Cherokee Reports Second Quarter 2008 Financial Results

Cherokee International Corp. announced its financial results for the second quarter ended June 29, 2008, marked by record global sales and further improvement in its gross margins. Net sales for the second quarter of 2008 were $40.5 million, up 37% compared to $29.6 million for the second quarter ended July 1, 2007. Sequentially, net sales for the second quarter of 2008 were up $5.8 million or 17% when compared to $34.7 million for the first quarter of 2008.

The company’s backlog at June 29, 2008 was $54.1 million compared with $47.6 million at July 1, 2007. The book to bill for the second quarter of 2008 was 0.98 to 1.00, compared to 0.94 to 1.00 for the second quarter of 2007.

Net loss for the second quarter of 2008 was $0.6 million, or $0.03 per diluted share. Included in these results is a non-cash impairment charge, related to the company’s European operation, for goodwill under SFAS 142 of $1.1 million, or $0.06 per diluted share, and a non-cash $1.7 million charge or $0.09 per diluted share for a valuation allowance against the company’s European deferred tax assets, as required by SFAS No. 109. Net of these non-recurring items, the company had non-GAAP net income for the second quarter of 2008 of $2.2 million, or $0.11 per diluted share. The company reported a GAAP net loss of $1.7 million, or $0.09 per diluted share for the second quarter of 2007, and GAAP net income of $12 thousand for the first quarter of 2008.

"We experienced continued improvement in our operating results, in which sales, gross margin, and operating profit all improved significantly and continue on a positive trend," said Jeffrey M. Frank, Cherokee’s President and Chief Executive Officer. "We were pleased to report non-GAAP net income of $2.2 million or $0.11 per share, net of the non-recurring items. We continue to experience improved gross margin and operating leverage through increased production levels at our China facility."

Gross profit for the second quarter of 2008 was $11.3 million, up 104%, or $5.8 million, compared to $5.6 million for the same period in 2007, and up 31% sequentially from the first quarter of 2008. Gross profit was higher sequentially during the second quarter due primarily to higher net sales from existing programs along with the continued introduction of new programs.

Operating income increased by $4.3 million to $1.8 million for the second quarter of 2008 compared to a loss of $2.5 million in the second quarter of 2007. Excluding the non-cash impairment charge for goodwill of $1.1 million, non-GAAP operating income increased by $5.4 million to $2.9 million. This compares to a GAAP operating loss of $2.5 million for the second quarter of 2007. GAAP operating margin for the second quarter of 2008 increased to 4.5% income from an 8.5% loss in the prior year period. On a non-GAAP basis, the operating margin was 7.2% for the second quarter of fiscal 2008, net of non-recurring items.

For the six months ended June 29, 2008, net sales increased approximately 26.3%, or $15.7 million, to $75.3 million, compared to $59.6 million for the same period in 2007. Gross profit increased by 77.3%, or $8.7 million, to $20.0 million compared to $11.3 million for the six months ended July 1, 2007. Gross margin for the six months ended June 29, 2008 increased to 26.5% from 18.9% in the prior year period. Operating income on a GAAP basis increased by $7.0 million to $2.4 million for the six months ended June 29, 2008, compared to an operating loss of $4.6 million for the same period in 2007. Excluding the non-cash impairment charge for goodwill of $1.1 million, non-GAAP operating income for the six months ended June 29, 2008 increased to $3.5 million.

Net loss for the six months ended June 29, 2008 was $0.6 million, or $0.03 per diluted share. Excluding the non-cash impairment charge for goodwill of $1.11 million and the non-cash valuation allowance charge of $1.7 million, non-GAAP net income for the six months ended June 29, 2008 was $2.2 million or $0.11 per share. This compares to a GAAP net loss of $3.7 million, or $0.19 per diluted share for the six months ended July 1, 2007.