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Emerson Radio Corp Reports Operating Results (10-Q)

November 12, 2009 | About:
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10qk

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Emerson Radio Corp (MSN) filed Quarterly Report for the period ended 2009-09-30.

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 $53.2 million; its shares were traded at around $1.96 with and P/S ratio of 0.3.

Highlight of Business Operations:

Net Revenues Net revenues for the second quarter of fiscal 2010 were $51.8 million as compared to $53.5 million for the second quarter of fiscal 2009, a decrease of $1.7 million or 3.3%. For the six month period of fiscal 2010, net revenues were $107.4 million as compared to $97.4 million for the six month period of fiscal 2009, an increase of $10.0 million or 10.3%. 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; and 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 increase in net revenues for the six months ended September 30, 2009 were as follows:

Cost of Sales In absolute terms, cost of sales decreased $3.3 million, or 7.1%, to $43.7 million in the second quarter of fiscal 2010 as compared to $47.0 million in the second quarter of fiscal 2009. In absolute terms, cost of sales increased $8.5 million, or 10.0%, to $93.3 million in the six month period of fiscal 2010 as compared to $84.8 million in the six month period of fiscal 2009. Cost of sales, as a percentage of net revenues, was 84.4% and 87.8% in the second quarters of fiscal 2010 and fiscal 2009, respectively, and 86.9% and 87.1% in the six month periods of fiscal 2010 and fiscal 2009, respectively. Cost of sales as a percentage of sales revenues less license revenues was 86.9% in the second quarter of fiscal 2010 as compared to 91.0% in the second quarter of fiscal 2009. Cost of sales as a percentage of sales revenues less license revenues was 89.3% in the six month period of fiscal 2010 as compared to 90.5% in the six month period of fiscal 2009. The decrease in cost of sales in absolute terms for the second quarter of fiscal 2010 as compared to the second quarter of fiscal 2009 was primarily related to the decrease in net sales volume, lower inventory reserves and lower costs of personnel in Asia involved with product sourcing and quality assurance activities. The increase in cost of sales in absolute terms for the six month period of fiscal 2010 as compared to the six month period of fiscal 2009 resulted from the increase in net sales volume, partially offset by lower costs of personnel in Asia involved with product sourcing and quality assurance activities.

Other Operating Costs and Expenses As a percentage of net revenues, other operating costs and expenses were 2.1% in the second quarter of fiscal 2010 versus 3.0% in the second quarter of fiscal 2009. In absolute terms, other operating costs and expenses decreased $509,000, or 32.1%, to $1.1 million for the second quarter of fiscal 2010 as compared to $1.6 million in the second quarter of fiscal 2009 as a result of decreased warranty, service and returns processing costs. For the six month period of fiscal 2010, other operating costs were 1.7% as a percentage of net revenues versus 2.8% for the six month period of fiscal 2009. In absolute terms, other operating costs and expenses decreased $856,000, or 31.5%, to $1.9 million for the six month period of fiscal 2010 as compared to $2.7 million in the six month period of fiscal 2009, as a result of decreased warranty, service and returns processing costs.

Selling, General and Administrative Expenses (S,G&A) S,G&A, as a percentage of net revenues, was 7.0% in the second quarter of fiscal 2010 as compared to 8.8% in the second quarter of fiscal 2009. S,G&A, in absolute terms, decreased $1.1 million, or 23.0%, to $3.6 million for the second quarter of fiscal 2010 as compared to $4.7 million for the second quarter of fiscal 2009. The decrease in S,G&A in absolute terms between the second quarter of fiscal 2010 and second quarter of fiscal 2009 was primarily due to lower compensation, marketing, facilities and travel and entertainment costs, partially offset by higher legal expenses. For the six month period of fiscal 2010, S,G&A was 6.9% of net revenues versus 9.5% of net revenues in the six month period of fiscal 2009. In absolute terms, S,G&A for the six month period of fiscal 2010 was $7.4 million, a $1.8 million, or 19.8% decrease from the six month period of fiscal 2009 level of $9.3 million. The decrease in S,G&A in absolute terms between the six month period of fiscal 2010 and the six month period of fiscal 2009 was primarily due to lower compensation, marketing, facilities and travel and entertainment costs, partially offset by higher legal expenses.

On December 23, 2005, the Company entered into a $45.0 million Revolving Credit Agreement with Wachovia Bank. This credit facility provides for revolving loans subject to individual maximums which, in the aggregate, are not to exceed the lesser of $45.0 million or a Borrowing Base as defined in the loan agreement. The Borrowing Base amount is established by specified percentages of eligible accounts receivables and inventories and bears interest ranging from Prime plus 1.00% to 1.50% or, at the Companys election, the London Interbank Offered Rate (LIBOR) plus 2.50% to 3.00% depending on excess availability. Pursuant to the loan agreement, the Company is restricted from, among other things, paying certain cash dividends, and entering into certain transactions without the lenders prior consent and is subject to certain leverage financial covenants. Borrowings under the loan agreement are secured by substantially all of the Companys tangible assets.

Short-Term Liquidity. Liquidity is impacted by seasonality in that the Company generally records the majority of its annual sales in the quarters ending September and December. This requires the Company to maintain higher inventory levels during the quarters ending June and September, therefore increasing the working capital needs during these periods. Additionally, the Company receives the largest percentage of product returns in the quarter ending March. The higher level of returns during this period adversely impacts collection activity, and therefore liquidity. In the three and six months ended September 30, 2009, products representing approximately 40.9% and 43.0%, respectively, of net product sales were imported directly to the Companys customers. This contributes significantly to the Companys liquidity in that this inventory does not need to be financed.

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10qk
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