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Universal Electronics(UEIC) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) Unaudited consolidated financial statements for Q2 2020 reflect a significant turnaround to $14.4 million net income, largely due to a $9.5 million social insurance liability reversal, alongside decreased assets and operating cash flow Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $58,832 | $74,302 | | Total current assets | $350,950 | $378,752 | | Total assets | $526,420 | $564,159 | | Liabilities & Equity | | | | Total current liabilities | $222,249 | $266,456 | | Total liabilities | $240,288 | $289,760 | | Total stockholders' equity | $286,132 | $274,399 | - Total assets decreased from $564.2 million at the end of 2019 to $526.4 million as of June 30, 2020, primarily due to a reduction in cash and cash equivalents, inventories, and contract assets8 - Total liabilities decreased from $289.8 million to $240.3 million, mainly driven by a significant reduction in accrued compensation and accounts payable8 Consolidated Statements of Operations Quarterly Operating Results (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Net sales | $153,133 | $193,896 | | Gross profit | $38,075 | $33,993 | | Operating income (loss) | $6,460 | $(3,926) | | Accrued social insurance adjustment | $9,464 | $— | | Net income (loss) | $14,400 | $(5,061) | | Diluted EPS | $1.02 | $(0.37) | - Net sales for Q2 2020 decreased by 21.0% year-over-year to $153.1 million11 - The company reported a net income of $14.4 million in Q2 2020, a significant improvement from a net loss of $5.1 million in Q2 2019, primarily due to a $9.5 million gain from an accrued social insurance adjustment11 Consolidated Statements of Cash Flows Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $4,487 | $20,233 | | Net cash used for investing activities | $(9,787) | $(11,353) | | Net cash used for financing activities | $(4,496) | $(12,155) | | Effect of exchange rate changes | $(5,674) | $(367) | | Net decrease in cash | $(15,470) | $(3,642) | - Net cash provided by operating activities decreased significantly to $4.5 million in the first six months of 2020 from $20.2 million in the same period of 2019, mainly due to changes in accounts payable and accrued liabilities21 - Cash and cash equivalents decreased by $15.5 million during the first six months of 2020, ending the period at $58.8 million21 Notes to Consolidated Financial Statements Key notes detail the impact of COVID-19, significant customer concentration, a $9.5 million social insurance liability reversal, ongoing litigation, and performance-based warrants - Comcast Corporation was a major customer, accounting for 19.3% of net sales in Q2 2020 and 20.5% in the first six months of 2020; Daikin Industries Ltd. also became a major customer, representing 10.7% of net sales in Q2 202038 - In June 2020, the company reversed an accrued social insurance liability of approximately $9.5 million related to its previously sold Guangzhou entity, as the two-year indemnification period expired70132 - The company is involved in multiple legal proceedings with Roku, Inc., including a patent infringement lawsuit and an ITC investigation; the company also settled a dispute with Ruwido in May 2020767778 - Performance-based warrants issued to Comcast are contingent on purchase levels; for the period ending Dec 31, 2019, Comcast vested in 100,000 warrants out of a potential 250,0009394 Management's Discussion and Analysis (MD&A) Management discusses Q2 2020 sales decline due to COVID-19, improved gross margin, and liquidity management COVID-19 Impact - The COVID-19 pandemic has caused a global economic slowdown, and its impact on the company's operations and financial performance remains uncertain116 - The company experienced temporary factory closures in China (two weeks in Q1) and Mexico (over one week in Q2) due to government mandates, implementing safety measures like temperature scans, masks, and social distancing117 - Management anticipates a negative impact on sales demand for Q3 and possibly the rest of 2020 due to the pandemic, with observed supply chain disruptions119 Results of Operations Comparison of Three Months Ended June 30, 2020 and 2019 (in millions) | Metric | Q2 2020 | Q2 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $153.1 | $193.9 | -21.0% | | Gross Profit | $38.1 | $34.0 | +12.1% | | Gross Margin | 24.9% | 17.5% | +7.4 pts | | Operating Income (Loss) | $6.5 | $(3.9) | N/A | - The 21.0% decrease in Q2 net sales was primarily attributed to the COVID-19 pandemic's adverse effect on demand and the supply chain126 - Gross margin increased to 24.9% in Q2 2020 from 17.5% in Q2 2019, driven by lower U.S. tariff expenses, improved operational efficiencies in the Mexico facility, higher royalty revenue, and favorable currency exchange rates127 - A $9.5 million reversal of an accrued social insurance liability related to a previously sold Guangzhou entity significantly boosted income132 Liquidity and Capital Resources - Net cash from operating activities for the first six months of 2020 was $4.5 million, a sharp decrease from $20.2 million in the same period of 2019143 - As of June 30, 2020, the company had $58.8 million in cash and cash equivalents and $49.3 million available for borrowing under its $125.0 million credit line151157 - The company suspended its share repurchase program (2020 Plan) due to uncertainties surrounding the COVID-19 pandemic84147 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign currency fluctuations, with a 10% adverse FX movement potentially impacting Q3 net income by $6.4 million - The company is exposed to interest rate risk on its credit line; a 100 basis point increase in interest rates would impact annual net income by approximately $0.5 million based on the June 30, 2020 outstanding balance163 - Significant foreign currency exchange rate risk exists, particularly with the Chinese Yuan Renminbi (CNY), as most products are manufactured in China; a stronger CNY increases manufacturing costs165 - A sensitivity analysis indicates that a 10% adverse fluctuation in the exchange rates of key currencies (CNY, MXN, GBP, EUR, etc.) against the U.S. Dollar would cause a fluctuation of approximately $6.4 million in net income for the third quarter of 2020168 Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter - Based on an evaluation as of the end of the period, the principal executive and financial officers concluded that the company's disclosure controls and procedures were effective170 - There were no changes in internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls171 PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings typical for its industry, with specific details referenced from Note 11 of the financial statements - The company is involved in various lawsuits typical for its industry, including claims related to patent infringement and product liability82172 - For detailed information on specific litigation, the report refers to Note 11 in the Notes to Consolidated Financial Statements, which covers matters with Ruwido (settled) and Roku (ongoing)172 Risk Factors The ongoing COVID-19 pandemic is highlighted as a significant risk factor, potentially impacting demand, supply chains, and overall financial condition - The COVID-19 pandemic is a significant risk factor, impacting global economic activity, consumer confidence, and business spending, which may reduce sales and margins174177 - The pandemic poses risks of disruptions in manufacturing operations and the supply chain, particularly from geographic areas impacted by containment measures177 - The ultimate impact of COVID-19 is uncertain and depends on future developments, including the duration of the pandemic and its effect on the global economy177 Share Repurchases and Use of Proceeds The company repurchased 3,107 shares in Q2 2020 for employee tax obligations, but suspended its 2020 repurchase plan due to COVID-19 uncertainties Share Repurchases for Q2 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2020 | — | $— | | May 2020 | 3,107 | $36.87 | | June 2020 | — | $— | | Total | 3,107 | $36.87 | - On March 10, 2020, the Board approved a new plan authorizing the repurchase of up to 300,000 shares (the "2020 Plan"); as of June 30, 2020, 175,127 shares remained available for repurchase under this plan178 - The company has suspended share repurchasing under its 2020 Plan due to uncertainties surrounding the COVID-19 pandemic, but may resume when conditions warrant178