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Emerson Radio Corp Reports Operating Results (10-Q)

February 13, 2009 | About:
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Emerson Radio Corp (MSN) filed Quarterly Report for the period ended 2008-12-31.

Emerson Radio Corp. a consumer electronics distributor directly and through subsidiaries designs sources imports and markets a variety of televisions and other video products microwave ovens audio home theater specialty and other consumer electronic products. The company also licenses the Emerson and G Clef trademark for a variety of television video and other products domestically and internationally to certain non-affiliated entities. Emerson Radio Corp has a market cap of $14.11 million; its shares were traded at around $0.51 with and P/S ratio of 0.06.

Highlight of Business Operations:

Net Revenues Net revenues for the third quarter of fiscal 2009 were $60.3 million as compared to $75.8 million for the third quarter of fiscal 2008, a decrease of $15.5 million or 20.4%. For the nine month period of fiscal 2009, net revenues were $158.4 million as compared to $186.3 million for the nine month period of fiscal 2008, a decrease of $27.9 million or 15.0%. Net revenues are comprised of Emerson(R) branded product sales, themed product sales and licensing revenues. Emerson(R) branded product sales are earned from the sale of products bearing the Emerson(R) or HH Scott(R) brand name; themed product sales represent products sold bearing a certain theme or character. Furthermore, licensing revenues are derived from licensing the Emerson(R) and HH Scott(R) brand names to licensees for a fee. The major elements which contributed to the overall decrease in net revenues were as follows:

Cost of Sales In absolute terms, cost of sales decreased $12.7 million, or 18.6%, to $55.7 million in the third quarter of fiscal 2009 as compared to $68.4 million in the third quarter of fiscal 2008. In absolute terms, cost of sales was $141.1 million in the nine month period of fiscal 2009 as compared to $165.1 million in the nine month period of fiscal 2008. Cost of sales, as a percentage of net revenues, was 92.5% and 90.3% in the third quarters of fiscal 2009 and fiscal 2008, respectively, and 89.1% and 88.6% in the nine month periods of fiscal 2009 and fiscal 2008, respectively. Cost of sales as a percentage of sales revenues less license revenues was 95.0% in the third quarter of fiscal 2009 as compared to 92.2% in the third quarter of fiscal 2008. Cost of sales as a percentage of sales revenues less license revenues was 92.1% in the nine month period of fiscal 2009 as compared to 91.0% in the nine month period of fiscal 2008. The decrease in cost of sales in absolute terms for the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008 was primarily related to the decrease in sales volume, a decrease in reserves for sales returns, royalty expense, and warehousing costs offset by an increase in inventory reserves, costs of personnel in Asia involved in quality assurance in production of Emersons product, writedowns of inventory, and costs in fiscal 2009 associated with independent quality assurance consultants. The increase in cost of sales as a percentage of net revenues for the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008 was primarily related to by lower margins on microwave ovens and in several audio categories, an increase in quality assurance costs, and an increase in inventory reserves. The decrease in cost of sales in absolute terms for the nine month period of fiscal 2009 as compared to the nine month period of fiscal 2008 resulted from the decrease in sales volume, royalty expense, and warehousing costs offset by an increase in quality assurance costs and inventory reserves. The increase in cost of sales as a percentage of net revenues for the nine months of fiscal 2009 as compared to the nine months of fiscal 2008 resulted from lower margins on microwave ovens and in several audio categories, increased inventory reserves, and quality assurance costs offset by lower warehousing costs. The decrease in inventory reserves in the nine month period of fiscal 2008 resulted primarily from the reduction of inventory levels of a discontinued themed-product line and returned, substandard goods which are not sold to retailers, which had been fully reserved at the end of the preceding fiscal year.

variable selling expenses of $1.2 million, legal fees of $870,000, and employment agency fees of $127,000 offset by an increase in rent expense of $216,000. As a percentage of net revenues, S,G&A were 9.3% in the nine month period of fiscal 2009 as compared to 9.6% in the nine month period of fiscal 2008. In absolute terms, S,G&A decreased $2.9 million, or 16.4%, to $14.8 million for the nine month period of fiscal 2009 as compared to $17.7 million for the nine month period of fiscal 2008. The decrease in S,G&A in absolute terms between the nine month periods of fiscal 2009 and fiscal 2008 was primarily due to a decrease in variable selling expenses of $1.9 million and legal fees of $1.2 million offset by an increase in rent expense of $487,000.

Provision for Income Taxes The Company estimates its annual effective tax rate and makes the necessary changes to adjust the rate on a quarterly basis. The estimated annual tax rate may fluctuate due to changes in the jurisdictional mix of anticipated annual income and changes to the valuation allowance for net deferred tax assets. The Companys benefit for income taxes was $616,000 for the third quarter of fiscal 2009, as compared to a benefit of $2.4 million for the third quarter of fiscal 2008. In the second quarter of fiscal 2008, Emerson increased its estimated liability for California franchise taxes for tax years 1979-1990 in the amount of $3.7 million. In the third quarter of fiscal 2008, Emerson reduced its estimated liability by $1.0 million as a result of having resolved the matter. California franchise taxes are effectively tax on income and are recorded as such. See Note 6 Income Taxes. Separate from the increase in the liability associated with California franchise taxes, the Company had a benefit of $1.4 million for the third quarter of fiscal 2008. For the nine months of fiscal 2009, Emersons provision for income taxes was $610,000 due to losses in foreign jurisdictions for which we recognize no tax benefit. Separate from the increase of $2.7 million in the liability associated with California franchise taxes, the Company had a benefit for income taxes for the nine month period of fiscal 2008 of $719,000.

As of December 31, 2008, Emerson had cash and cash equivalents of approximately $15.7 million, compared to approximately $20.4 million at December 31, 2007. Working capital decreased to $46.8 million at December 31, 2008 as compared to $63.9 million at December 31, 2007. The decrease in cash and cash equivalents of approximately $4.7 million was primarily due to investments in securities which have been classified as long-term and property and equipment additions, partially offset by an amount received from a new revolving loan agreement as described in the following paragraphs.

value of these investments no longer approximates par value. In the nine months ended December 31, 2008, the Company redeemed for cash $5.1 million of the face value of the securities, and recognized within its non-operating expenses and income, $431,000 of unrealized loss and $623,000 of realized gains. As of December 31, 2008, the total cash redemptions on the face value of the securities was $6.2 million and the full decline recognized from the par value of these investments was $1.8 million. The Company continues to monitor the market for these investments. Continued decline of the market or downgrade of the ratings for these investments may necessitate additional impairments, which could detrimentally impact the Companys results of operations and cash flows. The Company does not expect it will be necessary to sell the auction rate securities to continue its operations, and the Company has obtained financing, secured by these investments, to mitigate their effect on funding of operations see Note 8. Borrowings.

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