Koss Corporation Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2013, fiscal 2013. The request metadata identifies “2012 Q3,” but the filing itself clearly covers the quarter ended March 31, 2013, compared with March 31, 2012.
Business context
Koss markets high-fidelity headphones, wireless and noise-canceling headphones, headsets, speaker-phones, telecommunications products, computer headsets and Koss Classics recordings. It operates as one business segment. The filing continues to address the significant unauthorized transactions identified in 2009 and related litigation, recoveries and legal costs.
Financial performance
| Metric | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Nine months ended March 31, 2013 | Nine months ended March 31, 2012 |
|---|---|---|---|---|
| Net sales | $8.302 million | $8.233 million | $25.859 million | $26.978 million |
| Gross profit | $3.304 million | $3.152 million | $9.313 million | $10.279 million |
| Gross margin | 39.8% | 38.3% | 36.0% | 38.1% |
| Income from operations | $0.040 million | $0.751 million | $1.222 million | $2.589 million |
| Operating margin | 0.5% | 9.1% | 4.7% | 9.6% |
| Net income | $0.115 million | $0.897 million | $0.820 million | $2.009 million |
| Diluted earnings per share | $0.02 | $0.12 | $0.11 | $0.27 |
Quarterly sales increased 0.8%, while nine-month sales declined 4.1%. Quarterly net income fell 87.1%, and nine-month net income fell 59.2%. The quarterly tax benefit was $58,583, compared with a $96,441 tax provision in the prior-year quarter.
Cash flow, balance sheet and liquidity
- Cash provided by operating activities was $2.544 million for the first nine months, down from $2.878 million in the prior-year period.
- Investing cash use was $0.759 million, compared with $1.690 million in the prior-year period, primarily because capitalized software development expenditures declined.
- Financing cash use was $1.329 million, consisting primarily of quarterly dividends. Dividends declared were $0.06 per share for the quarter and $0.18 per share for the nine-month period.
- Cash increased by $0.456 million from June 30, 2012, to $0.506 million at March 31, 2013.
- Accounts receivable declined to $3.618 million from $5.327 million at June 30, 2012; inventories increased to $9.989 million from $9.396 million.
- Total assets were $26.953 million and total liabilities were $9.926 million at March 31, 2013.
- No borrowings were outstanding under the $8.0 million secured revolving credit facility. The facility, which expires July 31, 2014, also provides for letters of credit subject to a $2.0 million sublimit.
- Management believes operating cash flow and available credit provide adequate liquidity for operating needs, debt service, planned capital expenditures and dividends.
Material changes versus the prior comparable period
- Sales improved modestly in the quarter because of stronger export and education-market sales, including approximately $240,000 of export orders delayed from December 2012. Sales to certain large U.S. retailers weakened, and export sales remained lower for the nine-month period.
- Quarterly gross margin improved by 150 basis points because of product mix and favorable pricing. Nine-month gross margin declined by 210 basis points, primarily due to Striva software amortization, a low-margin product closeout and a tooling write-off.
- Software amortization related to the Striva product was approximately $398,000 in the quarter and $1.160 million for the nine months. Capitalized software development expenditures totaled $3.139 million at March 31, 2013, net of amortization.
- Selling, general and administrative expenses increased to $3.112 million for the quarter and $9.134 million for the nine months, driven mainly by new product introductions, marketing and product development.
- Unauthorized-transaction-related costs and recoveries shifted from a net recovery of $617,103 in the prior-year quarter to a net cost of $152,001. For the nine months, the net recovery was $1.043 million, compared with $1.137 million previously.
Guidance, outlook, risks and unusual items
- Management described the long-term outlook as positive and expects approximately $600,000 of tooling and leasehold-improvement spending during fiscal 2013.
- The company intends to continue paying quarterly dividends of $0.06 per share for the foreseeable future, although future payments remain subject to the company’s financial condition and board action.
- Management anticipated a fiscal 2013 effective tax rate of approximately 20% to 31%, partly because of an expected decrease in unrecognized tax benefits.
- Unrecognized tax benefits were $1.146 million at March 31, 2013. The company stated that these benefits and income tax expense could decrease by up to $1.0 million during the following twelve months as certain tax positions are expected to close.
- Pending legal matters include actions involving American Express, Grant Thornton and Park Bank arising from the unauthorized transactions. The ultimate resolution was not determinable.
- Capitalized software is subject to technological obsolescence and impairment risk. Lower expected product revenue, adverse pricing or competition could require additional impairment or accelerated amortization.
- The company leases its Milwaukee facility from its Chairman under a lease running through June 30, 2018, at fixed annual rent of $380,000, with the company responsible for maintenance, insurance and taxes.
- Management stated that disclosure controls were effective as of March 31, 2013, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weaker sales to major U.S. retailers and lower nine-month export sales persist.
- Striva product demand, inventory levels and the recoverability of the $3.139 million net capitalized software balance.
- The effect of ongoing legal proceedings and any additional unauthorized-transaction-related legal costs or recoveries.
- The timing and amount of potential reductions in unrecognized tax benefits, including the possible $1.0 million benefit.
- Compliance with the secured credit facility’s current-ratio, tangible-net-worth and leverage covenants.
- The sustainability of quarterly $0.06-per-share dividends while operating income and cash generation remain pressured.