Universal Electronics Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; comparisons are with Q1 2016 unless otherwise stated. The company develops and manufactures universal remote controls, AV accessories, software, and home security and automation products. It reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net sales | $161.4 million | $150.7 million; up 7.1% |
| Gross profit / margin | $41.0 million / 25.4% | $37.6 million / 25.0% |
| Operating income (loss) / margin | ($0.4) million / (0.2)% | $3.0 million / 2.0% |
| Net income attributable to Universal Electronics / diluted EPS | $0.1 million / $0.01 | $2.7 million / $0.19 |
| Cash from operating activities | ($7.9) million | $3.1 million |
| Cash and cash equivalents | $62.7 million | $50.6 million at Dec. 31, 2016 |
| Line-of-credit borrowings | $88.0 million | $50.0 million at Dec. 31, 2016 |
| Working capital | $93.9 million | $108.3 million at Dec. 31, 2016 |
| Capital expenditures and intangible-asset purchases | $6.9 million | $8.0 million |
Gross margin improved 0.4 percentage points, but operating expenses rose to 25.6% of sales from 23.0%, principally reflecting higher factory-transition restructuring charges and SG&A. SG&A increased 9.5% to $30.7 million; R&D increased 6.0% to $5.5 million. The Q1 2017 tax benefit was $0.3 million, versus a $0.8 million provision in Q1 2016. Cash used in operations reflected working-capital needs, including higher receivables; days sales outstanding rose to 72 from 66 a year earlier. Financing provided $26.9 million, mainly from net line-of-credit borrowings, partly offset by $11.4 million of share repurchases.
At March 31, the company reported $17.0 million of available borrowing capacity and was in compliance with credit-facility covenants. The stated interest rate was 2.11%; the facility is secured by substantially all U.S. personal property and 65% of the ownership interest in the subsidiary controlling its China factories. Cash is held internationally, and some foreign balances are restricted by local laws or could incur U.S. tax if repatriated.
Material changes and business developments
- Sales growth came from the Business line, up 6.9% to $150.4 million, and the Consumer line, up 10.0% to $11.0 million. Management cited higher-end platform rollouts in North America and Europe, Latin American market-share gains, and home-security product shipments.
- Sales by geography included $81.9 million in the United States, $24.7 million in Asia excluding China, $15.7 million in China, $17.4 million in Europe, and $15.6 million in Latin America. Comcast represented 26.2% of sales; DIRECTV represented 10.3%.
- Gross margin benefited from a weaker Chinese yuan, partly offset by manufacturing inefficiencies during the factory transition and price reductions to certain large customers.
- The company repurchased 185,120 shares for $11.4 million, versus 32,934 shares for $1.7 million in Q1 2016.
- Cash and cash equivalents increased by $12.0 million, including the return of a $4.6 million litigation-related surety bond. Separately, $4.6 million of buyer funds for the proposed Guangzhou factory sale remained in long-term restricted cash.
Outlook, risks, and unusual items
- Management expected about $2 million of additional factory-transition severance charges over the next three to six months and expected continued manufacturing inefficiencies over that period. It projected 2017 property, plant, and equipment purchases of $22–$25 million. No specific revenue or earnings forecast was provided.
- The Guangzhou factory agreement provides for a purchase price of RMB 320 million, approximately $46 million at the stated March 31 exchange rate. Closing is subject to due diligence and regulatory approval; the company may take up to 24 months to cease operations at the site, and closing could take approximately 28 months from signing.
- On April 6, 2017, the company acquired substantially all net assets of Residential Control Systems for about $9 million cash, plus up to $10 million of contingent consideration through June 30, 2022. On May 5, the credit line was increased to $115 million.
- Patent disputes include a European matter involving Ruwido and an ITC investigation requested by the Kudelski Group concerning remote controls supplied to Comcast. The company denied the allegations and stated it intended to defend itself; it said it could not estimate potential losses. It viewed potential litigation outcomes as not expected to materially affect its financial condition, results, or cash flows.
- Foreign exchange is a significant exposure: management estimated that a 10% move in specified currencies relative to the U.S. dollar could change Q2 2017 net income by approximately $9.0 million. A 100-basis-point rise in interest rates was estimated to affect annual net income by about $0.6 million at the period-end borrowing balance.
- The company reported effective disclosure controls. It began the first phase of a global ERP implementation, projected to continue through 2019, and said it did not expect an adverse effect on internal controls.
Key investor verification points
- Track whether the factory transition achieves expected cost savings and whether further restructuring costs or production inefficiencies arise.
- Monitor collections, DSO, working capital, borrowing levels, and compliance with credit covenants; verify the impact of the subsequent credit-line increase.
- Assess customer concentration and the sustainability of Comcast and DIRECTV sales, including the Comcast purchase thresholds tied to performance-based warrants.
- Confirm the timing, approvals, and proceeds of the Guangzhou factory sale and the integration and contingent payments associated with the RCS acquisition.
- Follow the Ruwido and Kudelski litigation, currency exposures, and adoption of the new revenue-recognition standard, whose potential impact the company said could be material and was still being assessed.