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UUU > SEC Filings for UUU > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for UNIVERSAL SECURITY INSTRUMENTS INC

Form 10-Q for UNIVERSAL SECURITY INSTRUMENTS INC


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used throughout this Report, "we," "our," "the Company" "USI" and similar words refers to Universal Security Instruments, Inc.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements reflecting our current expectations with respect to our operations, performance, financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words "may", "will", "believes", "should", "expects", "anticipates", "estimates", and similar expressions. These statements are necessarily estimates reflecting management's best judgment based upon current information and involve a number of risks and uncertainties. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified in our periodic reports filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K.

General

We are in the business of marketing and distributing safety and security products which are primarily manufactured through our 50%-owned Hong Kong Joint Venture. Our financial statements detail our sales and other operational results only, and report the financial results of the Hong Kong Joint Venture using the equity method. Accordingly, the following discussion and analysis of the three and six month periods ended September 30, 2012 and 2011 relate to the operational results of the Company. A discussion and analysis of the Hong Kong Joint Venture's operational results for these periods is presented below under the heading "Joint Venture."

The Company has developed new products based on new smoke and gas detection technologies, with what the Company believes are improved sensing technology and product features. The Company has applied for patents for these new products.

Results of Operations

Three Months Ended September 30, 2012 and 2011

Sales. Net sales for the three months ended September 30, 2012 were $3,456,813 compared to $3,307,514 for the comparable three months in the prior fiscal year, an increase of $149,299 (4.5%). The primary reasons for the increase in net sales volumes were higher sales of carbon monoxide detectors during the quarter ended September 30, 2012.

Gross Profit Margin.Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit margin was 33.9% and 30.3% of sales for the quarters ended September 30, 2012 and 2011, respectively. The increase in gross profit margin was primarily due to the mix of products sold which included sales of our new product line which typically provide higher margins.

Expenses. Research and development, and selling, general and administrative expenses were $1,366,460 at September 30, 2012, compared to $1,234,611 for the comparable three months in the prior year. As a percentage of net sales, these expenses increased to 39.5% for the three month period ended September 30, 2012, from 37.3% for the 2011 period. The increase of these costs in dollars and as a percentage of net sales was primarily due to advertising and promotional expense of approximately $125,000 related to the introduction of our new product line.

Other Income.The Company recorded a gain on an insurance claim related to an inventory loss during transit that represents the insured value of the inventory in excess of actual inventory cost.

Interest Income.Our interest income, net of interest expense, was $5,205 for the quarter ended September 30, 2012, compared to net interest income of $15,841 for the quarter ended September 30, 2011. The decrease in net interest income is due to a reduction in cash held in an interest bearing account.

Income Taxes.During the quarter ended September 30, 2012, the Company recorded an income tax expense of $13,837. For the corresponding 2011 period, the Company incurred income tax expense of $94,315. The provision for an income tax expense for the quarter ended September 30, 2012, as compared to the same quarter in the prior year, is impacted principally by the amount and timing of the unrealized earnings of and the payment of dividends by the Hong Kong Joint Venture.

Net Loss. We reported a net loss of $218,193 for the quarter ended September 30, 2012, compared to a net loss of $309,941 for the corresponding quarter of the prior fiscal year, a $91,748 (29.6%) decrease. The reason for the decrease in net loss is increased net sales and higher gross profit margins, as previously discussed.

Six Months Ended September 30, 2012 and 2011

Sales. Net sales for the six months ended September 30, 2012 were $6,516,165 compared to $6,508,816 for the comparable six months in the prior fiscal year, an increase of $7,349 (0.0%). The primary reasons for the lack of a recovery in net sales volumes is due to the continued difficulties experienced in the housing market and general economic conditions.

Gross Profit Margin.The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. The Company's gross profit margin was 33.0% for the period ended September 30, 2012 and 28.8% for the period ended September 30, 2011. The increase in gross profit margin was primarily due to the mix of products sold, which included sales of our new product line which typically provide higher margins.

Expenses. Research and development, and selling, general and administrative expenses were $2,852,530 at September 30, 2012 compared to $2,478,758 for the comparable six months in the prior year. As a percentage of sales, these expenses were 43.8% for the six month period ended September 30, 2012 and 38.1% for the comparable 2011 period. The primary reason for the increase in the amount of these expenses and these expenses as a percentage of sales is due to advertising and promotional expenses of approximately $317,000 related to the introduction of our new product line.

Interest Income.Our interest income, net of interest expense was $14,852 for the six months ended September 30, 2012, compared to net interest income of $21,015 for the six months ended September 30, 2011. The decrease in net interest income is due to a reduction in cash held in an interest bearing account.

Income Taxes.During the six months ended September 30, 2012, the Company recorded an income tax benefit of $167,897. For the corresponding 2011 period, the Company recorded a tax benefit of $33,112. The provision for income tax benefit for the six months ended September 30 2012, as compared to the same period in the prior year, is impacted principally by the amount and timing of the unrealized earnings of and the payment of dividends by the Hong Kong Joint Venture.

Net Loss. We reported a net loss of $580,791 for the six months ended September 30, 2012 compared to a net loss of $309,360 for the corresponding period of the prior fiscal year, an increase in loss of $271,431 (87.7%). The primary reasons for the increased loss are advertising and promotional charges incurred to promote the new product line, and lower Joint Venture earnings.

Financial Condition and Liquidity

The Company has a Factoring Agreement with CIT Group, Inc. (CIT) which supplies both short-term borrowings and letters of credit to finance foreign inventory purchases. The maximum amount available under the Factoring Agreement is currently $1,000,000. Based on specified percentages of our accounts receivable and inventory and letter of credit commitments, as of September 30, 2012 we had a borrowing availability of $1,000,000 under the Factoring Agreement. The interest rate under the Factoring Agreement on the uncollected factored accounts receivable and any additional borrowings is equal to the prime rate of interest charged by our lender. At September 30, 2012, the prime rate was 3.25%. Borrowings are collateralized by all of our accounts receivable and inventory.

Our factored accounts receivable as of the end of our last fiscal year was $1,719,731, and was $1,648,568 as of September 30, 2012. Our prepaid expenses as of the end of our last fiscal year were $599,876, and were comparable to prepaid expenses of $537,432 as of September 30, 2012.

Operating activities used cash of $1,843,646 for the six months ended September 30, 2012. This was primarily due to an increase in inventories and prepaid expenses of $992,668, a decrease in accounts payable and accrued expenses of $375,236, and a loss from operations of $580,791. For the same period last year, operating activities used cash of $2,426,582, primarily as a result of increases in inventory and increases in accounts receivable and amounts due from factor.

Investing activities provided cash of $48,835 during the six months ended September 30, 2012, and provided cash of $387,448 for the six months ended September 30, 2011.

Financing activities used cash of $121,070 during the six months ended September 30, 2012 for the repurchase of common stock in accordance with the Company's Stock Repurchase Plan.

We believe that cash on hand available under the Factoring Agreement, distributions from the Joint Venture, and our line of credit facilities provide us with sufficient resources to meet our requirements for liquidity and working capital.

Joint Venture

Net Sales. Net sales of the Joint Venture for the three and six months ended September 30, 2012 were $5,172,868 and $10,571,417, respectively, compared to $5,222,374 and $11,418,433, respectively, for the comparable period in the prior fiscal year. The 1.0% and 7.4% respective decreases in net sales by the Joint Venture for the three and six month periods were due to lower volumes of sales to unaffiliated customers primarily in Europe.

Gross Margins.Gross margins of the Joint Venture for the three month period ended September 30, 2012 decreased to 18.7% from 21.7% for the 2011 corresponding period. For the six month period ended September 30, 2012, gross margins decreased to 21.7% from the 23.9% gross margin of the prior year's corresponding period. The lower gross margins for the 2012 period are due to increased labor and materials costs and due to product mix of the Joint Venture's sales; since gross margins depend on sales volume of various products, with varying margins, decreased sales of higher margin products and increased sales of lower margin products affect the overall gross margins.

Expenses.Selling, general and administrative expenses were $1,083,463 and $2,269,614, respectively, for the three and six month periods ended September 30, 2012, compared to $1,128,308 and $2,158,386 in the prior year's respective periods. As a percentage of sales, expenses were 20.9% and 21.5% for the three and six month periods ended September 30, 2012, compared to 21.6% and 18.9% for the three and six month periods ended September 30, 2011. The changes in selling, general and administrative expense as a percent of sales for the three and six month periods were primarily due to certain fixed costs that remained constant despite decreased net sales in the 2012 periods.

Interest Income and Expense. Interest income on assets held for investment was $111,295 and $224,188 respectively, for the three and six month periods ended September 30, 2012, compared to interest income of $115,283 and $217,812, respectively, for the prior year's periods. The decrease for the three month period was principally due to currency fluctuations and the increase for the six month period was principally due to currency fluctuations and the increase in the average balance of assets held for investment.

Net Income. Net income for the three and six months ended September 30, 2012 was $29,902 and $196,721 respectively, compared to $125,490 and $792,317, respectively, in the comparable periods last year. The 76.2% and 75.2% respective decreases in net income for the three and six month periods were due primarily to decreased sales volume as noted above, combined with higher costs for labor and materials reflected as lower gross profit margins as discussed above.

Liquidity.Cash needs of the Joint Venture are currently met by funds generated from operations. During the six months ended September 30, 2012, working capital decreased by $2,501,466 from $10,492,507 on March 31, 2012 to $7,991,041 on September 30, 2012.

Critical Accounting Policies

Management's discussion and analysis of our condensed consolidated financial statements and results of operations are based on our condensed Consolidated Financial Statements included as part of this document. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories, income taxes, and contingencies and litigation. We base these estimates on historical experiences, future projections and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect management's more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. For a detailed discussion on the application on these and other accounting policies, see Note A to the consolidated financial statements included in Item 8 of the Form 10-K for the year ended March 31, 2012. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include:

Revenue Recognition.We recognize sales upon shipment of products net of applicable provisions for any discounts or allowances. The shipping date from our warehouse is the appropriate point of revenue recognition since upon shipment we have substantially completed our obligations which entitle us to receive the benefits represented by the revenues, and the shipping date provides a consistent point within our control to measure revenue. Customers may not return, exchange or refuse acceptance of goods without our approval. We have established allowances to cover anticipated doubtful accounts based upon historical experience.

Inventories.Inventories are valued at the lower of market or cost. Cost is determined on the first-in first-out method. We have recorded a reserve for obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Management reviews the reserve quarterly.

Income Taxes. The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, whenever it is more likely than not that a deferred tax asset will not be realized.. The Company follows the financial pronouncement that gives guidance related to the financial statement of recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties related to income tax matters are recorded as income tax expenses.

Financing Receivables.Management considers amounts due from the Company's factor to be "financing receivables". Trade accounts receivable, other receivables, and receivables from our Hong Kong Joint Venture are not considered by management to be financing receivables.

The Company sells the majority of its short-term receivables arising in the ordinary course of business to our factor. At the time a receivable is sold to our factor the credit risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to bear any credit risk associated with delivery or warranty issues related to the products sold.

Management assesses the credit risk of both its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account from one accounting period to the next are charged to operations in the period the change is determined. Amounts ultimately determined to be uncollectible are eliminated from the receivable accounts and from the allowance account in the period that the receivables' status is determined to be uncollectible.

Based on the nature of the factoring agreement and prior experience, no allowance for uncollectible financing receivables has been provided. At September 30, 2012, an allowance of $57,000 has been provided for uncollectible trade accounts receivable.

Contingencies.From time to time, we are subject to lawsuits and other claims, related to patents and other matters. Management is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is based on a careful analysis of each individual issue with the assistance of outside legal counsel. It is the opinion of management, based on advice of legal counsel, that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial statements.

Warranties.We generally provide warranties from one to ten years to the non-commercial end user on all products sold. The manufacturers of our products provide us with a one-year warranty on all products we purchase for resale. Claims for warranty replacement of products beyond the one-year warranty period covered by the manufacturers are immaterial and we do not record estimated warranty expense or a contingent liability for warranty claims.

recent accounting pronouncements not yet adopted

Changes to accounting principles generally accepted in the United Stated of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updated (ASU's) to the FASB's Accounting Standards Codification.

We consider the applicability and impact of all ASU's. Recently issued ASU's were evaluated and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements.

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