Universal Electronics Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Universal Electronics designs and supplies control and sensor technology, consumer electronics and smart-home products, software, cloud services, and related intellectual property. It reports one business segment.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $132.4 million | $150.5 million; down 12.0% |
| Gross profit / margin | $36.3 million / 27.4% | $46.4 million / 30.8% |
| Operating income (loss) / margin | $(0.6) million / (0.4)% | $8.6 million / 5.7% |
| Net income (loss) / diluted EPS | $(2.9) million / $(0.23) | $7.0 million / $0.49 |
| Operating cash flow | $(18.0) million | $(6.7) million |
| Investing cash flow | $(11.6) million | $(4.8) million |
| Cash and cash equivalents | $53.6 million | $60.8 million at Dec. 31, 2021 |
| Term deposit | $8.6 million | None reported at Dec. 31, 2021 |
| Revolving credit line outstanding | $85.0 million | $56.0 million at Dec. 31, 2021 |
Working capital was $115.2 million at March 31, 2022, and available borrowing capacity was $37.3 million under the $125 million revolving facility, which expires November 1, 2023. The company was in compliance with its credit covenants. Management said cash, expected operating cash flow, and borrowing resources should cover expected outlays for at least the next 12 months, while noting that cash is distributed across jurisdictions and may not always be readily transferable.
Operating cash use reflected the quarterly loss, working-capital movements, and inventory investment. Inventory rose to $139.4 million from $134.5 million at year-end; days sales outstanding increased to 88 from 79 a year earlier, while inventory turns declined to 2.8 from 3.5. Q1 investing outflows included a $7.5 million term deposit, $0.9 million for the Qterics acquisition, $1.8 million of capital expenditures, and $1.4 million for intangible assets. Financing included $29.0 million of net credit-line borrowings and $7.4 million of share repurchases.
Material changes and management commentary
- Sales declined across subscription broadcast, HVAC, consumer electronics, and retail channels. Management cited component shortages and lower customer demand, China COVID-related lockdowns that constrained manufacturing and deliveries, and the loss of a North American retail customer.
- Gross margin fell 3.4 percentage points. Higher material and freight costs and unfavorable currency movements weighed on margins; product price increases and a mix shift toward higher-margin royalty revenue provided partial offsets.
- Operating expenses were 27.8% of sales, versus 25.1% a year earlier. R&D was broadly flat at $7.8 million; SG&A declined to $29.0 million from $29.8 million, mainly due to lower incentive compensation.
- Income tax expense was $2.4 million despite a $0.5 million pretax loss. Management cited the mix of income and losses across jurisdictions, losses not benefited because of valuation allowances, and tax changes affecting research costs and foreign tax credits. The company expects U.S. pretax losses without tax benefit for full-year 2022.
- Comcast represented 15.0% of Q1 sales and 15.1% of receivables at quarter-end. Daikin represented 12.9% of sales. Qorvo accounted for 10.4% of inventory purchases; the filing also identifies a supplier representing 11.9% of accounts payable.
Outlook, risks, and contingencies
- Outlook: The company provided no specific full-year revenue or earnings guidance in the supplied filing text. Management expected COVID-related demand effects to continue at least through the first half of 2022, IC shortages through at least mid-to-late 2022, and some supply relief in the second half. It expected 2022 capital expenditures of $15 million to $18 million and planned to begin manufacturing at a new Vietnam factory in Q3; near-term start-up inefficiencies were possible.
- Operating risks: Component availability, transport and port congestion, rising material, freight, labor and borrowing costs, factory disruptions, and customer demand could constrain shipments, margins, cash flows, and quarterly revenue. Inflation was expected to adversely affect the business through year-end 2022. A 10% movement in specified currencies was estimated to change Q2 2022 net income by approximately $8.4 million; a 100-basis-point interest-rate increase was estimated to affect annual net income by approximately $0.6 million, based on quarter-end debt.
- China labor and reputation: Following press reports about workers at a China facility, the company said its review found no forced labor or underpayment, ended the labor-agency arrangement, and paid outstanding wages and severance. It disclosed that one customer had put further business on hold; additional customer losses could become material.
- Litigation and tariffs: The ITC’s exclusion and cease-and-desist orders against Roku became effective January 9, 2022. Separate Roku patent proceedings, including Roku’s ITC complaint against the company and certain customers, remained pending. In the company’s challenge to U.S. China tariffs, the Court of International Trade ruled in April 2022 that the USTR violated the APA, remanded the matter for further explanation, but left the tariffs in place; the liquidation injunction remained in effect. The filing says potential litigation losses cannot be estimated, while management did not expect pending matters to materially affect financial condition, results, or cash flows.
- Capital allocation and acquisition: Qterics was acquired for approximately $0.9 million cash in February; it contributed $0.3 million of sales and $0.1 million of net income after acquisition. The company repurchased 224,638 shares for $7.4 million during Q1 and reported completing its 300,000-share February 2022 authorization by May 2.
Most important facts for investors to verify
- Whether component supply, logistics, China factory conditions, and customer demand improve as management anticipated, and how they affect sales and gross margin.
- Whether inventory levels, receivables collection, and operating cash flow improve; Q1 operating cash use increased year over year.
- Credit-line utilization, borrowing costs, covenant compliance, and the company’s ability to access geographically distributed cash.
- Customer concentration and the status of the customer that paused business following the China labor allegations.
- Developments in the Roku disputes and China tariff litigation, including any financial or commercial consequences.
- Execution, costs, and capacity ramp at the Vietnam factory, alongside the stated $15 million–$18 million 2022 capital expenditure estimate.