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COBRA ELECTRONICS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 13, 2012]

COBRA ELECTRONICS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) 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.

19 -------------------------------------------------------------------------------- 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.

20-------------------------------------------------------------------------------- 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.

21-------------------------------------------------------------------------------- Table of Contents 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) Net Pre-tax Net Pre-tax Net Pre-tax Business Segment Sales Income Sales Income (Loss) Sales 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.

22-------------------------------------------------------------------------------- Table of Contents 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.

23 -------------------------------------------------------------------------------- Table of Contents 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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