Emerson Radio Corp. Form 10-Q Summary
Business Context and Reporting Period
Emerson Radio Corp. designs, sources, imports and markets houseware and consumer electronic products and licenses the Emerson trademark. This unaudited filing covers the three and six months ended September 30, 2014, the second quarter and first six months of fiscal 2015, compared with the corresponding fiscal 2014 periods.
Financial Performance and Position
| Metric | Three Months 2014 | Three Months 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net revenues | $14.247 million | $18.338 million | $40.190 million | $42.990 million |
| Net product sales | $12.862 million | $17.258 million | $37.704 million | $40.739 million |
| Licensing revenue | $1.385 million | $1.080 million | $2.486 million | $2.251 million |
| Operating income | $30 thousand | $207 thousand | $821 thousand | $1.536 million |
| Net income | $47 thousand | $388 thousand | $698 thousand | $1.757 million |
| Diluted EPS | $0.00 | $0.01 | $0.03 | $0.06 |
- Second-quarter revenue declined 22.3%; six-month revenue declined 6.5%.
- Approximate operating margins were 0.2% for the quarter and 2.0% year to date, versus 1.1% and 3.6%, respectively, in the prior comparable periods.
- Cost of sales represented 91.6% of net product sales in the quarter and 90.7% year to date, compared with 90.6% and 89.9% in the prior-year periods.
- Cash provided by operating activities was $2.726 million for the six months, compared with $657 thousand in the prior year.
- Cash and cash equivalents were $26.757 million at September 30, 2014, with $500 thousand of restricted cash and $15.0 million in certificates of deposit maturing October 31, 2014.
- Total assets were $61.420 million and total liabilities were $4.415 million. The Company had no borrowings or outstanding letters of credit.
- Working capital was approximately $54.7 million. Shareholders’ equity was $57.005 million.
Material Changes Versus the Prior Comparable Period
- Houseware sales fell 28.6% in the quarter and 7.4% year to date, primarily because of lower microwave oven, wine cooler and compact refrigerator sales.
- Quarterly audio sales increased 64.7%, but year-to-date audio sales decreased 8.2%.
- Licensing revenue increased 28.2% in the quarter and 10.4% year to date, driven by higher sales by licensees. Funai accounted for approximately 68% of quarterly and 75% of year-to-date licensing revenue.
- Quarterly and year-to-date net income declined 87.9% and 60.3%, respectively, reflecting lower revenue, higher product cost ratios and lower interest income.
- SG&A was flat at $2.3 million in the quarter and increased 4.8% to $4.7 million year to date. Fiscal 2015 SG&A included approximately $600 thousand of Special Committee legal and advisory fees and $100 thousand of tax advisory fees in the quarter.
- A $600 thousand reversal of reserves no longer required reduced cost of sales in both the quarterly and year-to-date periods.
- The Company paid an extraordinary cash dividend of $0.70 per common share on September 30, 2014, resulting in a net cash payment to stockholders of approximately $18.5 million. Financing cash flow was negative $18.991 million.
- Cash increased $429 thousand during the first six months, primarily because operating cash flow and certificate-of-deposit redemptions offset the extraordinary dividend.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that existing cash and operating cash sources should be sufficient to support existing operations for the next 12 months. No formal revenue or earnings guidance was provided.
- The Company depends on operating cash flow, a limited number of customers and suppliers, third-party manufacturers, licensees and distributors, and consumer demand. Its two largest customers represented approximately 88.5% of gross product sales year to date, while its two largest suppliers represented approximately 90% of purchases.
- The Company purchases virtually all products from manufacturers in China and identified supplier pricing, Chinese production costs, renminbi appreciation, competition, foreign conditions and limited financing access as risks.
- The IRS is challenging the Company’s treatment of certain Macao controlled-foreign-corporation sales and service-fee income. The Company estimates maximum taxes, penalties and interest of approximately $14.9 million for the NOPA 1 matter through fiscal 2014, for which no liability was recorded because management believes its appeal is more likely than not to succeed.
- For NOPA 2, the Company recorded approximately $1.3 million for estimated taxes, penalties and interest through September 30, 2014.
- A separate IRS dispute concerning the taxability of the 2010 extraordinary dividend could expose the Company to approximately $4.7 million of taxes, penalties and interest as of September 30, 2014. The Company holds $500 thousand of cash collateral from S&T, but enforcement of the related indemnity may be impaired because S&T is affiliated with Grande, which is in liquidation.
- Grande and related entities controlled approximately 56.2% of Emerson’s common stock. Grande’s restructuring and liquidation proceedings could affect control, related-party relationships, the Company and its share price.
- Management reported that disclosure controls were effective as of September 30, 2014 and that no material changes occurred in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether declining product sales and very low operating margins persist through the remainder of fiscal 2015.
- The timing and liquidity impact of the $15.0 million certificate-of-deposit maturities and the Company’s use of cash following the extraordinary dividend.
- The resolution and ultimate cash exposure from the IRS NOPA 1, NOPA 2 and 2010 dividend-related tax matters.
- The collectability of S&T’s indemnification obligations and the adequacy of the $500 thousand collateral.
- The effects of Grande’s restructuring or liquidation proceedings on Emerson’s controlling ownership and governance.
- Customer and supplier concentration, including reliance on Funai and the Company’s two largest customers and suppliers.