Financial Analysis of KOSS Corporation

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The table below summarizes statistics for the US for the year 2011 and 2006.

Current 2006
GDP $15,094,000,000, $13,314,500,000
Inflation 2.7% 3.2%
Unemployment 7.7% 4.6%
Interest rate 0.5% 4.6%

From the table above, the GDP increased from $13.314 billion in 2006 to $15.094 billion in 2011. Inflation rate declined from 3.2% in 2006 to 2.7% in 2011. Despite the increase and decline in inflation rate, the rate of unemployment increased from 4.6% in 2006 to 7.7% in 2011. Interest rates declined from 4.6% in 2006 to 0.5% in 2011. The low interest rate in 2010 was a measure taken by the state to stimulate money circulation. This would in turn lead to job creation thus reducing the unemployment rate. The economy of US has been on an upward trend since 2006. The graph below shows trend of GDP in current for US.

GDP in current prices

The Electronics Industry

Industry Characteristics

Koss Corporation operates in the audio/video industry. It is a segment of home entertainment industry. Specifically, the company produces and sales stereo headphones. The home entertainment industry is highly is dominated with consumer spending on TV. Audio /video takes a small fraction of the entertainment industry.

Sales Characteristics

In the recent past, the industry has experienced declines in sales and revenue. This created a lot of panic in the industry. The decline in sales was caused by rapid change in technology. These new products did not respond positively in the market as fast as they were expected. Revenue for the industry increased by 5% (3.7% billion to 3.9% billion) from 2010 to 2011.

Sources and Uses of Funds

The industry relies on funding from shareholders and debt financing. These are coupled with other short term financing. A large proportion of the financing is consumed in cost of goods sold, selling, general and administrative expenses.

Causes of Changes in Industry Prospects

The industry is expected to grow at a rapid rate in the future. This can be attributed to the fact that customers will be more conversant with the products. This will increase demand of the products hence increase in sales and revenues.

KOSS Corporation

Background and History

KOSS Corporation was founded by John Koss in 1958. John Koss invented stereo headphones in that year thus leading to the formation of KOSS Corporation. The company is headquartered in Wisconsin, USA. The company operates in audio/video industry segment of the home entertainment industry. Over 99% of the company’s products are stereo headphones. They are basically used for listening to music. Further, demand of products is seasonal. The company records high sales during the holiday seasons. Baker Tilly Virchow Krause, LLP is the external auditors of the company (Koss Corporation 5).

Organization of Management

The executive management of Koss Corporation is made up of five personnel. The total number of employees of the organization was 60 as of June 30, 2012. All the employees of the company are not unionized. The table below summarizes the five key executives of the organization and their positions.

Name and age Position
1 Mr. Michael J. Koss (59 years) Vice Chairman, Chief Exec. Officer, President and Chief Operating Officer
2 Mr. David D. Smith (58 years) Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary
3 Mr. John C. Koss Jr. (56 years) Vice President of Sales
4 Ms. Cheryl Mike (61 years) Vice President of Human Resources and Customer Service
5 Ms. Lenore E. Lillie (54 years) Vice President of Operations


The company designs, produces, distributes, and sells stereo headphones and related accessories across the world. Koss corporation sells a wide range of high quality “stereo headphones, speaker-phones, computer headsets, telecommunications headsets, active noise canceling stereo headphones, wireless stereo headphones, and compact disc recordings of American Symphony Orchestras under the Koss Classics label” (ABC News Network 1). It is worth noting that the company sells their products in their brand name. In the recent past, the company changed their brand name to Radio Shack. The new brand possesses the same features as Koss phones. The most selling and iconic products in the market are the Koss Plug and Spark Plug. The company’s products comprise of “full size, noise cancellation, portability, Earbud and wireless headphones” (ABC News Network 1). The product warranty for a limited period for both the initial buyer and subsequent buyers gives the company a strong competitive advantage over its competitors.

Market and Distribution Channels

The company sells its products both in the US market and other foreign markets. The foreign markets include Europe, Middle East, Latin America, Canada, and Mexico among others. The large amount of net sales emanates from the US market. This amounted to $17,155,135 in 2012. This was followed by Sweden and Cyprus. The two largest customers of the company are Tura Scandinavia AB and Walmart. The two accounted for 48% in 2011 and 53% in 2012 of the company’s net sales. The net sales from the market regions is summarized in the table below.

Market Net sales in 2011 Net sales in 2012
1 United States 19,532,323 17,155,135
2 Sweden 10,450,895 9,361,346
3 Cyprus 1,119,701 1,901,601
4 Russia 2,139,521 1,430,949
5 Canada 1,079,081 1,220,109
6 Czech Republic 1,237,034 1,200,374
7 All other countries 5,959,580 5,596,253
Net sales 41,518,135 37,865,767

From the above table, it is evident that the net sales of the company declined from $41,518,135 in 2011 to $37,865,767 in 2012. The pie charts below show the proportion of net sales that originated from each region for the year 2011 and 2012.


Net sales in 2011


Net sales in 2012

Koss Corporation sells its products mainly though “national retailers, international distributors, audio specialty stores, the internet, direct mail catalogs, regional department store chains, discount department stores, military exchanges, and to prisons” (Koss Corporation 6). Further, the company sells the products directly to distributors and manufacturers. For instance, the company has about 17,000 retail outlets within the US. For the international market, the company has a sales office in Switzerland. The office service all other international markets. The use of one sales center to connect to other foreign markets does not is not a risk. Thus, in the event that the company loses the office, marketing and sales responsibility will be transferred. The company will sell its products directly to the independent distributors in the foreign markets. The only marketing risks that the company faces are exchange rate fluctuations and barriers to trade (Koss Corporation 6).


A stereo headphone industry in which the company operates its quite competitive. Koss Corporation faces stiff competition from three top companies. These are Harman International Industries Incorporated, Plantronics, Inc., and Bose Corporation. Some of these companies have diversified products with a greater asset base than Koss Corporation. However, Koss Corporation has a greater competitive advantage than its competitors because it offers high quality stereo headphone products. In addition, it offers an outstanding after sales customer sales that its competitors cannot match. The company depends on “unique sound, quality workmanship, brand identification, engineering skills, and customer service to maintain its competitive position” (Koss Corporation 6).

Production Facilities

The company’s production plant is based in Milwaukee, Wisconsin in the US. The company also makes use of independent suppliers based in South Korea, Taiwan and People’s Republic of China. The contract manufacturing facilities are strategically located away from the main production plant (in the US) and from each other so as to mitigate risks associated with business interruptions that might arise from natural disasters, trade restrictions and war. Despite the measures taken by the company to ensure continuous flow of supplies, it still faces risk of disruption of supply chains in the event that trade restrictions are imposed on its products centered on the country of origin. Koss Corporation opts to store finished goods inventory in its facility located in the US. In summary, the company maintains an excellent production and inventory management model that would ensure restoration of supply within a year in the event that the whole supply chain collapses (Koss Corporation 7).

Promotional Activities

In 2012, the company participated in the Consumer Electronic Show (CES) trade show in the US. It is the world largest trade fair for electronics. Koss Corporation spent $206,000 in the function. Most of which were spent on promotion. The company also spent an additional $1,124,000 for innovation, marketing and promotion of the new product headphones. In the year 2012, the company also incurred substantial amount of income the promotion of Striva product line (Koss Corporation 5).


Koss Corporation was formed in 1953 under the name J.C. Koss Hospital Television Rental Company. The founder felt the need to diversify into several product lines. This led to the formation of Koss Audio & Video Electronics. The new company produced and sold its products as a distinct entity. Koss family owned about 74% of this new company. Koss Audio & Video Electronics Ltd. was later renamed to Koss Classics Ltd. Koss Corporation was formed in 1971. The company wholly owned Koss Classics Ltd. Koss Classics was dissolved in 2012. Therefore, it is evident that the company experienced a change of name over the years. It was not involved in any major acquisition or merger. The company owns about 441 trademarks registered in 90 countries. Also, it owns about 31 patents registered across the world (Koss Corporation 2).

Notes to Consolidated Financial Statements

Notes to consolidated financial statements gives detailed explanation of the values reported in the income statement, cash flow statement, statement of changes in equity, and the balance sheet statement. Further, the notes give details or explanation of the information that were not included in the financial statements. The financial statements of the company are accompanied by 20 notes. The first note focuses on the accounting policies employed by the company when preparing the financial statements. The second note gives more information on the unauthorized transaction related costs and recoveries. The total amount of these transactions amounted to $31,500,000 for the period between 2005 and 2009. The third note gives information on accounts receivables. It gives information on the opening account balance, expensed provisions and amounts written off. The fourth note gives information on inventories that is, raw materials, work in progress, finished goods, and reserve for obsolete inventory. The fifth note gives information on equipment and leasehold improvement. It shows their opening balances, closing balances and accumulated depreciation.

The sixth note gives the opening balances, capitalized software cost, accumulated amortization, and closing balances for product software and development expenditure. The seventh note gives information on current and deferred income taxes. The eighth note gives information on the credit facility of the company and the interest rates. The ninth note gives information on accrued liabilities. The next note gives information on product warranty obligation. It shows the amount that the company spent on product warranty. Note eleven and twelve give information on deferred compensation and interest expense. Note thirteen and fourteen give information income per common and common stock equivalent share and stock option. The fifteenth note gives information on the stock purchase agreement. Note sixteen gives additional information on the cash flow statement. Note seventeen gives the amount the company contributed to the employee benefit plans. The eighteenth note gives a breakdown of foreign sales and significant customers. Note nineteen and twenty give information on commitments, contingencies and legal matters (Koss Corporation 22).

Trends in Growth and Variability and Historical Financial Statements

The tables below summarize the trend of Koss Corporation between 2010 and 2012.

Trend and historical information for income statement values:

Item 2010 2011 2012
1 Net sales 40,598,722 41,518,135 37,865,767
Percentage change 2.26% -8.80%
2 Gross profit 16,868,411 16,856,632 14,531,415
Percentage change -0.07% -13.79%
3 Total Operating Expenses 21,824,178 10,605,314 10,644,654
Percentage change -51.41% 0.37%
4 Net income (3,572,225) 4,373,331 2,940,415
Percentage change 222.43% -32.76%

From the table above, sales increased by 2.26% from 2010 to 2011. Thereafter, it declined by 8% in 2012. On the other hand, gross profit declined by 0.07% from 2010 to 2011. It further declined by 13.79% in 2012. Net income increased by 222.43% from 2010 to 2011. The increase can be attributed to the fact that operating expenses declined by 51.41%. It declined by 32.76% in 2012. Despite the decline in sales and profitability, operating expenses increased negligibly by 0.37% from 2011 to 2012. The decline in sales reported in 2012 was attributed to increase in cost of the products from the manufacturers based in China. This led to an increase in the cost of the product to the consumer. As the law of demand states, an increase in price lead to a decline in quantity demanded for a normal good. This explains the decline in sales and profitability. The graph below shows the trend of the values for the three years.

Trend of values

The table below summarizes the trend of earnings per common share and dividends declared per common share.

Item 2010 2011 2012
1 Income per common share -0.48 0.59 0.4
Percentage change 222.92% -32.20%
2 The dividend declared per common share 0.245 0.24 0.24
Percentage change -2.04% 0

From the table, income per common share changes in the same trend as net income. The dividend declared per common share declined by 2.04% thereafter it remained constant.

Trend and historical information for balance sheet items

The table below summarizes the balance sheet values for the company.

Item 2010 2011 2012
1 Total assets 25,750,291 27,405,487 28,748,909
Percentage change 6.43% 4.90%
2 Total long term liabilities 3,805,759 4,279,390 3,085,653
Percentage change 12.45% -27.89%
3 Total equity 12,192,248 15,446,051 17,095,239
Percentage change 26.69% 10.68%

From the table, total assets increase by 6.43% from 2010 to 2011 and by 4.90% in 2012. Similarly, Total long term liabilities increase by 12.45% from 2011 to 2012. It declined by 27.89% in 2012. Finally, total equity increased by 26.69% from 2010 to 2011. It further increased by 10.68% in 2012. The graph below shows the trend of the balance sheet values.

Trend balance shett values

Ratio Analysis

Ratio analysis breaks down the financial data into various components for better understanding of the financial strengths and weaknesses of the company. Ratio analysis will focus on the profitability, liquidity, efficiency, and the gearing level of the company from 2010 to 2012 (Eugene and Michael 56).

Liquidity ratios

Analysis of liquidity is necessary as it establishes the ability of an organization to maintain positive cash flow while satisfying immediate obligations, that is, the availability of cash to pay current debt. The table below summarizes the liquidity ratios for the Group.

2010 2011 2012
Current ratio 1.55 2.03 1.88
Quick ratio 0.68 1.01 0.79

From the ratios calculated above, current ratio for the three year period were greater than one. This implies that the company is in a position to offset the current liabilities using current assets. Quick ratios were also fairly high. However, the ratios declined between 2011 and 2012 as shown in the graph below. This can be attributed to a significant increase in current liabilities.

Liquidity ratios

Profitability ratios

Profitability is the capability of an entity to earn income after eliminating the cost of running a business. The table below shows various profitability ratios over the five year period.

2010 2011 2012
Gross profit margin 41.55% 40.60% 38.37%
Net profit margin -8.79% 10.53% 7.76%
Return on assets -13.87% 15.95% 10.22%
Return on equity -29.29% 28.31% 17.20%

Gross profit margin and net profit margin measure the ability of the company to manage the cost of sales and cost of operation so as to generate profit. Further, return on assets and equity measure the ability of the organization to generate revenue from the assets and shareholders’ funds. Profitability ratios for the company were fairly high and took the same trend net income as shown below.

Profitability ratios

Efficiency ratios

These ratios show the level of activity in a company, that is, how well a company manages resources to generate sales. Turnover ratios are the most commonly used to measure efficiency. The table below shows the turnover ratio for the Group over the five year period.

2007 2008 2009
Inventory turnover 2.8 3.1 2.5
Accounts receivable turnover 9.6 6.9 7.1
Assets turnover 1.6 1.5 1.3

Efficiency ratios for the company are quite low with an inventory turnover ratio of up to 3times. This can be attributed to the seasonal demand.

Efficiency ratios

Leverage ratios

A company’s leverage is explained by the amount of debt financing it holds. The ratios are vital since they show the investor the extent of exposure of equity financing The table below shows leverages ratios for the company.

2010 2011 2012
Debt to equity ratio 0.10 0.09 0

The leverage level of the company is quite low and declining. A low debt to equity ratio implies that the company has a low amount of debt financing in relation to equity financing. This implies that the company has not exploited its full potential. It implies that there is room for growth.

Works cited

ABC News Network 2013, Company Profile. Web.

Eugene, Brigham and J. Michael. Financial management theory and practice, USA: South-Western Cengage Learning, 2009. Print.

Hoover’s Inc. 2013, Koss Corporation company information. Web.

Koss Corporation 2012, Annual Report 2012. PDF file. Web.

The Wall Street Journal 2012, Headphone makers battle over form and function. Web.

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