Filing summary
Issuer and period: The filing is for Universal Security Instruments, Inc. (not “Universal Safety Products, Inc.” as stated in the request). It is an unaudited Form 10-Q for the quarter and six months ended September 30, 2011, the company’s fiscal second quarter. The company markets and distributes safety and security products; much of its manufacturing is conducted through its 50%-owned Hong Kong joint venture, accounted for under the equity method.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $3.31 million, down 11.0% from $3.71 million | $6.51 million, down 12.0% from $7.40 million |
| Gross profit / margin | $1.00 million / 30.3%, versus $1.06 million / 28.6% | $1.87 million / 28.8%, versus $2.18 million / 29.4% |
| Operating loss | $234,000, versus $169,000 | $605,000, versus $433,000 |
| Joint venture earnings | $2,000, versus $417,000 | $242,000, versus $852,000 |
| Net income (loss) | $(310,000), versus $268,000 | $(309,000), versus $550,000 |
| Basic and diluted EPS | $(0.13), versus $0.11 | $(0.13), versus $0.23 |
Quarterly gross margin improved on product mix, including higher-margin new products; six-month margin declined. Freight costs to meet a Canadian retailer’s delivery commitments affected cost of goods sold. For the six-month period, research and development plus selling, general and administrative expenses were $2.48 million, down from $2.61 million, but rose as a share of sales to 38.1% from 35.3%.
Cash flow and liquidity: Operating activities used $2.43 million in the six months, compared with $923,000 provided in the prior-year period. The filing attributes the use mainly to a $1.43 million increase in inventories and prepaid expenses and a $397,000 increase in receivables and amounts due from the factor. Investing activities provided $387,000, including joint-venture dividends; financing activities had no cash flow. Cash fell to $4.69 million from $6.73 million at March 31, 2011.
At September 30, current assets were $12.78 million and current liabilities $1.42 million (working capital approximately $11.36 million). The company reported $25,000 of long-term obligations and no borrowings under its CIT factoring agreement. The facility maximum is $7.5 million, with $3.39 million of borrowing availability; receivables and inventory collateralize borrowings. Total assets were $28.14 million and shareholders’ equity $26.69 million.
Changes, outlook, and risks
- Results weakened versus the prior-year periods: lower company sales and substantially lower joint-venture earnings drove a shift from net income to net loss.
- Management attributed reduced company sales primarily to lower core-product volumes amid housing-market weakness and general economic conditions. Joint-venture sales also declined, particularly to unaffiliated European customers.
- The joint venture reported six-month sales of $11.42 million, down 8.4%, and net income of $792,000, down 51.9%. Its six-month gross margin fell to 23.9% from 28.7%, which management linked mainly to sales mix and higher labor and material costs.
- The company is pursuing independent approvals for new smoke- and gas-detection products; some products have approvals, while approvals for the remainder were still being pursued. The filing gives no quantitative earnings or sales guidance.
- Management said the factoring facility, joint-venture distributions, and credit facilities should provide sufficient liquidity. Key exposures include economic and housing-market conditions, product mix and freight costs, reliance on the Hong Kong joint venture and its China manufacturing operations, and obtaining product certifications.
- Quarterly tax expense was $94,000 despite a pretax loss; the six-month statements report a $33,000 tax benefit. Management said interim taxes are affected principally by the timing of joint-venture earnings and dividends. The filing does not provide a clear reconciliation of the quarter’s tax expense to its pretax loss.
- Management stated that existing legal matters are not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Universal Security Instruments, Inc.; the request names Universal Safety Products, Inc.
- Review the full financial statements and subsequent filings for the drivers and persistence of the sales decline, operating losses, and working-capital build, especially inventory.
- Assess the joint venture’s operating performance, distributions, and the company’s dependence on it for product supply and earnings.
- Verify availability and terms of the CIT facility, including borrowing-base restrictions and collateral, rather than treating the stated facility maximum as freely available cash.
- Check product approval progress, freight commitments, and any updates to tax, legal, or other contingencies.