LRAD Corporation (now Genasys Inc.) — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016, compared with fiscal 2015. This filing is for LRAD Corporation; it does not present a standalone fourth-quarter income statement.
Business context
LRAD develops directional acoustic hailing devices and omnidirectional mass-notification systems for government, military, law-enforcement and commercial customers. Sales are often tied to government budget cycles and can be uneven. The company reported one operating segment.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $16.36 million | $16.78 million |
| Gross profit / margin | $7.67 million / 46.9% | $8.53 million / 50.8% |
| Operating income (loss) | ($1.59 million) | $1.22 million |
| Net income (loss) | ($1.28 million) | $9.69 million |
| Operating cash flow | ($1.15 million) | $0.14 million |
| Cash and cash equivalents at year-end | $13.47 million | $18.32 million |
| Working capital at year-end | $23.09 million | $25.60 million |
- FY2016 revenue fell 2.5%. Product sales declined 3.1%; contract and other revenue rose 7.3%.
- Operating expenses increased 26.8% to $9.26 million. SG&A included $1.14 million of unusual proxy-contest, former-CEO separation and new-CEO recruiting costs. R&D expense rose to $2.39 million.
- FY2015 net income included an $8.34 million non-cash income-tax benefit from releasing part of the deferred-tax-asset valuation allowance. FY2016 recorded a $186,000 tax benefit, including a $188,000 deferred benefit. Thus, the sharp year-over-year earnings decline is not solely a change in operating performance.
- Investing cash outflow was $1.00 million and financing cash outflow was $2.70 million. Financing included $1.75 million of share repurchases and $955,000 of dividends. The board did not approve a fourth-quarter dividend; management said it did not presently intend to pay dividends in the near future.
- The balance sheet reported total liabilities of $2.24 million and stockholders’ equity of $34.57 million; no borrowings are listed. Cash plus short- and long-term marketable securities totaled approximately $18.59 million at year-end.
Material changes and operating developments
- U.S. revenue increased 47% after several years of declines; international revenue decreased 19%. Total revenue by region was $7.58 million in the Americas, $1.04 million in Europe, Middle East and Africa, and $7.74 million in Asia Pacific.
- Gross margin declined 3.9 percentage points, with management citing lower revenue, unfavorable sales-channel and product mix, lower fixed-overhead absorption, inventory-reserve charges and higher fixed manufacturing overhead.
- Year-end backlog for products deliverable within 12 months fell to $3.07 million from $4.45 million. No customer exceeded 10% of FY2016 revenue, compared with one customer at 15% in FY2015; however, three customers represented 27%, 24% and 12% of year-end receivables.
- The company launched its remotely operated LRAD RXL and received a $7.4 million multi-year U.S. Navy IDIQ contract. The filing notes that IDIQ awards do not guarantee purchases. An initial $915,000 U.S. Army program order was delivered in FY2016.
Outlook, risks and contingencies
- Management said it expected adequate resources to fund operations for at least 12 months, based on cash, backlog and planned spending, while cautioning that future cash receipts and expenditures could differ and additional financing might be needed.
- Management planned to pursue U.S. and international government and military sales and expand the mass-notification business. It anticipated higher SG&A and potentially higher engineering and R&D spending in FY2017. It reported $2.4 million of early-FY2017 awards; the filing identifies individual awards of $1.3 million and $600,000.
- Management cited uncertain defense budgets, delayed international programs, geopolitical conditions, a strong U.S. dollar, and competitive pricing pressure in mass notification. It cautioned that product and channel mix make historical gross margins unreliable indicators of future margins.
- Other material risks include reliance on government procurement and a limited number of customers, acceptance of the newer mass-notification products, possible warranty and inventory-obsolescence charges, and supplier concentration. The company relied on a single supplier for LRAD compression drivers.
- The company had a $356,984 warranty reserve and a $580,132 inventory-obsolescence reserve. It also disclosed a foreign-military maintenance obligation through 2019 whose costs could exceed the fixed related revenue.
- Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2016. The independent auditor issued an unqualified opinion on the financial statements; it did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether the $7.4 million Navy IDIQ contract and reported early-FY2017 awards convert into funded orders and recognized revenue.
- Whether revenue recovers in international markets and mass notification, and whether the lower backlog signals continued order delays.
- Whether margins stabilize despite sales-mix changes, competitive price pressure and inventory-reserve exposure.
- Whether operating cash flow turns positive and receivables are collected; year-end receivables rose to $3.41 million, or approximately 76 days of revenue.
- Whether the deferred tax asset is realizable: the balance sheet reported $8.53 million net deferred tax assets, with a $12.11 million valuation allowance against gross deferred tax assets.
- Whether the company can reduce dependence on its single-source compression-driver supplier and manage the maintenance contract through 2019.