RadioShack explores options but warns that bankruptcy is possible

By Paul Deckelman

New York, Sept. 11 – RadioShack Corp. is “actively exploring options for restructuring our balance sheet,” its chief executive officer said Thursday, adding that the problem-plagued Fort Worth, Texas-based consumer electronics retail chain operator is “in advanced discussions with a number of parties.”

Seeking to defuse speculation in the analyst community and the financial media that the company might soon be forced into a bankruptcy restructuring – although, for the first time, it officially acknowledged such a possibility itself in its latest regulatory filing – CEO Joseph C. Magnacca acknowledged that “it’s clear that the current pace of our turnaround is simply not fast enough to address our near-term liquidity needs,” despite what he claimed to be “the steady progress we are making with our strategic initiatives.”

Despite his assertions that “every day, we see consumers responding positively to the key elements of our turnaround strategy, such as the actions we have taken on reinvigorating our store experience, revamping our product assortment and creating a stronger inventory position,” Magnacca admitted that “we know we need additional financial flexibility to move ahead with our goals.”

He said that RadioShack is currently “in the process of working with our key financial stakeholders, including our existing lenders, bondholders, shareholders and landlords, to create a long-term solution that would potentially involve a comprehensive recapitalization.”

He said that this could include a store-based consolidation program and other measures “to make significant reductions in our cost structure in order to provide the additional liquidity and time necessary to see the effect of our turnaround strategy.”

Magnacca offered little in the way of concrete information, saying only that “the details of that initiative have yet to be finalized, and we are reviewing several alternatives.”

He stressed the point that “there is no predetermined outcome to this work” and warned analysts on the company’s conference call following the release of its results for the 2015 fiscal second quarter ended Aug. 2 that “perhaps for obvious reasons, we will not be in a position to provide details on our recapitalization work while it’s underway.”

Accordingly, Magnacca and RadioShack’s executive vice president and chief financial officer, John W. Feray, departed from the standard corporate conference call procedure and did not entertain questions from analysts following their respective formal presentations.

$182 million of liquidity

During his portion of the call, Feray talked about RadioShack’s liquidity position, noting that as of the end of the fiscal second quarter, RadioShack had $30 million of cash and cash equivalents on its balance sheet, as well as borrowing availability of $152 million under its asset-based revolving credit facility, for total liquidity of $182 million.

That $535 million revolver – part of an overall $585 million credit facility maturing in 2018 that includes a $50 million asset-based term loan – had a borrowing base as of Aug. 2 of $284.4 million.

Availability was reduced by $43 million of outstanding revolver borrowings and by $89.4 million of outstanding letters of credit. The latter included $37 million pledged as collateral for standby letters of credit issued to the company’s casualty insurance providers, $31 million related to merchandise-vendor standby letters of credit, $17 million of trade letters of credit and another $4 million related to depository requirements and miscellaneous other items.

Feray noted that the company was required by its lenders to maintain discretionary reserves of $104 million to cover such items as sales tax, wireless phone-carrier chargebacks, excess inventory, trade accounts receivable, inventory valuation and shrinkage and payroll reserves. Excluding those reserve requirements, he said, total availability would have been $256 million.

Since the end of the quarter, revolver borrowings have declined to $38 million as of Wednesday.

At the end of the quarter, the company had total debt of $658 million, with all but $1.1 million of that considered to be long-term debt. That long-term debt all matures in 2018 and 2019.

Besides the revolver, the capital structure included a $250 million five-year secured term loan that the company entered into last December along with the revolver and $325 million of 6¾% junk bonds due 2019 that it sold in 2011.

Bankruptcy possible

Those bonds, which had started the year trading in the 60s, were trading in a 37 bid context on Thursday, having been steadily hammered down by the continued drumbeat of bad news over the past months. This included the renewed bankruptcy speculation, with Wedbush Securities analyst Michael Pachter warning on Tuesday that a filing could be imminent, with equity investors wiped out.

“RadioShack's operational decisions are now being vetted by creditors, and equity investors are no longer relevant to management decisions – the creditors clearly are in control of the ship and, in our view, the ship is sinking,” Pachter declared in a research note.

For the first time, RadioShack itself has now been forced to officially acknowledge that possibility.

In its fiscal second-quarter 10-Q filing with the Securities and Exchange Commission, RadioShack cautioned that “given our negative cash flows from operations and in order to meet our expected cash needs for the next twelve months and over the longer term, we will be required to obtain additional liquidity sources, consolidate our store base and possibly restructure our debt and other obligations.”

Among the alternatives it is currently exploring with its lenders, bondholders and other financial stakeholders are the possible sale of the company, a partnership through a recapitalization and investment agreement, as well as both in- and out-of-court restructurings. While it presently anticipates announcing a recapitalization alternative in the near term, calling that “our most likely course of action,” it admitted that it could give no assurances that such a step would prove successful.

For the first time, the company included the standard legalistic warning to investors that if acceptable terms of a sale or partnership or out-of court restructuring cannot be accomplished, “we may not have enough cash and working capital to fund our operations beyond the very near term, which raises substantial doubt about our ability to continue as a going concern.”

In boilerplate legal language, it advised the investors that if that were to be the case, a Chapter 11 bankruptcy filing was possible, with the company trying for either a pre-packaged or a pre-arranged restructuring transaction in that case.

It also raised the grim specter that if all efforts at restructuring or recapitalizing were to fail, “we would likely be required to liquidate under Chapter 7 of the Bankruptcy Code.”

Sales slump, loss widens

During the fiscal second quarter, total net sales and operating revenues slid to $673.8 million from $861.4 million in the year-ago period.

Comparable-store sales at outlets open at least one year – a key retailing industry performance metric – plunged by 20% year over year, driven by traffic declines and soft performance in RadioShack’s important mobility business, which sells wireless phone instruments, service contracts and accessories.

Its loss from continuing operations was $137.4 million, or $1.35 per diluted share, versus a year-earlier loss from continuing operations of $51.4 million, or 51 cents per share. On an adjusted basis, the loss from continuing operations was $101.5 million, compared with the year-ago red ink of $62.9 million.

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