Universal Electronics Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company designs, manufactures and licenses control, sensor, smart-home and audio-video technologies and products. Results are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $150.5 million | $153.1 million | $301.0 million | $304.9 million |
| Gross profit / margin | $44.7 million / 29.7% | $38.1 million / 24.9% | $91.1 million / 30.2% | $81.0 million / 26.6% |
| Operating income / margin | $9.0 million / 6.0% | $6.5 million / 4.2% | $17.6 million / 5.9% | $14.5 million / 4.8% |
| Net income | $5.6 million | $14.4 million | $12.6 million | $20.2 million |
| Diluted EPS | $0.40 | $1.02 | $0.89 | $1.43 |
| Operating cash flow | — | $16.5 million | $4.5 million |
Sales declined 1.7% in Q2 and 1.3% in the first half year over year. Higher-margin royalties and product mix lifted gross margin; the company said currency weakness against the Chinese yuan and Mexican peso partly offset the benefit. SG&A rose to $28.0 million in Q2 and $57.8 million in the first half, primarily because of outside legal expenses. First-half capital expenditures were $6.2 million and intangible-asset development spending was $1.9 million.
Financial position and liquidity
- At June 30, 2021, cash and cash equivalents were $67.7 million, current assets $344.3 million and current liabilities $197.0 million. Working capital was $147.3 million.
- Borrowings under the revolving credit line were $46.0 million, up from $20.0 million at December 31, 2020. The $125 million facility had $76.3 million available, net of letters of credit, and expires November 1, 2022. The company was in covenant compliance.
- First-half operating cash flow was $16.5 million; cash increased $10.5 million to $67.7 million. The company repurchased $26.7 million of shares during the half.
Material changes and unusual items
Reported net income fell year over year despite higher operating income. The comparison is affected by a $9.5 million accrued social-insurance reversal recognized in Q2 and the first half of 2020 after an indemnification period expired; there was no comparable 2021 benefit. First-half 2021 operating cash flow improved over 2020, when accounts payable and accrued liabilities drove a much larger cash outflow.
Comcast represented 16.4% of Q2 sales and 17.2% of first-half sales. The filing also identifies Daikin as 10.9% of Q2 sales and 11.3% of first-half sales. Comcast represented 17.0% of accounts receivable at June 30.
Outlook, risks and contingencies
- Outlook: No numeric earnings or revenue guidance is provided. Management expected COVID-related demand effects to continue into at least the second half of 2021.
- Supply chain: The global integrated-circuit shortage and port and downstream transport congestion could constrain production and deliveries, increase component and freight costs, and impede quarterly revenue targets. Management said factories were at or near labor capacity.
- COVID-19 and customer demand: The pandemic continued to weigh particularly on the subscription-broadcast channel. Management cited uncertainty around the pandemic, economic conditions, and customer demand.
- Legal matters: In the company’s patent dispute with Roku, an ITC administrative law judge issued a July 2021 initial determination finding infringement; both parties appealed, with full Commission review expected by November 10, 2021. Roku’s separate ITC complaint against the company and certain customers had been instituted, and the company said it would defend the case. The company also challenged U.S. China tariffs; a July 2021 preliminary injunction suspended liquidation of certain unliquidated entries pending further proceedings. Outcomes and potential financial effects are uncertain.
- Other exposures: Cash is largely held outside the U.S.; some balances may be subject to tax or local repatriation restrictions. A 10% move in specified foreign currencies against the U.S. dollar was estimated to change Q3 2021 net income by approximately $8.6 million. A 100-basis-point interest-rate increase was estimated to affect annual net income by approximately $0.3 million based on period-end borrowings.
Important facts for investors to verify
- Whether the IC shortage and logistics delays affected production, costs, or customer shipments after June 30, 2021.
- Whether higher royalty mix and gross margins persisted despite lower sales and increased SG&A.
- How much of the reported earnings comparison reflects the nonrecurring 2020 social-insurance reversal and tax-related items.
- Developments in the Roku proceedings and tariff litigation, including any financial consequences.
- Use of the revolving facility, covenant headroom, and the impact of share repurchases on liquidity and leverage.