Universal Electronics Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company designs, manufactures and licenses control, sensor, smart-home and audio-video products and technologies. It reports one business segment. All dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $155.6 | $153.5 | $456.7 | $458.4 |
| Gross profit / margin | $45.8 / 29.4% | $44.2 / 28.8% | $136.9 / 30.0% | $125.2 / 27.3% |
| Operating income / margin | $8.9 / 5.7% | $10.2 / 6.7% | $26.5 / 5.8% | $24.8 / 5.4% |
| Net income (loss) | $(1.0) | $6.2 | $11.6 | $26.4 |
| Diluted EPS | $(0.07) | $0.43 | $0.84 | $1.86 |
| Operating cash flow | Not separately reported for the quarter | $22.9 | $43.8 |
- Quarterly sales rose 1.4%; year-to-date sales declined 0.4%. Quarterly gross margin improved 0.6 percentage point, while operating margin fell 1.0 point.
- Quarterly operating expenses rose to $36.9 million from $33.9 million, mainly due to higher outside legal expenses. Year-to-date SG&A increased to $87.3 million from $77.4 million; R&D was approximately $23.0 million in both periods.
- Net loss in Q3 included a $6.1 million loss on the sale of the Argentina subsidiary. The sale-related loss was also a primary factor in the elevated tax burden: Q3 tax expense was $3.4 million, an effective rate of 138.4%. Year-to-date tax expense was $8.3 million, or 41.5%.
- At September 30, cash was $58.8 million, current assets $340.9 million, current liabilities $204.8 million and working capital $136.1 million. Cash increased $1.7 million from year-end 2020.
- Operating cash flow was $22.9 million; investing cash outflow was $12.4 million and financing cash outflow $10.2 million for the first nine months. Operating cash flow was lower year over year, with working-capital movements and lower net income among the factors discussed.
- Line-of-credit borrowings were $53.0 million, up from $20.0 million at December 31, 2020. The $125 million revolving facility had $69.3 million available at quarter-end; the company reported compliance with its covenants. The agreement was extended after quarter-end to November 1, 2023.
- Repurchased 858,670 shares for $44.2 million in the first nine months, versus 263,164 shares for $9.8 million in 2020. Treasury stock increased and stockholders’ equity declined to $295.2 million from $313.3 million at year-end.
Business changes and management commentary
- Management attributed sales growth to HVAC demand, especially in APAC, and higher royalty revenue as major TV OEMs embed the company’s technology. These gains were offset by lower subscription-broadcast sales, primarily in North America.
- Higher-margin royalty mix supported gross margin. In Q3, margin also benefited from selling previously reserved inventory to a customer; currency weakness against the Chinese yuan and Mexican peso, and rising commodity and transportation costs, were offsets.
- Management expects COVID-related demand effects to continue into at least the first half of 2022. It cited ongoing integrated-circuit shortages and port and downstream transport congestion, which have delayed customer orders and deliveries and may increase freight costs. The company said its factories were at or near labor capacity at the report date.
- No specific full-year revenue or earnings guidance was provided. Management stated that cash balances, expected operating cash flow and available borrowing resources should cover expected cash outlays for the next 12 months, while noting that cash location and transfer restrictions could require additional borrowing.
Risks, contingencies and unusual items
- Supply chain and costs: IC supply constraints were expected to continue into 2022; insufficient components could limit production and quarterly revenue. Higher commodity and freight costs could pressure margins.
- Customer concentration: Comcast represented 16.3% of nine-month sales and 15.4% of accounts receivable at quarter-end. Daikin represented 11.9% of nine-month sales. Customer demand, product launches and sourcing decisions may affect results.
- Qinzhou labor allegations: Following a Reuters report about workers from Xinjiang at a PRC facility, the company said its review found no forced work or underpayment, ended the labor-agency arrangement and paid outstanding wages and severance. It disclosed a Senate inquiry and said some customers had paused or stopped business; revenue then at issue was described as immaterial. Potential reputational, customer, regulatory and import restrictions remain uncertain.
- Intellectual-property litigation: In the company’s ITC case, an administrative law judge’s July 2021 initial determination found Roku infringed patents; the full ITC review was pending, with a final determination expected by November 9, 2021. Related cases were stayed. Roku also brought an ITC investigation and district-court action against the company and certain customers; the trial was scheduled for January 2022.
- Tariff litigation: The company and subsidiaries challenged U.S. Section 301 tariffs on China imports. A July 2021 preliminary injunction suspended liquidation of unliquidated entries while the case proceeded; the ultimate outcome and any refunds were uncertain.
- Other unusual items: The 2020 comparison included a $9.5 million reversal of accrued social insurance, benefiting prior-year results. The Argentina sale generated a $6.1 million loss in 2021. The October 2021 credit amendment changed collateral arrangements, replacing a pledge of a PRC subsidiary interest with a subsidiary guaranty.
- Market exposure: Management estimated a 100-basis-point rate increase would affect annual net income by about $0.4 million based on quarter-end borrowings. A 10% move in specified currencies could change Q4 2021 net income by approximately $8.6 million.
Investor verification priorities
- Track IC availability, port congestion, freight and commodity costs, and whether management’s demand outlook through at least H1 2022 changes.
- Assess whether royalty and HVAC growth can offset continued weakness in subscription broadcasting and customer concentration.
- Monitor cash conversion, receivables, inventory levels, credit-line usage and covenant headroom; distinguish operating needs from share repurchases.
- Review the final outcomes and potential business effects of the Roku-related proceedings, tariff case and Senate inquiry, including any customer losses or import restrictions.
- Separate recurring operating performance from the Argentina disposal loss, prior-year social-insurance reversal, tax effects and other unusual items.