Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2012 (fiscal second quarter). The filing identifies the registrant as Universal Security Instruments, Inc.; the supplied company metadata says Universal Safety Products, Inc. Financial statements are unaudited.
Business context and financial performance
The company markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (Eyston Company Limited). The company accounts for the venture using the equity method.
| Metric | Three months ended Sep. 30, 2012 | Six months ended Sep. 30, 2012 |
|---|---|---|
| Net sales | $3.46 million, up 4.5% year over year | $6.52 million, up $7,349 year over year |
| Gross profit / margin | $1.17 million / 33.9% (30.3% in 2011) | $2.15 million / 33.0% (28.8% in 2011) |
| Operating loss | $193,128 (prior-year loss: $233,952) | $700,853 (prior-year loss: $605,161) |
| Net loss / diluted loss per share | $218,193 / $0.09 (prior-year loss: $309,941 / $0.13) | $580,791 / $0.25 (prior-year loss: $309,360 / $0.13) |
| Operating cash flow | Six-month cash used: $1.84 million (prior-year use: $2.43 million) |
Quarterly sales growth was attributed mainly to higher carbon monoxide detector sales. Management said higher-margin new-product sales improved gross margin. For the six-month period, increased advertising and promotional costs and lower joint-venture earnings contributed to the larger net loss. R&D and SG&A totaled $2.85 million for six months, up from $2.48 million; approximately $317,000 of promotional expense related to the new product line.
Liquidity, balance sheet and joint venture
- At September 30, cash was $1.27 million, down from $3.19 million at March 31, 2012. Current assets were $10.82 million and current liabilities $918,527, implying working capital of approximately $9.90 million. Inventory was $6.45 million, up from $5.40 million at fiscal year-end.
- Total assets were $26.53 million and shareholders’ equity was $25.59 million. Liabilities included $918,527 of current liabilities and a $25,000 long-term obligation; the balance sheet lists no bank borrowings.
- Operating activities used $1.84 million, principally reflecting a $992,668 increase in inventory and prepaid expenses, a $375,236 decrease in payables and accruals, and the net loss. Investing activities provided $48,835, including $57,539 of joint-venture dividends; share repurchases used $121,070.
- The CIT factoring agreement has a $1 million maximum and reported availability of $1 million at September 30. It provides short-term financing and letters of credit, is secured by receivables and inventory, and bears interest at prime (3.25% at period-end). Management said cash, factoring availability, joint-venture distributions and credit facilities should be sufficient for liquidity and working capital.
- The joint venture’s six-month sales were $10.57 million, down 7.4%; net income was $196,721, down from $792,317. Lower volume, especially to unaffiliated European customers, higher labor and material costs, and product mix reduced margins and earnings. Its working capital declined by $2.50 million during the six months.
Outlook, risks and notable items
- No quantified financial guidance was provided. Management cited continued housing-market difficulties and general economic conditions as constraints on sales, while promoting newly developed smoke- and gas-detection products and seeking patents.
- A June 2012 shipping accident destroyed one container of products. The company recorded $64,224 of insurance income in the September quarter, representing proceeds above the inventory cost previously recorded; the filing describes approximately $400,000 of lost sales associated with the shipment.
- The company repurchased 11,990 shares during the quarter at an average $4.90 per share. Since the program began, it had repurchased 75,128 of the authorized 100,000 shares.
- Management said routine lawsuits and legal matters were not expected, based on counsel’s advice, to have a material adverse effect. Interim results are not necessarily indicative of full-year results. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether new-product sales and improved company-level gross margins can offset promotional spending and persistent operating losses.
- Whether the joint venture’s declining sales, margins and earnings recover, and how those results affect distributions and the company’s equity-method earnings.
- Cash consumption, inventory growth, and continued availability and terms of the CIT factoring facility.
- The final insurance recovery and any remaining effect of the lost shipment; also assess the stated litigation and contingency disclosures.
- Reconcile the filing’s stated $1 million facility availability with the factored-receivable balance and any letters of credit or other facility use; the filing text does not provide a clear breakdown.