RadioShack ends Q3 with 'strong' balance sheet, lines up financing

By Paul Deckelman

New York, Oct. 22 - RadioShack Corp. ended its 2013 third quarter with what its senior executives termed a "strong" balance sheet and liquidity position, after successfully paying off a convertibles issue that came due in August - and it announced on Tuesday that it had that it had secured new funding to refinance its existing debt and provide the company with $175 million of incremental liquidity.

"I want to make it very clear that our liquidity position remains strong," the Fort Worth, Texas-based consumer electronics retailer's chief executive officer, Joseph C. Magnacca, declared on a conference call following the release of results for the third quarter ended Sept. 30.

He said that "we continue to have ample liquidity - but because we have debt that comes due in two years, we have also worked to secure new financing," which he said would be "a further step to ensure that this liquidity position stays strong well into the future, and gives us the time we need to complete our work" - the ongoing turnaround effort at the underperforming retailer.

Funding commitments in place

RadioShack announced along with its results that it had obtained financing commitments from a consortium of lenders led by GE Capital, Corporate Finance; CIT Corporate Finance; RBS Citizens, NA; and Salus Capital Partners.

The commitments total $835 million, consisting of a new $585 million senior secured asset-based lending facility and a new $250 million secured term loan. RadioShack plans to use the new debt facilities to refinance its existing $450 million ABL revolving credit facility, $75 million of term loans and a $100 million second lien term loan. The company also expects the new financings will provide $175 million of incremental liquidity.

The company's interim chief financial officer, Holly F. Etlin, noted that "importantly" the new credit facilities being entered into will mature in 2018, which she said "will provide the runway for the turnaround."

The new debt facilities will close sometime during the current fourth quarter and will be subject to customary closing conditions.

During the question-and answer portion of the conference call that followed the formal presentations by Magnacca and Etlin, an analyst pressed for further details on what the new financing will cost the company - but didn't get any.

Magnacca merely said that "at this point, we've got the commitment letters in place and we're working on bringing those to close and we've disclosed [in the press release] what we're going to disclose at this point in time."

Etlin added that "we ran a highly competitive process, our investment bankers did, and while we had multiple proposals, the facility that we ultimately signed a commitment letter on is [at] very market-based competitive rates that you would expect for this size and type of facility for the company at this time."

Converts payment cuts debt

At the end of the third quarter, Etlin said that the company had a "strong" balance sheet, with $613 million of total liquidity, consisting of $316.4 million of cash and cash equivalents and $296.2 million of available credit under the existing revolver, which was to have come due in 2016 but which is being refinanced.

Etlin said that the company's borrowing availability was lower than the previous quarter - it stood at $386 million as of the end of the second quarter on June 30 - principally driven by the company's efforts during the quarter to reduce its inventory levels by getting rid of duplicate or unproductive merchandise, since inventory is one of the asset valuation components used to calculate the credit facility borrowing base. It took a $47 million write-down on the value of the inventory and otherwise "strategically managed" overall inventories down to $708 million from $826 million at the end of the second quarter. Borrowing availability was further reduced by "a modest increase" in the company's use of letters of credit.

As of the end of the third quarter, RadioShack was carrying $499 million of debt on its balance sheet - down from $713 million at the end of the quarter, with the reduction due to the company's having paid off the final $214 million of its outstanding 2½% convertible notes when they came due. Radio Shack had originally issued $375 million of those converts back in August 2008, but redeemed $88.1 million of them during last year's third quarter ended Sept. 30, 2012, leaving $286.9 million outstanding. It paid down $70.5 million of the notes during the first quarter ended March 31, which further lowered the outstanding amount to $216.4 million. During the second quarter, it paid down another $2 million, leaving just over $214 million outstanding, which was repaid on Aug. 1.

With the convertibles now out of the way, the remaining capital structure at the end of the third quarter consisted of just under $325 million of 6¾% notes due 2019 that RadioShack sold in 2011, as well as $175 million of term loan debt due in 2016 and 2017 that the company had borrowed in three tranches last year in anticipation of buying back the convertible notes - a $50 million secured term loan that will come due in January 2016 and a $25 million secured term loan due in September 2017, both under the existing credit facility, and a $100 million secured term loan due in September 2017 under a new supplemental term loan facility which it entered into.

Red ink level rises

During the quarter, net sales fell to $805.4 million from $898 million in the year-earlier third period. The decline was driven by an 8.4% decrease in comparable store sales due to reduced sales for each of RadioShack's product platforms, although it did continue to see increased sales of prepaid mobile phones in its "mobility" platform and in certain product lines sold under what it calls its "signature" platform, including portable speakers, Apple Lightning compatible cables and adapters.

Its operating loss widened to $118 million from $34 million of red ink on an operating basis a year ago.

Its net loss was $112 million, or $1.11 per diluted share, versus a net loss of $47 million, or 47 cents per share, last year.

Magnacca acknowledged that "our results for the third quarter reflect the ongoing reality that despite our progress in a number of areas, we have a lot of work to do in addressing a great number of legacy operational issues."

He said the company would continue to pursue its turnaround strategy built around "five pillars" - repositioning the nearly century-old company's brand, revamping its product assortment, reinvigorating its more than 7,000 stores in the United States and abroad, increasing its operational efficiency and improving its financial flexibility.

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