Economic Slowdown Jeopardizes Telex Turnaround
By Chris Doering
Dynamic Market Systems

The stagnant US economy and lack of box office excitement (not to mention receipts) continue to impact pro audio manufacturers. Telex Communications, the $200 million global manufacturer formed by Greenwich Capital Partners' merger of Telex and EV, is the latest to expose its struggles to the financial community via the SEC's reporting requirements.

Earlier this year, Telex issued an additional $20 million in debt at a whopping 27.3% interest rate. Almost half of the junk bonds were purchased by TCI Investments LLC, a sister company to Greenwich Capital Partners. Even with an $18.8 million cash cushion as a result of the debt issue, Telex is peering down an awfully long tunnel, with not much light at the end.

Telex Sales: Click image for full chart

To meet its accumulated debt obligations, Telex must come up with $31.4 million in cash by the end of this year. Meanwhile, the slowing economy is making it hard for Telex to turn the corner into profitability (altogether, EV and Telex have lost about $100 million since they were combined in May of 1997).

The most recent quarterly report touts management's "strategies to significantly improve operating results by reducing purchased material costs through more effective supply-chain management, increasing selling prices on selected products, managing other operating costs, reducing inventory, improving accounts receivable collections and introducing several new products." But the first half numbers tell a different story: gross margin dipped slightly from 39% a year ago to 38.2% in the first half of 2001, due to the inefficiencies of starting new plants and the costs of shutting down old ones. Aren't big companies supposed to benefit from economies of scale? Maybe Telex should talk to NEXO, which runs at almost 45% gross margin despite being about 1/40th its size. Despite the fact that most of the restructuring charges associated with the dismissal of over 600 employees were taken last year, the costs of servicing old debt and issuing new debt pushed up other costs by 4%.

Meanwhile, sales were down 11.9% from last year's first half. Telex now divides itself into Professional Sound & Entertainment and Multimedia/Audio Communications. The Pro Sound segment is roughly two-thirds of the business, even though all microphone lines are part of Multimedia. "Lower speaker sales" through MI retail, installed sound, touring, recording and broadcast channels caused the drop of 8.3% in Telex Pro Sound business, according to the 10-Q. Multimedia was off 18.6% due to lower sales of hearing aids and assisted listening devices and of microphones and headsets to the computer industry.

Telex Debt: Click Image for full chart

Slipping sales and climbing costs produced a net loss of over $17 million for the first half of 2001, on sales of $148 million. A company as big as Telex now is could probably afford to continue losing money, except for some major debt balloons that are looming on the horizon like the Hindenberg coming in for a landing.

Telex has accumulated over $350 million in total debt, and while much of it is relatively long term, the company has to pay $31.4 million on its Term Loan facility by the end of the year, while generating "sufficient cash to meet its liquidity needs." The books showed $2.7 million in cash at the start of the year, but only $1.6 million at the end of June. These are not healthy signs.

If Telex makes it through the end of year in recognizable form, it will have to deal with another accounting bombshell, called Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets." Issued by the Financial Accounting Standards Board, which defines standard accounting practices for the USA, SFAS revises procedures for reporting on "business combinations" such as Telex. In the past, the "goodwill and other intangible assets" that were part of transactions like the combination of Telex and EV were amortized over a period of time. For accounting purposes, they were treated like buildings, machinery and other tangible assets that lose value over time. SFAS 142 revises the accounting procedure: "goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment."

SFAS 142 is good news for marketers everywhere, since it is a small step towards recognition of a brand as the one corporate asset that doesn't inevitably decline over time. Telex is required to conduct such a review of its intangible assets, which currently include the Telex and EV brands along with brands like Midas, Klark-Teknik, and Dynacord, in January 2002. If sales continue to shrink, it will be interesting to see how Telex deals with the $56 million of intangible assets now on its balance sheet. Perhaps in preparation, Telex has increased its promotional expenditures in 2001.

Considering the declining cash balance and the enormous debt payment due at the end of the year, it's not surprising that Telex is planning to "liquidate certain businesses and assets" of the company. Still no deal memos announced, though, and time is getting tight. If the hoped-for operating profits and profitable sales of businesses and brands don't work out soon, Telex could be on the auction block by the next NAMM show. When the quarterly report acknowledges the possibility, it's a sign that management may be thinking about a probability.