Directed Electronics Reports Record Second Quarter 2006 Results; Raises 2006 Sales and Earnings Outlook; Announces Progress with FCC
* Raises 2006 Net Sales Outlook to an Increase of 25% - 30%, and Earnings Outlook to $1.01 - $1.04 per Diluted Share
* Second Quarter 2006 Net Sales Increase 40% to $77.7 Million
* Second Quarter 2006 Net Income Increases 175% to $3.1 Million, or $0.12 per Diluted Share, Compared with GAAP Net Income of $1.1 Million or $0.06 per Diluted Share in the Second Quarter of 2005
* Excluding Adjustments in the Prior Year, Second Quarter 2006 Net Income Increases 83% Compared to Pro Forma Net Income of $1.7 Million or $0.09 per Diluted Share in the Second Quarter of 2005
VISTA, Calif., Aug. 14 -- Directed Electronics, Inc. today announced record sales and net income results for the quarter ended June 30, 2006. The Company also raised guidance for the full year of 2006.
(Logo: http://www.newscom.com/cgi-bin/prnh/20020424/DIRECTLOGO) Second Quarter Results
Net sales in the second quarter of 2006 were $77.7 million, an increase of 39.6% over the prior year second quarter net sales of $55.7 million. Gross sales of satellite radio products were $41.3 million, an increase of 162.3% over the prior year second quarter. Gross sales of security and entertainment products in the second quarter of 2006 were $38.0 million, compared with $41.1 million in the prior year second quarter.
Net income for the second quarter of 2006 increased 82.9% to $3.1 million, or $0.12 per diluted share, compared with pro forma net income available to common shareholders of $1.7 million, or $0.09 per diluted share in the prior year period. Net income for the second quarter of 2006 increased 175.0% over GAAP net income available to common shareholders of $1.1 million, or $0.06 per diluted share in the prior year period. The second quarter 2005 GAAP net income available to common shareholders included $0.2 million of management fees to a related party, $0.4 million of IPO related costs, and their related tax effects.
"We are pleased with our second quarter sales and earnings performance," commented James E. Minarik, Directed's President and Chief Executive Officer. "Our SIRIUS satellite radio products continued to experience outstanding growth, and our security and entertainment sales were essentially in line with our internal expectations, except for slightly lower than expected sales in our security products and a more significant decline in our mobile video sales which decreased from the prior year due to industry-wide softness in this category."
"Looking forward, we remain confident in achieving our full year 2006 security and entertainment sales plan due to the full roll-out of our remote start value program (RSVP), our new Spread Spectrum Technology security and convenience products, as well as the continued rollout of Best Buy's Magnolia stores in the back half of the year," stated Mr. Minarik. "Combined with the new Sirius satellite radio products scheduled to launch later this summer, we anticipate a record 2006."
Year-to-Date Results
Net sales for the first six months of 2006 were $152.0 million, an increase of 41.1% over the first six months of 2005 net sales of $107.7 million. Gross sales of satellite radio products were $77.5 million, an increase of 169.5% over the first six months of 2005. Gross sales of security and entertainment products for the first six months of 2006 were $77.2 million, compared with $81.7 million in the same period of the prior year.
Pro forma net income for the first six months of 2006 increased 107.0% to $6.6 million, or $0.26 per diluted share, compared with pro forma net income available to common shareholders of $3.2 million, or $0.17 per diluted share in the prior year period. GAAP net income for the first six months of 2006 increased 179.2% to $7.1 million, or $0.27 per diluted share, compared with GAAP net income available to common shareholders of $2.5 million, or $0.14 per diluted share, in the prior year period. The first six months of 2006 GAAP net income includes a one-time income tax benefit related to the revaluation of deferred tax assets and liabilities of $0.4 million. The first six months 2005 GAAP net income available to common shareholders included $0.4 million of management fees to a related party, $0.4 million of IPO costs, and the related tax effects.
Gross Profit and Operating Margins
For the second quarter of 2006, gross profit increased to $20.7 million, compared with $19.4 million in the prior year period. Gross margin for the second quarter of 2006 declined to 26.6% from 34.9% for the prior year period, due to the significant sales increase of satellite radio products, which have lower margins compared to security and entertainment products, which retained historical gross margin levels. For the first six months of 2006, gross profit increased 14.2% to $43.4 million, compared with $38.0 million in the prior year period.
For the second quarter of 2006, EBITDA (earnings before interest, taxes, depreciation and amortization) increased 12.3% to $9.8 million, or 12.6% of net sales, from $8.7 million, or 15.7% of net sales, in the prior year second quarter. Excluding the adjustments in the prior year period, second quarter of 2005 pro forma EBITDA was $9.3 million. For the first six months of 2006, EBITDA increased 16.9% to $20.4 million, or 13.4% of net sales, from $17.4 million, or 16.2% of net sales, in the prior year period. Excluding the adjustments in the prior year period, first half of 2005 pro forma EBITDA was $18.2 million.
Balance Sheet and Cash Flows
The Company had $15.6 million in cash as of June 30, 2006, and generated $14.4 million of cash provided by operating activities in the first half of 2006, compared to $6.6 million of cash used in operating activities in the prior year period. After repaying $6.1 million of debt during the first six months of 2006, the Company had total debt of $165.8 million as of June 30, 2006, resulting in total debt to proforma EBITDA, on a trailing twelve-month basis, of 2.8x, an improvement from 3.1x as of December 31, 2005.
"For the first half of 2006, we are very pleased with our cash flow from operations of $14.4 million, which is an increase of $21.0 million from the prior year period," stated John D. Morberg, Directed's Chief Financial Officer. "Directed has very favorable cash flow characteristics including minimal capital expenditures, a favorable cash tax shield, and a significant portion of customers who pay on a COD basis. These factors provide us with significant financial flexibility to continue to deliver strong growth, make opportunistic acquisitions, and pay down debt."
FCC Update
As previously announced, on June 30, 2006, the Company received a letter from the Federal Communications Commission (FCC) stating that two SIRIUS receivers with FM transmitters distributed by the Company, the SIRIUS ST2 and SIRIUS S50-C, were not in compliance with certain FCC frequency or emission limits. The Company has responded to the FCC's letter and provided the information requested.
"We are very pleased to announce that the FCC has now approved the modifications made to the SIRIUS ST2 (Starmate Replay) and has determined that it is now in compliance with FCC frequency and emission limits. Accordingly, we will recommence shipping the SIRIUS ST2 this week," stated Mr. Minarik. "We also continue to ship the new SIRIUS Sportster 4 (SP4TK1), and have ramped up production to meet the strong demand for this new model."
"We continue to cooperate with SIRIUS, our manufacturers and the FCC in their review of the SIRIUS S50, and we expect that any issues with this model will be resolved in the very near future," continued Mr. Minarik. "We also remain on target to have available to consumers by the end of the summer, the new live personal satellite radio, SIRIUS Stiletto (SL100)."
Outlook for 2006
The Company's guidance philosophy is to provide annual sales and earnings forecasts at the beginning of the year, and update its progress towards the achievement of this outlook during each quarter. The Company does not provide specific quarterly sales and earnings forecasts, which is consistent with the Company's focus on long-term sales and earnings growth generation.
For the second time this year, the Company is raising its 2006 annual sales expectations and currently expects net sales to increase 25% to 30%, up from a previously forecasted low 20% range over 2005. The Company currently believes that it will achieve gross sales growth in security and entertainment products, in the mid-single digit range, and gross sales growth in satellite radio products in excess of 50%.
The Company is raising its 2006 annual net earnings per diluted share expectations from a range of $1.00 -- $1.03 to a range of $1.01 -- $1.04, excluding the one-time income tax benefit in the first quarter of 2006. Reflected in this revised guidance are one-time legal fees expected to total approximately $1.0 million, net of tax effects, or $0.04 per diluted share, that the Company expects to incur during the last half of 2006, in defense of previously disclosed patent litigation. This guidance also reflects annual general and administrative expenses associated with being a public company of approximately $3.0 million, or $0.07 per diluted share, which were not incurred in 2005, as well as the Company's current expectations regarding shipment of FCC-compliant satellite radio products.
Conference Call and Webcast
Directed Electronics will host a conference call and webcast to discuss its financial results today, August 14th, at 5:00 p.m. EDT. This call will be webcast live on the Investor Relations section of the Company's website at www.directed.com and will be archived and available for replay approximately three hours after the live event. The audio replay will be available until midnight, August 28, 2006. The Company's financial results are also available online at www.directed.com.
About Directed Electronics, Inc.
Directed Electronics is the largest designer and marketer of consumer branded vehicle security and convenience systems in the United States based on sales and a major supplier of home audio, mobile audio and video, and satellite radio products. As the sales leader in the vehicle security and convenience category, Directed offers a broad range of products, including security, remote start, hybrid systems, GPS tracking and navigation, and accessories, which are sold under its Viper(R), Clifford(R), Python(R), and other brand names. In the home audio market, Directed designs and markets award-winning Definitive Technology(R) and a/d/s/(R) premium loudspeakers. Directed's mobile audio products include speakers, subwoofers, and amplifiers sold under its Orion(R), Precision Power(R), Directed Audio(R), a/d/s/(R), and Xtreme(R) brand names. Directed also markets a variety of mobile video systems under the Directed Video(R), Directed Mobile Media(R) and Automate(R) brand names. Directed also markets and sells certain SIRIUS-branded satellite radio products, with exclusive distribution rights for such products to Directed's existing U.S. retailer customer base.
Forward-Looking Statements
Certain statements in this news release that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by the use of terms such as "may," "should," "might," "believe," "expect," "anticipate," "estimate" and similar words, although some may be expressed differently. Forward-looking statements in this release include, but are not limited to, statements as to expected net sales, expected earnings per share, the effect of investments in the business as well as other efforts to improve business metrics and attributes, the effect of growth strategies, and the ability to achieve operational efficiencies. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results of Directed to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These factors include competition in the consumer electronics industry, development of new products and changing demand of customers, reliance on certain key customers, adverse developments affecting SIRIUS Satellite Radio, challenge of the Company's pricing and promotional practices, reliance on certain manufacturers and their ability to maintain satisfactory delivery schedules, disruption in supply chain, shortages of components and materials, disruption in imports, quality installation of products by customers, significant product returns or product liability claims, compliance with various state and local regulations, remediation of any internal control deficiencies and identified material weaknesses in internal control over financial reporting, risks with international operations, claims related to intellectual property, ability to service debt obligations, disruption in distribution centers, decline in consumer spending, outcome of existing litigation, dependence on senior management, ability to realize on investments made in the business, and integration of acquired businesses. Certain of these factors, as well as various additional factors, are discussed from time to time in the reports filed by Directed with the Securities and Exchange Commission, including the Form 10-K for the year ended December 31, 2005. Directed disclaims any intent or obligation to update these forward-looking statements.
DIRECTED ELECTRONICS, INC.
Consolidated Statements of Income
(unaudited, in thousands, except per share amounts)
GAAP Pro Forma
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
6/30/ 6/30/ 6/30/ 6/30/
2006 2005 2006 2005
Net product sales $76,895 $54,959 $76,895 $54,959
Royalty and other revenue 783 697 783 697
Net Sales 77,678 55,656 77,678 55,656
Cost of sales 57,004 36,245 57,004 36,245
Gross profit 20,674 19,411 20,674 19,411
Operating expenses:
Selling, general and administrative 12,344 11,879 12,344 11,489
Management fee to related party -- 166 -- --
Total operating expenses 12,344 12,045 12,344 11,489
Income from operations 8,330 7,366 8,330 7,922
Other income (expense):
Interest expense, net (3,291) (5,052) (3,291) (5,052)
Income before provision for income
taxes 5,039 2,314 5,039 2,870
Provision for income taxes 1,965 1,182 1,965 1,168
Net income 3,074 1,132 3,074 1,702
Net income attributable to
participating securityholders -- 14 -- 21
Net income available to common
shareholders $3,074 $1,118 $3,074 $1,681
Net income per common share:
Basic $0.12 $0.06 $0.12 $0.09
Diluted $0.12 $0.06 $0.12 $0.09
Weighted average number of shares:
Basic 25,748 18,583 25,748 18,583
Diluted 25,749 18,583 25,749 18,583
This earnings release includes information presented on a pro forma basis. These pro forma financial measures are considered "non-GAAP" financial measures within the meaning of SEC Regulation G. The Company believes that this presentation of pro forma results provides useful information to both management and investors by excluding specific revenue, costs and expenses that we believe are not indicative of core operating results. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. The reconciliation set forth below is provided in accordance with Regulation G and reconciles the pro forma financial measure with the most directly comparable GAAP-based financial measure.
DIRECTED ELECTRONICS, INC.
Reconciliation of GAAP to Pro Forma Net Income Available to Common
Shareholders
(unaudited, in thousands, except per share amounts)
Quarter Quarter
Ended Ended
6/30/2006 6/30/2005
GAAP net income $3,074 $1,132
Adjustments:
Management fee to related party -- 166
IPO related costs -- 390
Tax effects of adjustments -- 14
Pro forma net income 3,074 1,702
Pro forma net income attributable to
participating securityholders -- 21
Pro forma net income available to
common shareholders $3,074 $1,681
GAAP net income per common share,
diluted $0.12 $0.06
Pro forma net income per common
share, diluted $0.12 $0.09
Diluted weighted average number of
shares (GAAP and Pro forma) 25,749 18,583
DIRECTED ELECTRONICS, INC.
Reconciliation of GAAP Net Income to Pro Forma EBITDA (Note 1)
(unaudited, in thousands)
GAAP Pro Forma
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
6/30/ 6/30/ 6/30/ 6/30/
2006 2005 2006 2005
Net income $3,074 $1,132 $3,074 $1,702
Adjustments:
Interest expense, net 3,291 5,052 3,291 5,052
Depreciation 431 347 431 347
Amortization 1,038 1,011 1,038 1,011
Taxes 1,965 1,182 1,965 1,168
EBITDA (Note 1) $9,799 $8,724 $9,799 $9,280
DIRECTED ELECTRONICS, INC.
Itemization of Net Sales
(unaudited, in thousands)
Quarter Quarter
Ended Ended
6/30/2006 6/30/2005
Gross Security and Entertainment
Sales $37,968 $41,142
Gross Satellite Radio Sales 41,253 15,728
Rebates and Discounts (2,326) (1,911)
Net Product Sales 76,895 54,959
Royalties and Other Revenue 783 697
Net Sales $77,678 $55,656
Note 1: Pro forma EBITDA (earnings before interest, income taxes, depreciation, and amortization) is not a measure of financial performance under generally accepted accounting principles, or GAAP, but is used by some investors to determine a company's ability to service or incur indebtedness. EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. EBITDA is not intended to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.
DIRECTED ELECTRONICS, INC.
Consolidated Statements of Income
(unaudited, in thousands, except per share amounts)
GAAP Pro Forma
YTD YTD YTD YTD
6/30/ 6/30/ 6/30/ 6/30/
2006 2005 2006 2005
Net product sales $150,161 $106,298 $150,161 $106,298
Royalty and other revenue 1,818 1,423 1,818 1,423
Net Sales 151,979 107,721 151,979 107,721
Cost of sales 108,547 69,705 108,547 69,705
Gross profit 43,432 38,016 43,432 38,016
Operating expenses:
Selling, general and
administrative 25,990 22,872 25,990 22,482
Management fee to related party -- 354 -- --
Total operating expenses 25,990 23,226 25,990 22,482
Income from operations 17,442 14,790 17,442 15,534
Other income (expense):
Interest expense, net (6,566) (10,062) (6,566) (10,062)
Income before provision for income
taxes 10,876 4,728 10,876 5,472
Provision for income taxes 3,805 2,165 4,237 2,227
Net income 7,071 2,563 6,639 3,245
Net income attributable to
participating securityholders -- 30 -- 38
Net income available to common
shareholders $7,071 $2,533 $6,639 $3,207
Net income per common share:
Basic $0.27 $0.14 $0.26 $0.17
Diluted $0.27 $0.14 $0.26 $0.17
Weighted average number of shares:
Basic 25,750 18,583 25,750 18,583
Diluted 25,751 18,583 25,751 18,583
This earnings release includes information presented on a pro forma basis. These pro forma financial measures are considered "non-GAAP" financial measures within the meaning of SEC Regulation G. The Company believes that this presentation of pro forma results provides useful information to both management and investors by excluding specific revenue, costs and expenses that we believe are not indicative of core operating results. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. The reconciliation set forth below is provided in accordance with Regulation G and reconciles the pro forma financial measure with the most directly comparable GAAP-based financial measure.
DIRECTED ELECTRONICS, INC.
Reconciliation of GAAP to Pro Forma Net Income Available to Common
Shareholders
(unaudited, in thousands, except per share amounts)
YTD YTD
6/30/2006 6/30/2005
GAAP net income $7,071 $2,563
Adjustments:
Management fee to related party -- 354
IPO related costs -- 390
Tax effects of adjustments -- (62)
Revaluation of deferred tax assets
and liabilities (432) --
Pro forma net income 6,639 3,245
Pro forma net income attributable to
participating securityholders -- 38
Pro forma net income available to
common shareholders $6,639 $3,207
GAAP net income per common share,
diluted $0.27 $0.14
Pro forma net income per common
share, diluted $0.26 $0.17
Diluted weighted average number of
shares (GAAP and Pro forma) 25,751 18,583
DIRECTED ELECTRONICS, INC.
Reconciliation of GAAP Net Income to Pro Forma EBITDA (Note 1)
(unaudited, in thousands)
GAAP Pro Forma
YTD YTD YTD YTD
6/30/ 6/30/ 6/30/ 6/30/
2006 2005 2006 2005
Net income $7,071 $2,563 $6,639 $3,245
Adjustments:
Interest expense, net 6,566 10,062 6,566 10,062
Depreciation 886 630 886 630
Amortization 2,052 2,021 2,052 2,021
Taxes 3,805 2,165 4,237 2,227
EBITDA (Note 1) $20,380 $17,441 $20,380 $18,185
DIRECTED ELECTRONICS, INC.
Itemization of Net Sales
(unaudited, in thousands)
YTD YTD
6/30/2006 6/30/2005
Gross Security and Entertainment Sales $77,202 $81,662
Gross Satellite Radio Sales 77,530 28,773
Rebates and Discounts (4,571) (4,137)
Net Product Sales 150,161 106,298
Royalties and Other Revenue 1,818 1,423
Net Sales $151,979 $107,721
Note 1: Pro forma EBITDA (earnings before interest, income taxes, depreciation, and amortization) is not a measure of financial performance under generally accepted accounting principles, or GAAP, but is used by some investors to determine a company's ability to service or incur indebtedness. EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. EBITDA is not intended to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.
DIRECTED ELECTRONICS, INC.
Condensed Consolidated Balance Sheets
(in thousands)
June 30, December 31,
2006 2005
ASSETS (Unaudited)
Cash and cash equivalents $15,638 $12,167
Accounts receivable, net 46,108 100,140
Inventories 58,823 43,324
Other current assets 14,937 16,597
Total current assets 135,506 172,228
Property and equipment, net 4,859 4,649
Goodwill and intangible assets, net 189,082 188,053
Other assets 5,044 5,690
$334,491 $370,620
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $34,291 $54,520
Accrued expenses 13,055 31,037
Current portion of notes payable 1,699 1,699
Total current liabilities 49,045 87,256
Revolving loan -- 5,200
Senior notes, less current portion 164,061 164,911
Other liabilities 14,585 13,730
Total liabilities 227,691 271,097
Shareholders' equity 106,800 99,523
$334,491 $370,620
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