Universal Electronics Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company designs, manufactures and sells control, sensor, remote-control, and smart-home products and technologies. It operates as one business segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $153.1 million | $193.9 million | $304.9 million | $378.1 million |
| Gross profit / margin | $38.1 million / 24.9% | $34.0 million / 17.5% | $81.0 million / 26.6% | $73.9 million / 19.5% |
| Operating income (loss) | $6.5 million | ($3.9 million) | $14.5 million | ($2.3 million) |
| Net income (loss) | $14.4 million | ($5.1 million) | $20.2 million | ($6.1 million) |
| Diluted EPS | $1.02 | ($0.37) | $1.43 | ($0.44) |
| Operating cash flow | Not separately presented for the quarter | $4.5 million | $20.2 million |
Q2 sales fell 21.0% year over year; first-half sales fell 19.3%. The company attributed the declines mainly to COVID-19-related demand, supply and production disruption, particularly among traditional home-entertainment and security customers. U.S. sales fell to $65.2 million from $106.5 million in Q2. Comcast represented 19.3% of Q2 sales and 20.5% of first-half sales.
Gross margin improved despite lower sales, supported by reduced U.S. tariff expense, better Mexico manufacturing efficiencies, higher royalty revenue, and favorable currency movements. SG&A declined to $24.2 million in Q2 and $51.2 million for the half, reflecting lower incentive compensation, contingent consideration and freight costs, as well as discretionary cost reductions. R&D spending increased.
Reported earnings included a $9.5 million reversal of accrued social-insurance liability after the indemnification period related to the 2018 sale of the Guangzhou entity expired. Q2 also included approximately $1.1 million of China incentive tax refunds and reversal of approximately $1.3 million of a tax reserve. These items are important when assessing earnings quality.
Cash, debt and liquidity
- At June 30, cash and equivalents were $58.8 million, down from $74.3 million at year-end 2019. Working capital was $128.7 million.
- First-half operating cash flow was $4.5 million, down from $20.2 million, with accounts payable and accrued liabilities producing a $40.9 million cash outflow, principally due to payment timing.
- Investing activities used $9.8 million, including $6.2 million of capital expenditures. Financing activities used $4.5 million; net line-of-credit borrowings were $5.0 million, while treasury-share purchases cost $6.4 million.
- Line-of-credit borrowings were $73.0 million under a $125.0 million revolving facility; available borrowing resources were $49.3 million. The facility expires November 1, 2021, carries a reported rate of 1.43%, is secured by specified assets, and has financial covenants. The company reported compliance at quarter-end.
- Cash exceeded line-of-credit borrowings by $14.2 million, before considering lease obligations. Management said cash, expected operating cash flow and borrowing availability should cover expected outlays for the next 12 months, while noting that cash is geographically dispersed and some foreign balances face repatriation restrictions or taxes.
Outlook, risks and notable items
- Management expected COVID-19 to continue to weigh on sales in Q3 and possibly the remainder of 2020. It gave no specific numerical earnings or revenue guidance.
- Factories were at or near labor capacity when the report was issued, but supply-chain disruptions and renewed factory closures could impair fulfillment, raise manufacturing costs, or add tariffs and other costs. China factories reopened late after Lunar New Year; the Mexico facility experienced a closure of more than one week in Q2.
- Management cited continued investment in new products and home automation, international market penetration, customer growth, and potential complementary acquisitions or strategic partnerships as 2020 objectives. Discretionary expense reductions were expected to continue.
- Foreign exchange is a material exposure: management estimated that a 10% move in specified currencies against the U.S. dollar could change Q3 net income by approximately $6.4 million. A 100-basis-point interest-rate increase was estimated to affect annual net income by approximately $0.5 million.
- Customer concentration, competition, product demand, tariffs, component availability and COVID-19 remain significant risks. The company also disclosed patent litigation involving Roku, TCL, Hisense and Funai, including an ITC investigation and related court actions; outcomes and potential losses were not estimable. A separate Ruwido-related dispute was settled confidentially, with an undisclosed payment to the company and proceedings dismissed.
- The company suspended repurchases under its 2020 plan amid COVID-19 uncertainty. At quarter-end, 175,127 shares remained authorized for repurchase.
Investor verification points
- Separate recurring operating performance from the $9.5 million liability reversal and other tax benefits when evaluating Q2 and first-half earnings.
- Track sales recovery, order patterns and customer concentration, especially Comcast, as well as COVID-19 effects on demand and production.
- Monitor cash conversion, working-capital movements, receivable collection (days sales outstanding rose to 79 from 69 a year earlier), and inventory turns (3.0 versus 3.5).
- Confirm ongoing covenant compliance, revolver availability and the company’s ability to manage debt and geographically restricted cash.
- Follow developments in the patent cases, foreign-exchange exposures, and any renewed share repurchases; potential litigation outcomes are uncertain.