Universal Electronics Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company designs and manufactures universal control, sensing, automation and AV products, and licenses related technology. It reports one operating segment. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $164.7 million | $161.4 million |
| Gross profit / margin | $37.2 million / 22.6% | $41.0 million / 25.4% |
| Operating income (loss) / margin | $0.9 million / 0.5% | ($0.4 million) / (0.2%) |
| Net income (loss) | ($0.6 million) | $0.1 million |
| Diluted earnings (loss) per share | ($0.04) | $0.01 |
| Operating cash flow | ($11.9 million) | ($12.6 million) |
| Capital expenditures and intangible asset purchases | $9.9 million | $6.9 million |
At March 31, cash and cash equivalents were $40.2 million, with an additional $5.1 million of restricted cash. Working capital was $76.4 million. Revolver borrowings were $141.0 million under a $170.0 million facility, leaving $29.0 million available; the interest rate was 3.34%, and the company reported compliance with its covenants. Total liabilities were $337.3 million. The company expects 2018 capital expenditures of approximately $23–25 million and says current cash, expected operating cash flow and borrowing availability should cover anticipated cash needs for the next 12 months.
Material changes and drivers
- Reported sales increased 2.0%. Business-line sales rose 1.2% to $152.2 million; Consumer-line sales rose 13.6% to $12.5 million. Growth in Asia, Europe and home security was partly offset by lower North American and Latin American subscription-broadcasting sales.
- Gross margin fell 2.8 percentage points. Management cited a stronger Chinese yuan, China labor-cost inflation and price reductions for large customers; factory efficiencies partly offset these pressures.
- Operating income improved from a prior-year loss, when the company recorded $5.3 million of factory-transition restructuring charges. R&D expense rose 10.1% to $6.1 million, while SG&A declined 1.3% to $30.2 million.
- Net interest expense increased to $1.1 million from $0.4 million, primarily due to higher revolver borrowings. Other expense was $0.6 million versus $0.6 million of other income in the prior year, driven mainly by foreign-currency contract losses.
- Operating cash use remained substantial. The company reported DSO of 83 days, up from 72 a year earlier, attributing the increase to longer payment terms for certain large customers and collection timing. Inventory turns declined to 3.5 from 3.8; management said higher inventory reflected planned factory shutdowns during an ERP-system transition.
Accounting, outlook, risks and unusual items
- Revenue recognition change: The company adopted ASC 606 on January 1, 2018, using the modified retrospective method. Q1 2018 reported sales were $7.5 million lower than they would have been under the prior standard; reported net loss was $0.5 million greater. The company cautions that the change affects period comparability. It recorded $22.3 million of contract assets at March 31.
- Customer concentration: Comcast represented 23.1% of Q1 sales, compared with 26.2% a year earlier. Management identifies reliance on a limited number of customers and customer order timing as risks.
- Guangzhou facility sale: After quarter-end, the original sale agreement was terminated by mutual agreement on April 17, 2018, without penalty, and its deposit was returned. A new agreement was signed April 23 for RMB 339 million (approximately $53.8 million at the stated exchange rate); a $5.4 million nonrefundable deposit was received, with closing expected by June 30, 2018. Completion remains subject to the agreement’s terms and approvals.
- Contingencies: Patent litigation involving Ruwido and FMH remains ongoing in Belgium and the Netherlands. A Belgian court had found that a discontinued product infringed certain design rights, stayed compensation or damages pending further proceedings, and the company appealed. The company states it cannot estimate potential losses, while believing final judgments would not materially affect its financial condition or results.
- Market and tax exposures: A 100-basis-point increase in interest rates would have an estimated $1.1 million annual impact on net income at the quarter-end borrowing level. Management estimates a 10% move in specified currencies could change Q2 2018 net income by approximately $9.8 million. Accounting for effects of the Tax Cuts and Jobs Act remained incomplete; estimates could change materially.
- Capital allocation: The board approved a new authorization on May 3, 2018 to repurchase up to 100,000 shares. The authorization does not require the company to buy any shares. Q1 purchases were employee share tenders for tax withholding, not open-market repurchases.
- No specific full-year revenue or earnings guidance is provided in the filing. Management’s stated 2018 priorities include developing advanced remote controls and home-automation products, expanding international markets and customer share, and pursuing complementary acquisitions or partnerships.
Important facts for investors to verify
- How the adoption of ASC 606 affects reported revenue, margins and contract assets in subsequent quarters, and how best to compare results with 2017.
- Whether gross-margin pressure from currency, labor costs and customer pricing persists, and whether planned efficiencies offset it.
- Customer demand and collection trends, especially given Comcast’s sales concentration and the increase in DSO.
- Cash generation, capital spending, revolver availability and covenant compliance as the company funds operations and its ERP and factory investments.
- Whether the new Guangzhou facility sale closes on schedule and for the expected consideration.
- Developments in the patent cases and the company’s completion of its Tax Act accounting and related estimates.