Emerson Radio Corp. — Form 10-Q Summary
Business context and reporting period
Emerson designs, sources, imports and markets houseware and consumer electronic products and licenses its trademarks. This unaudited Form 10-Q covers the three months ended June 30, 2012, the first quarter of fiscal 2013, compared with the three months ended June 30, 2011. The company had 27,129,832 common shares outstanding as of August 14, 2012.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net product sales | $44.9 million | $50.1 million | Down 10.4% |
| Licensing revenue | $1.1 million | $1.4 million | Down 20.2% |
| Net revenues | $46.0 million | $51.5 million | Down 10.7% |
| Gross profit | $6.8 million | $5.9 million | Up approximately 15% |
| Operating income | $4.4 million | $3.9 million | Up 14.8% |
| Net income | $3.8 million | $3.3 million | Up 15.1% |
| Basic and diluted EPS | $0.14 | $0.12 | Increased |
- Gross margin improved to approximately 14.9% from 11.5%; operating margin improved to approximately 9.6% from 7.5%; net margin was approximately 8.3% versus 6.5%.
- Houseware sales declined 7.5% to $43.8 million, while audio sales declined 60.7% to $1.1 million.
- Cost of sales fell 14.1% to $39.2 million and represented 85.1% of revenue versus 88.5% in the prior-year quarter.
- Selling, general and administrative expenses increased 18.9% to $2.0 million, principally because of higher legal fees and lower bad-debt recoveries.
- Income tax expense declined to $0.6 million from $1.4 million, primarily because a larger proportion of taxable earnings arose in lower-tax jurisdictions.
- Cash and cash equivalents were $39.7 million at June 30, 2012, compared with $45.0 million at March 31, 2012 and $21.5 million at June 30, 2011. Working capital was $68.5 million at June 30, 2012, compared with $54.2 million a year earlier.
- Operating activities used $5.4 million of cash, compared with $19.0 million used in the prior-year quarter. The principal current-quarter uses were increased accounts receivable and prepaid factory purchases.
- Investing activities provided $0.2 million, and financing activities used $9,000.
- Total borrowings were approximately $127,000, including $65,000 of current maturities and $62,000 of long-term borrowings. Outstanding letters of credit totaled approximately $70,000 and were fully cash-collateralized.
Material changes versus the prior comparable period
- Revenue declined by $5.5 million, driven by lower houseware, audio and licensing revenue, but profitability increased because of lower cost of sales as a percentage of revenue and lower income tax expense.
- The company reported no realized gain on marketable securities in the current quarter, compared with an $828,000 gain in the prior-year quarter. The prior-year gain resulted from the sale of the company’s last auction-rate security.
- Management stated that the improved gross margin was aided by a higher level of prepaid factory purchases and is not expected to continue for the remainder of fiscal 2013.
- Accounts receivable increased to $25.6 million from $12.1 million at March 31, 2012, while prepaid expenses and other current assets increased to $10.3 million from $2.9 million.
- Inventory declined to $9.9 million from $11.3 million at March 31, 2012.
Guidance, outlook, risks and unusual items
- No quantitative revenue or earnings guidance was provided. Management stated that existing cash and operating cash sources are expected to support existing operations for the next 12 months.
- Approximately 58% of first-quarter net sales involved products imported directly to customers, reducing the inventory financing burden on the company.
- Sales were highly concentrated among the two largest customers, which represented approximately 94.7% of gross product sales in the current quarter versus 89.8% in the prior-year quarter.
- Funai accounted for approximately 83% of licensing revenue. Its principal license agreement expires December 31, 2012; renewal negotiations were ongoing, with no assurance of renewal on acceptable terms or at all.
- Following the appointment of provisional liquidators over controlling shareholder Grande, certain major suppliers reduced the company’s open credit lines. The company relies on cash on hand and operating cash flow.
- The company faces pricing pressure, potential supplier and customer concentration, dependence on third-party manufacturers, Chinese production costs and renminbi appreciation, consumer-spending weakness, competition, licensing risk and foreign-market risks.
- The Kayne litigation alleges that Emerson and related parties improperly interfered with collection of an approximately $47 million judgment against Grande and asserts civil RICO and alter-ego claims. Certain claims were dismissed with leave to re-plead, while the alter-ego claim remained; Emerson’s motion was awaiting a ruling, and trial was scheduled for April 23, 2013. Management believes the claims lack merit and cannot estimate the ultimate liability.
- There are competing claims regarding beneficial ownership of 3,380,079 Emerson shares, and the company stated that it could not determine the beneficial owner pending clarification.
- Management reported effective disclosure controls as of June 30, 2012 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Funai license agreement was renewed after its December 31, 2012 expiration and on what economic terms.
- Whether revenue concentration among the two largest customers increased or declined in subsequent periods.
- Whether the first-quarter gross-margin improvement reversed as management anticipated.
- Operating cash-flow trends, particularly collections of the $25.6 million accounts receivable balance and the use of prepaid factory purchases.
- The status, potential exposure and insurance or indemnification arrangements related to the Kayne litigation.
- The resolution of competing ownership claims involving 3,380,079 common shares and any effects on corporate control.
- Supplier credit availability and the company’s ability to fund operations if operating cash flow remains negative.