Universal Electronics Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended June 30, 2022. Universal Electronics designs and supplies control, sensor, smart-home and AV products, software and related services, and licenses intellectual property. It operates as one business segment.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $139.1m | $150.5m | $271.5m | $301.0m |
| Gross profit / margin | $39.4m / 28.3% | $44.7m / 29.7% | $75.6m / 27.9% | $91.1m / 30.2% |
| Operating income / margin | $5.5m / 4.0% | $9.0m / 6.0% | $4.9m / 1.8% | $17.6m / 5.9% |
| Net income | $3.0m | $5.6m | $0.1m | $12.6m |
| Diluted EPS | $0.23 | $0.40 | $0.01 | $0.89 |
For the six months, operating cash flow was negative $17.1m, versus positive $16.5m a year earlier. Investing cash outflow was $16.9m, including $7.5m for a term deposit, $5.5m of capital expenditures, $3.0m for intangible assets and $0.9m for the Qterics acquisition. Financing provided $20.8m, including $32.0m of net line-of-credit borrowings, partly offset by $11.2m of share repurchases.
At June 30, cash and cash equivalents were $46.1m, with a separate $7.8m one-year term deposit. The company had $88.0m drawn on its $125.0m revolving credit line and $34.3m available to borrow; the line expires November 1, 2023. Working capital was $115.1m. Total liabilities were $251.0m and stockholders’ equity was $265.1m. Management said cash, expected operating cash flow and borrowing capacity should cover expected outlays for at least 12 months.
Changes versus prior periods
- Q2 sales declined 7.6%; six-month sales declined about 9.8%. Subscription-broadcast sales fell due to component shortages and weaker customer demand; retail sales were pressured by a North American customer loss and macroeconomic conditions. HVAC sales increased as the company gained share.
- Gross margin fell 1.4 percentage points in Q2 and 2.3 points year to date, with inflation in components, raw materials, freight and wages. Price increases partly offset these pressures.
- Six-month net income fell to $78,000 from $12.6m. The 2022 six-month effective tax rate was 98.1%, reflecting jurisdictional income mix and losses without tax benefit, among other items.
- Inventory was $147.4m, up from $134.5m at year-end. The company said it purchased components ahead of need amid long lead times; inventory turns fell to 2.7 from 3.4 a year earlier.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expects component shortages to continue into 2023, with some relief beginning in the first half of 2023; shortages have delayed customer orders and raised logistics costs.
- COVID-related factory disruptions, inflation, recessionary demand risk, higher labor and borrowing costs, and customer access to components may weigh on results. The Vietnam factory is expected to begin operations in Q4 2022 and may initially face manufacturing inefficiencies. Estimated remaining-2022 capital expenditures are $13m–$16m.
- Q2 other expense included a one-time expense of about $0.7m for which the company filed an insurance claim. The claim’s outcome is not stated.
- Borrowing rates were 3.04% at quarter-end, compared with 1.35% at December 2021; the company reported compliance with credit covenants. A 100-basis-point rate increase was estimated to affect annual net income by about $0.7m. A 10% move in specified foreign exchange rates was estimated to change Q3 net income by about $8.0m.
- Patent litigation remains active. The ITC issued exclusion and cease-and-desist orders against Roku effective January 9, 2022. In a separate Roku ITC matter, the administrative law judge found the asserted Roku patents invalid and found no violation; full Commission review was scheduled for October 28, 2022. In the company’s tariff case, Lists 3 and 4A tariffs remained in effect while USTR reconsidered its rationale. The company said it could not estimate potential litigation losses.
- Comcast and Daikin each accounted for more than 10% of six-month sales, at 14.2% and 14.0%, respectively, indicating customer concentration.
Important facts for investors to verify
- Whether component availability and customer demand improve as management expects, and whether the inventory build converts to sales and cash.
- Whether margin pressure, weak operating cash flow and near-break-even year-to-date earnings persist; monitor working capital and revolver usage.
- Progress, costs and production performance at the Vietnam factory, including the stated capital expenditure range.
- Developments in the Roku and tariff litigation, the insurance claim, and the potential financial consequences of those matters.
- Customer concentration and the company’s ability to pass through further cost inflation without affecting demand.