Business context and reporting period
Universal Security Instruments, Inc. (the registrant named in this 10-Q; the request metadata says Universal Safety Products, Inc.) markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (JV) in China. The report covers the quarter and six months ended September 30, 2013, the company’s fiscal second quarter. The statements are unaudited.
Financial performance and position
| Metric | Three months ended September 30, 2013 | Six months ended September 30, 2013 |
|---|---|---|
| Net sales | $3.20 million | $6.20 million |
| Gross profit / margin | $809,155 / 25.3% | $1.56 million / 25.1% |
| Operating loss | $317,099 | $784,155 |
| Net loss / loss per share | $2.56 million / $1.12 | $2.58 million / $1.13 |
| Operating cash used | Not presented for the quarter | $1.68 million |
At September 30, cash was $1.02 million, current assets $9.70 million, current liabilities $582,296, total assets $24.96 million, and shareholders’ equity $24.36 million. Inventory was $6.04 million. The balance sheet reports a $25,000 long-term obligation, identified in the notes with an uncertain tax position; it does not clearly state outstanding borrowings under the factoring facility.
The CIT factoring agreement provides up to $1.0 million of borrowing availability, with receivables and inventory as collateral; the stated prime rate was 3.25%. The company says cash, facility availability, JV distributions, and credit facilities are sufficient for liquidity and working-capital needs. Cash fell $1.42 million from March 31. Working-capital investment was a major operating cash use, including a $1.47 million increase in inventories and prepaid expenses. JV dividends provided $257,638 in investing cash flow.
Changes versus the prior comparable period
- Quarterly sales declined 7.6% year over year; six-month sales declined 4.8%. Management attributed the weakness mainly to lower carbon monoxide detector sales.
- Gross margin fell from 33.9% to 25.3% for the quarter and from 33.0% to 25.1% for six months, primarily due to product mix.
- SG&A declined year over year: $1.03 million versus $1.24 million for the quarter, and $2.12 million versus $2.60 million for six months. Management cited reduced advertising and promotion spending. R&D was described as comparable.
- Net loss increased substantially, chiefly because of a non-cash deferred-tax valuation allowance. Excluding that unusual charge, the company still reported pre-tax losses: $79,317 for the quarter and $267,913 for six months.
- The JV’s six-month sales rose 20.7% to $12.76 million, gross margin increased to 28.8% from 21.7%, and net income rose to $1.17 million from $196,721. USI’s equity in JV earnings was $504,420 for six months versus a $126,911 loss a year earlier.
Outlook, risks, contingencies, and unusual items
The company recorded a $2.48 million non-cash tax charge in the quarter to fully offset its deferred tax assets. Management cited continued taxable losses below projections and delays in product offerings, creating uncertainty about using tax benefits before they begin expiring in March 2016. The charge could be reversed to the extent future taxable income permits use of the credits. Management believes the planned 2014 introduction of sealed smoke and carbon monoxide alarms will support sales and income; no quantified financial guidance was provided.
The company reported 10 granted patents, including six covering new technologies or features, and three applications awaiting notice. Forward-looking statements are subject to risks described in its filings, including the most recent Form 10-K. Management, based on counsel’s advice, said ongoing legal matters are not expected to materially adversely affect the financial statements. The company also revised its March 31, 2013 comparative balance sheet to recognize its share of JV other comprehensive income, increasing the JV investment and accumulated other comprehensive income by $1.38 million; management deemed the prior-period error immaterial and did not amend earlier filings.
Key facts for investors to verify
- Whether product launches occur as planned and improve sales, margins, and taxable income.
- How much deferred tax benefit, if any, can be realized before expiration, and whether a valuation-allowance reversal becomes appropriate.
- Inventory levels, product mix, and cash conversion, given the inventory build and operating cash outflow.
- Current usage and availability under the CIT facility, including any borrowings not clearly quantified in the filing.
- Whether the JV’s improved sales and profitability continue, and the effect of its performance on USI’s equity-method earnings and distributions.