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Navarre Corp. Reports Operating Results (10-Q)

August 13, 2009 | About:

Navarre Corp. (NAVR) filed Quarterly Report for the period ended 2009-06-30.

Navarre Corporation is a major distributor of music software interactive CD-ROM products and DVD videos. They sell to major music and software retailers wholesalers and rackjobbers. In addition through their majority-owned subsidiary NetRadio Corporation they own and operate NetRadio Network a leading audio content broadcaster on the Internet. Navarre Corp. has a market cap of $59.5 million; its shares were traded at around $1.6402 with a P/E ratio of 20.5 and P/S ratio of 0.1. Navarre Corp. had an annual average earning growth of 15.2% over the past 5 years.

Highlight of Business Operations:

Net sales for the publishing segment were $24.9 million (before inter-company eliminations) for the first quarter of fiscal 2010 compared to $27.4 million (before inter-company eliminations) for the first quarter of fiscal 2009. The 9.3% decrease in net sales over the prior year quarter was primarily due to the wind down of BCI in fiscal 2009 which generated $4.4 million in net sales during the first quarter of fiscal 2009 compared to $136,000 during the first quarter of fiscal 2010 and decreased sales due to the deteriorating economic conditions. These sales decreases were partially offset by an increase in sales of anime products of $4.1 million due to increased sales to a major retailer and an agent fee related to a new licensing agreement. The Company believes future net sales will be dependent upon the ability to continue to add new, appealing content and upon the strength of the retail environment and overall economic conditions.

Net sales for the distribution segment decreased 8.8% to $121.4 million (before inter-company eliminations) for the first quarter of fiscal 2010 compared to $133.1 million (before inter-company eliminations) for the first quarter of fiscal 2009. Net sales decreased in the software product group to $101.0 million during the first quarter of fiscal 2010 from $105.5 million for the same period last year due to loss of sales from a large retailer that filed for bankruptcy during fiscal 2009 and subsequently decided to liquidate. DVD video net sales decreased to $11.5 million in the first quarter of fiscal 2010 from $13.7 million in first quarter of fiscal 2009, due primarily to a decrease in sales resulting from the timing of new releases and the overall deteriorating economic conditions. Video games net sales decreased to $8.9 million in the first quarter of fiscal 2010 from $13.9 million for the same period last year, due to several new releases in the prior year. The Company believes future net sales results will be dependent upon the ability to continue to add new, appealing content and upon the strength of the retail environment and overall economic conditions.

Interest expense was $719,000 for first quarter of fiscal 2010 compared to $1.6 million for first quarter of fiscal 2009. The decrease in interest expense for the first quarter of fiscal 2010 was a result of a reduction in debt, a reduction of effective interest rates and a write-off of debt acquisition costs of $490,000 during the first quarter of fiscal 2009. Interest income, which primarily relates to interest on available cash balances, was $7,000 for the first quarter of fiscal 2010 compared to $15,000 for the same period last year. Other income (expense), net, for the three months ended June 30, 2009 was net income of $451,000, which amount consisted of foreign exchange gain. Other income (expense), net, for the three months ended June 30, 2008 was net expense of $98,000 and consisted of foreign exchange loss.

We adopted the provisions of FIN 48 on April 1, 2007 which had no impact on our retained earnings. At adoption, we had approximately $417,000 of gross unrecognized income tax benefits (UTBs) as a result of the implementation of FIN 48 and approximately $327,000 of UTBs, net of deferred federal and state income tax benefits, related to various federal and state matters, that would impact the effective tax rate if recognized. We recognize interest accrued related to UTBs in the provision for income taxes. As of April 1, 2009, interest accrued was approximately $127,000. During the three months ended June 30, 2009, an additional $73,000 of UTBs was accrued, which was net of $20,000 of deferred federal and state income tax benefits. As of June 30, 2009, interest accrued was $142,000 and total UTBs, net of deferred federal and state income tax benefits that would impact the effective tax rate if recognized, were $1.0 million.

The net cash provided by operating activities for the first three months of fiscal 2010 mainly reflected our net income, combined with various non-cash charges, including depreciation and amortization of $4.9 million, amortization of debt acquisition costs of $109,000, share-based compensation of $257,000, deferred income taxes of $1.9 million, a decrease in deferred compensation of $198,000 and an increase in deferred revenue of $92,000, offset by our working capital demands. The following are changes in the operating assets and liabilities during the first three months of fiscal 2010: accounts receivable decreased $15.5 million, reflecting strong cash collections; inventories increased $7.7 million, primarily reflecting higher inventories in anticipation of our second quarter operating needs; prepaid expenses increased $162,000, primarily reflecting timing of insurance premium payments; production costs and license fees increased $1.6 million and $2.2 million, respectively, due to content acquisitions; income taxes receivable decreased $246,000 primarily due to the timing of required tax payments and tax refunds; other assets decreased $227,000 due to amortization and recoupments; accounts payable decreased $14.8 million, primarily as a result of timing of disbursements; and accrued expenses increased $973,000 primarily as a result of the performance based cash compensation accrual.

The net cash used in operating activities in the first three months of fiscal 2009 of $9.9 million was primarily the result of net income, combined with various non-cash charges, including depreciation and amortization of $4.2 million, write-off of debt acquisition costs of $490,000, share-based compensation of $288,000, deferred income taxes of $1.2 million, an increase in deferred compensation of $208,000 and an increase in deferred revenue of $525,000, offset by our working capital demands.

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