The following discussion of the Company's operations and financial condition should be read in conjunction with the Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under Item 1A - "Risk Factors" and "Forward-Looking Information" and in other parts of this Annual Report on Form 10-K.
In the following discussion, most percentages and dollar amounts have been rounded to aid presentation. As a result, all figures are approximations.
Results of Operations:
The following table summarizes certain financial information for the fiscal
years ended
Year Ended March 31, 2021 2020 Net product sales$ 7,200 $ 6,065 Licensing revenue 245 228 Net revenues 7,445 6,293 Cost of sales 5,749 5,144 Selling, general and administrative expenses 5,891 5,775 Operating loss (4,195 ) (4,626 ) Interest income, net 151 776 Income from governmental assistance programs 83 - Loss before income taxes (3,961 ) (3,850 ) Provision for income taxes 15 457 Net loss$ (3,976 ) $ (4,307 )
Results of Operations - Fiscal 2021 compared with Fiscal 2020
Net product sales - Net product sales for fiscal 2021 were
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by customers through deductions from accounts receivable within a certain time
period. In the aggregate, these adjustments had the effect of increasing net
product sales and operating income by approximately
i) Houseware product net sales increased$0.3 million , or 16.1%, to$2.6 million in fiscal 2021 as compared to$2.3 million in fiscal 2020, principally driven by an increase in sales of microwave ovens and partially offset by a decrease in sales of toaster ovens. The Company and its core customers benefitted from reduced competition during the early stages of the COVID-19 pandemic in fiscal 2021. ii) Audio product net sales were$4.6 million in fiscal 2021 compared to$3.8 million in fiscal 2020, an increase of$0.8 million , or 20.4%, resulting from increased net sales of clock radios. The Company and its core customers benefitted from reduced competition during the early stages of the COVID-19 pandemic in fiscal 2021.
Business operations - The Company expects to continue to expand its existing
distribution channels and to develop and promote new products with retailers in
the
Emerson's success is dependent on its ability to anticipate and respond to
changing consumer demands and trends in a timely manner, as well as expanding
into new markets and sourcing new products that are profitable to the Company.
Geo-political factors may also affect the Company's operations and demand for
the Company's products, which are subject to customs requirements and to tariffs
and quotas set by governments through mutual agreements and bilateral actions.
The Company expects that recently imposed and proposed
Starting in the fourth quarter of fiscal 2020, the global COVID-19 pandemic has
presented significant challenges and impacted the Company's business and
operating results, and the operations and production capabilities of the
Company's suppliers in
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customer dissatisfaction in the event of inventory shortages or may otherwise adversely impact the Company's business and results of operations.
In light of the adverse effects of the COVID-19 pandemic on macroeconomic conditions domestically and internationally, along with the uncertainty associated with a potential recovery, the Company has implemented certain cost-reduction actions intended to reduce expenditures in light of the effects of the COVID-19 pandemic to the business. However, the environment remains highly uncertain and demand for the Company's products remains difficult to assess due to many factors including the pace of economic recovery around the world, the status of various government stimulus programs, competitive intensity and retailer actions to continue carefully managing inventory. As a result, the Company is unable at this time to predict the full impact of the COVID-19 pandemic on its operations and financial results, and, depending on the magnitude and duration of the pandemic, including the further spread and severity of COVID-19 cases in areas in which the Company operates and the availability and distribution of effective vaccines, such impact may be material. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.
For more information on risks associated with the Company's operations, including tariffs and the COVID-19 pandemic, please see the risk factors within Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K.
Licensing revenue - Licensing revenue in fiscal 2021 was approximately
Net revenues - As a result of the foregoing factors, the Company's net revenues
were
Cost of sales - Cost of sales includes those components as described in Note 1
"Cost of Sales" of the Notes to the Consolidated Financial Statements. In
absolute terms, cost of sales increased
Selling, general and administrative expenses ("S,G&A") - S,G&A, as a percentage
of net revenues, was 79.1% in fiscal 2021 as compared to 91.8% in fiscal 2020.
Fiscal 2021 S,G&A, in absolute terms, was
Interest income, net - Interest income, net, was
Provision for income tax expense - The Company recorded income tax expense of
approximately
Net (loss) - As a result of the foregoing factors, the Company recorded a net
loss of
Liquidity and Capital Resources
General
As of
Cash Flows
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Net cash used by operating activities was approximately
Net cash provided by investing activities was
Net cash provided by financing activities was
Credit Arrangements
Letters of Credit - The Company utilizes the services of one of its banks to
issue secured letters of credit on behalf of the Company, as needed, on a 100%
cash collateralized basis. At
Short-term Liquidity
The Company's principal existing sources of cash are generated from operations. The Company believes that its cash on hand and existing sources of cash will be sufficient to support its existing operations over the next 12 months.
Historically, a significant percentage of the Company's product sales were made under the Direct Import Program. The direct importation of product by the Company to its customers can significantly benefit the Company's liquidity because this inventory does not need to be financed by the Company. In fiscal 2021, there were no product sales imported directly to the Company's customers due to changes in the Company's key customers.
As of
Paycheck Protection Program Loan
In April and May of 2020, the Company applied for and received aggregate PPP
loan proceeds of approximately
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles that are generally accepted
within
Revenue recognition: Sales to customers and related cost of sales are primarily recognized at the point in time when control of goods transfers to the customer. Under the Direct Import Program, title passes in the country of origin. Under the Domestic Program, title passes primarily at the time of shipment. Under both programs, the Company recognizes revenues at the time title passes to the customer as this is when the Company satisfies its performance obligation under the contracts with its customers. Estimates for future expected returns are based upon historical return rates and netted against revenues.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Revenue is recorded net of customer discounts, promotional allowances, volume rebates and similar charges. When the Company offers the right to return product, historical experience is utilized to establish a liability for the estimate of expected returns. Sales and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue.
The Company adopted ASC topic 606 effective
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net revenues in the period in which the related sales are recognized. Prior to the adoption of ASC topic 606, the Company followed the provisions of ASC topic 605. The adoption of ASC topic 606 did not have a material impact on revenue recognition as compared to revenue recognition provided under ASC topic 605.
If additional marketing support programs, promotions and other volume-based incentives are required to promote the Company's products subsequent to the initial sale, then additional reserves may be required and are accrued for when such support is offered.
Inventories. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out basis. The Company records inventory reserves to reduce the carrying value of inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. Conversely, if market conditions improve, such reserves are reduced.
Trade Accounts Receivable. The Company extends credit based upon evaluations of a customer's financial condition and provides for any anticipated credit losses in the Company's financial statements based upon management's estimates and ongoing reviews of recorded allowances. If the financial condition of a customer deteriorates, resulting in an impairment of that customer's ability to make payments, additional reserves may be required. Conversely, reserves are reduced to reflect credit and collection improvements.
Income Taxes. The Company records a valuation allowance to reduce the amount of its deferred tax assets to the amount that management estimates is more likely than not to be realized. While management considers future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event that management determines that a deferred tax asset will likely be realized in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if it is determined that all or part of a net deferred tax asset will likely not be realized in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
Sales Return Reserves. Management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends and changes in customer demand for the Company's products when evaluating the adequacy of the reserve for sales returns. Management judgments and estimates must be made and used in connection with establishing the sales return reserves in any accounting period. Additional reserves may be required if actual sales returns increase above the historical return rates. Conversely, the sales return reserve could be decreased if the actual return rates are less than the historical return rates, which were used to establish the reserve.
Sales Allowance and Marketing Support Accruals. Sales allowances, marketing support programs, promotions and other volume-based incentives which are provided to retailers and distributors are accounted for on an accrual basis as a reduction to net revenues in the period in which the related sales are recognized in accordance with ASC topic 606, "Revenue from Contracts with Customers".
At the time of sale, the Company reduces recognized gross revenue by allowances to cover, in addition to estimated sales returns as required by ASC topic 606, "Revenue from Contracts with Customers," (i) sales incentives offered to customers that meet the criteria for accrual and (ii) an estimated amount to recognize additional non-offered deductions it anticipates and can reasonably estimate will be taken by customers, which it does not expect to recover. Accruals for the estimated amount of future non-offered deductions are required to be made as contra-revenue items, because that percentage of shipped revenue fails to meet the collectability criteria within ASC topic 606.
If additional marketing support programs, promotions and other volume-based incentives are required to promote the Company's products subsequent to the initial sale, then additional reserves may be required and are accrued for when such support is offered.
Recently Adopted Accounting Pronouncements
In
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well as relief from reviewing expired or existing contracts, to determine if they contain leases. The Company will be exempting leases with an initial term of twelve months, or less, from balance sheet recognition and will not separate lease and non-lease components.
Upon adoption, the Company recognized total lease liabilities of
Recently Issued Accounting Pronouncements
The following ASUs were issued by the FASB which relate to or could relate to the Company as concerns the Company's normal ongoing operations or the industry in which the Company operates.
Accounting Standards Update 2019-12 "Income Taxes (Topic 740) - Simplifying the
Accounting for Income Taxes" (Issued
In
Accounting Standards Update 2016-13 "Financial Instruments - Credit Losses"
(Issued
In
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