Directed Electronics Reports Record Third Quarter 2006 Sales; Reaffirms and Updates 2006 Earnings Outlook
* Third Quarter 2006 Net Sales Increase 23% to $75.5 Million
* Third Quarter 2006 GAAP Net Income Increases 63% to $3.2 Million, or $0.12 per Diluted Share
* Third Quarter 2006 Pro Forma Net Income Increases 79% to $4.8 Million, or $0.19 per Diluted Share
* 2006 Pro Forma Consolidated Net Income Outlook of $1.09 to $1.13 per Diluted Share
VISTA, Calif., Nov. 14 -- Directed Electronics, Inc. today announced record sales and also announced net income results for the quarter ended September 30, 2006. The Company also reaffirmed and updated guidance for the full year of 2006.
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"We are pleased with our third quarter performance," commented James E. Minarik, Directed's President and Chief Executive Officer. "While our SIRIUS satellite radio products continued to experience outstanding growth, the previously announced FCC inquiry slowed our distribution during the third quarter, shifting approximately $15 million of satellite radio gross sales into the fourth quarter. We are currently shipping all satellite radio receivers as the FCC inquiry has since been finalized. We do not expect that inquiry to have any annual financial impact to Directed. In our security and entertainment sales, a continued significant decline in mobile video, due to industry-wide softness in this category, as well as a slight decline in security sales as retailers delayed their seasonal load-in of these products, were largely offset by continued growth in home audio sales, particularly to Best Buy's Magnolia stores. Our fourth quarter security sales to date have been very robust, giving us confidence in achieving our full year 2006 sales plans."
"We were also pleased in the third quarter in furthering our long term strategy to hold the leading positions in the categories in which we participate," continued Mr. Minarik. "Most notably, we completed the acquisition of Polk Audio making Directed the leading provider of home audio loudspeakers in the United States when combined with our Definitive Technology brand. We expect home theater to continue to be a growing and profitable category in the consumer electronics business, and we now have two of the best brands to capitalize on this trend."
"Including Polk Audio, we have acquired four companies in 2006. In the third quarter, we purchased Directed Electronics Canada, a distributor relationship for over 20 years, which now allows us direct distribution to those customers. In the past two weeks, we also acquired Autostart, a leading Canadian remote start company, providing Directed with access to their exclusive customer relationships. These two acquisitions, combined with our second quarter purchase of Astroflex, will make Directed the leading security and convenience provider in Canada, the second largest market for remote start products," continued Mr. Minarik.
"In the third quarter, we also introduced our new digital spread spectrum technology (SST) security and remote start devices and innovative new satellite radio accessories, including our Soloist Universal Media Dock, as well as introducing the new SIRIUS Stiletto personal satellite radio receiver," stated Mr. Minarik.
"Over the long term, we are well positioned to benefit from these third quarter activities. We are focused on strong execution of our strategies and investments to expand Directed's market share, deliver innovative products to our customers, and generate long-term value for our shareholders," continued Mr. Minarik.
Third Quarter Results
Net sales in the third quarter of 2006 were $75.5 million, an increase of 23.1% over the prior year third quarter net sales of $61.3 million. Net sales for the third quarter of 2006 includes $2.3 million attributable to the recent acquisition of Polk Audio.
Gross sales of satellite radio products were $28.6 million, an increase of 76.0% over the prior year third quarter. Gross sales of security and entertainment products in the third quarter of 2006, including $2.3 million attributable to Polk Audio, were $48.6 million compared with $46.5 million in the prior year third quarter.
Pro forma net income for the third quarter of 2006 increased 79.0% to $4.8 million, or $0.19 per diluted share, compared with pro forma net income available to common shareholders of $2.7 million, or $0.14 per diluted share, in the prior year period. GAAP net income for the third quarter of 2006 increased 63.1% to $3.2 million, or $0.12 per diluted share, compared with GAAP net income available to common shareholders of $1.9 million, or $0.10 per diluted share, in the prior year period. The third quarter 2006 GAAP net income includes a $0.2 million gross profit reduction related to purchase accounting, $1.6 million of expenses for the previously announced patent litigation, $0.8 million of one-time stock compensation expense related to the Polk acquisition, $0.4 million write-off of debt issuance costs, and their related tax effects, and $0.2 million income tax benefit from the revaluation of deferred tax assets and liabilities. The third quarter 2005 GAAP net income available to common shareholders included $0.2 million of management fees to a related party, $0.5 million of IPO related costs, and their related tax effects.
Year-to-Date Results
Net sales for the first nine months of 2006 were $227.5 million, an increase of 34.6% over the first nine months of 2005 net sales of $169.0 million. Gross sales of satellite radio products were $106.1 million, an increase of 135.7% over the first nine months of 2005. Gross sales of security and entertainment products for the first nine months of 2006, including $2.3 million attributable to Polk Audio, were $125.8 million, compared with $128.1 million in the same period of the prior year.
Pro forma net income for the first nine months of 2006 increased 94.3% to $11.4 million, or $0.44 per diluted share, compared with pro forma net income available to common shareholders of $5.9 million, or $0.32 per diluted share, in the prior year period. GAAP net income for the first nine months of 2006 increased 128.7% to $10.2 million, or $0.40 per diluted share, compared with GAAP net income available to common shareholders of $4.5 million, or $0.24 per diluted share, in the prior year period. The first nine months of 2006 GAAP net income includes a $0.2 million gross profit reduction related to purchase accounting, $1.6 million of expenses for the previously announced patent litigation, $0.8 million of one-time stock compensation expense related to the Polk acquisition, $0.4 million write-off of debt issuance costs, and their related tax effects, and $0.7 million income tax benefit from the revaluation of deferred tax assets and liabilities. The first nine months 2005 GAAP net income available to common shareholders included $0.5 million of management fees to a related party, $0.8 million of IPO costs, and their related tax effects.
Gross Profit and Operating Margins
For the third quarter of 2006, pro forma gross profit increased to $25.2 million, or 33.4% of net sales, compared with $21.7 million, or 35.3% of net sales, in the prior year period. GAAP gross profit for the third quarter of 2006 increased to $25.0 million, or 33.1% of net sales, compared to $21.7 million, or 35.3% of net sales, in the prior year period. For the first nine months of 2006, GAAP gross profit increased 14.7% to $68.4 million, compared with $59.7 million in the prior year period. Gross margins have declined year over year 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 third quarter of 2006, pro forma EBITDA (earnings before interest, taxes, depreciation and amortization) increased 13.6% to $13.0 million, or 17.2% of net sales, from $11.4 million, or 18.6% of net sales, in the prior year third quarter. For the third quarter of 2006, GAAP EBITDA decreased to $10.3 million from $10.8 million in the prior year third quarter. For the first nine months of 2006, pro forma EBITDA increased 12.7% to $33.4 million, or 14.7% of net sales, from $29.6 million, or 17.5% of net sales, in the prior year period. For the first nine months of 2006, GAAP EBITDA increased to $30.7 million from $28.2 million in the prior year period.
Balance Sheet and Cash Flows
Directed had $16.3 million in cash as of September 30, 2006, and generated $14.6 million of cash provided by operating activities in the first nine months of 2006, compared to $12.7 million of cash used in operating activities in the prior year period primarily due to changes in working capital. In connection with the acquisition of Polk Audio, Directed borrowed an additional $141 million in term debt resulting in a total of $306 million in total debt as of September 30, 2006.
"We are very pleased with our cash flow from operations of $14.6 million during the first nine months of 2006, which is an increase of $27.3 million from the prior year period," stated John D. Morberg, Directed's Chief Financial Officer. "Our favorable cash flow characteristics have provided Directed with the financial flexibility to add to our debt levels and purchase Polk Audio, as well as to continue our long term objectives. We expect our net debt to pro forma EBITDA to peak in the low 4x's in 2006, and then quickly decline in the first half of next year as we collect accounts receivable and sell through inventories due to significant fourth quarter sales."
Outlook for 2006
Directed currently expects 2006 net sales to increase in the range of 45% to 50% over the prior year, to approximately $440 million to $460 million, including approximately $25 million attributable to Polk Audio. Excluding Polk Audio's sales, the Company currently expects gross sales of security and entertainment products to increase in the 6% - 8% range over the prior year, and gross sales of satellite radio products to increase in excess of 75%.
Directed currently expects 2006 pro forma net income per diluted share in the range of $1.09 - $1.13, including the previously announced contribution to earnings from Polk Audio of $0.03 - $0.04 per diluted share. This pro forma net income per diluted share guidance excludes the $0.7 million year-to-date income tax benefit related to the revaluation of deferred tax assets and liabilities, one-time legal fees expected to total approximately $2.0 million, or $0.05 per diluted share, in defense of the previously disclosed patent litigation, and the purchase accounting impact on net income of acquired companies including the gross profit impact of selling through acquired inventories which are required to be written up to fair value less cost to sell. 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.
Directed expects to provide 2007 sales and earnings guidance during the 2006 year-end earnings release, currently expected to occur in March of 2007.
Conference Call and Webcast
Directed Electronics will host a conference call and webcast to discuss its financial results today, November 14th, at 5:00 p.m. EST. The conference call may include forward-looking statements. 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, December 1, 2006. The company's financial results are also available online at www.directed.com.
About Directed Electronics, Inc.
Headquartered in Vista, California, Directed Electronics is the largest designer and marketer in North America of premium home theater loudspeakers, consumer branded vehicle security, vehicle remote start and convenience systems, and the largest supplier of aftermarket satellite radio receivers based upon sales. Directed is also a major supplier of mobile audio and video systems and has exclusive rights to market and sell certain SIRIUS-branded satellite radio receivers and accessories to Directed's existing U.S. retailer customer base. In the home audio market, Directed designs and markets award-winning Polk Audio(R) and Definitive Technology(R) premium loudspeakers. Directed's broad portfolio of security products, remote start, hybrid systems, GPS tracking, and navigation systems are sold under leading brands including Viper(R), Clifford(R), Python(R), Astroflex(R) and Autostart(R). Directed's mobile audio and video products include speakers, subwoofers, amplifiers, video screens and digital media players, sold under its Polk MOMO(R), Orion(R), Precision Power(R), Directed Audio(R), Xtreme(R) Directed Video(R), Directed Mobile Media(R) and Automate(R) brand names. Directed was founded in 1982 and markets its broad portfolio of products through many channels including leading retailers and specialty chains throughout North America and around the world. More information is available at www.directed.com.
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, expected debt, 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
09/30/2006 09/30/2005 09/30/2006 09/30/2005
Net product sales $74,498 $60,522 $74,498 $60,522
Royalty and other revenue 1,002 794 1,002 794
Net Sales 75,500 61,316 75,500 61,316
Cost of sales 50,516 39,662 50,282 39,662
Gross profit 24,984 21,654 25,218 21,654
Operating expenses:
Selling, general and
administrative 16,211 11,966 13,784 11,508
Management fee to
related party -- 185 -- --
Total operating expenses 16,211 12,151 13,784 11,508
Income from operations 8,773 9,503 11,434 10,146
Other income (expense):
Interest expense, net (4,120) (5,585) (3,779) (5,585)
Income before provision for
income taxes 4,653 3,918 7,655 4,561
Provision for income taxes 1,475 1,944 2,878 1,856
Net income 3,178 1,974 4,777 2,705
Net income attributable to
participating
securityholders -- 26 -- 36
Net income available to
common shareholders $3,178 $1,948 $4,777 $2,669
Net income per common share:
Basic $0.12 $0.10 $0.19 $0.15
Diluted $0.12 $0.10 $0.19 $0.14
Weighted average number of
shares:
Basic 25,776 18,583 25,776 18,583
Diluted 25,780 18,583 25,780 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 the Company believes 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
09/30/2006 09/30/2005
GAAP net income $3,178 $1,974
Adjustments:
Gross profit reduction from purchase accounting 234 --
Patent litigation costs 1,576 --
One-time stock compensation expense related to
Polk acquisition 767 --
Write-off of debt issuance costs 425 --
Management fee to related party -- 185
IPO related costs -- 458
Tax effects of adjustments (1,171) 88
Revaluation of deferred tax assets
and liabilities (232) --
Pro forma net income 4,777 2,705
Pro forma net income attributable to
participating securityholders -- 36
Pro forma net income available to
common shareholders $4,777 $2,669
GAAP net income per common share, diluted $0.12 $0.10
Pro forma net income per common share, diluted $0.19 $0.14
Diluted weighted average number of
shares (GAAP and pro forma) 25,780 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
09/30/2006 09/30/2005 09/30/2006 09/30/2005
Net income $3,178 $1,974 $4,777 $2,705
Adjustments:
Interest expense, net 4,120 5,585 3,779 5,585
Depreciation 451 258 451 258
Amortization 1,092 1,015 1,092 1,015
Taxes 1,475 1,944 2,878 1,856
EBITDA (Note 1) $10,316 $10,776 $12,977 $11,419
DIRECTED ELECTRONICS, INC.
Itemization of Net Sales
(unaudited, in thousands)
Quarter Quarter
Ended Ended
09/30/2006 09/30/2005
Gross Security and Entertainment Sales $48,592 $46,484
Gross Satellite Radio Sales 28,565 16,233
Rebates and Discounts (2,659) (2,195)
Net Product Sales 74,498 60,522
Royalties and Other Revenue 1,002 794
Net Sales $75,500 $61,316
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
09/30/2006 09/30/2005 09/30/2006 09/30/2005
Net product sales $224,659 $166,820 $224,659 $166,820
Royalty and other revenue 2,820 2,217 2,820 2,217
Net Sales 227,479 169,037 227,479 169,037
Cost of sales 159,063 109,367 158,829 109,367
Gross profit 68,416 59,670 68,650 59,670
Operating expenses:
Selling, general and
administrative 42,201 34,838 39,774 33,990
Management fee to related
party -- 539 -- --
Total operating expenses 42,201 35,377 39,774 33,990
Income from operations 26,215 24,293 28,876 25,680
Other income (expense):
Interest expense, net (10,686) (15,647) (10,345) (15,647)
Income before provision for
income taxes 15,529 8,646 18,531 10,033
Provision for income taxes 5,280 4,109 7,116 4,083
Net income 10,249 4,537 11,415 5,950
Net income attributable to
participating
securityholders -- 56 -- 74
Net income available to
common shareholders $10,249 $4,481 $11,415 $5,876
Net income per common share:
Basic $0.40 $0.24 $0.44 $0.32
Diluted $0.40 $0.24 $0.44 $0.32
Weighted average number of
shares:
Basic 25,759 18,583 25,759 18,583
Diluted 25,761 18,583 25,761 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 the Company believes 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
09/30/2006 09/30/2005
GAAP net income $10,249 $4,537
Adjustments:
Gross profit reduction from purchase
accounting 234 --
Patent litigation costs 1,576 --
One-time stock compensation expense
related to Polk acquisition 767 --
Write-off of debt issuance costs 425 --
Management fee to related party -- --
IPO related costs -- --
Tax effects of adjustments (1,171) --
Revaluation of deferred tax assets
and liabilities (665) --
Management fee to related party -- 539
IPO related costs -- 848
Tax effects of adjustments -- 26
Revaluation of deferred tax assets
and liabilities -- --
Pro forma net income 11,415 5,950
Pro forma net income attributable
to participating securityholders -- 74
Pro forma net income available
to common shareholders $11,415 $5,876
GAAP net income per common share, diluted $0.40 $0.24
Pro forma net income per common
share, diluted $0.44 $0.32
Diluted weighted average number of
shares (GAAP and pro forma) 25,761 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
09/30/2006 09/30/2005 09/30/2006 09/30/2005
Net income $10,249 $4,537 $11,415 $5,950
Adjustments:
Interest expense, net 10,686 15,647 10,345 15,647
Depreciation 1,337 888 1,337 888
Amortization 3,143 3,036 3,143 3,036
Taxes 5,280 4,109 7,116 4,083
EBITDA (Note 1) $30,695 $28,217 $33,356 $29,604
DIRECTED ELECTRONICS, INC.
Itemization of Net Sales
(unaudited, in thousands)
YTD YTD
09/30/2006 09/30/2005
Gross Security and Entertainment Sales $125,794 $128,146
Gross Satellite Radio Sales 106,095 45,006
Rebates and Discounts (7,230) (6,332)
Net Product Sales 224,659 166,820
Royalties and Other Revenue 2,820 2,217
Net Sales $227,479 $169,037
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)
September 30, December 31,
2006 2005
ASSETS (Unaudited)
Cash and cash equivalents $16,319 $12,167
Accounts receivable, net 70,492 100,140
Inventories 95,231 43,324
Other current assets 23,645 16,597
Total current assets 205,687 172,228
Property and equipment, net 6,794 4,649
Goodwill and intangible assets, net 357,453 188,053
Other assets 7,874 5,690
$577,808 $370,620
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $69,439 $54,520
Accrued expenses 23,882 31,037
Current portion of notes payable 3,068 1,699
Total current liabilities 96,389 87,256
Revolving loan -- 5,200
Senior notes, less current portion 302,926 164,911
Deferred tax liability 62,779 12,690
Other liabilities 1,276 1,040
Total liabilities 463,370 271,097
Shareholders' equity 114,438 99,523
$577,808 $370,620
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