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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number: 0-21044
UNIVERSAL ELECTRONICS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0204817
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1864 ENTERPRISE PARKWAY WEST, TWINSBURG, OHIO 44087
(Address of principal executive offices) (Zip Code)
216-487-1110
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, $.01
par value, outstanding at September 30, 1996 6,366,769
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THE INDEX OF EXHIBITS TO THIS QUARTERLY REPORT APPEARS ON PAGE 11
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UNIVERSAL ELECTRONICS INC.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEET
ASSETS
------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
---- ---- ----
(UNAUDITED) (AUDITED) (UNAUDITED)
(Dollars in thousands)
Current assets:
Cash and cash equivalents $ 722 $ 872 $ 1,319
Accounts receivable, net 20,877 26,106 24,204
Inventories 31,230 30,278 33,594
Refundable income taxes -- 795 90
Prepaid expenses 4,207 2,110 2,242
Deferred income taxes 4,329 3,702 4,992
-------- -------- --------
Total current assets 61,365 63,863 66,441
Fixed assets, net 7,231 5,187 4,413
Other assets 996 1,055 892
-------- -------- --------
Total assets $ 69,592 $ 70,105 $ 71,746
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 6,996 $ 6,120 $ 10,469
Accounts payable 8,050 9,162 9,137
Accrued income taxes 134 307 156
Accrued compensation 248 756 263
Other accrued expenses 1,887 3,522 2,898
-------- -------- --------
Total current liabilities 17,315 19,867 22,923
-------- -------- --------
Long-term debt 4,594 -- --
Stockholders' equity:
Capital stock 68 68 67
Paid-in capital 53,917 53,623 53,506
Currency translation adjustment (20) 25 62
Retained deficit (3,688) (3,478) (4,812)
Cost of common stock held
in treasury (2,594) -- --
-------- -------- --------
Total stockholders'
equity 47,683 50,238 48,823
-------- -------- --------
Total liabilities and
Stockholders' equity $ 69,592 $ 70,105 $ 71,746
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(Dollars and shares in
thousands, except per share
amounts.)
Net Sales $ 25,641 $ 30,726 $ 69,073 $ 73,966
Cost of sales 18,870 21,583 49,835 53,148
-------- -------- -------- --------
Gross profit 6,771 9,143 19,238 20,818
Selling, general and
administrative expenses 6,482 6,824 19,668 21,086
Restructuring expenses -- -- -- 977
-------- -------- -------- --------
Operating income (loss) 289 2,319 (430) (1,245)
Interest expense 213 265 557 814
Interest income (6) (15) (26) (30)
Other (income) expenses, net (83) (11) (221) (356)
-------- -------- -------- --------
Income (loss) before income
taxes 165 2,080 (740) (1,673)
Income tax (expense) benefit (53) (703) 530 658
-------- -------- -------- --------
Net income (loss) $ 112 $ 1,377 $ (210) $ (1,015)
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Net income (loss) per share $ 0.02 $ 0.20 $ (0.03) $ (0.15)
======== ======== ======== ========
Weighted average common and
common stock equivalents
outstanding 6,855 6,829 6,760 6,742
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
(Dollars in Thousands) 1996 1995
---- ----
Cash provided by operating activities
Net loss $ (210) $ (1,015)
Adjustments to reconcile net loss
to net cash provided by (used for)
operating activities:
Depreciation and amortization 1,192 1,000
Deferred income taxes (627) (1,368)
Changes in operating assets and liabilities:
Receivables 5,469 (7,453)
Inventories (982) 9,398
Other assets (2,063) 3,750
Payables and accruals (3,383) (1,264)
Accrued income taxes 641 (269)
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Net cash provided by
operating activities 37 2,779
-------- --------
Cash used for investing activities:
Acquisition of fixed assets (3,185) (1,756)
Trademarks (155) (143)
-------- --------
Net cash used for investing activities: (3,340) (1,899)
-------- --------
Cash provided by (used for) financing activities:
Short-term bank borrowings 46,259 58,500
Short-term bank payments (45,383) (59,511)
Long-term debt 4,594 (25)
Proceeds from stock options
exercised 295 10
Treasury stock purchased (2,594)
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Net cash provided by (used for) financing
activities 3,171 (1,026)
-------- --------
Effect of exchange rates on cash (18) 25
-------- --------
Net decrease in cash and cash equivalents (150) (121)
Cash and cash equivalents at beginning of
period 872 1,440
-------- --------
Cash and cash equivalents at end of period $ 722 $ 1,319
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Supplemental Information to the Consolidated Statement of Cash Flows
Cash paid (received) during the period for:
Interest $ 545 $ 824
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Income taxes $ (358) $ 537
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The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADJUSTMENTS
All adjustments, consisting of recurring adjustments necessary for a fair
presentation of financial position and results of operations of these unaudited
interim periods, have been included in the accompanying consolidated financial
statements.
INVENTORIES
Inventories consist of the following (in thousands):
September 30, 1996 December 31, 1995 September 30, 1995
Components $13,273 $14,127 $15,932
Finished goods 17,957 16,151 17,662
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Total
inventories $31,230 $30,278 $33,594
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The Company provides certain components to its contract manufacturers for
inclusion in the Company's finished goods.
Net Income Per Share
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Net income per share is computed by dividing net income by the weighted average
of common stock and common stock equivalents outstanding. Common stock
equivalents are computed using the treasury stock method.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net sales for the third quarter were $25.6 million compared to $30.7 million for
the same quarter a year earlier. Net income was $112,000, or $0.02 per share, as
compared to net income of $1.4 million, or $0.20 per share, for the third
quarter of 1995.
Net sales for the first nine months of 1996 were $69.1 million compared to $74.0
million for the same period a year earlier. The Company experienced a loss for
the first nine months of 1996 equal to $210,000, or $0.03 per share, compared to
a loss of $1.0 million, or $0.15 per share in the first nine months of 1995.
Included in the 1995 loss was a restructuring charge of $0.09 per share
($977,000 pre-tax) associated with personnel severance and facilities closures.
Net sales in the Company's Retail Businesses experienced 4.0% growth for the
third quarter, increasing from $19.2 million last year to $20.0 million this
year. Competitive pressures in the domestic One For All(R) Retail Business
continued during the quarter, resulting in a sales decline of 12.3%. The other
Retail Businesses, however, including Private Label, Europe and Eversafe(R),
increased by 19.8% over the same period last year. Year-to-date sales for the
Retail Businesses showed a 1.8% decline mainly due to the loss of a large, but
low margin Private Label customer and the competitive pricing and cost pressures
which the Company experiences in its domestic One For All Retail Business.
Net sales in the Company's Technology Businesses (Cable, Cable OEM, and OEM)
declined from $11.6 million in the third quarter of 1995 to $5.7 million in
1996. This decline was driven largely by the absence of a large non-recurring
order in the third quarter of 1995 and the loss of a major OEM customer. These
factors were also the major reasons for the 15.3% year to date sales decline.
Gross margins for the third quarter declined from 29.8% last year to 26.4% this
year, driven largely by changes in sales mix between our Retail and Technology
Businesses and continued price competition in our the domestic Retail Business.
Gross profit margins will fluctuate due to a variety of factors, including,
among other things, shifts in product mix, changes in product pricing,
fluctuations in manufacturing and freight costs, and changes in customer mix.
Selling, general and administrative expenses were $6.5 million for the 1996
third quarter compared with $6.8 million last year. Year-to-date, S, G, & A
expenses were $19.7 for 1996 compared with $21.1 last year. The decrease is due
primarily to the decrease in professional legal fees and consumer affairs costs.
The Company recorded interest expense of approximately $557,000 related to
borrowings under its revolving credit line for the first nine months of 1996
compared to approximately $814,000 for the same period last year. The decrease
is the result of a lower average outstanding balance and reduced interest rate
in the first nine months of 1996 compared to the same period in 1995.
The Company recorded an income tax benefit of approximately $530,000 for the
first nine months of 1996 as compared to a benefit of approximately $658,000
million for the same period of 1995. The 1996 benefit includes a first quarter
release of approximately $174,000 in the valuation allowance of deferred tax
assets created in 1994. The continuing improvement and return to profitable
operations has permitted management to reevaluate the Company's position and
recognize the tax benefit because management believes the related tax credits
should be realized before their statutory expiration.
Backlog
As of the end of the third quarter of 1996, the Company had backlog orders of
$7.6 million. Although the Company believes current orders to be firm and
expects that substantially all of the backlog will be shipped in 1996, there can
be no assurance that such orders will be shipped. The Company further believes
that backlog is not a meaningful indicator of its future performance.
Liquidity and Capital Resources
The Company's principal sources of funds are its operations and bank credit
facilities. Cash provided from operating activities was approximately $37,000
for the first nine months of 1996 compared to $2.8 million in 1995. The cash
provided from operating activities in 1995 was primarily the result of the
liquidation of excess inventories identified at the end of 1994. The Company's
bank credit facilities include a revolving credit line which is available to
fund the Company's seasonal working capital needs and for general operating
purposes. This revolving credit facility provides the Company with borrowing
availability of $22 million and bears interest equal to the bank's prime rate
minus three-quarter percent. The credit facility is
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secured by a first priority security interest in the accounts receivable,
inventory, equipment, and general intangibles of the Company. At September 30,
1996, the interest rate charged on the outstanding balance of this credit line
was 7.5%. Under the terms of this revolving credit facility, the Company's
ability to pay cash dividends on its common stock is restricted and amounts
available for borrowing are reduced by the outstanding balance of the Company's
import letters of credit. As of September 30, 1996, the Company had utilized
approximately $7.0 million of the credit facility for the acquisition of
inventory to support future sales and for other general operating purposes and
had approximately $1.3 million of outstanding import letters of credit. In
addition, the Company utilized approximately $4.6 million of the outstanding
credit facility for the acquisition of and improvements to its Twinsburg, Ohio
facility amounting to approximately $2.0 million and approximately $2.6 million
for a previously announced acquisition of treasury stock. This amount has been
classified as long-term in the accompanying balance sheet. The Company's
borrowing under this revolving credit facility and outstanding import letters of
credit fluctuates due to, among other things, seasonality of the business, the
timing of supplier shipments, customer orders and payments, and vendor payments.
Capital expenditures in the first nine months of 1996 and 1995 were
approximately $3.3 million and $1.9 million, respectively. Approximately $1.7
million of 1996 first half capital expenditures were for the acquisition of the
Twinsburg, Ohio facility with the balance primarily relating to the acquisition
of new product tooling. Capital expenditures for the first nine months of 1995
were primarily for new product tooling, computers, and operating software. It is
the Company's policy to carefully monitor the state of its business, cash
requirements and capital structure. The Company believes that funds generated
from operations and available from its borrowing capacity will be sufficient to
fund its currently anticipated cash needs, however, there can be no assurances
that this will occur.
RISK FACTORS PERTAINING TO THE THIRD QUARTER 1996
The Company cautions that the following important factors, among others
(including but not limited to factors mentioned from time to time in the
Company's reports filed with the Securities and Exchange Commission), could
affect the Company's actual results and could cause the Company's actual
consolidated results to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
The factors included here are not exhaustive. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements. Therefore, forward-looking statements should not be
relied upon as a prediction of actual future results.
Dependence Upon Key Suppliers
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Most of the components used in the Company's products are available from
multiple sources; however, the Company has elected to purchase integrated
circuit components used in the Company's products, principally its remote
control products, and certain other components used in the Company's products,
from several selected sources. The Company has recently developed alternative
sources of supply for these integrated circuit components. However, there can be
no assurance that the Company will be able to continue to obtain these
components on a timely basis or in the quantities necessary to maintain or meet
the forecasted requirements. The Company generally maintains inventories of its
integrated chips, which could be used in part to mitigate, but not eliminate,
delays resulting from supply interruptions. An extended interruption or
termination in the supply of any of the components used in the Company's
products, or a reduction in their quality or reliability, would have an adverse
effect on the Company's business and results of operations.
Dependence On Foreign Manufacturing
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Third-party manufacturers located in foreign countries manufacture substantially
all of the Company's remote controls products. The Company's arrangements with
its foreign manufacturers are subject to the risks of doing business abroad,
such as import duties, trade restrictions, work stoppages, political instability
and other factors which could have a material adverse effect on the Company's
business and results of operations. The Company believes that the loss of any
one or more of its manufacturers would not have a long-term material adverse
effect on the Company's business and results of operations because numerous
other manufacturers are
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available to fulfill the Company's requirements. In addition to continuing to
seek out alternative and additional third party manufacturers both domestically
and abroad, the Company has recently commenced manufacturing a small amount of
its remote controls in-house. Such in-house manufacturing, however, does not
presently reduce the Company's dependence on its third party manufacturers.
However, the loss of any of the Company's major manufacturers could adversely
affect the Company's business until alterative manufacturing arrangements are
secured.
Potential Fluctuations In Quarterly Results
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The Company's quarterly financial results may vary significantly depending
primarily upon factors such as the timing of significant orders, the timing of
new product offerings and presentations by the Company and its competitors. In
addition, historically the Company's business historically has been seasonal,
with the largest proportion of sales occurring in September, October and
November of each calendar year. Factors such as quarterly variations in
financial results could aversely affect the market price of the Common Stock and
cause it to fluctuate substantially. In addition, the Company may (i) from time
to time increase its operating expenses to fund greater levels of research and
development, increase its sales and marketing activities, develop new
distribution channels, improve its operational and financial systems and broaden
its customer support capabilities and (ii) incur significant operating expenses
associated with any new acquisitions. To the extent that such expenses precede
or are not subsequently followed by increased revenues, the Company's business,
operating results and financial condition will be materially adversely affected.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including demand for the
Company's products, introduction or enhancement of products by the Company and
its competitors, market acceptance of new products, price reductions by the
Company or its competitors, changes in the mix of distribution channels through
which products are sold, level of product returns, mix of products sold,
component pricing, mix of international and North American revenues, and general
economic conditions. In addition, as a strategic response to changes in the
competitive environment, the Company may from time to time make certain pricing
or marketing decisions or acquisitions that could have a material adverse effect
on the Company's business, results of operations or financial condition. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance. Due to all of the foregoing factors, it is
likely that in some future quarters the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's common stock would likely be materially adversely
affected.
Dependence On Consumer Preference
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The Company is susceptible to fluctuations in its business based upon consumer
demand for its products. The Company believes that its success depends in
substantial part on its ability to anticipate, gauge and respond to such
fluctuation in consumer demand. However, it is impossible to predict with
complete accuracy the occurrence and effect of any such event that will cause
such fluctuations in consumer demand for the Company's products.
Dependence Upon Timely Product Introduction
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The Company's ability to remain competitive in the remote control products
market will depend in part upon its ability to successfully identify new product
opportunities and to develop and introduce new products and enhancements on a
timely and cost effective basis. There can be no assurance that the Company will
be successful in developing and marketing new products or in enhancing its
existing products, that new products will achieve ongoing consumer acceptance,
that products developed by others will not render the Company's products
non-competitive or obsolete or that the Company will be able to obtain or
maintain the rights to use proprietary technologies developed by others which
are incorporated in the Company's products. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's financial condition and
results of operations.
In addition, the introduction of new products which the Company may introduce in
the future may require the expenditure of funds for research and development,
tooling, manufacturing processes, inventory and marketing. In order to achieve
high volume production of any new product, the Company may have to make
substantial investments in inventory and expand its production capabilities.
Dependence On Major Customers
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The Company's performance is affected by the economic strength and weakness of
its worldwide customers. The Company sells its products to mass merchants, such
as Wal-Mart, Kmart, and Sears and to technology oriented business such as
companies doing business in the cable and telecommunications industries. The
Company also supplies its products to its wholly-owned, non-U.S. subsidiaries
and to independent foreign distributors, who in turn distribute the Company's
products worldwide, with the United Kingdom, Europe, and Australia currently
representing the Company's principal foreign markets. The loss of any one or
more of the Company's key customers either in the United States or abroad due to
the financial weakness or bankruptcy of any such customer may have an adverse
affect on the Company's financial condition or results of operations.
Competition
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The remote control industry is characterized by intense competition based
primarily on product availability, price, speed of delivery, ability to tailor
specific solutions to customer needs, quality and depth of product lines. The
Company's competition is fragmented across its product lines, and accordingly,
the Company does not compete with any one company across all product lines. The
Company competes with a variety of entities, some of which have greater
financial and other resources than the Company and, in particular, the Company's
competition in its domestic Retail Business comes primarily from two companies,
RCA and Sony. The Company's ability to remain competitive in this industry
depends in part on its ability to successfully identify new product
opportunities and develop and introduce new products and enhancements on a
timely and cost effective basis.
General Economic Conditions
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General economic conditions, both domestic and foreign, have an impact on the
Company's business and financial results. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
such conditions could have an adverse effect on the Company's business.
Moreover, operating its business in countries outside of the United States
exposes the Company to fluctuations in foreign currency exchange rates, exchange
ratios, nationalization or expropriation of assets, import/export controls,
political instability, variations in the protection of intellectual property
rights, limitations on foreign investments and restrictions on the ability to
convert currency are risks inherent in conducting operations in geographically
distant locations, with customers speaking different languages and having
different cultural approaches to the conduct of business, any one of which alone
or collectively, may have an adverse affect on the Company's international
operations, and consequently on the Company's business, operating results and
financial condition.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(A) Exhibits
11.1 Statement re: Computation of Per 13
Share Earnings (filed herewith).
(B) Reports on Form 8-K
There were no reports on Forms 8-K filed during the
quarter ended September 30, 1996.
(C) Exhibit 27 Financial Data Schedule 14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(Registrant) Universal Electronics Inc.
Date: November 14, 1996 \s\ David M. Gabrielsen
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David M. Gabrielsen
Chairman, President and Chief Executive Officer
Date: November 14, 1996 \s\ Paul Arling
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Paul Arling
Senior Vice President and Chief Financial Officer
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