cord sales and net income results for the quarter ended June 30, 2006. The Company also raised guidance for the full year of 2006.
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."
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."
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.
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