Universal Electronics Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; comparisons are with Q1 2019 unless otherwise noted. The company designs and sells control, sensor, remote-control, and smart-home technology products and operates as one business segment.
Financial performance
| Metric | Q1 2020 | Q1 2019 / prior balance |
|---|---|---|
| Net sales | $151.8 million | $184.2 million; down 17.6% |
| Gross profit / margin | $42.9 million / 28.3% | $39.9 million / 21.7% |
| Operating income / margin | $8.0 million / 5.3% | $1.7 million / 0.9% |
| Net income (loss) | $5.8 million | $(1.0) million |
| Diluted earnings (loss) per share | $0.41 | $(0.07) |
| Operating cash flow | $(8.3) million | $(4.5) million |
| Cash and cash equivalents | $58.9 million | $74.3 million at Dec. 31, 2019 |
| Working capital | $110.0 million | $112.3 million at Dec. 31, 2019 |
| Credit-line borrowings | $78.0 million | $68.0 million at Dec. 31, 2019 |
Research and development expense increased 16.3% to $7.9 million; selling, general and administrative expense decreased to $27.0 million from $31.4 million. Net interest expense was $0.6 million, down from $1.2 million. Income tax expense was $1.2 million, with a 17.3% effective tax rate. Foreign-currency translation reduced comprehensive income by $7.0 million, resulting in a comprehensive loss of $1.2 million.
Liquidity, debt, and cash flow
Cash declined by $15.4 million during the quarter. Investing activities used $3.8 million, including $2.0 million of capital expenditures. Financing activities provided $0.6 million: $10.0 million of net credit-line borrowings was partly offset by $6.3 million of share repurchases and $3.1 million of contingent-consideration payments. Operating cash use reflected a $29.0 million outflow from accounts payable and accrued liabilities, primarily due to payment timing.
The company had a $125.0 million revolving credit facility expiring November 1, 2021, with $44.3 million available at quarter-end, net of outstanding letters of credit. The rate then in effect was 2.20%; the company reported compliance with financial covenants. Management believed cash, expected operating cash flows, and available borrowing capacity would cover expected outlays for the next 12 months, while noting that cash is held in multiple jurisdictions and transfers may be restricted or delayed.
Changes, outlook, and risks
- Sales fell primarily in subscription broadcast and security, with COVID-19-related factory reopening delays in China, supplier closures, and reduced customer orders. U.S. sales declined to $74.4 million from $98.9 million; Asia excluding China increased to $27.8 million from $24.1 million.
- Higher gross margin reflected lower U.S. tariff expense, increased royalty revenue, and favorable currency effects, partly offset by excess manufacturing costs from delayed China factory reopening. Lower SG&A reflected reduced Ecolink contingent consideration and freight costs; R&D rose with continued product-development investment.
- Management expected COVID-19 to negatively affect sales in Q2 and possibly the remainder of 2020. It cited uncertain demand, possible supply-chain disruption, and the risk that factory closures could impair fulfillment and increase manufacturing costs, tariffs, and other expenses. No numerical earnings or sales guidance was provided.
- Management anticipated reducing certain discretionary expenses during the rest of 2020. Factories were reported at or near labor capacity when the filing was issued; the company had implemented workplace safety measures and work-from-home arrangements.
- Comcast accounted for 21.7% of Q1 sales and 20.7% of quarter-end receivables, creating customer concentration exposure. A single supplier represented 14.0% of inventory purchases.
- Foreign-exchange exposure remains significant. The company estimated that a 10% movement in specified currencies against the U.S. dollar could change Q2 2020 net income by approximately $8.5 million. A 100-basis-point interest-rate increase was estimated to affect annual net income by approximately $0.6 million.
- The company suspended repurchases under its new 300,000-share authorization amid COVID-19 uncertainty; 175,127 shares remained authorized at quarter-end. It repurchased 169,167 shares for $6.3 million during Q1.
- Patent disputes with Ruwido remained pending in Europe. The company also filed patent-infringement actions against Roku, TCL, Hisense, and Funai in April 2020. Management said it could not estimate potential litigation losses but did not expect pending matters to materially affect consolidated financial condition, results, or cash flows.
- The company was evaluating possible tax effects of the CARES and Families First Coronavirus Response Acts and a German withholding-tax interpretation. COVID-19-related estimates and asset valuations could change as circumstances develop.
Key facts for investors to verify
- Whether the Q1 sales decline and margin improvement persist, and how COVID-19 affected Q2 and full-year demand, production, and costs.
- Whether negative operating cash flow and working-capital outflows normalize, and how cash generation compares with debt and planned capital needs.
- Customer and supplier concentration, including Comcast’s sales and receivables exposure and the dependence on key component suppliers.
- Credit-line availability, covenant compliance, borrowing costs, and the geographic availability of cash balances.
- Developments in patent litigation, foreign-exchange exposure, and the company’s evaluations of tax-law matters.