Universal Electronics Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Universal Electronics designs, manufactures and supports universal control, sensor, smart-home and audio-video products, software, cloud services and licensed intellectual property. It reports one business segment.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $150.5 million | $151.8 million |
| Gross profit / margin | $46.4 million / 30.8% | $42.9 million / 28.3% |
| Operating income / margin | $8.6 million / 5.7% | $8.0 million / 5.3% |
| Net income | $7.0 million | $5.8 million |
| Diluted EPS | $0.49 | $0.41 |
| Operating cash flow | $(6.7) million | $(8.3) million |
| Investing cash flow | $(4.8) million | $(3.8) million |
| Financing cash flow | $10.0 million | $0.6 million |
Gross margin improved despite slightly lower sales; operating expenses rose to 25.1% of sales from 23.0%. Cash and equivalents were $55.4 million at quarter-end, versus $57.2 million at December 31, 2020. Working capital was $147.0 million. Accounts receivable and contract assets used $10.1 million of operating cash, while accounts payable and accrued liabilities used $12.5 million.
Revolving credit borrowings were $40.0 million, up from $20.0 million at year-end; $82.3 million remained available under the $125 million facility, which expires November 1, 2022. The rate was 1.37%; the company reported covenant compliance. Management said cash, expected operating cash generation and available borrowing resources should cover expected outlays for the next 12 months, while noting that cash is geographically dispersed and some foreign balances are restricted or may incur repatriation taxes.
Material changes and management commentary
- Sales declined 0.8% year over year. Management attributed ongoing weakness in part to COVID-19 effects on the subscription-broadcast channel.
- Higher gross margin reflected a mix shift toward higher-margin royalties as major electronics companies embedded the company’s technology; currency effects, including a weaker U.S. dollar against the Chinese yuan and Mexican peso, partly offset the improvement.
- SG&A increased to $29.8 million from $27.0 million, primarily due to higher outside legal expenses for a specific matter. R&D was essentially unchanged at $7.9 million.
- Net interest expense fell to $0.1 million from $0.6 million, reflecting a lower average loan balance and interest rate. Tax expense was $1.5 million versus $1.2 million; the effective tax rate was 18.0% versus 17.3%.
- The company repurchased 190,523 shares for $11.0 million, compared with 169,167 shares for $6.3 million a year earlier.
Outlook, risks, contingencies and unusual items
- No numerical full-year guidance was provided. The company expected COVID-19 to continue negatively affecting global business activity and sales demand into at least the first half of 2021.
- A global integrated-circuit shortage began affecting sourcing in Q1 and was expected to continue for the rest of 2021. Alternative supply and sufficient quantities are not assured; shortages or higher component and freight costs could impair production, margins and revenue targets. Customers’ own component shortages could also reduce demand.
- Foreign-exchange exposure is material: management estimated a 10% movement in specified currencies against the U.S. dollar could change Q2 2021 net income by approximately $9.0 million. A 100-basis-point interest-rate increase was estimated to affect annual net income by approximately $0.3 million at the quarter-end borrowing balance.
- Patent disputes include the company’s ITC case against Roku, TCL, Hisense and Funai; the ITC trial concluded April 23, 2021, with an initial determination expected in early July. Roku also filed an ITC request and federal lawsuit against the company in April 2021; outcomes remain uncertain. Separate Section 301 tariff litigation was stayed pending a sample case; the company seeks tariff refunds and other relief.
- Other notable items: the company recognized $1.2 million in foreign-currency contract gains, partly offset by transaction losses, leaving $23,000 of other income, net. It also disclosed a new 300,000-share repurchase authorization approved April 28, 2021.
Important facts for investors to verify
- Whether IC supply constraints, component pricing and delivery costs affect production, sales and margins through the remainder of 2021.
- How subscription-broadcast demand and the COVID-19 outlook develop, and whether the company provides updated guidance.
- Cash conversion, receivables and working-capital trends, alongside increased credit-line usage and repurchases.
- Progress and outcomes in the company’s patent and tariff litigation, including potential financial consequences.
- Foreign-exchange sensitivity, cash accessibility across jurisdictions and the transition from LIBOR to a replacement benchmark.