UNIVERSAL SAFETY PRODUCTS, INC. annual report, FY2013

Business context and reporting period

Filing: Form 10-K for Universal Security Instruments, Inc. (the request metadata names Universal Safety Products, Inc.; the registrant in the filing is Universal Security Instruments, Inc.). The reporting year ended March 31, 2013, with comparison to the year ended March 31, 2012. The filing also reports unaudited quarterly results.

The company markets smoke alarms, carbon monoxide alarms and related safety products. It imports its products and accounts for its 50%-owned Hong Kong joint venture (Eyston Company Limited) using the equity method.

Financial results and condition

Metric	FY2013	FY2012
Net sales	$15.38 million	$13.30 million
Gross profit / margin	$4.34 million / 28.2%	$3.51 million / 26.4%
Operating loss	$1.21 million	$1.45 million
Net loss	$452,561	$503,288
Basic and diluted loss per share	$0.20	$0.21
Cash from operating activities	$(785,730)	$(3.82) million

• Sales increased 15.6%, primarily due to higher orders for a new carbon monoxide detector. Gross margin improved as product costs declined and product mix changed.
• Selling, general and administrative expense rose to $5.01 million from $4.39 million, including approximately $500,000 in new-product marketing costs versus $107,000 in FY2012. Research and development expense was $543,141.
• Equity earnings from the joint venture increased to $722,827 from $500,502. The venture reported sales of $22.03 million and net income of $1.65 million in FY2013, compared with $22.16 million and $1.26 million, respectively, in FY2012.
• Cash and cash equivalents were $2.44 million at year-end, down from $3.19 million. Working capital was $9.57 million, down from $10.49 million. Current assets were $10.30 million and current liabilities $728,000.
• No borrowings were outstanding under the $1 million CIT factoring facility at year-end; the full $1 million was available. A separate $25,000 long-term obligation remained. The filing reports no interest expense for the company.
• Investing activities provided $264,268, mainly from joint-venture distributions; financing activities used $225,920, primarily for share repurchases.
• Fourth-quarter FY2013 sales were $4.11 million and net income was $104,973, versus sales of $3.61 million and a net loss of $261,154 in fourth-quarter FY2012.

Changes, outlook, risks and unusual items

• The annual net loss narrowed by 10.1%, but the company remained loss-making at the operating level. Operating cash use improved substantially from FY2012, helped by a $1.06 million inventory reduction; accounts payable and accrued expenses also declined by $566,000.
• Management expects to spend $300,000–$500,000 on engineering, design and certification in FY2014. It anticipated higher quarterly sales from the next-generation products and expected sales to benefit if the U.S. housing market recovers; no quantified revenue or earnings guidance was provided.
• The company recorded a $300,000 valuation allowance against deferred tax assets for foreign tax credits expected to expire unused. It also recorded $66,862 of other income from an insurance settlement.
• Key exposure: 98.5% of FY2013 product purchases came from the Hong Kong joint venture, and substantially all products are imported from China. Disruption or adverse conditions affecting the venture could materially harm supply and operations. The U.S. housing downturn, tariffs, trade restrictions, shipping delays and currency movements are additional risks.
• Two customers accounted for 28.2% of FY2013 product sales. Backlog fell to approximately $581,000 from $2.13 million, which management attributed mainly to order timing.
• Management said it believed capital resources were sufficient for operations. The company completed its authorized 100,000-share repurchase program in February 2013. It had no material legal proceedings identified; management believed pending matters would not materially affect the financial statements.
• The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2013.

Important facts for investors to verify

1. Whether new-detector demand and the expected FY2014 product investment translate into sustained sales growth and improved operating profitability.
2. The company’s ability to generate operating cash and maintain liquidity while continuing to incur operating losses.
3. The financial and operational condition of Eyston, given the company’s dependence on it for nearly all product purchases and its reliance on joint-venture earnings and distributions.
4. Customer concentration, the sharp backlog decline, and sensitivity to U.S. housing-market recovery.
5. Realizability of deferred tax assets and any further effects from expiring foreign tax credits.
6. Joint-venture contingencies disclosed in its financial statements, including estimated tax exposures of approximately HK$6.9 million for the group and HK$33.7 million for the company, and the status of the PRC social-insurance provision.