Emerson Radio Corp. — Form 10-Q Summary
Business context and reporting period
Emerson Radio Corp. designs, sources, imports and markets housewares and consumer electronics and licenses the Emerson trademark. This unaudited Form 10-Q covers the three and nine months ended December 31, 2012, representing fiscal 2013, compared with the corresponding fiscal 2012 periods. The company is a smaller reporting company and had 27,129,832 common shares outstanding as of February 14, 2013.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net revenues | $24.7 million | $43.5 million | $105.4 million | $136.4 million |
| Operating income | $2.0 million | $4.5 million | $8.6 million | $10.0 million |
| Net income | $1.7 million | $3.2 million | $7.5 million | $8.3 million |
| Basic and diluted EPS | $0.06 | $0.12 | $0.28 | $0.30 |
- Third-quarter operating margin was approximately 8.1%, compared with 10.3% in the prior-year quarter. Nine-month operating margin was approximately 8.1%, compared with 7.3%.
- Third-quarter net margin was approximately 6.9%, compared with 7.3%; nine-month net margin was approximately 7.1%, compared with 6.1%.
- Cash provided by operating activities was $13.4 million for the nine months, compared with cash used of $2.8 million in the prior-year period.
- Investing activities used $35.0 million, principally for purchases of certificates of deposit. Financing activities used $53,000.
- Cash and cash equivalents were $23.3 million at December 31, 2012, versus $45.0 million at March 31, 2012. Short-term investments were $35.0 million, consisting of certificates of deposit; $20.0 million matured in February 2013 and $15.0 million matured in June 2013.
- Working capital was $73.6 million at December 31, 2012, compared with $63.0 million at December 31, 2011.
- Total borrowings were $83,000, including $42,000 of current maturities and $41,000 of long-term obligations. Outstanding letters of credit totaled $102,000 and were fully cash collateralized.
Material changes versus the prior comparable period
- Third-quarter net revenues declined 43.3% and nine-month revenues declined 22.7%. Net product sales fell 45.2% in the quarter and 24.2% year to date, driven by pricing pressure, competition and weak retail conditions.
- Houseware sales declined 44.2% in the quarter and 21.5% for the nine months. Audio sales declined 59.7% and 63.0%, respectively.
- Licensing revenue decreased 6.0% in the quarter but increased 17.5% year to date. Funai represented approximately 86% of quarterly and 88% of year-to-date licensing revenue. Its agreement was extended through March 31, 2015 and provides minimum annual royalties of $3.75 million per calendar year.
- Cost of sales decreased in absolute dollars, but quarterly cost of sales increased to 83.1% of revenue from 84.4% in the prior-year quarter when measured against total revenue, and to 90.6% of product sales from 88.8%. Management stated that the year-to-date margin improvement is not expected to continue.
- SG&A declined modestly in dollars but increased to 7.8% of quarterly revenue from 4.7% because of lower sales. A $1.3 million trademark impairment was recorded during the nine months ended December 31, 2012.
- Net income declined 46.6% in the quarter and 9.6% for the nine months. Prior-year results included an $828,000 gain on sale of a marketable security and a $347,000 building-sale gain.
Guidance, outlook, risks and unusual items
- Wal-Mart informed Emerson that it would discontinue purchasing two microwave products beginning in spring 2013. Those products represented approximately $48.4 million, or 31%, of fiscal 2012 net product sales. Management expects the full effect primarily in fiscal 2014 and states that the decision will materially adversely affect results.
- The company is evaluating product-line and pricing initiatives but provided no quantified revenue or earnings guidance. Management stated that it cannot assure that replacement sales will offset the Wal-Mart impact.
- Sales are highly concentrated: the two largest customers represented approximately 94.1% of gross product sales for the nine months ended December 31, 2012. The two largest suppliers represented approximately 78% of purchases during the same period.
- Grande, the controlling shareholder, remains subject to provisional liquidation proceedings in Hong Kong. Following that appointment, certain suppliers reduced Emerson’s open credit lines. The company relies primarily on cash on hand and operating cash flow and believes available liquidity is sufficient for existing operations over the next 12 months.
- The IRS challenged Emerson’s position that only 4.9% of the March 2010 extraordinary dividend was taxable and concluded that 100% was taxable. If Emerson is unsuccessful and S&T cannot indemnify the company, Emerson may bear additional shareholder-related taxes that could materially affect financial condition and operations.
- The Kayne litigation involves claims related to the 2010 dividend and alleged interference with collection of an approximately $47 million judgment against Grande. The matter remained pending, with a July 2, 2013 trial date scheduled; management could not estimate ultimate liability.
- Management reported that disclosure controls were effective as of December 31, 2012 and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Timing and magnitude of the Wal-Mart product discontinuation and Emerson’s ability to replace the affected sales beginning in fiscal 2014.
- Customer and supplier concentration, including credit-line availability and dependence on operating cash flow.
- Status and potential exposure from the IRS challenge to the 2010 dividend tax treatment, including the enforceability and collectability of the S&T indemnification.
- Status, defense costs and potential liability associated with the Kayne litigation.
- Whether the $35.0 million certificate-of-deposit investments were released as scheduled and the company’s resulting cash position.
- Whether year-to-date gross-margin improvement reverses as management expected and whether further asset impairments or inventory reserves arise.