Universal Electronics Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Universal Electronics develops and manufactures control, remote-control, AV accessory, security and smart-home products and licenses related technology. It reports one business segment.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $184.2 million | $164.7 million |
| Gross profit / margin | $39.9 million / 21.7% | $37.2 million / 22.6% |
| Operating income / margin | $1.7 million / 0.9% | $0.9 million / 0.5% |
| Net loss / diluted loss per share | $1.0 million / $0.07 | $0.6 million / $0.04 |
| Operating cash flow | $(4.5) million | $(11.9) million |
| Capital expenditures and intangible-asset purchases | $3.5 million | $9.9 million |
Sales rose 11.8%, primarily from launches of higher-end platforms by existing customers, a newly acquired customer and continued home-automation strength. Gross margin declined 0.9 percentage points, while operating expenses fell to 20.7% of sales from 22.0%, supporting improved operating income. A $1.0 million tax expense, versus a $0.2 million tax benefit in the prior-year quarter, contributed to the net loss; the company attributed the increase mainly to remeasurement of certain deferred tax assets related to China tax incentives, partly offset by a tax refund.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $44.9 million at March 31, down from $53.2 million at year-end. Working capital was $101.8 million.
- Borrowings under the revolving credit line were $106.5 million; available borrowing capacity was $20.8 million, net of letters of credit. The rate in effect was 4.25%, and the company reported compliance with covenants.
- Total assets were $582.4 million and total liabilities were $317.2 million. Operating lease liabilities totaled $21.3 million following adoption of the new lease standard.
- Operating cash use improved year over year, but remained negative. Increased receivables and contract assets and higher inventory were working-capital uses; the company reported 78 days sales outstanding and 3.4 inventory turns.
- Financing cash flow included $5.0 million of net credit-line borrowings, $4.3 million in contingent-consideration payments and $1.2 million of treasury-stock purchases.
Material changes, outlook and risks
- Tariffs and manufacturing transition: Higher U.S. tariffs on products made in China and imported into the U.S., together with transition-related costs and inefficiencies, pressured gross margin. The company was moving U.S.-destined production to Mexico, expected completion by summer 2019, and expected margin pressure to continue until then. It expects inventory turns to improve as the transition is completed.
- Management outlook: No numerical revenue or earnings guidance is provided in the filing. Strategic priorities include advancing remote-control and home-automation products, expanding international markets and existing-customer share, acquiring customers, and evaluating complementary acquisitions or partners. Management expected to reduce credit-line borrowings as working-capital management improved.
- Customer concentration: Comcast represented 15.9% of quarterly sales and Dish Network 10.7%; Comcast was 23.1% of sales in Q1 2018. Management identifies reliance on a limited number of customers and customer product-rollout timing as risks.
- Foreign exchange and interest rates: The company estimated that a 10% move in specified currencies against the U.S. dollar could change Q2 2019 net income by approximately $11.5 million. A 100-basis-point rate increase was estimated to affect annual net income by about $0.8 million, based on quarter-end borrowings.
- Legal matters: Patent disputes with Ruwido/FM Marketing remain pending in Belgium and the Netherlands; a separate Belgium proceeding was scheduled for June 2019. The EPO revoked a Ruwido utility patent as originally filed but maintained it in narrower amended form. The company also has a patent-infringement action against Roku, with trial set for June 2020. Management said it could not estimate potential losses but did not expect pending litigation to materially affect financial condition, results or cash flows.
- Tax and accounting items: The company maintained a full valuation allowance on U.S. and state deferred tax assets due to cumulative U.S. operating losses. Lease accounting adoption added $20.7 million of ROU assets and corresponding lease liabilities at adoption, without an earnings or cash-flow impact.
Important facts for investors to verify
- Whether the Mexico production transition was completed on schedule and whether tariff and transition costs eased gross-margin pressure.
- Whether sales growth and customer launches persisted, particularly given Comcast and Dish concentration and customer rollout risks.
- Whether operating cash flow, inventory turns and receivables improved enough to reduce revolving-credit borrowings.
- Subsequent developments in the Ruwido/FM Marketing and Roku litigation, including any potential financial exposure.
- Whether foreign-exchange movements, tax-asset realizability and covenant headroom materially changed after quarter-end.