Universal Power Group Reports 52% Increase in Third Quarter Net Income

November 10, 2009 8:30 AM EST

CARROLLTON, Texas--(BUSINESS WIRE)-- Universal Power Group, Inc. (NYSE Amex: UPG), a Texas-based distributor and supplier of batteries and related power accessories and a provider of supply chain and other value-added services, reported a 52.4 percent increase in net income despite softer sales for the third quarter ended Sept. 30, 2009. In addition, as a result of supply chain efficiencies, UPG reported improved operating leverage which drove margins and an $8.0 million decrease in inventory levels year-to-date.

Due largely to economic conditions, UPG reported a 10.3 percent decline in net sales to $27.5 million, compared to $30.6 million for the third quarter of 2008. Increased sales volume on certain higher-margin products, reduced volatility for raw material costs and improved efficiencies across the company's supply chain helped boost gross margin in the quarter to 16.5 percent of net sales, compared to 15.0 percent for the same quarter of 2008. UPG reported gross profit of $4.5 million in the 2009 third quarter, compared to gross profit of $4.6 million in the 2008 third quarter.

The Company reported operating income of $1.2 million, an increase of 23.1 percent compared to operating income of $1.0 million in the third quarter of 2008. At the bottom line, UPG posted net income of $0.6 million, or $0.12 per diluted share, for the third quarter of 2009 compared to net earnings of $0.4 million, or $0.08 per diluted share, in the comparable quarter of 2008.

"This was another quarter in the right direction, highlighted by margin improvements, continued control over operating costs and strengthening our balance sheet," stated UPG's president and chief executive officer, Ian Edmonds. "We are taking every step to add efficiencies into our business and to position ourselves for the eventual economic recovery. Improved relationships with our suppliers, increased efficiencies within our supply chain and reduced volatility in certain raw material costs all contributed to the gross margin improvements. Several of these factors are also helping us increase inventory turnover, improving our balance sheet and providing better service to our customers. We also made strides in reducing our operating expenses in the third quarter, an indication of our leaner structure."

Third Quarter and Year-to-Date Overview

Net sales for the third quarter fell to $27.5 million from $30.6 million in the third quarter of 2008. For the first nine months, net sales fell 8.0 percent to $83.1 million, from $90.4 million in the first nine months last year. Core battery and related power accessory revenues (from sources other than Broadview Security and its authorized dealers) decreased 15.9 percent to $14.5 million in the third quarter of 2009, compared with core revenues of $17.3 million for the third quarter of 2008. UPG attributed the lower sales volume in its core business to the general slowdown in global demand. For the nine-month period, core battery and related power accessory revenues decreased 10.6 percent to $44.7 million, from $50.0 million in 2008.

UPG reported net sales from Broadview Security and its authorized dealers in the third quarter of 2009 of $13.0 million, a decrease of 3.0 percent year-over-year from $13.4 million in the third quarter of 2008. For the nine-month period, net sales from Broadview Security and its authorized dealers declined 4.8 percent year-over-year to $38.4 million, compared to $40.4 million in the same quarter of 2008. Net sales from Broadview Security and its authorized dealers accounted for 47.2 percent of total revenues in the third quarter of 2009, compared with 43.6 percent in the prior year's quarter, and 46.2 percent of total revenues in the 2009 nine-month period, compared to 44.7 percent in 2008.

Gross profit was $4.5 million, or 16.5 percent of sales in the 2009 third quarter, compared to gross profit of $4.6 million, or 15.0 percent of sales in the 2008 third quarter. For the first nine month of 2009, gross profit rose to $14.5 million, or 17.4 percent of sales, from $13.6 million, or 15.0 percent of sales in the first nine months of 2008.

Operating expenses decreased by $0.3 million, or 8.1 percent, in the third quarter of 2009 compared to the third quarter of 2008. The company attributed the improvement in operating expenses to a leaner operational structure and general efficiency improvements across the organization. Year-to-date operating expenses increased $2.9 million to $13.3 million, compared with $10.4 million in the comparable period of 2008. The majority of this increase was due to $2.5 million in settlement charges incurred in the first quarter, relating to the departure of the Company's former CEO and the cancellation of the agreement with the Company's former primary independent sourcing agent.

For the nine-month period, UPG reported operating income of $1.2 million, compared to operating income of $3.2 million for the first nine months of 2008. Excluding the settlement charges incurred in the first quarter, UPG's operating income would have been $3.7 million, an increase of 15.7 percent over the comparable period in the prior year, and net income before provision for income taxes would have been $3.0 million, an increase of approximately 21.1 percent over the 2008 period. For the first nine months, UPG reported a net loss of $0.5 million, or $0.10 per share, compared with net income of $1.4 million, or $0.29 per share in the first nine months of 2008.

Balance Sheet & Financial Position

On the balance sheet, inventory was reduced by $8.0 million year-to-date, to $29.3 million, in line with management's commitment to reduce inventory levels from the high levels at the end of 2008. UPG's management team is committed to better controlling inventory levels in an effort to improve efficiencies, increase inventory turnover and maintain adequate inventory to support current levels of customer demand. UPG also reduced outstanding borrowings to $9.1 million, compared with $14.4 million at the end of 2008.

UPG generated operating cash flow of $6.5 million in the nine months ended Sept. 30, 2009, compared to operating cash flow of $2.2 million in the same period of 2008. The improved cash generated by operations in 2009 was used primarily to reduce outstanding borrowings on its short-term line of credit. The company ended the third quarter with $0.4 million in cash and cash equivalents.

Outlook

Edmonds continued: "Though we continue to face soft conditions in the broad economy, we are seeing more reasons for optimism in 2010, especially when considering our expanded relationships with existing customers, as well as our ongoing efforts to establish new relationships. Our strong balance sheet, along with our proven ability to manage costs and improve efficiencies, will allow us to capitalize on new opportunities to increase our product offerings and provide our retail and strategic partners a more complete line of batteries and power accessories. It will also help us secure opportunities to broaden our base of suppliers, including opportunities for potential joint-ventures with new and existing partners. The vision behind all of these initiatives is improved bottom line results, supported by diversification into new markets and a global reach for UPG's products."

Reconciliation of GAAP Operating Income and Income Before Provision for Income Taxes to Non-GAAP Operating Income and Income Before Provision for Income Taxes (Unaudited)

The following table reconciles Operating Income and Income before provision for income taxes, as reported in accordance with U.S. Generally Accepted Accounting Principals ("GAAP"), to non-GAAP operating income and Income before provision for income taxes. We believe that non-GAAP operating income, which is generally operating income less costs related to settlement agreements, more accurately reflects our operating efficiency. Non-GAAP operating income and income before provision for income taxes, are non-GAAP financial measures and should not be considered an alternative to, or more meaningful than, net income prepared on a GAAP basis. Additionally, non-GAAP operating income and income before provision for income taxes may not be comparable to similar metrics used by others in our industry.

                 Financial Summary (Non-GAAP)

                 (unaudited)

                  Three Months Ended September  Nine Months Ended September 30,
                  30,

                  2009         2008             2009          2008

Operating income
and income
before provision
for income taxes
as reported:

Operating         $ 3,305,166  $ 3,595,313      $ 10,726,856  $ 10,366,426
expenses

Settlement          --           --               2,529,345     --
expenses

Total operating     3,305,166    3,595,313        13,256,201    10,366,426
expenses

Operating income    1,231,943    1,000,619        1,194,297     3,218,784

Other expense,      (240,110)    (235,645)        (718,791)     (736,714)
net

Income before
provision for       991,833      764,974          475,506       2,482,070
income taxes

Non-GAAP
measures to
exclude
settlement
expenses from
operating
expenses:

Settlement          --           --               2,529,345     --
expenses

Non-GAAP          $ 1,231,943  $ 1,000,619      $ 3,723,642   $ 3,218,784
operating income

Non-GAAP income
before provision  $ 991,833    $ 764,974        $ 3,004,851   $ 2,482,070
for income taxes

Conference Call Information

Universal Power Group will host an investor conference call today, Tuesday, November 10, 2009 at 11:30 a.m. EST (10:30 a.m. CST) to discuss financial results for the third quarter and nine months ended September 30, 2009.

Interested parties may access the conference call by dialing 1.866.730.5762; passcode 10540969. The conference call will also be broadcast live on www.upgi.com and through the Thomson StreetEvents Network. Individual investors can listen to the call at www.earnings.com, Thomson's individual investor portal. Institutional investors can access the call via Thomson StreetEvents (www.streetevents.com), a password-protected event management site.

A replay of the conference call will be made available through November 16, 2009 by calling 1.888.286.8010, passcode 15592079, and an archived webcast will be available at www.upgi.com.

About Universal Power Group, Inc.

Universal Power Group, Inc. (NYSE Amex: UPG) is a leading supplier and distributor of batteries and power accessories, and a provider of supply chain and other value-added services. UPG's product offerings include proprietary brands of industrial and consumer batteries of all chemistries, chargers, jump-starters, 12-volt accessories, solar and security products. UPG's supply chain services include procurement, warehousing, inventory management, distribution, fulfillment and value-added services such as sourcing, battery pack assembly, coordination of battery recycling efforts, and product design and development. For more information, please visit the UPG website at www.upgi.com.

Forward-Looking Statements

Statements in this press release that are not statements of historical or current fact constitute "forward-looking statements." Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the Company's actual operating results to be materially different from any historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements that explicitly describe these risks and uncertainties, readers are urged to consider statements that contain terms such as "believes," "belief," "expects," "expect," "intends," "intend," "anticipate," "anticipates," "plans," "plan," to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's filings with Securities and Exchange Commission. Historical financial results are not necessarily indicative of future performance.

UNIVERSAL POWER GROUP, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

ASSETS

                                                    September 30,  December 31,

                                                    2009           2008

CURRENT ASSETS

Cash and cash equivalents                           $ 442,785      $ 326,194

Restricted cash                                       --             900,000

Accounts receivable:

Trade, net of allowance for doubtful accounts of      11,969,526     12,423,279
$1,210,692 and $1,143,213

Other                                                 18,654         50,303

Inventories - finished goods, net of allowance for    29,349,295     37,304,500
obsolescence of $522,908 and $358,350

Current deferred tax asset (net of valuation          1,697,163      1,555,173
allowance of $768,324 and $0)

Income tax receivable                                 --             193,386

Prepaid expenses and other current assets             1,156,281      880,528

Total current assets                                  44,633,704     53,633,363

PROPERTY AND EQUIPMENT

Logistics and distribution systems                    1,821,590      1,795,935

Machinery and equipment                               994,137        651,916

Furniture and fixtures                                436,424        436,424

Leasehold improvements                                388,334        388,334

Vehicles                                              223,633        155,630

                                                      3,864,118      3,428,239

Less accumulated depreciation and amortization        (1,851,550)    (1,407,712)

Net property and equipment                            2,012,568      2,020,527

OTHER ASSETS                                          246,896        86,879

TOTAL ASSETS                                        $ 46,893,168   $ 55,740,769

UNIVERSAL POWER GROUP, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)

LIABILITIES AND SHAREHOLDERS' EQUITY

                                                     September 30,  December 31,

                                                     2009           2008

CURRENT LIABILITIES

Line of credit                                       $ 9,092,470    $ 14,351,775

Accounts payable                                       11,394,754     16,418,768

Accrued liabilities                                    1,113,627      200,100

Interest rate swap liability                           417,586        484,131

Current portion of notes payable to Zunicom, Inc.      1,462,500      1,462,500

Current portion of settlement expenses                 949,388        --

Current portion of capital lease

obligations                                            20,549         --

Current portion of deferred rent                       81,035         57,984

Total current liabilities                              24,531,910     32,975,258

LONG TERM LIABILITIES

Notes payable to Zunicom, Inc., less current           2,559,375      3,656,250
portion

Capital lease obligations, less current portion        54,081         --

Settlement expenses, less current portion              1,233,712      --

Non-current deferred tax liability                     190,585        230,611

Deferred rent, less current portion                    70,345         168,317

Total long term liabilities                            4,108,098      4,055,178

TOTAL LIABILITIES                                      28,640,008     37,030,436

COMMITMENTS

SHAREHOLDERS' EQUITY

Common stock - $0.01 par value, 50,000,000 shares      50,000         50,000
authorized, 5,000,000 shares issued and outstanding

Additional paid-in capital                             15,550,947     15,529,783

Retained earnings                                      2,927,820      3,450,076

Accumulated other comprehensive loss                   (275,607)      (319,526)

Total shareholders' equity                             18,253,161     18,710,333

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $ 46,893,168   $ 55,740,769

UNIVERSAL POWER GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

                 Three Months Ended September  Nine Months Ended September 30,
                 30,

                 2009          2008            2009          2008

Net sales        $ 27,494,909  $ 30,648,315    $ 83,132,341  $ 90,372,517

Cost of sales      22,957,800    26,052,383      68,681,843    76,787,307

Gross profit       4,537,109     4,595,932       14,450,498    13,585,210

Operating          3,305,166     3,595,313       10,726,856    10,366,426
expenses

Settlement         --            --              2,529,345     --
expenses

Total operating    3,305,166     3,595,313       13,256,201    10,366,426
expenses

Operating          1,231,943     1,000,619       1,194,297     3,218,784
income

Other income
(expense)

Interest
expense
(including
$66,353,           (238,936)     (235,701)       (719,732)     (737,283)
$88,471,
$213,184 and
$263,490 to
Zunicom, Inc.)

Other expense,     (1,174)       --              (1,174)       --
net

Interest income    --            56              2,115         569

Total other        (240,110)     (235,645)       (718,791)     (736,714)
expense, net

Income before
provision for      991,833       764,974         475,506       2,482,070
income taxes

Provision for      (379,765)     (363,369)       (997,762)     (1,053,249)
income taxes

Net income       $ 612,068     $ 401,605       $ (522,256)   $ 1,428,821
(loss)

Net income
(loss) per
share

Basic            $ 0.12        $ 0.08          $ (0.10)      $ 0.29

Diluted          $ 0.12        $ 0.08          $ (0.10)      $ 0.29

Weighted
average number
of shares
outstanding

Basic              5,000,000     5,000,000       5,000,000     5,000,000

Diluted            5,004,794     5,000,000       5,000,000     5,000,000

UNIVERSAL POWER GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

                                                Nine Months Ended September 30,

                                                2009           2008

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)                               $ (522,256)    $ 1,428,821

Adjustments to reconcile net income (loss) to
net cash provided by operating activities:

Depreciation and amortization of property and     588,616        403,917
equipment

Provision for bad debts                           320,000        91,406

Provision for obsolete inventory                  230,000        140,000

Deferred income taxes                             (182,016)      (137,216)

Loss on disposal of property                      2,174          --

Stock-based compensation                          21,164         124,009

Changes in operating assets and liabilities:

Accounts receivable - trade                       159,087        (3,668,143)

Accounts receivable - other                       31,649         11,378

Inventories                                       7,989,448      3,317,619

Prepaid expenses and other current assets         (275,753)      (341,040)

Income tax receivable                             193,386        --

Other assets                                      --             (18,295)

Accounts payable                                  (5,025,190)    259,956

Accrued liabilities                               890,903        597,280

Settlement expenses                               2,183,100      --

Deferred rent                                     (74,921)       (36,512)

Net cash provided by operating activities         6,529,391      2,173,180

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment               (57,950)       (443,112)

Net cash paid in Monarch acquisition              (892,000)      --

Deposit in escrow account                         --             (900,000)

Change in restricted cash                         900,000        --

Proceeds from sale of equipment                   1,000          --

Net cash used in investing activities             (48,950)       (1,343,112)

CASH FLOWS FROM FINANCING ACTIVITIES

Net activity on line of credit                    (5,259,305)    (129,590)

Payment on notes payable to Zunicom, Inc.         (1,096,875)    (365,625)

Payments on note and capital lease obligations    (7,671)        (6,609)

Net cash used in financing activities             (6,363,851)    (501,824)

Net increase in cash and cash equivalents         116,591        328,244

Cash and cash equivalents at beginning of         326,194        691,288
period

Cash and cash equivalents at end of period      $ 442,785      $ 1,019,532

SUPPLEMENTAL DISCLOSURES

Income taxes paid                               $ 854,837      $ 1,182,162

Interest paid                                   $ 719,732      $ 737,283

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND
INVESTING ACTIVITIES

Purchase of equipment with a note payable       $ 75,961       $ --

    Source: Universal Power Group, Inc.

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