Universal Electronics Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; the company reports one operating segment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $175.7 million | $169.2 million | $514.6 million | $490.8 million |
| Gross profit / margin | $43.1 million / 24.5% | $41.8 million / 24.7% | $127.9 million / 24.8% | $122.9 million / 25.0% |
| Operating income / margin | $4.2 million / 2.4% | $8.1 million / 4.8% | $11.2 million / 2.1% | $19.1 million / 3.9% |
| Net income attributable to Universal Electronics | $1.7 million | $7.8 million | $6.5 million | $17.1 million |
| Diluted EPS | $0.12 | $0.53 | $0.44 | $1.16 |
| Operating cash flow | Not separately stated | Not separately stated | $(1.2) million | $38.7 million |
Q3 sales increased 3.8% year over year, while net income declined about 78%. Nine-month sales rose 4.8%, but net income fell about 62%. Lower margins, higher operating expenses, restructuring charges, increased interest expense and higher tax rates weighed on earnings.
For the first nine months, investing cash outflow was $40.1 million, including $29.9 million of property and equipment purchases and $8.9 million for the RCS acquisition. Financing provided $44.9 million, primarily through net line-of-credit borrowings; the company also spent $20.2 million on share repurchases. Cash and cash equivalents were $48.6 million at quarter-end.
Balance sheet, liquidity and material changes
- At September 30, 2017, current assets were $386.9 million and current liabilities were $288.8 million; reported working capital was $98.1 million.
- Line-of-credit borrowings were $114.0 million at quarter-end, compared with $50.0 million at December 31, 2016. Under the then-existing $125 million facility, $11 million was available; the company reported compliance with its covenants. Interest rate at quarter-end was 2.48%.
- On October 27, 2017, after quarter-end, the company replaced the credit agreement and increased the revolving facility to $170 million, with maturity remaining November 1, 2019. The facility is secured by substantially all U.S. personal property and 65% of its ownership interest in a PRC subsidiary.
- Operating cash flow deteriorated mainly because of working-capital needs: receivables used $24.4 million and inventories used $21.2 million. Days sales outstanding increased to 79 from 72 a year earlier; inventory turns decreased to 3.6 from 4.2.
- Accounts receivable rose to $153.4 million from $124.6 million and inventory to $154.5 million from $129.9 million since year-end 2016.
- Q3 repurchases totaled 90,494 shares for $5.3 million. The board expanded repurchase authorization after quarter-end; authorization totaled 386,434 shares as of October 23.
Management commentary, outlook and risks
- Management attributed sales growth mainly to home security products, Asian consumer-electronics sales, higher-end European platforms, and Latin American market-share gains. North American satellite-broadcasting sales were pressured as customers reduced inventory ahead of new platform launches.
- Gross margin was affected by customer price reductions, China factory-transition inefficiencies, and lower-margin Latin American projects; raw-material savings and a weaker Chinese yuan partly offset the pressure. SG&A increased with contingent-consideration expense related to Ecolink, stock compensation, product-development staffing, ERP implementation and the RCS acquisition.
- The Guangzhou factory ceased operations in July 2017. The company does not expect significant further transition-related severance costs. A proposed sale for approximately $48 million remains subject to due diligence and regulatory approval; $12.4 million of related land-lease and building assets was classified as held for sale. Timing and completion are not assured.
- Management stated that cash, anticipated operating cash flow and borrowing resources should cover expected outlays over the next 12 months, while noting that cash is geographically dispersed and some foreign balances face transfer restrictions or potential U.S. tax upon repatriation. No numerical earnings or revenue guidance was provided.
- Customer concentration is material: Comcast generated 21.0% of Q3 sales and 23.7% of nine-month sales; AT&T generated 11.5% and 11.9%, respectively. Texas Instruments supplied 11.3% of nine-month inventory purchases.
- Foreign exchange and interest-rate exposure are significant. The filing estimates that a 10% movement in specified currencies could change Q3 net income by approximately $11.5 million; a 100-basis-point rate increase would have an estimated annual net-income impact of about $0.7 million based on quarter-end borrowings.
- In the Ruwido patent litigation, a Belgian court ruled that a discontinued product infringed certain design rights; compensation and damages were deferred. Other patent claims and an employee lawsuit remain pending. The company said it could not estimate a range of potential litigation losses.
- The Q3 effective tax rate was 51.4%, primarily reflecting nondeductible transactions associated with the pending Guangzhou sale; the comparable 2016 quarter also benefited from Chinese tax refunds. Management identified adoption of the new revenue-recognition standard on January 1, 2018 as potentially having a material transition effect, including a retained-earnings adjustment.
- Unusual items included $6.1 million of factory-transition restructuring charges for the first nine months and $1.2 million of accelerated stock-compensation expense after independent directors surrendered options.
Most important facts for investors to verify
- Whether the Guangzhou factory sale receives approvals, closes on schedule and produces expected proceeds, and how its tax effects develop.
- Whether customer inventory normalization and new platform launches translate into sustained sales growth, particularly in North American broadcasting.
- Whether working capital improves and operating cash flow returns to positive levels as receivables and inventory unwind.
- Current borrowing availability and covenant headroom under the amended $170 million credit facility, alongside the higher debt and share-repurchase program.
- Developments in the Ruwido and other litigation, customer concentration, foreign-exchange exposure, and the 2018 revenue-standard adoption impact.