Universal Electronics Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. UEI develops and manufactures remote controls, AV accessories, wireless security and smart-home products, and licenses related software and intellectual property. It reports one operating segment.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $680.2 million | $695.8 million |
| Gross profit / gross margin | $141.8 million / 20.8% | $165.7 million / 23.8% |
| Operating income (loss) / margin | $(1.7) million / (0.2)% | $10.7 million / 1.5% |
| Net income (loss) attributable to UEI | $11.9 million | $(10.3) million |
| Diluted EPS | $0.85 | $(0.72) |
| Cash from operating activities | $12.9 million | $9.2 million |
| Cash and cash equivalents at year-end | $53.2 million | $62.4 million |
| Working capital / current ratio | $100.6 million / 1.4 | $74.4 million / 1.2 |
| Revolver outstanding at year-end | $101.5 million | $138.0 million |
- Fourth-quarter sales were $170.3 million; operating income was $2.6 million; net loss was $11.1 million, or $(0.80) per diluted share.
- FY2018 net income included a $37.0 million pretax gain on the Guangzhou factory sale. Excluding that gain, the company reported an operating loss; the filing does not provide a non-GAAP adjusted earnings measure.
- Investing activities provided $23.6 million, including $51.3 million in factory-sale proceeds. Capital expenditures were $20.1 million, so operating cash flow less capital expenditures was approximately negative $7.3 million.
- Gross margin declined three percentage points. Operating expenses fell to 21.1% of sales from 22.3%, but did not offset the gross-margin deterioration.
Material changes and drivers
- Sales declined 2.2%. Business-line sales fell 3.5% to $619.5 million, mainly due to lower orders from certain North American subscription-broadcast customers during platform transitions and manufacturing delays. Consumer-line sales rose 13.2% to $60.7 million.
- Margin pressure reflected component-cost inflation, a stronger Chinese yuan, factory underutilization during the Asia ERP transition, factory asset write-downs, and costs and inefficiencies as production shifted from China to Mexico and other locations.
- Interest expense increased to $4.7 million from $2.5 million, reflecting higher borrowings and interest rates. Other expense was $4.5 million, primarily from foreign-exchange losses.
- Income tax expense was $14.2 million and the effective tax rate was 54.4%. FY2017’s 241.6% rate included $16.6 million of estimated Tax Act-related expense; FY2018 was also affected by an $8.1 million valuation allowance against U.S. deferred tax assets.
- Comcast represented 17.6% of FY2018 sales, down from 23.0%. No other customer exceeded 10% in 2018. The company repurchased 413,585 shares for $13.8 million during the year.
Liquidity, outlook and risks
- UEI had $28.5 million available under its revolving credit facility at year-end and reported compliance with its financial covenants. The facility’s stated maturity is November 1, 2020; the commitment reduces from $130 million to $125 million after June 30, 2019. The year-end interest rate was 4.13%.
- Management said cash, anticipated operating cash flow and borrowing availability should cover expected outlays for the next 12 months, while noting cash is distributed across jurisdictions and some foreign funds are restricted or costly to repatriate.
- Management’s 2019 priorities include further development of advanced remotes and home-automation products, international market penetration, expanding business with existing customers, acquiring new customers and considering complementary acquisitions or partnerships. It expects the shift of U.S.-destined production out of China to continue and be substantially completed by summer 2019; tariffs and the transition may continue to pressure margins and disrupt sales.
- Key risks include customer concentration and changing broadcaster platforms; U.S.-China tariffs and dependence on China-based manufacturing; foreign-exchange exposure; competition and pricing pressure; product-development execution; supply constraints; cybersecurity and privacy; and potential impairment of goodwill or other assets. A 10% currency-rate movement across listed exposures was estimated to change first-quarter 2019 net income by approximately $9.7 million.
- Pending patent matters include litigation involving Ruwido and a 2018 patent-infringement suit against Roku. UEI stated it could not estimate potential losses across pending matters, while opining that final judgments would not materially affect its financial condition, results or cash flows. The EPO revoked a Ruwido patent as originally filed in January 2019 but maintained it in narrower amended form.
- The company adopted the new revenue-recognition standard in 2018; it reduced reported FY2018 sales by $3.8 million and net income by $0.4 million versus the prior guidance. It estimated lease-standard adoption in 2019 would add up to $27 million of right-of-use assets and corresponding lease liabilities.
Most important facts for investors to verify
- How much of FY2018 earnings depended on the one-time $37.0 million factory-sale gain, and whether underlying operating performance improves.
- Whether the production shift out of China is completed on schedule and reduces tariff exposure without further delays, costs or margin pressure.
- Customer order trends, particularly Comcast concentration and broadcaster platform transitions.
- Inventory quality and cash conversion: inventory turns fell to 3.3 from 3.6, and the inventory reserve and write-downs increased.
- Revolver availability, covenant headroom, refinancing plans and the ability to generate cash sufficient to reduce borrowings.
- Realizability of deferred tax assets and the valuation allowance, plus outcomes and potential costs of the Ruwido and Roku proceedings.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2018.