Emerson Radio Corp. Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended September 30, 2016, covering the three and six months ended September 30, 2016. Emerson designs, sources, imports and markets houseware and consumer electronic products and licenses the Emerson trademark. The company is a controlled company; Grande-related entities held approximately 56.2% of outstanding common stock.
Key Financial Metrics
| Metric | Three Months 2016 | Three Months 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net revenues | $6.0 million | $8.9 million | $12.7 million | $28.5 million |
| Net product sales | $4.8 million | $7.8 million | $10.3 million | $26.1 million |
| Licensing revenue | $1.2 million | $1.2 million | $2.3 million | $2.4 million |
| Operating income (loss) | $0.3 million | $(0.9) million | $0.2 million | $(0.7) million |
| Net income (loss) | $0.2 million | $(0.7) million | $0.1 million | $(0.6) million |
| Diluted earnings (loss) per share | $0.01 | $(0.03) | $0.00 | $(0.02) |
| Cash flow from operations | Not separately provided | Not separately provided | $1.3 million | $4.9 million |
Calculated net revenue margins were approximately 26.0% in the quarter and 24.5% year to date, compared with approximately 11.6% and negative 2.1% in the comparable periods. Operating margins were approximately 5.4% and 1.9%, respectively. Cost of sales was 92.1% of net product sales in the quarter and 92.7% year to date.
- Cash and cash equivalents were $39.0 million at September 30, 2016, compared with $30.1 million at March 31, 2016.
- Short-term investments were $13.1 million, consisting of bank certificates of deposit maturing in November 2016.
- Working capital was approximately $55.9 million. Total current liabilities were $2.5 million.
- The company reported no long-term liabilities or debt and no financing cash flows during the six-month period.
- Total assets were $59.9 million and shareholders’ equity was $57.3 million at September 30, 2016.
Material Changes Versus the Prior Comparable Period
- Quarterly net revenues declined 32.6%; six-month net revenues declined 55.5%.
- Quarterly net product sales declined 37.7%; six-month net product sales declined 60.4%, primarily because a former key customer discontinued Emerson-branded microwave ovens and compact refrigerators at retail beginning January 1, 2016.
- Houseware sales declined 43.6% in the quarter and 64.7% year to date. Audio sales increased 45.0% in the quarter and 47.5% year to date, primarily from clock radios.
- Sales concentration increased: the two largest customers represented approximately 88.0% of gross product sales in the quarter and 88.2% year to date, versus 71.3% and 84.4% in the prior-year periods.
- Licensing revenue was broadly stable, but approximately 79% of quarterly and 80% of year-to-date licensing revenue came from Funai. Funai’s license agreement terminates December 31, 2016.
- Selling, general and administrative expense declined 42.5% in the quarter and 39.0% year to date, primarily from lower personnel and corporate costs. The current quarter included approximately $0.1 million of Special Committee legal fees.
- Net cash provided by operations declined to $1.3 million from $4.9 million, while investing activities provided $7.6 million, principally from reductions in certificates of deposit and restricted cash.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2017 net product sales to be materially lower than fiscal 2016 because of the lost key customer relationship.
- Management expects licensing revenue to decline after Funai’s termination unless a replacement licensee is secured. The company stated that no assurance exists that replacement licensing or distribution relationships will be obtained.
- Funai paid $2.8 million in June 2016 for contracted minimum royalties through the termination date. Of this amount, $0.9 million remained deferred at September 30, 2016 and was expected to be recognized in the third quarter of fiscal 2017.
- Second-quarter and year-to-date tax expense included $0.171 million of accrued interest that management believes is more likely than not to be assessed by tax authorities in connection with audits of fiscal 2010–2013 returns.
- The company returned $0.421 million of pledged collateral to related party S&T in April 2016, net of $0.079 million of expenses related to an IRS challenge.
- Key risks include customer and licensing concentration, dependence on a limited number of suppliers and third-party manufacturers, consumer spending, competition, Chinese production costs and currency fluctuations, related-party conflicts, and the ability to manage operating cash flows.
- Management believes existing cash and operating sources will be sufficient to support operations for the next 12 months, but also states that the customer loss and Funai termination will materially affect the business, financial condition, results and cash position.
- No material active litigation, off-balance-sheet arrangements, or material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important Facts for Investors to Verify
- Whether Emerson can replace the lost retail customer volume and offset the expected termination of Funai licensing revenue.
- The sustainability of profitability after the deferred Funai royalty revenue is recognized.
- Customer and supplier concentration, including approximately 88% of product sales from the two largest customers and 96% of quarterly purchases from the two largest suppliers.
- The status and ultimate cost of IRS and state tax examinations, including the accrued $0.171 million of estimated interest.
- The composition, maturity and reinvestment plans for the $13.1 million of certificates of deposit and the company’s ability to preserve liquidity as revenue declines.
- Future inventory levels, customer deductions, sales allowances and the company’s ability to convert inventory and receivables into cash.