

Operator

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.

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Source: Audiovox Q4 2010 Earnings Call Transcript
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