Universal Electronics Reports Third Quarter 2017 Financial Results

Nov 02, 2017 04:05 pm
SANTA ANA, Calif. -- 

Universal Electronics Inc. (UEI), (NASDAQ: UEIC) reported financial results for the three and nine months ended September 30, 2017.

Paul Arling, UEI’s chairman and CEO, stated, “During the third quarter, our home security products performed well and we expect sales in this category to continue to ramp nicely both in the fourth quarter and next year. While the transition to higher end platforms continues to support growth in our core business, this growth was offset by softer than typical shipments to some of our domestic subscription broadcasting customers. We expect this effect to be temporal as evidenced by our guidance for the fourth quarter of 2017, which reflects anticipated net sales growth of between 7% and 12%, representing higher average selling prices for our advanced technologies and the continued adoption of smart devices. We are more excited than ever about what is in store for UEI in the years ahead.”

Financial Results for the Three Months Ended September 30: 2017 Compared to 2016

  • GAAP net sales were $175.7 million, compared to $169.2 million; Adjusted Non-GAAP net sales were $175.5 million, compared to $170.3 million.
  • GAAP gross margins were 24.5%, compared to 24.7%; Adjusted Non-GAAP gross margins were 26.3%, compared to 26.1%.
  • GAAP operating income was $4.2 million, compared to $8.1 million; Adjusted Non-GAAP operating income was $15.4 million, compared to $15.6 million.
  • GAAP net income was $1.7 million, or $0.12 per diluted share, compared to $7.8 million or $0.53 per diluted share; Adjusted Non-GAAP net income was $11.9 million, or $0.81 per diluted share, compared to $13.8 million, or $0.93 per diluted share.
  • At September 30, 2017, cash and cash equivalents were $48.6 million, compared to $50.6 million at December 31, 2016.

Financial Results for the Nine Months Ended September 30: 2017 Compared to 2016

  • GAAP net sales were $514.6 million, compared to $490.8 million; Adjusted Non-GAAP net sales were $515.8 million, compared to $494.0 million.
  • GAAP gross margins were 24.8%, compared to 25.0%; Adjusted Non-GAAP gross margins were 26.3%, compared to 26.0%.
  • GAAP operating income was $11.2 million, compared to $19.1 million; Adjusted Non-GAAP operating income was $43.0 million, compared to $39.6 million.
  • GAAP net income was $6.5 million, or $0.44 per diluted share, compared to $17.1 million or $1.16 per diluted share; Adjusted Non-GAAP net income was $32.4 million, or $2.21 per diluted share, compared to $31.5 million, or $2.14 per diluted share.

Financial Outlook

Bryan Hackworth, UEI’s CFO, stated, “We are excited about the influx of new, more complex devices, albeit the surge is creating manufacturing inefficiencies at a time when we are completing the transition of activities from our southern China factory to our other China factories. We expect this will create near-term margin pressure, which is embedded in our fourth quarter 2017 guidance. While a temporary setback, we continue to believe relocating to a talent rich region will deliver long-term benefits. We expect transitionary impacts to diminish and ultimately be eliminated into 2018, supporting stronger bottom-line growth rates.”

For the fourth quarter of 2017, the company expects GAAP net sales to range between $172 million and $180 million, compared to $160.5 million in the fourth quarter of 2016. GAAP earnings per diluted share for the fourth quarter of 2017 is expected to range from $0.07 to $0.17, compared to GAAP earnings per diluted share of $0.22 in the fourth quarter of 2016.

For the fourth quarter of 2017, the company expects Adjusted Non-GAAP net sales to range between $172 million and $180 million, compared to $160.1 million in the fourth quarter of 2016. Adjusted Non-GAAP earnings per diluted share are expected to range from $0.55 to $0.65, compared to Adjusted Non-GAAP earnings per diluted share of $0.74 in the fourth quarter of 2016. The fourth quarter Adjusted Non-GAAP earnings per diluted share estimate excludes $0.48 per share related to stock-based compensation, amortization of acquired intangibles, excess manufacturing costs from a factory transition between our Chinese factories, severance related to the consolidation of manufacturing facilities, changes in contingent consideration related to acquisitions, and income tax adjustments.

Conference Call Information

UEI’s management team will hold a conference call today, Thursday, November 2, 2017 at 4:30 p.m. ET / 1:30 p.m. PT, to discuss its third quarter 2017 earnings results, review recent activity and answer questions. To access the call in the U.S. please dial 877-843-0414, and for international calls dial 315-625-3071 approximately 10 minutes prior to the start of the conference. The conference ID is 1725614. The conference call will also be broadcast live at www.uei.com where it will be available for replay for one year. In addition, a replay will be available via telephone for two business days beginning two hours after the call. To listen to the replay, in the U.S. please dial 855-859-2056, and internationally dial 404-537-3406. The access code is 1725614.

Use of Non-GAAP Financial Metrics

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, UEI provides Adjusted Non-GAAP information as additional information for its operating results. References to Adjusted Non-GAAP information are to non-GAAP financial measures. These measures are not required by, in accordance with, or an alternative for, GAAP and may be different from non-GAAP financial measures used by other companies. UEI’s management uses these measures for reviewing the financial results of UEI, for budget planning purposes, and for making operational and financial decisions and believes that providing these non-GAAP financial measures to investors, as a supplement to GAAP financial measures, helps investors evaluate UEI’s core operating and financial performance and business trends consistent with how management evaluates such performance and trends. Additionally, management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors and other companies.

Adjusted Non-GAAP net sales is defined as net sales excluding the impact of stock-based compensation for performance-based warrants. Adjusted Non-GAAP gross profit is defined as gross profit excluding stock-based compensation expense, cost of goods sold and depreciation expense related to the increase in inventories and fixed assets from cost to fair market value resulting from acquisitions, amortization of intangibles acquired, and excess manufacturing costs. Adjusted Non-GAAP operating expenses are defined as operating expenses excluding amortization of intangibles acquired, stock-based compensation expense, employee related restructuring costs, litigation settlement costs and changes in contingent consideration related to acquisitions as well as other acquisition related costs and nonrecurring items. Adjusted Non-GAAP net income is defined as net income excluding the aforementioned items, foreign currency gains and losses, and the related tax effects of all adjustments, as well as the income tax effects of nondeductible projected losses to be incurred as a result of the shutdown of the company's Guangzhou factory and the effect of net deferred tax asset adjustments related to tax incentives at one of our other China factories. Adjusted Non-GAAP diluted earnings per share attributable to Universal Electronics Inc. is calculated using Adjusted Non-GAAP net income attributable to Universal Electronics Inc. A reconciliation of these financial measures to the most directly comparable GAAP financial measures is included at the end of this press release.

About Universal Electronics

Universal Electronics Inc. is the worldwide leader in universal control and sensing technologies for the smart home. For more information, please visit www.uei.com/about.

Note on Forward-looking Statements

This press release and accompanying schedules contain "forward-looking statements" within the meaning of federal securities laws, including net sales, profit margin and earnings trends, estimates and assumptions; our expectations about new product introductions; and similar statements concerning anticipated future events and expectations that are not historical facts. We caution you that these statements are not guarantees of future performance and are subject to numerous risks and uncertainties, including those we identify below and other risk factors that we identify in our most recent annual report on Form 10-K and the periodic reports filed thereafter. Risks that could affect forward-looking statements in this press release include changes in market conditions; the continued adoption of our advanced control technologies by our customers as anticipated by management; the convergence of smart home devices and technologies as anticipated by management; the pace of the economy; competitive conditions in the industries we serve, including the smart home and residential and commercial security industries; and relationships with our customers and our ability to attract new customers; our ability to successfully and profitably transition our manufacturing operations, and our continued ability to maintain and/or improve our margins and cost effective operations. Any of these factors could cause actual results to differ materially from the expectations we express or imply in this press release. We make these forward-looking statements as of November 2, 2017. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

   

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share-related data)

(Unaudited)

 
September 30, 2017 December 31, 2016

ASSETS

Current assets:
Cash and cash equivalents $ 48,560 $ 50,611
Restricted cash 4,799 4,623
Accounts receivable, net 153,355 124,592
Inventories, net 154,520 129,879
Prepaid expenses and other current assets 9,988 7,439
Assets held for sale 12,403 —
Income tax receivable 3,262 1,054
Deferred income taxes —   5,960  
Total current assets 386,887 324,158
Property, plant, and equipment, net 109,149 105,351
Goodwill 48,624 43,052
Intangible assets, net 30,159 28,549
Deferred income taxes 18,349 10,430
Long-term restricted cash — 4,600
Other assets 4,040   4,896  
Total assets $ 597,208   $ 521,036  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 106,872 $ 97,157
Line of credit 114,000 49,987
Accrued compensation 33,328 35,580
Accrued sales discounts, rebates and royalties 7,790 8,358
Accrued income taxes 994 375
Other accrued expenses 25,840   24,410  
Total current liabilities 288,824 215,867
Long-term liabilities:
Long-term contingent consideration 14,000 10,500
Deferred income taxes 6,376 7,060
Income tax payable 791 791
Other long-term liabilities 1,598   6,308  
Total liabilities 311,589 240,526
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding — —
Common stock, $0.01 par value, 50,000,000 shares authorized; 23,687,651 and 23,575,340 shares issued on September 30, 2017 and December 31, 2016, respectively 237 236
Paid-in capital 262,776 250,481
Treasury stock, at cost, 9,352,551 and 9,022,587 shares on September 30, 2017 and December 31, 2016, respectively (243,197 ) (222,980 )
Accumulated other comprehensive income (loss) (17,831 ) (22,821 )
Retained earnings 283,634   275,594  
Total stockholders’ equity 285,619   280,510  
Total liabilities and stockholders’ equity $ 597,208   $ 521,036  
 

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

   
Three Months Ended September 30, Nine Months Ended September 30,
2017   2016 2017   2016
Net sales $ 175,652 $ 169,185 $ 514,638 $ 490,829
Cost of sales 132,582   127,400   386,783   367,941  
Gross profit 43,070 41,785 127,855 122,888
Research and development expenses 5,415 4,955 15,859 15,292
Factory transition restructuring charges 446 81 6,145 1,598
Selling, general and administrative expenses 32,997   28,628   94,701   86,867  
Operating income 4,212 8,121 11,150 19,131
Interest income (expense), net (721 ) (228 ) (1,676 ) (753 )
Other income (expense), net 61   335   2     1,726  
Income before provision for income taxes 3,552 8,228 9,476 20,104
Provision for income taxes 1,824   421   2,945     2,956  
Net income 1,728 7,807 6,531 17,148
Net income attributable to noncontrolling interest —   —   —    

30

 
Net income attributable to Universal Electronics Inc. $ 1,728   $ 7,807   $ 6,531     $ 17,118  
 
Earnings per share attributable to Universal Electronics Inc.:
Basic $ 0.12   $ 0.54   $ 0.45     $ 1.19  
Diluted $ 0.12   $ 0.53   $ 0.44     $ 1.16  
Shares used in computing earnings per share:
Basic 14,381   14,510   14,412   14,441  
Diluted 14,666   14,848   14,689   14,740  
 

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
Nine Months Ended September 30,
2017   2016
Cash provided by (used for) operating activities:
Net income $ 6,531 $ 17,148
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization 23,202 18,994
Provision for doubtful accounts 167 123
Provision for inventory write-downs 2,189 2,398
Deferred income taxes (953 ) 1,413
Tax benefit from exercise of stock options and vested restricted stock — 2,230
Excess tax benefit from stock-based compensation — (2,292 )
Shares issued for employee benefit plan 591 763
Employee and director stock-based compensation 9,476 7,638
Performance-based common stock warrants 1,122 3,219
Changes in operating assets and liabilities:
Restricted cash 4,623 —
Accounts receivable (24,440 ) (11,359 )
Inventories (21,217 ) (4,470 )
Prepaid expenses and other assets (2,422 ) (86 )
Accounts payable and accrued expenses 1,488 7,699
Accrued income taxes (1,517 ) (4,737 )
Net cash provided by (used for) operating activities (1,160 ) 38,681
Cash used for investing activities:
Acquisition of property, plant, and equipment (29,922 ) (28,914 )
Acquisition of net assets of Residential Control Systems, Inc. (8,894 ) —
Acquisition of intangible assets (1,275 ) (1,373 )
Increase in restricted cash — (4,797 )
Deposit received toward sale of Guangzhou factory — 4,797
Deconsolidation of Encore Controls LLC —   48  
Net cash used for investing activities (40,091 ) (30,239 )
Cash provided by (used for) financing activities:
Borrowings under line of credit 115,000 92,987
Repayments on line of credit (50,987 ) (107,987 )
Proceeds from stock options exercised 1,107 4,813
Treasury stock purchased (20,217 ) (2,188 )
Excess tax benefit from stock-based compensation —   2,292  
Net cash provided by (used for) financing activities 44,903 (10,083 )
Effect of exchange rate changes on cash (5,703 ) (3,184 )
Net increase (decrease) in cash and cash equivalents (2,051 ) (4,825 )
Cash and cash equivalents at beginning of year 50,611   52,966  
Cash and cash equivalents at end of period $ 48,560   $ 48,141  
 
Supplemental cash flow information:
Income taxes paid $ 5,770 $ 6,034
Interest paid $ 1,697 $ 926
 

UNIVERSAL ELECTRONICS INC.

RECONCILIATION OF ADJUSTED NON-GAAP FINANCIAL RESULTS

(In thousands, except per share amounts)

(Unaudited)

   
Three Months Ended September 30, Nine Months Ended September 30,
2017   2016 2017   2016
Net sales:
Net sales - GAAP $ 175,652 $ 169,185 $ 514,638 $ 490,829
Stock-based compensation for performance-based warrants (141 )   1,160   1,122   3,219  
Adjusted Non-GAAP net sales $ 175,511   $ 170,345   $ 515,760   $ 494,048  
 
Cost of sales:
Cost of sales - GAAP $ 132,582 $ 127,400 $ 386,783 $ 367,941
Adjustments to acquired tangible assets (1) (466 ) (260 ) (1,023 ) (892 )
Stock-based compensation expense (19 ) (14 ) (53 ) (43 )
Excess manufacturing overhead (2) (2,700 ) (1,262 ) (5,468 ) (1,262 )
Amortization of acquired intangible assets (37 ) —   (75 ) —  
Adjusted Non-GAAP cost of sales 129,360   125,864   380,164   365,744  
Adjusted Non-GAAP gross profit $ 46,151   $ 44,481   $ 135,596   $ 128,304  
 
Gross margin:
Gross margin - GAAP 24.5

 %

24.7 % 24.8 % 25.0 %
Stock-based compensation for performance-based warrants

(0.0

)%

0.5 % 0.2 % 0.5 %
Adjustments to acquired tangible assets (1) 0.3

 %

0.2 % 0.2 % 0.2 %
Stock-based compensation expense 0.0

 %

0.0 % 0.0 % 0.0 %
Excess manufacturing overhead (2) 1.5

 %

0.7 % 1.1 % 0.3 %
Amortization of acquired intangible assets 0.0

 %

— % 0.0 % — %
Adjusted Non-GAAP gross margin 26.3

 %

26.1 % 26.3 % 26.0 %
 
Operating expenses:
Operating expenses - GAAP $ 38,858 $ 33,664 $ 116,705 $ 103,757
Amortization of acquired intangible assets (1,395 ) (1,247 ) (4,071 ) (3,709 )
Stock-based compensation expense (3,902 ) (2,654 ) (9,423 ) (7,595 )
Employee related restructuring costs (524 ) (264 ) (7,008 ) (1,925 )
Litigation settlement costs — — — (2,000 )
Change in contingent consideration (2,300 ) (600 ) (3,200 ) 151
Other —   —   (366 ) —  
Adjusted Non-GAAP operating expenses $ 30,737   $ 28,899   $ 92,637   $ 88,679  
 

UNIVERSAL ELECTRONICS INC.

RECONCILIATION OF ADJUSTED NON-GAAP FINANCIAL RESULTS

(In thousands, except per share amounts)

(Unaudited)

   
Three Months Ended September 30, Nine Months Ended September 30,
2017   2016 2017   2016
Operating income:
Operating income - GAAP $ 4,212 $ 8,121 $ 11,150 $ 19,131
Stock-based compensation for performance-based warrants (141 ) 1,160 1,122 3,219
Adjustments to acquired tangible assets (1) 466 260 1,023 892
Excess manufacturing overhead (2) 2,700 1,262 5,468 1,262
Amortization of acquired intangible assets 1,432 1,247 4,146 3,709
Stock-based compensation expense 3,921 2,668 9,476 7,638
Employee related restructuring costs 524 264 7,008 1,925
Litigation settlement costs — — — 2,000
Change in contingent consideration 2,300 600 3,200 (151 )
Other —   —   366   —  
Adjusted Non-GAAP operating income $ 15,414   $ 15,582   $ 42,959   $ 39,625  
 
Adjusted Non-GAAP operating income as a percentage of net sales 8.8 % 9.1 % 8.3 % 8.0 %
 

UNIVERSAL ELECTRONICS INC.

RECONCILIATION OF ADJUSTED NON-GAAP FINANCIAL RESULTS

(In thousands, except per share amounts)

(Unaudited)

   
Three Months Ended September 30, Nine Months Ended September 30,
2017   2016 2017   2016
Net income attributable to Universal Electronics Inc.:
Net income attributable to Universal Electronics Inc. - GAAP $ 1,728 $ 7,807 $ 6,531 $ 17,118
Stock-based compensation for performance-based warrants (141 ) 1,160 1,122 3,219
Adjustments to acquired tangible assets (1) 466 260 1,023 892
Excess manufacturing overhead (2) 2,700 1,262 5,468 1,262
Amortization of acquired intangible assets 1,432 1,247 4,146 3,709
Stock-based compensation expense 3,921 2,668 9,476 7,638
Employee related restructuring costs 524 264 7,008 1,925
Litigation settlement costs — — — 2,000
Change in contingent consideration 2,300 600 3,200 (151 )
Foreign currency (gain) loss 312 (221 ) 340 (1,561 )
Other — — 366 (11 )
Income tax provision on adjustments (1,921 ) (1,935 ) (7,173 ) (5,232 )
Other income tax adjustments (3) 539   691   918   691  
Adjusted Non-GAAP net income attributable to Universal Electronics Inc. $ 11,860   $ 13,803   $ 32,425   $ 31,499  
 
Diluted earnings per share attributable to Universal Electronics Inc.:
Diluted earnings per share attributable to Universal Electronics Inc. - GAAP $ 0.12 $ 0.53 $ 0.44 $ 1.16
Total adjustments $ 0.69 $ 0.40 $ 1.77 $ 0.98
Adjusted Non-GAAP diluted earnings per share attributable to Universal Electronics Inc. $ 0.81 $ 0.93 $ 2.21 $ 2.14
 
(1)   Consists of depreciation related to the mark-up from cost to fair value of fixed assets acquired in business combinations as well as the effect of fair value adjustments to inventories acquired in business combinations that sold through during the period.
 
(2) Excess manufacturing costs incurred resulting from the transition of manufacturing activities from our Guangzhou factory to our other three China factories.
 
(3) 2017 amounts represent the tax effect of projected losses to be incurred as a result of the shutdown of our Guangzhou factory. These losses will not provide future tax benefits due to this entity ceasing operations and as a result, not generating future taxable income. 2016 amounts reflect the effect of net deferred tax asset adjustments resulting from a lower statutory tax rate due to tax incentives at one of our China factories.
 

UEI
Paul Arling, 714-918-9500
or
IR Agency
Becky Herrick, 415-433-3777