10-Q 1 d239506d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from                     to

Commission File Number 0-511

 

 

COBRA ELECTRONICS CORPORATION

(Exact name of Registrant as specified in its Charter)

 

 

 

DELAWARE   36-2479991
(State or other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
6500 WEST CORTLAND STREET
CHICAGO, ILLINOIS
  60707
(Address of principal executive offices)   (Zip Code)

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

 

 

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

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

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

 

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

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

Number of shares of Common Stock of Registrant outstanding as of November 7, 2011: 6,539,580

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page
No.
 

PART I

  FINANCIAL INFORMATION   

Item 1

  Financial Statements      3   

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   

Item 3

  Quantitative and Qualitative Disclosures About Market Risk      23   

Item 4

  Controls and Procedures      23   

PART II

  OTHER INFORMATION   

Item 1A

  Risk Factors      24   

Item 6

  Exhibits      24   

SIGNATURE

     25   

 

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PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Operations - Unaudited

(In Thousands, Except Per Share Amounts)

 

      Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2011     2010     2011     2010  

Net sales

   $ 34,454      $ 28,909      $ 85,753      $ 75,702   

Cost of sales

     24,155        21,547        61,430        55,719   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     10,299        7,362        24,323        19,983   

Selling, general and administrative expense

     7,952        6,840        21,847        20,288   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from operations

     2,347        522        2,476        (305

Interest expense

     (272     (636     (795     (1,264

Other (expense) income

     (899     710        (738     444   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     1,176        596        943        (1,125

Tax benefit

     (202     (203     (133     (200
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 1,378      $ 799      $ 1,076      $ (925
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per common share:

        

Basic

   $ 0.21      $ 0.12      $ 0.16      $ (0.14

Diluted

   $ 0.21      $ 0.12      $ 0.16      $ (0.14

Weighted average shares outstanding:

        

Basic

     6,540        6,471        6,522        6,471   

Diluted

     6,540        6,471        6,522        6,471   

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

 

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Cobra Electronics Corporation and Subsidiaries

Consolidated Balance Sheets - Unaudited

(In Thousands)

 

     September 30
2011
    December 31
2010
 

ASSETS

    

Current assets:

    

Cash

   $ 1,289      $ 1,133   

Receivables, net of allowance for doubtful accounts of $85 in 2011 and $186 in 2010

     22,064        22,021   

Inventories, primarily finished goods, net

     32,487        27,614   

Other current assets

     2,931        3,289   
  

 

 

   

 

 

 

Total current assets

     58,771        54,057   

Property, plant and equipment, at cost:

    

Buildings and improvements

     6,558        6,305   

Tooling and equipment

     19,076        18,393   
  

 

 

   

 

 

 
     25,634        24,698   

Accumulated depreciation

     (20,379     (19,436

Land

     230        230   
  

 

 

   

 

 

 

Property, plant and equipment, net

     5,485        5,492   

Other assets:

    

Cash surrender value of life insurance policies

     4,695        4,891   

Deferred income taxes, non-current

     282        427   

Intangible assets

     8,721        9,315   

Other assets

     146        172   
  

 

 

   

 

 

 

Total other assets

     13,844        14,805   
  

 

 

   

 

 

 

Total assets

   $ 78,100      $ 74,354   
  

 

 

   

 

 

 

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

 

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Cobra Electronics Corporation and Subsidiaries

Consolidated Balance Sheets - Unaudited

(In Thousands, Except Share Data)

 

     September 30
2011
    December 31
2010
 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Bank debt

   $ 20,172      $ 18,042   

Accounts payable

     6,655        7,205   

Accrued salaries and commissions

     1,889        1,510   

Accrued advertising and sales promotion costs

     1,136        1,196   

Accrued product warranty costs

     1,023        923   

Accrued income taxes

     297        197   

Deferred income taxes, current

     292        439   

Other accrued liabilities

     2,808        2,388   
  

 

 

   

 

 

 

Total current liabilities

     34,272        31,900   
  

 

 

   

 

 

 

Non-current liabilities:

    

Deferred compensation

     7,242        7,145   

Deferred income taxes

     1,203        1,538   

Other long-term liabilities

     533        565   
  

 

 

   

 

 

 

Total non-current liabilities

     8,978        9,248   
  

 

 

   

 

 

 

Total liabilities

     43,250        41,148   

Commitments and contingencies

     —          —     

Shareholders’ equity:

    

Preferred stock, $1 par value

    

Authorized: 1,000,000 shares

    

Issued: None

     —          —     

Common stock, $.33 1/3 par value

    

Authorized: 12,000,000 shares

    

Issued: 7,107,400 shares for 2011 and 7,039,100 shares for 2010

    

Outstanding: 6,539,580 shares for 2011 and 6,471,280 shares for 2010

     2,368        2,345   

Paid-in capital

     20,945        20,785   

Retained earnings

     17,278        16,202   

Accumulated other comprehensive loss

     (1,904     (2,317
  

 

 

   

 

 

 
     38,687        37,015   

Treasury stock, at cost (567,820 shares)

     (3,837     (3,837
  

 

 

   

 

 

 

Total shareholders’ equity—Cobra

     34,850        33,178   

Non-controlling interest

     0        28   
  

 

 

   

 

 

 

Total equity

     34,850        33,206   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 78,100      $ 74,354   
  

 

 

   

 

 

 

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

 

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Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Cash Flows - Unaudited

(In Thousands)

 

     Nine Months Ended
September 30
 
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ 1,076      $ (925

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

    

Depreciation and amortization

     2,866        3,042   

Deferred income taxes

     (365     (231

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

     512        (221

Stock-based compensation

     171        169   

Changes in assets and liabilities:

    

Receivables

     48        3,750   

Inventories

     (4,746     (3,930

Other assets

     45        (1,498

Income tax refund

     8        1,079   

Accounts payable

     (535     (148

Other liabilities

     941        506   
  

 

 

   

 

 

 

Net cash provided by operating activities

     21        1,593   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Property, plant and equipment

     (941     (979

Premiums on CSV life insurance

     (317     (266

Intangible assets

     (891     (461

Non-controlling interest

     (28     0   
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,177     (1,706
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Bank borrowings

     2,130        69   
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,130        69   

Effect of exchange rate changes on cash and cash equivalents

     182        1   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     156        (43

Cash at beginning of period

     1,133        1,405   
  

 

 

   

 

 

 

Cash at end of period

   $ 1,289      $ 1,362   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 530      $ 673   

Income taxes

   $ 131      $ (1,059

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

 

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Cobra Electronics Corporation and Subsidiaries

Notes to Consolidated Financial Statements

For the nine months ended September 30, 2011 and 2010

(Unaudited)

The consolidated financial statements included herein have been prepared by Cobra Electronics Corporation (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The Consolidated Balance Sheet as of December 31, 2010 has been derived from the audited consolidated balance sheet as of that date. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim period a fair statement of such operations. Due to the seasonality of the Company’s business, the results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year.

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business — Cobra designs and markets consumer electronics products, which it sells primarily under the Cobra brand name principally in the United States, Canada and Europe. Effective October 20, 2006, the Company acquired Performance Products Limited which sells its products under the Snooper trade name, principally in the United Kingdom, as well as elsewhere in Europe. A majority of the Company’s products are purchased from overseas suppliers, primarily in China, Hong Kong and South Korea. The consumer electronics market is characterized by rapidly changing technology and certain products may have limited life cycles. Management believes that it maintains strong relationships with its current suppliers and that, if necessary, other suppliers could be found. The extent to which a change in a supplier would have an adverse effect on the Company’s business depends on the timing of the change, the product or products that the supplier produces for the Company and the volume of that production. The Company also maintains insurance coverage that would, in certain limited circumstances, reimburse the Company for lost profits resulting from a supplier’s inability to fulfill its commitments to the Company.

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

Reclassifications — Amortization of deferred loan fees were reclassified from Other Income (Expense) to Interest Expense for the periods presented in the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Correction of Immaterial Errors — Prior year amounts were revised to reflect the out-of-period correction for custom duties. Refer to Note 2, Correction of Immaterial Errors.

(2) CORRECTION OF IMMATERIAL ERRORS

In the second quarter of 2011, management discovered that the Company’s customs broker used an incorrect duty rate for its detection products. Subsequently, the Company confirmed that the duty rates for its other products were correct. A Prior Disclosure document was filed with the U.S. Customs Service to correct the underpayment error. The cumulative adjustment for the incorrect duty rate, covering the period from July 1, 2006 to June 30, 2011, was approximately $1.5 million. The adjustment applicable to the third quarter of 2010 was approximately $75,000, the adjustment applicable to the first nine months of 2010 was approximately $166,000, and the adjustment applicable to prior years (2006—2010) totaled approximately $1.4 million.

Pursuant to the guidance of Staff Accounting Bulletin (“SAB”) No. 99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements. Although the errors were immaterial to prior periods, the prior period financial statements were revised, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, due to the significance of the out-of-period correction in the second quarter of 2011.

 

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A reconciliation of the effects of the adjustments to the previously reported balance sheet at December 31, 2010 follows:

 

     December 31, 2010  
     As Reported      Adjustment     As Adjusted  
     (In Thousands)  

Accounts payable

   $ 5,797       $ 1,408      $ 7,205   

Total current liabilities

     30,492         1,408        31,900   

Total equity

     34,614         (1,408     33,206   

A reconciliation of the effects of the adjustments to the previously reported statement of operations for the three and nine months ending September 30, 2010 follows:

 

     Three Months Ended September 30, 2010      Nine Months Ended September 30, 2010  
     As Reported      Adjustment     As Adjusted      As Reported     Adjustment     As Adjusted  
     (In Thousands)  

Cost of sales

   $ 21,472       $ 75      $ 21,547       $ 55,553      $ 166      $ 55,719   

Gross profit

     7,437         (75     7,362         20,149        (166     19,983   

Earnings (loss) from operations

     597         (75     522         (139     (166     (305

Net earnings (loss)

     874         (75     799         (759     (166     (925

A reconciliation of the effects of the adjustments to the previously reported statement of cash flows for the nine months ending September 30, 2010 follows:

 

     Nine Months Ended September 30, 2010  
     As Reported     Adjustment     As Adjusted  
     (In Thousands)  

Net loss

   $ (759   $ (166   $ (925

Accounts payable

     (314     166        (148

 

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(3) SEGMENT INFORMATION

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

The financial information by business segment for the three months and nine months ended September 30, 2011 and 2010 follows:

 

Three months - 2011 vs. 2010  
     2011     2010  
     COBRA     PPL     TOTAL     COBRA     PPL     TOTAL  
     (In Thousands)  

Net sales

   $ 30,907      $ 3,547      $ 34,454      $ 25,178      $ 3,731      $ 28,909   

Cost of sales

     21,886        2,269        24,155        18,688        2,859        21,547   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,021        1,278        10,299        6,490        872        7,362   

Selling, general and administrative expense

     6,749        1,203        7,952        5,692        1,148        6,840   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from operations

     2,272        75        2,347        798        (276     522   

Interest expense

     (272     —          (272     (636     —          (636

Other (expense) income

     (662     (237     (899     337        373        710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     1,338        (162     1,176        499        97        596   

Tax provision (benefit)

     32        (234     (202     (82     (121     (203
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 1,306      $ 72      $ 1,378      $ 581      $ 218      $ 799   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months - 2011 vs. 2010  
     2011     2010  
     COBRA     PPL     TOTAL     COBRA     PPL     TOTAL  
     (In Thousands)  

Net sales

   $ 74,428      $ 11,325      $ 85,753      $ 64,945      $ 10,757      $ 75,702   

Cost of sales

     53,949        7,481        61,430        48,055        7,664        55,719   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     20,479        3,844        24,323        16,890        3,093        19,983   

Selling, general and administrative expense

     18,141        3,706        21,847        16,912        3,376        20,288   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from operations

     2,338        138        2,476        (22     (283     (305

Interest expense

     (795     —          (795     (1,263     (1     (1,264

Other (expense) income

     (594     (144     (738     208        236        444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     949        (6     943        (1,077     (48     (1,125

Tax provision (benefit)

     230        (363     (133     26        (226     (200
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 719      $ 357      $ 1,076      $ (1,103   $ 178      $ (925
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There have been no differences in the basis of segmentation or the basis of measurement between the periods presented.

 

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(4) INCOME TAXES

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

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

The Company will continue to review periodically the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates and may make further adjustments based on management’s outlook for continued profits in each jurisdiction. The valuation allowance for its U.S. operations totaled $8.0 million at September 30, 2011and $7.9 million at December 31, 2010.

(5) FINANCING ARRANGEMENTS

On July 16, 2010, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, Harris N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto from time to time (the “Lenders”). In connection therewith, the Company terminated the Loan and Security Agreement (as amended, the “Terminated Loan Agreement”) dated as of February 15, 2008 among the Company, the lenders party thereto and The PrivateBank and Trust Company, as a lender and administrative agent. On September 14, 2011, the Company amended the Credit Agreement to increase the borrowings available under the revolving loan facility from $25 million to $30 million.

The Company’s amended Credit Agreement, which matures on July 16, 2013, provides for a $30.0 million revolving loan facility. Pursuant to the terms of its Credit Agreement, the Company is required to make mandatory prepayments on the amounts outstanding thereunder in the event that the Company receives proceeds under certain circumstances or in connection with other specified events. Financing costs totaling $513,000 for the Credit Agreement were capitalized in the third quarter of 2010 and will be amortized over the loan term. In connection with the Credit Agreement, the Company wrote-off the deferred financing costs associated with the Terminated Loan Agreement and recognized a non-cash pre-tax charge of $349,000 in the third quarter of 2010. Additionally, in connection with the execution of the Credit Agreement, the Company terminated an interest rate swap agreement in exchange for a $381,000 cash payment by the Company on July 16, 2010. With the elimination of the interest rate swap, the fair value of the Company’s debt is no longer affected by changes in interest rates and future changes in the applicable interest rate will affect the interest expense incurred on the Company’s outstanding indebtedness.

Borrowings under the Credit Agreement bear interest at either the base rate or the LIBOR lending rate (each as defined in the Credit Agreement), as applicable, plus the applicable margin set forth in the Credit Agreement. The Company will also pay certain fees and expenses, including a (i) commitment fee equal to 0.50 percent per annum on the unused portion of the Lenders’ aggregate revolving commitment and (ii) a letter of credit fee equal to the product of the applicable margin set forth in the Credit Agreement times the face amount of the standby letters of credit and the commercial letters of credit outstanding at such time. The Credit Agreement contains customary covenants, including but not limited to financial covenants requiring the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.10 to 1.00 for the periods set forth in the Credit Agreement and providing that annual capital expenditures cannot exceed $3.5 million. Commencing in 2011, the Company may pay dividends to shareholders up to an aggregate amount of $1,250,000 in any fiscal year, subject to compliance with certain covenants and conditions. The Company’s Fixed Charge Coverage Ratio, which is based on adjusted EBITDA less capital expenditures and cash tax payments in relation to interest expense, for the third quarter of 2011, exceeded the required minimum ratio of 1.10 to 1.00 and all financial covenants for the first nine months of 2011 were satisfied.

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

 

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At September 30, 2011, the Company had interest bearing debt outstanding of $20.2 million borrowed under the Credit Agreement and credit availability was approximately $5.8 million based on the borrowing base formula that includes the following: 85 percent of eligible accounts receivable, the lesser of 65 percent of lower of cost or market of eligible inventory or 85 percent of the appraised net orderly liquidation value of eligible inventory, and 65 percent of commercial letters of credit issued for the purchase of inventory, subject to certain limitations and reserves established at the lenders discretion. If necessary, the Credit Agreement permits an “overadvance” of up to $1.0 million for sixty consecutive days. The weighted average interest rate for the three months ending September 30, 2011 and 2010 (which includes the amortization charges associated with the terminated interest rate swap, refer to Note 7, Derivatives for additional information) was 4.8 percent and 6.0 percent, respectively. On a year to date basis, the weighted average interest rate for the nine months ending September 30, 2011 and 2010 (which includes the amortization charges associated with the terminated interest rate swap) was 5.0 percent and 6.5 percent, respectively.

(6) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash, accounts receivable, accounts payable, short-term debt, long-term debt and letters of credit. The carrying values of cash, accounts receivable and accounts payable approximated their fair value because of the short-term maturity of these instruments. The carrying amounts of the Company’s bank borrowings under its Credit Agreement approximate fair value because the interest rates are reset periodically to reflect current market rates. The letters of credit approximated fair value due to the short-term nature of the instruments. The contract value/fair value of the letters of credit was $3.9 million at September 30, 2011 and $2.7 million at December 31, 2010. The Company’s hedging activity is limited to foreign currency purchases and an interest rate swap, when applicable. The Company engages in foreign currency hedging to minimize the risk that the eventual settlement of foreign currency transactions would be adversely affected by changes in exchange rates. The Company did not have any open foreign exchange contracts at September 30, 2011 and December 31, 2010.

The Company occasionally hedges foreign exchange exposures by entering into various short-term forward foreign exchange contracts. The instruments are carried at fair value in its Consolidated Balance Sheets as a component of current liabilities. Changes in the fair value of foreign exchange forward contracts that meet the applicable hedging criteria are recorded as a component of Accumulated Other Comprehensive Income (Loss) and reclassified into earnings in the same period during which the hedged transaction affected earnings. Changes in the fair value of foreign exchange forward contracts that do not meet the applicable hedging criteria are recorded currently in income as cost of sales. Hedging activities did not have a material impact on results of operations or financial condition during the three and nine month periods ending September 30, 2011 and 2010.

(7) DERIVATIVES

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

Prior to its termination on July 16, 2010, the Company maintained an interest rate swap to fix the interest rate for the term of the revolving credit facility and term loan under the Terminated Loan Agreement, thereby protecting the Company from future interest rate increases. The interest rate swap represented a cash flow hedge and was recorded at fair value and classified as a non-current liability. Changes in the recorded fair value of the interest rate swap were recorded to Accumulated Other Comprehensive Income (Loss). At March 31, 2009, the existing contract applicable to the Terminated Loan Agreement with a value of $250,000 was terminated and replaced with a contract applicable to the term loan and a portion of the revolving loan valued at $377,000. The value of the interest rate swap liability terminated in March 2009 was amortized into interest expense through June 30, 2010. In connection with the refinancing of borrowings under the Terminated Loan Agreement, the Company paid $381,000 on July 16, 2010 to terminate the related interest rate swap agreement. The termination cost of the interest rate swap in July 2010 will be amortized into interest expense through March 31, 2014.

 

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The interest amortization for the Company’s terminated interest rate swaps reclassified from Accumulated Other Comprehensive Income (Loss) into Interest Expense (Income) during the three and nine months ending September 30, 2011 and 2010 follows:

 

     Three Months Ended      Nine Months Ended  

Income Statement Location

   2011      2010      2011      2010  
     (In Thousands)      (In Thousands)  

Interest expense (income)

   $ 32       $ 46       $ 107       $ (15
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32       $ 46       $ 107       $ (15
  

 

 

    

 

 

    

 

 

    

 

 

 

The effective portion of the gain (loss) on outstanding derivatives recognized in Accumulated Other Comprehensive Income (Loss) for the three and nine months ending September 30, 2011 and 2010.

 

     Three Months Ended      Nine Months Ended  
     September 30      September 30  
     2011     2010      2011     2010  
     (In Thousands)      (In Thousands)  

Interest rate swap

   $ (32   $ 112       $ (107   $ 86   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (32   $ 112       $ (107   $ 86   
  

 

 

   

 

 

    

 

 

   

 

 

 

(8) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock resulted in the issuance of common stock. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings (loss) per share. The earnings or loss per share for the three and nine months ending September 30, 2011 and 2010 follows:

 

     Three Months Ended      Nine Months Ended  
     September 30      September 30  
     2011      2010      2011      2010  
     (In Thousands, Except Share Data)      (In Thousands, Except Share Data)  

Net earnings (loss)

   $ 1,378       $ 799       $ 1,076       $ (925

Weighted-average shares outstanding

     6,539,580         6,471,280         6,521,915         6,471,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings (loss) per share

   $ 0.21       $ 0.12       $ 0.16       $ (0.14
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings (loss) per share

   $ 0.21       $ 0.12       $ 0.16       $ (0.14
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock options to purchase 255,950 shares and 342,780 shares for the three and nine months ending September 30, 2011 and 2010, respectively, were not included in the calculation for the fully-dilutive loss per share because the exercise price for such options exceeded the market price.

 

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(9) COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as the change in equity of a business enterprise from transactions and other events from non-owner sources. Comprehensive income (loss) includes net earnings (loss) and other non-owner changes in equity that bypass the statement of operations and are reported in a separate component of equity. For the three and nine months ending September 30, 2011 and 2010, Accumulated Other Comprehensive Loss included the foreign currency translation adjustment and an interest rate swap.

The cumulative balance of the Accumulated Other Comprehensive Loss at September 30, 2011 and December 31, 2010 follows:

 

     September 30     December 31  
     2011     2010  
     (In Thousands)  

Foreign currency translation adjustment

   $ (1,837   $ (2,143

Interest rate swap

     (67     (174
  

 

 

   

 

 

 

Total

   $ (1,904   $ (2,317
  

 

 

   

 

 

 

A summary of the Comprehensive Income (Loss) for the three and nine months ended September 30, 2011 and 2010 follows:

 

     Three Months Ended      Nine Months Ended  
     September 30      September 30  
     2011     2010      2011     2010  
     (In Thousands)      (In Thousands)  

Net earnings (loss)

   $ 1,378      $ 799       $ 1,076      $ (925

Foreign currency translation adjustment (no tax effect)

     356        828         (306     (230

Interest rate swap (net of applicable tax)

     (32     112         (107     86   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive earnings (loss)

   $ 1,702      $ 1,739       $ 663      $ (1,069
  

 

 

   

 

 

    

 

 

   

 

 

 

(10) OTHER CURRENT ASSETS

The following table summarizes the components of other current assets at September 30, 2011 and December 31, 2010:

 

     September 30      December 31  
     2011      2010  
     (In Thousands)  

Prepaid assets

   $ 1,819       $ 2,151   

Vendor and miscellaneous receivables

     1,112         1,135   

Tax refunds and receivables

     —           3   
  

 

 

    

 

 

 
   $ 2,931       $ 3,289   
  

 

 

    

 

 

 

 

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(11) COMMITMENTS AND CONTINGENCIES

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

At September 30, 2011 and December 31, 2010, the Company had outstanding inventory purchase orders with suppliers totaling approximately $27.1 million and $19.9 million, respectively.

(12) PRODUCT WARRANTY COSTS AND INVENTORY VALUATION RESERVES

The Company warrants to the consumer who purchases its products that it will repair or replace, without charge, defective products within one year of purchase. The Company also has a return policy that allows its customers to return to the Company products returned to them by their customers for full or partial credit based on when the Company’s customer last purchased these products.

Consequently, the Company maintains a warranty reserve, which reflects historical warranty return rates by product category multiplied by the most recent six months of unit sales of that model and the unit standard cost of the model. A roll-forward of the warranty reserve follows:

 

     Nine Months     Year  
     Ended     Ended  
     September 30,     December 31,  
     2011     2010  
     (In Thousands)  

Accrued product warranty costs, beginning of period

   $ 923      $ 857   

Warranty provision

     2,095        2,390   

Warranty expenditures

     (1,995     (2,324
  

 

 

   

 

 

 

Accrued product warranty costs, end of period

   $ 1,023      $ 923   
  

 

 

   

 

 

 

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

 

     Nine Months     Year  
     Ended     Ended  
     September 30,     December 31,  
     2011     2010  
     (In Thousands)  

Liquidation reserve, beginning of period

   $ 777      $ 648   

Liquidation provision

     1,674        2,229   

Liquidation of models

     (1,558     (2,100
  

 

 

   

 

 

 

Liquidation reserve, end of period

   $ 893      $ 777   
  

 

 

   

 

 

 

 

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

 

     Nine Months     Year  
     Ended     Ended  
     September 30,     December 31,  
     2011     2010  
     (In Thousands)  

Net realizable reserve, beginning of period

   $ 206      $ 238   

NRV provision

     253        329   

NRV write-offs

     (264     (361
  

 

 

   

 

 

 

Net realizable reserve, end of period

   $ 195      $ 206   
  

 

 

   

 

 

 

(13) INTEREST EXPENSE AND OTHER INCOME (EXPENSE)

The following table shows the components of Interest Expense for the three and nine month periods ending September 30, 2011 and 2010:

 

     Three Months Ended     Nine Months Ended  
     September 30     September 30  
     2011     2010     2011     2010  
     (In Thousands)     (In Thousands)  

Interest on debt

   $ (181   $ (205   $ (513   $ (780

Amortization of loan fees

     (59     (385     (175     (499

Interest rate swap amortization

     (32     (46     (107     15   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (272   $ (636   $ (795   $ (1,264
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the components of Other Income (Expense) for the three and nine month periods ending September 30, 2011 and 2010:

 

     Three Months Ended     Nine Months Ended  
     September 30     September 30  
     2011     2010     2011     2010  
     (In Thousands)     (In Thousands)  

CSV (expense) income

   $ (671   $ 400      $ (512   $ 221   

Foreign exchange (expense) income

     (253     327        (208     188   

Other - net

     25        (17     (18     35   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (899   $ 710      $ (738   $ 444   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

ANALYSIS OF RESULTS OF OPERATIONS

Executive Summary – Third Quarter

Operating income for the third quarter of 2011 totaled $2.3 million compared to operating income of $522,000 for the year ago quarter, an increase of $1.8 million. Key factors contributing to the increase in operating income were:

 

   

Net sales, mainly in the Cobra segment, increased $5.5 million, or 19.2 percent

 

   

Gross profit increased $2.9 million due to favorable product mix in the Cobra segment and lower costs, mainly smaller exchange losses in the PPL segment

Selling, general and administrative expense increased $1.1 million mainly due to higher fixed expenses for new product support and management incentive expenses. Interest expense decreased $364,000 due to the prepaid loan fees write-off in the third quarter of 2010. Other expense increased $1.6 million, mainly due to the unfavorable swing in cash surrender value (“CSV”) expense and foreign exchange. The combined impact of the improved operating results and the net increase in interest and other expenses of $1.2 million generated a $580,000 increase in pre-tax earnings.

With the continuation of a full valuation allowance for its U.S. operations, the Company’s consolidated tax benefit totaled $202,000 for the third quarter of 2011 compared to a $203,000 tax benefit for the same quarter last year. The tax benefit for the third quarter of 2011 reflects the return to provision variances for returns filed in the current quarter and the lowering of the UK tax rate to 26 percent for 2011 and 25 percent for 2012. The net earnings for the three month period ending September 30, 2011 were $1.4 million, or $.21 per share, compared to earnings of $799,000, or $.12 per share, for the three month period ending September 30, 2010.

Executive Summary – Nine Months

Operating income for the first nine months of 2011 totaled $2.5 million compared to a loss of $305,000 for the same period last year, an improvement of $2.8 million. Key factors contributing to the favorable change in operating income were:

 

   

Net sales, mainly in the Cobra segment, increased $10.0 million or 13.3 percent

 

   

Gross profit increased $4.3 million due to favorable product mix and lower costs

Selling, general and administrative expense increased $1.6 million mainly due to higher fixed expenses for new product support and management incentive expenses. Interest expense decreased $469,000, mainly due to the prepaid loan fees write-off in the third quarter of 2010 and an interest rate that was lower than in a previous credit agreement that was replaced in July 2010. Other expenses increased $1.2 million, mainly due to the unfavorable swing in CSV expense and foreign exchange. The combined impact of the improved operating results and the net increase in interest and other expenses of $713,000 was a $2.1 million increase in pre-tax earnings.

The consolidated tax benefit, including the continuation of the valuation allowance for U.S. operations, totaled $133,000 for the nine month period ending September 30, 2011 compared to a $200,000 tax benefit for the same period last year. The net earnings for the nine month period ending September 30, 2011 were $1.1 million, or $.16 per share, compared to the $925,000 loss, or $.14 loss per share, for the nine month period ending September 30, 2010.

Correction of Immaterial Errors

In the second quarter of 2011, management discovered that the Company’s customs broker used an incorrect duty rate for its detection products. The cumulative adjustment for the incorrect duty rate, covering the period from July 1, 2006 to June 30, 2011, was approximately $1.5 million. The adjustment applicable to the third quarter of 2010 was approximately $75,000, the adjustment applicable to the first nine months of 2010 was approximately $166,000, and the adjustment applicable to prior years (2006—2010) totaled approximately $1.4 million. Pursuant to the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements. However, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, the prior period financial statements were revised. Prior period amounts stated in this Form 10-Q have been revised to facilitate comparability between current and prior year periods.

 

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EBITDA

The following table shows the reconciliation of net earnings (loss) to EBITDA and EBITDA As Defined for the three and nine months ending September 30, 2011 and 2010:

 

     Three Months Ended September 30     Nine months Ended September 30  
     2011     2010     2011     2010  
     (In Thousands)     (In Thousands)  

Net earnings (loss)

   $ 1,378      $ 799      $ 1,076      $ (925

Depreciation/amortization

     1,009        1,135        2,866        3,042   

Interest expense, excluding loan fee amortization

     213        251        620        765   

Income tax provision

     (202     (203     (133     (200
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     2,398        1,982        4,429        2,682   

Stock option expense

     29        56        171        169   

CSV loss (income)

     671        (400     512        (221

Other non-cash items

     (62     (128     (141     949   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA As Defined

   $ 3,036      $ 1,510      $ 4,971      $ 3,579   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

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

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

 

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Third Quarter — 2011 vs. 2010

The following table summarizes sales and pre-tax income (loss) by business segment for the three months ending September 30, 2011 and 2010:

 

     2011     2010      2011 vs. 2010
Increase
 
     (In Thousands)  

Business Segment

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

Cobra

   $ 30,907       $ 1,338      $ 25,178       $ 499       $ 5,729      $ 839   

PPL

     3,547         (162     3,731         97         (184     (259
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Company

   $ 34,454       $ 1,176      $ 28,909       $ 596       $ 5,545      $ 580   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cobra Business Segment

Cobra segment net sales increased $5.7 million, or 22.8 percent, in the third quarter of 2011 to $30.9 million compared to $25.2 million in the third quarter of 2010. The increase was principally due to strong sales of domestic Citizens Band radios and Truck Navigation products, driven by new models, mainly the new limited edition Citizens Band radio, 29 LX Chrome, and the 5550 PRO navigation unit for the professional driver, introduced in the first quarter of 2011. Additionally, increased placement of Cobra iRadar™ models for use with iPhone® and Android™ smartphones, introduced in late 2010, drove a significant increase in iRadar sales compared to the prior year’s quarter. Lastly, the increase in segment net sales benefitted from a 48.6 percent growth in sales at CEEL because of strong sales of Detection products into Eastern Europe.

Gross profit increased $2.5 million, or 39.0 percent, to $9.0 million for the third quarter of 2011, while gross margin improved 3.4 points to 29.2 percent from 25.8 percent in the prior year’s quarter. The improvement in gross margin reflected both the impact of an improved domestic product mix, as the proportion of higher-margin Citizens Band radio sales increased, as well as a substantial increase in gross margin at CEEL compared to the prior year’s quarter. Contributing to this increase was strong sales of higher-margin Detectors into Eastern Europe and a favorable foreign exchange impact in the current year’s quarter compared to an unfavorable impact in the third quarter of 2010.

Selling, general and administrative expense increased $1.1 million, or 18.6 percent, to $6.7 million for the third quarter of 2011 compared to $5.7 million in the prior year’s quarter and, as a percentage of net sales, were 21.8 percent and 22.6 percent, respectively. The increase was primarily due to $902,000 of higher fixed expenses, for public relations, media and show expenditures to support new products, and higher management incentive expenses because of the significant improvement in financial results.

Interest expense was $272,000 in the third quarter of 2011 compared to $636,000 for the year ago period. The decrease was primarily a result of a $349,000 write off of the prepaid loan fees related to a previous credit agreement that was replaced in the third quarter of 2010. Other expense for the third quarter of 2011 increased by $1.0 million, mainly due to CSV expense of $671,000 in 2011 compared to CSV income of $400,000 in 2010.

As a result of the above, the Cobra segment had a pre-tax income of $1.3 million in the third quarter of 2011 compared to pre-tax earnings of $499,000 in the third quarter of 2010.

 

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Performance Products Limited (“PPL”) Business Segment

PPL’s net sales decreased $184,000, or 4.9 percent, to $3.5 million in the third quarter of 2011 compared to the same quarter last year. The main contributor to the decrease was a $219,000 decline in satellite navigation sales, primarily lower sales of the Truckmate TM S7000, which was partially offset by new Truckmate models. Some of the decline in satellite navigation sales was offset by increased sales of the GPS products, primarily 3 Zero™ and MySpeed™ units in France, and outdoor leisure products, including Shotsaver™ golf GPS and laser range finder products.

Gross profit increased $406,000, or 46.6 percent, to $1.3 million for the third quarter of 2011 and gross margin increased 12.6 points to 36.0 percent from 23.4 percent in the prior year’s quarter. The strong gross margin improvement was due to product mix and a reduction in exchange losses compared to the year ago quarter.

Selling, general and administrative expenses increased $55,000, or 4.8 percent, to $1.2 million for the current quarter from $1.1 million in the prior year’s quarter and, as a percentage of net sales, were 33.9 percent and 30.8 percent in the current quarter and prior year’s quarter, respectively. The increase was primarily due to higher selling and promotional costs and a write-down of a customer receivable.

Other expense for the third quarter of 2011 increased $610,000 compared to the third quarter of 2010, principally due to higher foreign exchange losses in 2011 as compared to 2010.

As a result of the above, the PPL segment had a pre-tax loss of $162,000 for the third quarter of 2011 compared to pre-tax earnings of $97,000 for the third quarter of 2010.

 

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Nine Months — 2011 vs. 2010

The following table summarizes sales and pre-tax income (loss) by business segment for the nine months ending September 30, 2011 and 2010:

 

     2011     2010     2011 vs. 2010
Increase
 
     (In Thousands)  

Business Segment

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

Cobra

   $ 74,428       $ 949      $ 64,945       $ (1,077   $ 9,483       $ 2,026   

PPL

     11,325         (6     10,757         (48     568         42   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Company

   $ 85,753       $ 943      $ 75,702       $ (1,125   $ 10,051       $ 2,068   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Cobra Business Segment

Cobra net sales increased $9.5 million, or 14.6 percent, in the first nine months of 2011 to $74.4 million compared to $64.9 million in the first nine months of 2010. The increase was attributable to strong sales of domestic Citizens Band radio and Truck Navigation products sales as well as higher sales at CEEL. Citizens Band radio sales benefitted from sales of new products, principally the 29 LX and the newly introduced limited edition 29 LX Chrome while Truck Navigation products benefitted from the 7550 PLT, introduced in the third quarter of 2010, and the 5550 PRO, introduced in the first quarter of 2011. The higher CEEL sales reflected an increase in sales of Detection products into Eastern Europe.

Gross profit increased $3.6 million, or 21.2 percent, to $20.5 million for the first nine months of 2011, while gross margin increased 1.5 points to 27.5 percent from 26.0 percent in the first nine months of 2010. The improved gross profit was due to a more favorable product mix, including the positive impact of higher-margin new products such as the Citizens Band radios, Truck Navigation and Detection products noted above as well as higher sales of iRadar.

Selling, general and administrative expense increased $1.2 million, or 7.3 percent, to $18.1 million from $16.9 million for the same period last year, and, as a percentage of net sales, was 24.4 percent and 26.0 percent, respectively. Variable selling costs decreased $260,000, or 6.7 percent, mainly because of higher sales to customers with a low variable selling cost program. Fixed expenses increased $1.5 million, mainly comprised of marketing expenses due to higher public relations, media and show expenses to support new products and an increase in management incentive expenses, offset in part by reductions in professional fees as well as payroll and deferred compensation because of the replacement of two long-term executive officers.

Interest expense was $795,000 in the first nine months of 2011 compared to $1.3 million for the same period in 2010. The $468,000 decrease was mainly due to the write off of prepaid loan fees related to a previous loan agreement that was replaced with a new agreement in the third quarter of 2010 and the lower interest rate that resulted from this new agreement. Other expense for the first nine months of 2011 increased $802,000 from the year ago period mainly due to CSV expense of $512,000 in 2011 compared to CSV income of $221,000 in 2010.

As a result of the above, the Cobra segment had pre-tax earnings of $949,000 in the first nine months of 2011 compared to a pre-tax loss of $1.1 million in the same period in 2010, an improvement of $2.0 million from 2010.

 

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Performance Products Limited (“PPL”) Business Segment

PPL’s net sales increased $568,000, or 5.3 percent, to $11.3 million in the first nine months of 2011 compared to the year ago period. This increase was due to the exchange rate fluctuation between the British pound sterling and the U.S. dollar as the local currency sales for the first nine months of 2011 are essentially unchanged when compared to sales for the same period in 2010.

Gross profit increased $751,000, or 24.3 percent, to $3.8 million for the first nine months of 2011, and gross margin increased 5.2 points to 33.9 percent from 28.8 percent in 2010. The improvement in gross profit reflected a more favorable product mix as well as the reduction of exchange losses incurred in the first nine months of 2011 as compared to the year ago period.

Selling, general and administrative expenses increased $330,000, or 9.8 percent, to $3.7 million from $3.4 million in the first nine months of 2010 and, as a percentage of net sales, was 32.7 percent and 31.4 percent in the first nine months of 2011 and the first nine months of 2010, respectively. The increase was due primarily to higher costs for commissions and promotions, overseas travel, legal fees and payroll due to two employee additions.

Other expense for the first nine months of 2011 increased $380,000 compared to the same period in 2010, principally due to foreign exchange losses in 2011 compared to foreign exchange gains in 2010.

As a result of the above, the PPL segment had a pre-tax loss of $6,000 for the first nine months of 2011 compared to a pre-tax loss of $48,000 for the first nine months of 2010.

LIQUIDITY AND CAPITAL RESOURCES

The Company refinanced its bank debt on July 16, 2010 and replaced a $23.0 million revolving asset-based credit facility and a $2.2 million term loan with a $25.0 million revolving asset-based credit facility. The July 2010 Credit Agreement provided a lower cost credit facility and greater liquidity due to the borrowing base formula. On September 14, 2011, the Company amended the Credit Agreement to increase the borrowings available from its revolving loan facility from $25 million to $30 million. Refer to Note 5, Financing Arrangements, for additional information.

At September 30, 2011, the Company had interest bearing debt outstanding of $20.2 million borrowed under the amended Credit Agreement. As of September 30, 2011, credit availability was approximately $5.8 million under the Credit Agreement. Additionally, the Company’s Credit Agreement permits an “overadvance” of up to $1.0 million for sixty consecutive days. For the nine months ended September 30, 2011, net cash flows provided by operating activities totaled $21,000. Net cash inflows from operations and non-cash add-backs included net earnings of $1.1 million, non-cash depreciation and amortization of $2.9 million and an increase in payables and other liabilities of $406,000. Offsetting these inflows was an increase in inventories of $4.7 million, primarily due to a seasonal build-up for the fourth quarter sales in 2011. The Company paid $1.4 million in the third quarter of 2011, which was accrued in the second quarter of 2011, for custom duties pertaining to the prior five years.

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 2011 to fund its working capital needs.

Net cash used in investing activities for the first nine months of 2011 totaled $2.2 million. Property, plant and equipment additions, primarily building improvements, computer hardware for a network upgrade and tooling totaled $941,000. Intangible asset additions totaled $891,000 and were primarily for in-house development of software for new products, new network software, patents and trademarks, and premium payments for life insurance.

Net cash provided by financing activities totaled $2.1 million for the nine months ended September 30, 2011 and resulted from increased borrowings pursuant to the Company’s Credit Agreement. The Company is not expected to pay a dividend in 2011.

A failure to comply, absent a waiver from lenders, with the covenants contained in the Credit Agreement in future periods 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.

 

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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, 2010. 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 Exchange Act. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the SEC, press releases or otherwise. Statements contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, liquidity, plans for acquisitions or sales of assets or businesses, plans relating to products or services, assessments of materiality, expansion into international markets, growth trends in the consumer electronics industry, technological and market developments in the consumer electronics industry, the availability of new consumer electronics products and predictions of future events, as well as assumptions relating to these statements. In addition, when used in this report, the words “anticipates,” “believes,” “should,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward-looking statements.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

changes in law; and

 

   

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

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

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

There have been no material changes in the Company’s market risk since December 31, 2010.

 

Item 4. Controls and Procedures

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

As of September 30, 2011, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of September 30, 2011.

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 6. Exhibits

 

a) Exhibit 4.1 Amended and Restated Rights Agreement dated November 3, 2011 between Cobra Electronics Corporation and American Stock Transfer & Trust Company, as rights agent – Filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 3, 2011 (File No. 0-511), and hereby incorporated by reference.

 

b) Exhibit 10.1 First Amendment to the Credit Agreement dated September 14, 2011 among Cobra Electronics Corporation, BMO Harris Bank N.A. (formerly known as Harris N.A.), as administrative agent, and the lenders party thereto– Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 14, 2011 (File No. 0-511), and hereby incorporated by reference.

 

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

 

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

 

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

 

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

 

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

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

COBRA ELECTRONICS CORPORATION
By   /s/    Robert J. Ben        
 

Robert J. Ben

Senior Vice President and

Chief Financial Officer

(Principal Financial Officer)

Dated: November 14, 2011

 

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INDEX TO EXHIBITS

 

Exhibit
Number

  

Description of Document

4.1    Amended and Restated Rights Agreement dated November 3, 2011 between Cobra Electronics Corporation and American Stock Transfer & Trust Company, as rights agent—Filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 3, 2011 (File No. 0-511), and hereby incorporated by reference.
10.1   

First Amendment to Credit Agreement dated September 14, 2011 among Cobra Electronics Corporation,

BMO Harris Bank N.A. (formerly known as Harris N.A.), as administrative agent, and the lenders party thereto—Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 14, 2011

(File No. 0-511), and hereby incorporated by reference.

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

 

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