Recoton Q2 Sales Flat, Loss Widens

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Lake Mary, Fla. - Accessories maker Recoton reported overall flat sales in the second quarter, while extending its loss for the period.

Consolidated sales hit $124.2 million in the three months, up from $122.9 million in the year-ago period. At the same time, the company recorded a net loss for the second quarter of $25.3 million, compared with a net loss of $2.8 million year over year. Excluding restructuring and one-time charges, the net loss for the second quarter was $4.6 million.

Much of Recoton's financial downturn can be blamed upon its Video Game Segment, where sales in the second quarter, ended June 30, reached $17.2 million, down from $24 million in the same three months in 2001. The segment reported a negative EBIT of $26.9 million in the second quarter, including restructuring and one-time charges, compared with a negative EBIT of $6.4 million in the same quarter last year.

Decreased sales were due to Recoton's decision to minimize sales of certain lower margin products, lower sales of products for Nintendo Advanced GameBoy and GameBoy, and lower-than-expected sales of products for Nintendo GameCube and Microsoft Xbox, due to first-party manufacturer market share gains.

Recoton, however, said it has substantially completed restructuring of its Video Game Segment, resulting in a one-time charge of $20.6 million. This effort is expected to result in annualized cost savings of $11 million, with the operating loss in the segment, before restructuring and one-time charges, totaling about $6.3 million in the second quarter of 2002, and about $12.5 million for the six months.

'We believe that our business plan, which includes the restructuring at our Video Game Segment, should eliminate the drag that this business segment has had on overall operating results,' said Robert Borchardt, president/CEO. 'Additionally, any asset sales that may occur will further serve to strengthen Recoton's financial position by allowing us to reduce debt and improve liquidity.'

The company has retained the services of Jefferies & Company to assist in the sale of certain assets that it considers non-strategic to its business plan going forward.

Also, as a result of the Video Game Segment restructuring and one-time charges, and the operating loss, Recoton is not in compliance with covenants set forth in its loan agreements. The company is actively negotiating with its lenders to obtain waivers of these defaults.

Sales in the Audio Segment at Recoton during the second quarter jumped 16 percent, hitting $59.2 million, up from $49.9 million in the year-ago period. However, due primarily to product mix and seasonal inventory transition, Earnings Before Interest and Taxes (EBIT) in the company's largest dollar volume segment remained flat at $2.6 million in the second three months, compared with $2.6 million in the second quarter of 2001.

Sales in the consumer electronics Accessories Segment in the second quarter dipped to $47.8 million, down from $48.9 million in the same quarter last year. The company attributed the decrease to a combination of decreased OEM sales and lower sales in its European accessories operations. EBIT in the segment came in at $5.3 million for the second quarter, compared with $7.4 million year over year, due mainly to lower sales, as well as increased losses at its European operations and higher operating expenses.

Consolidated Recoton sales for the six months climbed to $255.4 million, up from $251.1 million the previous year. Net loss for the six months jumped to $29.8 million, including charges, vs. $9.2 million, excluding charges. This compares with $5.6 million year over year.

In the Video Game Segment, sales in the six months came in at $46.7 million, down from $55.7 million in the first six months of last year. The segment reported a negative EBIT of $33.2 million for the first half, down from a negative EBIT of $10.1 million in the first six months of 2001.

Six-month Audio Segment sales reached $115.3 million, up from $99.3 million in the same period in 2001. EBIT for the segment in the first half hit $7.4 million, up from $5.3 million in the same period in 2001.

Sales in the Accessory Segment for the six months dropped to $93.5 million, compared with $96.1 million in the prior-year period. EBIT dropped to $7.4 million in the period, compared with $12.3 million year over year.

Looking ahead, Recoton expects improved operating results in the second half of 2002, with revised revenue of between $275 million and $290 million for the second six months. Second half EBIT is expected to range between $18 million and $20 million.

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