ARGN » Topics » Third Quarter 2008 Compared with Third Quarter 2007

This excerpt taken from the ARGN 10-Q filed Oct 30, 2008.

Third Quarter 2008 Compared with Third Quarter 2007

Product Revenues. Product revenues for the three months ended September 30, 2008 (“Third Quarter 2008”), were $16,631,000 compared with revenues of $15,909,000 for the three months ended September 30, 2007 (“Third Quarter 2007”), an increase of $722,000, or 5%. Higher sales were primarily the result of new model introductions and a higher average unit price. These increases were partially offset by lower volumes on existing programs. Unit shipments increased to 237,000 units for the Third Quarter 2008 compared with 234,000 units for the Third Quarter 2007. New vehicles equipped with CCS and launched since the Third Quarter 2007 included the Hyundai Genesis, Lexus LX 570, Nissan Teana, Nissan Maxima, Infiniti FX, Jaguar XJ, Jaguar XF, Lincoln MKS, Ford F-Series Pickup, Chevrolet Suburban, Chevrolet Tahoe, Chevrolet Avalanche, GMC Yukon, GMC Yukon XL, GMC Yukon Denali and the GMC Sierra Pickup. Higher average prices per unit were the result of a change in the mix of products sold being weighted more to CCS systems having higher Amerigon content during the Third Quarter 2008 compared with that of the Third Quarter 2007. Content varies among programs based upon differing customer sourcing decisions for certain components that complement the CCS system. Volume decreased on existing programs primarily due to declining overall automotive market volume which has been impacted by slowing economic activity in North America, higher gas prices and decreasing availability of consumer credit.

Cost of Sales. Cost of sales increased to $11,798,000 in the Third Quarter 2008 from $10,736,000 in the Third Quarter 2007. This increase of $1,062,000, or 10%, is attributable to higher sales volumes and a lower gross profit percentage. The gross profit percentage during the Third Quarter 2008 was 29% and was 33% during the Third Quarter 2007. This decrease is primarily attributable to higher raw material costs during the Third Quarter 2008 as compared to the Third Quarter 2007 and an unfavorable change in the mix

 

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of products sold which favored programs having a higher gross margin percentage during the Third Quarter 2007 compared with the Third Quarter 2008. TED’s which represent the key component of the CCS system contain the metal Tellurium (“Te”). During the early months of 2008 the market for Te experienced a significant increase. The average price of a kilogram of Te in 2007 was approximately $100 and increased to a peak of $286 in April 2008. Since that time the average market price has continually decreased to a current average of $215 per Kilogram during September 2008. We do not purchase Te directly but have agreed to price increases for our TED suppliers as a result of the increase in their Te costs. Existing Te supply contracts and on-hand inventory resulted in a delay in the impact of higher Te market prices to us until the Third Quarter 2008. Although the market for Te has moderated, we expect that the lower levels will not result in reduced costs to Amerigon until at least the first quarter 2009, if at all.

Net Research and Development Expenses. Net research and development expenses increased to $1,974,000 in the Third Quarter 2008 from $1,371,000 in the Third Quarter 2007. This $603,000, or 44%, increase was due to increased research activities associated with our advanced TED program and by lower research and development reimbursements. The increase in research and development expenses is associated with a recent breakthrough in our TED material program. With support from Amerigon subsidiary, BSST LLC, a scientist at The Ohio State University recently developed a new efficient TED material having certain desirable properties at high temperatures. Our higher research and development expenses are focused on further advancing and commercializing that new material. Our research and development reimbursements have decreased due to lower partner supported research projects during the Third Quarter 2008. Future research and development reimbursements are not likely to increase proportionately to any future increases in research and development expenses due to an increasing focus on efficient TED material, including that from The Ohio State University, and production process technology advancements for which we do not plan to seek partnership support.

We classify development and prototype costs and related reimbursements as research and development. This is consistent with accounting standards applied in the automotive industry. Depreciation costs for tooling are included in cost of sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $2,005,000 in the Third Quarter 2008 compared with $2,119,000 in the Third Quarter 2007.

Interest Income. We had interest income of $199,000 for the Third Quarter 2008 compared with $251,000 for the Third Quarter 2007. The decrease of $52,000, or 21%, resulted from lower average yields on our cash equivalents and short-term investments offset partially by higher balances on these interest paying investments during the Third Quarter 2008 compared with the Third Quarter 2007 (see “Liquidity and Capital Resources”).

Income Tax Expense. We recorded income tax expense of $430,000 during the Third Quarter 2008. This reflected an estimated effective tax rate for the year of approximately 38%. (Our current income tax expense is expected to be substantially offset by our net operating loss carryforwards. Therefore, we do not expect to have a significant cash outlay for income taxes in the current year.) During the Third Quarter 2007 we recorded an income tax benefit totaling $1,083,000. The benefit resulted from the recognition of certain Federal and state research and development credits (“R&D Credits”) related to our research and development activities during 1999 through 2006. The total credit recorded for this period was approximately $1,700,000. We recorded these R&D Credits as a result of having substantially completed a detailed analysis during the Third Quarter 2007 which substantiated and quantified our ability to claim the credits. This credit was partially offset by our normal tax provision for the Third Quarter 2007.

 

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This excerpt taken from the ARGN 10-Q filed Aug 11, 2008.

Second Quarter 2008 Compared with Second Quarter 2007

Product Revenues. Product revenues for the three months ended June 30, 2008 (“Second Quarter 2008”), were $16,796,000 compared with revenues of $15,058,000 for the three months ended June 30, 2007 (“Second Quarter 2007”), an increase of $1,738,000, or 12%. Higher sales were primarily the result of new model introductions, higher penetration on certain programs and a higher average unit price. These increases were partially offset by lower volumes on existing programs and by a production shutdown at one of our customers which resulted from a labor strike at an automotive supplier, American Axle and Manufacturing Holdings Incorporated (“AXL”). Unit shipments increased to 253,000 units for the Second Quarter 2008 compared with 226,000 units for the Second Quarter 2007. New products equipped with CCS and launched since the Second Quarter 2007 included the Hyundai Genesis, Lexus LX 570, Jaguar XJ, Jaguar XF, Lincoln MKS and three vehicle models not yet announced. We expect that our product revenue over the remainder of the year will increase due to the effect of reaching full production volume on these programs and due to a number of new vehicle introductions which will begin to offer the CCS as an option during the second half of the year. These new vehicles include the Ford F-Series pickup and an expansion into an increased number of models produced by General Motors under their light truck platform known as the GMT 900 series. These include the Chevrolet Suburban, Chevrolet Tahoe, Chevrolet Avalanche, GMC Yukon, GMC Yukon XL, GMC Yukon Denali and the GMC Sierra Pickup. Higher average prices per unit were the result of a change in the mix of products sold being weighted more to CCS systems having higher Amerigon content during the Second Quarter 2008 compared with that of the Second Quarter 2007. Content varies among programs based upon differing customer sourcing decisions for certain components that complement the CCS system. Also, two vehicles, beginning with the 2008 model year, began to install the CCS as a standard feature; previously, the CCS was installed on these vehicles at the option of the car buyer. Volume decreased on existing

 

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programs primarily due to declining overall automotive market volume which has been impacted by slowing economic activity in North America and higher gas prices. We estimate that the AXL strike reduced product revenue for the Second Quarter 2008 by $1,000,000 to $1,200,000.

Cost of Sales. Cost of sales increased to $11,517,000 in the Second Quarter 2008 from $9,903,000 in the Second Quarter 2007. This increase of $1,614,000, or 16%, is attributable to higher sales volumes and a lower gross profit percentage. The gross profit percentage during the Second Quarter 2008 was 31% and was 34% during the Second Quarter 2007. This decrease is primarily attributable to an unfavorable change in the mix of products sold which favored programs having a higher gross margin percentage during the Second Quarter 2007 compared with the Second Quarter 2008.

Net Research and Development Expenses. Net research and development expenses increased to $1,497,000 in the Second Quarter 2008 from $1,340,000 in the Second Quarter 2007. This $157,000, or 12%, increase was due to the addition of CCS engineering resources to support the large number of upcoming new vehicle programs, continued development of new automotive and non-automotive TE-based products and increased research activities associated with our advanced TED program, offset partially by higher research and development reimbursements. The higher research and development reimbursements reflect an increase in government research programs including the Department of Energy sponsored Automotive Waste Heat Recovery Program which is currently in phase three of four. We expect that our net research and development expenses will increase substantially during the remainder of 2008 and in 2009 as we continue to increase our development activities supporting the advanced TED technology. This increase is expected to be approximately $400,000 to $500,000 per quarter. Our research and development reimbursements are not likely to increase proportionately to the increase in research and development expenses due to an increasing focus on certain TED material and production process technology advancements for which we do not plan to seek partnership support.

We classify development and prototype costs and related reimbursements as research and development. This is consistent with accounting standards applied in the automotive industry. Depreciation costs for tooling are included in cost of sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased slightly to $2,032,000 in the Second Quarter 2008 compared with $2,023,000 in the Second Quarter 2007. We expect that selling, general and administrative expenses will increase by 5-10% in the second half of the year due to an approximately $100,000 per quarter increase in stock option compensation expense related to a stock option grant to employees approved by the Board of Directors on July 23, 2008 and due to marketing and administrative costs associated with new automotive and non-automotive TE-based product introductions.

Interest Income. We had interest income of $218,000 for the Second Quarter 2008 compared with $244,000 for the Second Quarter 2007. The decrease of $26,000, or 11%, resulted from lower average yields on our cash equivalents, short-term investments and long-term investments offset partially by higher balances on these interest paying investments during the Second Quarter 2008 compared with the Second Quarter 2007 (see “Liquidity and Capital Resources”).

Income Tax Expense. We recorded income tax expense of $749,000 during the Second Quarter 2008. This reflected an estimated effective tax rate for the year of approximately 37%. Our current income tax expense is expected to be substantially offset by our net operating loss carryforwards. Therefore, we do not expect to have a significant cash outlay for income taxes in the current year. The income tax expense for the Second Quarter 2007 was $830,000 representing an effective tax rate of 40%. The higher rate for the prior year was primarily due to having not recorded a benefit for research and development tax credits during that

 

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period. We began recording the benefit of our research and development tax credits during the third quarter of 2007 at which time we had completed a study of the qualification of our research and development activities toward such credits.

This excerpt taken from the ARGN 10-Q filed May 2, 2008.

First Quarter 2008 Compared with First Quarter 2007

Product Revenues. Product revenues for the three months ended March 31, 2008 (“First Quarter 2008”), were $17,360,000 compared with revenues of $16,273,000 for the three months ended March 31, 2007 (“First Quarter 2007”), an increase of $1,087,000, or 7%. Higher sales were primarily the result of new model introductions, higher penetration on certain programs and a higher average unit price. These increases were partially offset by lower volumes on existing programs. Unit shipments increased to 253,000 units for the First Quarter 2008 compared with 240,000 units for the First Quarter 2007. New products equipped with CCS and launched since the First Quarter 2007 included the Hyundai Genesis, Lexus LX 570, Jaguar XJ, Jaguar XF, Lincoln MKS and two vehicle models not yet announced. We expect that a number of new vehicles which will begin to offer the CCS as an option will favorably impact our product revenue over the remainder of the year. Higher average prices per unit were the result of a change in the mix of products sold being weighted more to CCS systems having higher Amerigon content during the First Quarter 2008 compared with that of the First Quarter 2007. Content varies among programs based upon differing customer sourcing decisions for certain components that complement the CCS system. A portion of our higher sales was attributable to two vehicles which, beginning with the 2008 model year, began to install the CCS as a standard feature. Previously, the CCS was installed at the option of the car buyer. Volume decreased on existing programs primarily due to declining overall automotive market volume which has been impacted by slowing economic activity in North America and higher gas prices.

Cost of Sales. Cost of sales increased to $11,801,000 in the First Quarter 2008 from $11,059,000 in the First Quarter 2007. This increase of $742,000, or 7%, is attributable to higher sales volumes.

 

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Net Research and Development Expenses. Net research and development expenses increased to $1,590,000 in the First Quarter 2008 from $1,143,000 in the First Quarter 2007. This $447,000, or 39%, increase was due to the addition of CCS engineering resources to support the large number or upcoming new vehicle programs, continued development of new automotive and non-automotive TE-based products and increased research activities associated with our advanced TED program offset partially by higher research and development reimbursements. The higher research and development reimbursements reflect an increase in government research programs including the Department of Energy sponsored Automotive Waste Heat Recovery Program which is currently in phase three of four. We expect that our net research and development expenses will increase during the remainder of 2008 and in 2009 as we continue to increase our development activities supporting the advanced TED technology. Our research and development reimbursements may not increase proportionately to the increase in research and development expenses due to an increasing focus on certain TED material and production process technology advancements for which we do not plan to seek partnership support.

We classify development and prototype costs and related reimbursements as research and development. This is consistent with accounting standards applied in the automotive industry. Depreciation costs for tooling are included in cost of sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $2,127,000 in the First Quarter 2008 compared with $2,153,000 in the First Quarter 2007. This represented a $26,000, or 1%, decrease.

Interest Income. We had interest income of $297,000 for the First Quarter 2008 compared with $186,000 for the First Quarter 2007. The increase of $111,000, or 60%, resulted from higher cash, short-term investment and long-term investment balances during the First Quarter 2008 compared with the First Quarter 2007 partially offset by lower average yields on our interest paying investments (see “Liquidity and Capital Resources”).

Income Tax Expense. We recorded income tax expense of $820,000. This reflected an estimated effective tax rate for the year of approximately 37%. Our current income tax expense is expected to be substantially offset by our net operating loss carryforwards. Therefore, we do not expect to have a significant cash outlay for income taxes in the current year. The income tax expense for the First Quarter of 2007 was $860,000 representing an effective tax rate of 40%. The higher rate for the prior year was primarily due to having not recorded a benefit for research and development tax credits during that period. We began recording the benefit of our research and development tax credits during the third quarter of 2007 at which time we had completed a study of the qualification of our research and development activities toward the credit.

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