Universal Electronics Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts below are in millions of dollars, except per-share data. The company develops and manufactures wireless control products, accessories, software and related integrated circuits for consumer electronics and subscription-broadcasting markets. It reports one operating segment.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $121.7 | $78.9 | $227.5 | $150.3 |
| Gross profit | $34.9 | $27.4 | $62.5 | $49.5 |
| Gross margin | 28.7% | 34.8% | 27.5% | 32.9% |
| Operating income | $8.3 | $7.3 | $10.8 | $10.0 |
| Operating margin | 6.8% | 9.3% | 4.8% | 6.6% |
| Net income | $6.1 | $4.8 | $7.9 | $6.6 |
| Diluted EPS | $0.40 | $0.34 | $0.52 | $0.47 |
| Operating cash flow | Not provided separately | Not provided separately | $4.6 | $13.7 |
Q2 sales rose 54.3% year over year; first-half sales rose 51.4%. Net income increased about 28% in Q2 and 20% for the first half. The filing attributes most of the sales growth to the November 2010 Enson acquisition, which contributed $41.4 million of Q2 sales and $78.5 million in the first half. Business-line sales accounted for 91% of Q2 sales and 90.7% of first-half sales; Consumer-line sales declined 8% and 7%, respectively.
Margins and costs: Lower-margin Business sales made up a larger share of revenue after the Enson acquisition; management attributed most of the gross-margin decline to sales mix, with lower royalty income also weighing on margins. First-half operating expenses fell as a percentage of sales, from 26.3% to 22.7%, but did not offset gross-margin pressure. SG&A included $8.8 million of Enson operating costs in the first half, including $1.3 million of acquired-intangible amortization.
Cash, debt and liquidity
- Cash and cash equivalents were $37.9 million at June 30, 2011, down from $54.2 million at year-end 2010. Working capital was $80.0 million, up from $65.6 million.
- First-half operating cash flow of $4.6 million was down from $13.7 million. Management cited inventory accumulation ahead of expected second-half volume, including Enson’s typically strongest sales quarter, and a change in shipping terms with a significant customer. Inventory increased to $76.5 million from $65.4 million at year-end.
- Investing activities used $6.1 million, including $5.6 million of capital spending, primarily for Yang Zhou factory capacity expansion and a new Brazil assembly plant. Financing activities used $16.3 million, including $14.4 million of term-loan repayment and $3.5 million of share repurchases.
- Debt was $20.6 million, all under a U.S. Bank term loan, versus $35.0 million at December 31, 2010. The loan matures November 1, 2011; minimum quarterly principal payments were $2.2 million, with remaining principal and interest due at maturity. Available borrowing resources were reported as $20.0 million.
- Management said cash and anticipated operating cash flows, supplemented if needed by the credit line, should cover expected outlays for at least the next 12 months. Most cash was held outside the United States; repatriation may incur U.S. tax and some foreign balances are subject to local restrictions.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance was provided. Management’s 2011 priorities include integrating Enson, using its factories more fully, expanding Asian and Latin American market penetration, growing customer relationships, and developing higher-margin products.
- Management identified product mix, customer order patterns, customer retention, Enson integration and performance, component availability, factory capacity, foreign exchange, and market demand as risks. The company estimated a 10% currency move in specified currencies could change Q3 2011 net income by about $2.7 million and cash flows by about $3.5 million.
- One customer represented 11.8% of first-half sales; two customers each exceeded 10% of prior-year first-half sales. Management warned that loss of a major customer could materially affect results and cash flows. A key integrated-circuit supplier represented 11.7% of first-half inventory purchases; the filing warns of potential adverse effects from supply interruptions or price increases.
- The company recorded a 22.6% first-half effective tax rate, versus 34.7% a year earlier, primarily because a greater share of income was earned in lower-tax jurisdictions following the Enson acquisition. Gross unrecognized tax benefits were approximately $6.0 million; management anticipated a roughly $0.3 million reduction within 12 months.
- Enson acquisition consideration may increase by up to $1.5 million due to a seller dispute over tax estimates. The auditor’s report on Enson’s earnings target was not yet issued at filing, and management did not anticipate a payment from the seller under that target.
- On July 15, 2011, the company sued Logitech entities, alleging infringement of 17 patents related to remote-control technology. The defendants had not answered as of the filing. The filing states that potential litigation losses cannot be estimated, while management did not expect other pending or potential matters to materially harm results or financial condition.
- Management assessed disclosure controls as effective, but excluded Enson from its internal-control assessment. Enson represented 56% of consolidated assets and 34% of first-half sales; the permitted exclusion period is limited to one year after acquisition.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects Enson versus underlying organic growth, and whether integration delivers expected factory utilization and cost benefits.
- Whether gross margins stabilize as the sales mix shifts toward Business products, and whether royalty income recovers.
- Inventory conversion, operating cash flow, and the company’s ability to repay or refinance the $20.6 million term loan before its November 2011 maturity.
- The resolution of the Enson seller dispute and earnings-target review, including any purchase-price adjustment.
- Customer and supplier concentration, foreign-exchange sensitivity, and the development of the Logitech patent litigation.
- Progress in bringing Enson within the company’s internal-control assessment before the one-year post-acquisition period expires.