Universal Electronics Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; comparisons are with the corresponding 2013 periods. The company develops and manufactures universal remote controls, AV accessories, software and related integrated circuits, and reports as one operating segment.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $146.3 million | $136.1 million | $276.2 million | $250.8 million |
| Gross profit / margin | $43.6 million / 29.8% | $37.8 million / 27.8% | $80.1 million / 29.0% | $70.4 million / 28.1% |
| Operating income / margin | $11.7 million / 8.0% | $10.0 million / 7.3% | $17.7 million / 6.4% | $13.9 million / 5.6% |
| Net income | $8.5 million | $5.8 million | $12.8 million | $8.8 million |
| Diluted EPS | $0.53 | $0.38 | $0.79 | $0.57 |
| Operating cash flow | Not separately stated | Not separately stated | $28.8 million | $7.9 million |
For the six months, investing activities used $8.4 million, including $7.7 million in capital expenditures; financing activities used $8.5 million, chiefly reflecting $14.3 million of share repurchases. Cash increased $11.5 million to $87.6 million. At June 30, working capital was $167.5 million. Debt was zero, with $55.0 million committed under the credit line less $13,000 of letters of credit, leaving $55.0 million available as reported.
Total assets were $437.0 million and stockholders’ equity was $297.5 million at June 30, 2014. Cash was geographically distributed as $29.4 million in the U.S., $45.8 million in Asia, $9.2 million in Europe and $3.3 million in South America. Most cash was held outside the U.S.; repatriation may incur U.S. taxes and some balances are subject to local restrictions.
Material changes and management commentary
- Q2 sales rose 7.5%; six-month sales rose 10.1%. Growth reflected Asian consumer-electronics sales, increased licensing income and broadcaster demand/market share. Consumer-line sales also benefited from expanded grocery-food distribution and FIFA World Cup-related demand.
- Gross margin improved, helped by higher smart-device-channel licensing revenue and, to a lesser extent, favorable currency movements. Lower-margin sales to certain large customers partly offset the gains.
- SG&A increased 16.6% in Q2 and 12.0% for six months, primarily due to higher incentive compensation, patent-litigation costs and product-development engineering. Operating expenses as a share of sales rose to 21.8% in Q2 from 20.5%.
- Other expense declined year over year, mainly because foreign-currency losses were lower. Q2 effective tax rate fell to 24.7% from 30.0%; the six-month rate was 24.5% versus 24.9%.
- Operating cash flow improved substantially, principally due to working-capital movements, including inventory and accounts payable. Receivables rose with sales and collection timing; days sales outstanding increased to 66 from 59 a year earlier. Inventory turns improved to 4.3 from 3.9.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management says current cash and anticipated operating cash flow should cover expected outlays for the next 12 months, while noting possible need to borrow or move cash between jurisdictions.
- The $55 million credit agreement expires November 1, 2014. The company was negotiating an extension or replacement and expected one before expiration; its size, pricing and terms had not been determined. The company reported covenant compliance at June 30.
- Management identified foreign-exchange exposure, particularly to the Chinese yuan given China-based manufacturing. It estimated that a 10% movement in specified currencies against the U.S. dollar could change third-quarter 2014 net income by approximately $7.2 million. Foreign-exchange contracts generated a $1.3 million net pre-tax loss in the first half.
- Customer concentration is material: Comcast represented 10.3% of Q2 2014 sales. DIRECTV represented 16.3% of Q2 2013 sales and 17.1% of first-half 2013 sales; it was not listed above the 10% threshold for 2014. The filing warns that loss of a major customer could adversely affect results.
- Patent litigation is unresolved. A jury found no infringement of the remaining patent in the first URC case; the company sought court review, and possible URC legal-fee reimbursement could be significant but was not estimable. A second URC case was stayed for six months pending patent-office review petitions. The Peel case and battery-supplier disputes also remained ongoing; potential losses were not estimable.
- Other items to monitor include $3.7 million of gross unrecognized tax benefits, the unpassed 2014 federal R&D tax credit (not reflected in the estimated tax rate), and the related-party vendor from which the company made $4.2 million of first-half purchases. The filing says vendor pricing and payment terms were consistent with other vendors.
- The Board increased share-repurchase authorization on July 30, 2014, bringing the total authorization to 1.1 million shares. The company had repurchased 349,533 shares for $14.3 million in the first half.
Most important facts for investors to verify
- Progress and final terms of the credit-line extension or replacement before November 1, 2014.
- Whether sales growth, licensing contribution and gross-margin improvement persist, and whether higher SG&A and litigation spending remain elevated.
- Receivables collection trends, customer concentration and working-capital needs, especially ahead of the seasonal third and fourth quarters.
- Developments and potential financial consequences in the URC, Peel and battery-related legal matters.
- Foreign-currency sensitivity and the geographic availability and tax consequences of cash held outside the U.S.
- Actual repurchase activity and dilution from stock compensation; no future repurchase amount or timing is assured.