Universal Electronics Inc. — Q2 2013 Form 10-Q
Business and period. The company develops and manufactures universal remote controls, AV accessories, related software and integrated circuits. It reports one operating segment. This filing covers the quarter and six months ended June 30, 2013; financial statements are unaudited.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $136.1m | $116.7m | $250.8m | $220.4m |
| Gross profit / margin | $37.8m / 27.8% | $33.0m / 28.3% | $70.4m / 28.1% | $61.3m / 27.8% |
| Operating income / margin | $10.0m / 7.3% | $6.5m / 5.5% | $13.9m / 5.6% | $8.8m / 4.0% |
| Net income | $5.8m | $5.2m | $8.8m | $6.8m |
| Diluted EPS | $0.38 | $0.34 | $0.57 | $0.45 |
Q2 sales rose about 17% year over year, led by business-line sales, which increased 20% to $124.2m. Growth came principally from North American and Latin American subscription broadcasting, including Brazil, and Asian consumer-electronics customers. Consumer-line sales fell 7% to $11.9m, reflecting weaker retail demand, particularly in North America and Europe. For the first half, sales increased 13.8%; management attributed the higher gross margin primarily to a greater share of internally produced units.
Q2 gross margin declined year over year, with management citing sales mix and a higher proportion of larger customers. Operating income improved as operating expenses fell as a share of sales. Research and development spending increased; higher payroll, incentive compensation and freight costs were partly offset by lower intellectual-property litigation costs.
Cash, liquidity and balance sheet
- Cash and equivalents were $49.7m at June 30, 2013, versus $44.6m at year-end 2012; working capital was $129.9m.
- First-half operating cash flow was $7.9m, compared with $8.6m a year earlier. Inventory increased $17.0m, which management said supported expected sales, advance resin purchases and longer component lead times.
- Investing cash outflow was $5.3m, including $4.7m for property and equipment, primarily equipment for the China factories. Financing provided $1.9m; the company repurchased $2.4m of stock during the half.
- No debt was outstanding at quarter-end. The company had a $55.0m revolving credit facility, with approximately $55.0m available (subject to $13,000 of letters of credit); it was in covenant compliance. The facility expires November 1, 2014.
- Management expected cash balances and operating cash flow to cover expected 2013 outlays, while noting that cash is spread across jurisdictions and may require borrowing to meet domestic needs. Most cash was held outside the United States; repatriation may incur U.S. federal tax and some balances face local restrictions.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. 2013 objectives include developing higher-margin products, expanding in smart devices and game consoles, growing in Asian and Latin American subscription markets, deepening customer relationships and pursuing complementary acquisitions or partnerships.
- Other expense was $1.6m in Q2 and $2.2m for the first half, mainly from foreign-currency losses, especially involving the Chinese yuan, Brazilian real and Argentine peso. The filing estimates that a 10% movement in specified currencies relative to the U.S. dollar could change Q3 net income by approximately $4.3m.
- The effective tax rate increased to 30.0% in Q2 and 24.9% for the first half, partly due to approximately $0.4m of additional reserves related to a Hong Kong tax audit for pre-acquisition years and a greater share of income in higher-tax jurisdictions. Gross unrecognized tax benefits were approximately $5.5m.
- Customer concentration is material: DIRECTV represented 16.3% of Q2 sales and 17.1% of first-half sales. The company warned that losing a major customer could adversely affect results.
- Component supply interruptions, shortages, price increases and production-capacity constraints could harm results. The company also cited demand, customer-order, product-acceptance, workforce, cost-control, currency and market-growth uncertainties.
- The company is pursuing two patent-infringement cases against Universal Remote Control, Inc. In the first case, a court invalidated four of 24 asserted claims; the company said it was assessing appeal options and believed the ruling did not materially affect its position. The second case, alleging infringement of nine additional patents, had not yet received a response. No other material pending proceedings were reported.
- Management reported that disclosure controls and procedures were effective at period-end.
Important facts for investors to verify
- Whether business-line growth and the increase in internal production can be sustained, and whether weaker consumer retail demand persists.
- Inventory growth, component lead times and the conversion of inventory and earnings into operating cash flow.
- Foreign-exchange exposure and the reported $4.3m estimated Q3 net-income sensitivity.
- DIRECTV concentration, customer order trends and the status and potential financial effects of the patent litigation.
- Tax-audit developments, unrecognized tax benefits, and the practical availability and tax implications of overseas cash.