Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2013; filed February 13, 2014. Financial statements are unaudited. The filing identifies the registrant as Universal Security Instruments, Inc. The company markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (JV).
Financial performance and position
| Metric | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2013 | Comparable 2012 period |
|---|---|---|---|
| Net sales | $3.74 million | $9.94 million | $4.75 million / $11.27 million |
| Gross profit / margin | $1.13 million / 30.1% | $2.68 million / 27.0% | $1.03 million / 21.6%; $3.18 million / 28.2% |
| Operating loss | $98,000 | $882,000 | $388,000 / $1.09 million |
| Net income (loss) | $(367,000) | $(2.95) million | $23,000 / $(558,000) |
| Net loss per share | $(0.16) | $(1.29) | $0.01 / $(0.24) |
- Nine-month operating cash use was $997,000, versus $527,000 in 2012. JV dividends provided $476,000 of investing cash flow. Cash declined by $521,000 to $1.92 million.
- At December 31, current assets were $9.66 million and current liabilities $451,000. Total assets were $24.44 million; shareholders’ equity was $23.97 million. The company reported a $25,000 long-term liability related to an uncertain tax position and penalties.
- The company reported $1.99 million due from its factor and $4.75 million of inventory. Its CIT factoring agreement had a $1 million maximum and $1 million of stated borrowing availability at quarter-end; the facility rate was prime (3.25% at that date), with receivables and inventory as collateral. The filing does not clearly state a separate outstanding borrowing balance.
Changes versus prior periods
- Quarterly sales declined 21.3%; nine-month sales declined 11.8%. Management attributed the nine-month decrease primarily to lower carbon monoxide detector sales.
- Quarterly gross margin rose to 30.1% from 21.6%, mainly due to product mix; nine-month margin fell to 27.0% from 28.2%, also attributed to product mix.
- Nine-month SG&A fell to $3.20 million from $3.89 million, reflecting lower advertising and promotional spending. Quarterly SG&A also declined, but increased as a percentage of sales.
- The nine-month net loss widened substantially, primarily because of a $2.31 million noncash tax expense to fully value-allow deferred tax assets. The company cited ongoing taxable losses, product delays, and uncertainty about generating taxable income before certain tax benefits expire in 2016.
- The JV reported nine-month net income of $634,000, down from $1.05 million; its December quarter recorded a $531,000 loss versus $850,000 income a year earlier. Its quarterly sales fell 42.6%, with lower European sales to unaffiliated customers cited as a key factor.
Outlook, risks, and unusual items
- Management said a new line of sealed smoke and carbon monoxide alarms expected in 2014 could positively affect sales and income, but provided no quantified guidance. Product delays have contributed to uncertainty over future taxable income.
- Management believes cash, factoring availability, JV distributions, and credit facilities are sufficient for liquidity and working capital. This outlook depends in part on operating performance and JV distributions.
- The company’s results are exposed to JV performance, product mix and demand, manufacturing costs, and foreign-currency and investment-security changes reflected in other comprehensive income. The company has applied for 13 patents on new technologies and features; 10 had been granted and three were pending.
- The company revised its March 31, 2013 balance-sheet presentation to include its share of the JV’s other comprehensive income, increasing the JV investment and accumulated other comprehensive income by $1.38 million. Management deemed the prior-period error immaterial and did not amend earlier filings.
- Management stated that material litigation losses were not reasonably likely. Management also reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Investor verification points
- Verify the timing, launch execution, demand, and profitability of the planned 2014 sealed-alarm product line.
- Monitor sales and margins, particularly carbon monoxide detector demand and the JV’s recovery from its quarterly loss and lower European sales.
- Assess whether future taxable income can support realization of deferred tax assets, including the effect of expiration dates and the full valuation allowance.
- Confirm actual factoring borrowings, facility terms and availability, and the company’s capacity to fund working capital if cash use continues.
- Review the JV’s distributions, financial results, and exposure to currency and investment-security movements.