Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
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
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
201 E. Sandpointe Avenue, 8th Floor
Santa Ana, California
 
92707
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's telephone number, including area code: (714) 918-9500
__________________________________ 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 14,572,220 shares of Common Stock, par value $0.01 per share, of the registrant were outstanding on November 3, 2016.



UNIVERSAL ELECTRONICS INC.
 
INDEX
 
 
Page
Number




Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
(Unaudited)
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
48,141

 
$
52,966

Restricted cash
4,623

 
4,623

Accounts receivable, net
134,438

 
121,801

Inventories, net
124,091

 
122,366

Prepaid expenses and other current assets
6,741

 
6,217

Income tax receivable
441

 
55

Deferred income taxes
7,243

 
7,296

Total current assets
325,718

 
315,324

Property, plant, and equipment, net
103,117

 
90,015

Goodwill
43,162

 
43,116

Intangible assets, net
29,615

 
32,926

Deferred income taxes
9,112

 
8,474

Long-term restricted cash
4,797



Other assets
5,065

 
5,365

Total assets
$
520,586

 
$
495,220

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
102,754

 
$
93,843

Line of credit
35,000

 
50,000

Accrued compensation
32,406

 
37,452

Accrued sales discounts, rebates and royalties
8,666

 
7,618

Accrued income taxes
359

 
4,745

Other accrued expenses
23,288

 
21,466

Total current liabilities
202,473

 
215,124

Long-term liabilities:
 
 
 
Long-term contingent consideration
11,600

 
11,751

Deferred income taxes
9,972

 
7,891

Income tax payable
629

 
629

Other long-term liabilities
6,568

 
1,917

Total liabilities
231,242

 
237,312

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; 23,435,769 and 23,176,277 shares issued on September 30, 2016 and December 31, 2015, respectively
234

 
232

Paid-in capital
246,930

 
228,269

Treasury stock, at cost, 8,864,299 and 8,824,768 shares on September 30, 2016 and December 31, 2015, respectively
(212,521
)
 
(210,333
)
Accumulated other comprehensive income (loss)
(17,657
)
 
(15,799
)
Retained earnings
272,358

 
255,240

Universal Electronics Inc. stockholders' equity
289,344

 
257,609

Noncontrolling interest

 
299

Total stockholders' equity
289,344

 
257,908

Total liabilities and stockholders' equity
$
520,586

 
$
495,220

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

UNIVERSAL ELECTRONICS INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
169,185

 
$
160,467

 
$
490,829

 
$
440,723

Cost of sales
127,400

 
117,658

 
367,941

 
320,225

Gross profit
41,785

 
42,809


122,888


120,498

Research and development expenses
4,955

 
4,134

 
15,292

 
12,664

Selling, general and administrative expenses
28,709

 
29,642

 
88,465

 
82,298

Operating income
8,121

 
9,033


19,131


25,536

Interest income (expense), net
(228
)
 
(16
)
 
(753
)
 
198

Other income (expense), net
335

 
(558
)
 
1,726

 
(272
)
Income before provision for income taxes
8,228

 
8,459


20,104


25,462

Provision for income taxes
421

 
2,185

 
2,956

 
5,624

Net income
7,807

 
6,274


17,148


19,838

Net income (loss) attributable to noncontrolling interest

 
3

 
30

 
3

Net income attributable to Universal Electronics Inc.
$
7,807


$
6,271


$
17,118


$
19,835

 
 
 
 
 
 
 
 
Earnings per share attributable to Universal Electronics Inc.:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.42


$
1.19


$
1.28

Diluted
$
0.53

 
$
0.41


$
1.16


$
1.25

Shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
14,510

 
14,966

 
14,441

 
15,535

Diluted
14,848

 
15,230

 
14,740

 
15,834

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.


4

Table of Contents

UNIVERSAL ELECTRONICS INC.
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(In thousands)
(Unaudited) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
7,807

 
$
6,274

 
$
17,148

 
$
19,838

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(540
)
 
(4,236
)
 
(1,858
)
 
(7,396
)
Total comprehensive income (loss)
7,267


2,038


15,290


12,442

Comprehensive income (loss) attributable to noncontrolling interest

 
3

 
30

 
3

Comprehensive income (loss) attributable to Universal Electronics Inc.
$
7,267


$
2,035


$
15,260


$
12,439

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.


5

Table of Contents

UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended September 30,
 
2016
 
2015
Cash provided by (used for) operating activities:
 
 
 
Net income
$
17,148

 
$
19,838

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
18,994

 
14,459

Provision for doubtful accounts
123

 
189

Provision for inventory write-downs
2,398

 
2,258

Deferred income taxes
1,413

 
(515
)
Tax benefit from exercise of stock options and vested restricted stock
2,230

 
1,023

Excess tax benefit from stock-based compensation
(2,292
)
 
(1,071
)
Shares issued for employee benefit plan
763

 
734

Employee and director stock-based compensation
7,638

 
5,923

Performance-based warrant stock-based compensation
3,219

 

Changes in operating assets and liabilities:
 
 
 
Restricted cash

 
(4,623
)
Accounts receivable
(11,359
)
 
(17,851
)
Inventories
(4,470
)
 
(20,261
)
Prepaid expenses and other assets
(86
)
 
426

Accounts payable and accrued expenses
7,699

 
21,821

Accrued income taxes
(4,737
)
 
180

Net cash provided by (used for) operating activities
38,681

 
22,530

Cash used for investing activities:
 
 
 
Acquisition of property, plant, and equipment
(28,914
)
 
(26,376
)
Acquisition of intangible assets
(1,373
)
 
(1,877
)
Increase in restricted cash
(4,797
)
 

Deposit received toward sale of Guangzhou factory
4,797

 

Deconsolidation of Encore Controls LLC
48

 

Acquisition of net assets of Ecolink Intelligent Technology, Inc., net of cash acquired

 
(12,482
)
Net cash used for investing activities
(30,239
)

(40,735
)
Cash provided by (used for) financing activities:
 
 
 
Borrowings under line of credit
92,987

 
69,500

Repayments on line of credit
(107,987
)
 
(22,500
)
Proceeds from stock options exercised
4,813

 
1,648

Treasury stock purchased
(2,188
)
 
(78,708
)
Excess tax benefit from stock-based compensation
2,292

 
1,071

Net cash provided by (used for) financing activities
(10,083
)
 
(28,989
)
Effect of exchange rate changes on cash
(3,184
)
 
(1,019
)
Net increase (decrease) in cash and cash equivalents
(4,825
)
 
(48,213
)
Cash and cash equivalents at beginning of year
52,966

 
112,521

Cash and cash equivalents at end of period
$
48,141

 
$
64,308

 
 
 
 
Supplemental cash flow information:
 
 
 
Income taxes paid
$
6,034

 
$
3,922

Interest paid
$
926

 
$
68

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.

6

Table of Contents

UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
Note 1 — Basis of Presentation and Significant Accounting Policies
In the opinion of management, the accompanying consolidated financial statements of Universal Electronics Inc. and its subsidiaries contain all the adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Information and footnote disclosures normally included in financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. As used herein, the terms "Company," "we," "us," and "our" refer to Universal Electronics Inc. and its subsidiaries, unless the context indicates to the contrary.
Our results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk," and the "Financial Statements and Supplementary Data" included in Items 1A, 7, 7A, and 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2015.
Estimates, Judgments and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for sales returns and doubtful accounts, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes, stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these estimates and assumptions, and they may be adjusted as more information becomes available. Any adjustment may be material.
See Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a summary of our significant accounting policies.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which will supersede most existing U.S. GAAP revenue recognition guidance. This new standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 contains expanded disclosure requirements relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal periods beginning after December 15, 2016 and permits the use of either the full retrospective or cumulative effect transition method. On July 9, 2015, the FASB postponed the effective date of the new revenue standard by one year; however, early adoption is permitted as of the original effective date. We do not plan to early adopt ASU 2014-09. We have not yet selected a transition method and are evaluating the impact that this new standard will have on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which amends Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other". The amendments provide guidance as to whether a cloud computing arrangement includes a software license, and based on that determination, how to account for such arrangements. ASU 2015-05 is effective for fiscal periods beginning after December 15, 2015 and permits the use of either the prospective or retrospective transition method. The adoption of ASU 2015-05 did not have a material impact on our consolidated financial position or results of operations.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory", which states that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal periods beginning after December 15, 2016 and must be applied prospectively. Early adoption is permitted. We do not anticipate that the adoption of ASU 2015-11 will have a material impact on our consolidated financial position or results of operations.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-period Adjustments." This new guidance requires an acquirer in a business combination to recognize adjustments to the provisional amounts that are identified during the measurement period to be reported in the period in which the adjustment amounts are determined. In addition, the effect

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Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


on earnings of changes in depreciation, amortization and other items as a result of the change to the provisional amounts, calculated as if the accounting had been complete as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal periods beginning after December 15, 2015 and must be applied prospectively. The adoption of ASU 2015-16 did not have a material impact on our consolidated financial position or results of operations.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." This new guidance requires all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. ASU 2015-17 is effective for fiscal periods beginning after December 15, 2016 and may be adopted either prospectively or retrospectively. Early adoption is permitted. We have not yet selected a transition method and are currently evaluating the impact that ASU 2015-17 will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases", which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance will require lessees to recognize a right of use asset and a lease liability at the commencement date for all leases with terms greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018 and must be adopted using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,"Improvements to Employee Share-Based Payment Accounting", which amends ASC 718, "Compensation - Stock Compensation". ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-09 will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments", which amends ASC 230, "Statement of Cash Flows". This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal periods beginning after December 15, 2017 and must be adopted retrospectively. Early adoption is permitted as long as all amendments are adopted in the same period. We are currently evaluating the impact that ASU 2016-15 will have on our consolidated financial statements.
Note 2 — Cash and Cash Equivalents and Restricted Cash
Cash and Cash Equivalents
Cash and cash equivalents were held in the following geographic regions:
(In thousands)
September 30, 2016
 
December 31, 2015
United States
$
3,499

 
$
8,458

People's Republic of China ("PRC")
20,613

 
28,681

Asia (excluding the PRC)
5,486

 
5,346

Europe
15,289

 
8,093

South America
3,254

 
2,388

Total cash and cash equivalents
$
48,141

 
$
52,966

Restricted Cash
In connection with the court order issued on September 4, 2015, we placed $4.6 million of cash into a collateralized surety bond. This bond has certain restrictions for liquidation and has therefore been classified as restricted cash. Refer to Note 10 for further information about this ongoing litigation.
In connection with the pending sale of our Guangzhou factory in the PRC (Note 10), the buyer made a cash deposit of RMB 32 million ($4.8 million) into an escrow account on September 29, 2016. Under the terms of the escrow account, these funds will not be paid to us until the close of the sale. Accordingly, this deposit is presented as long-term restricted cash within our consolidated balance sheet.

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Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Note 3 — Accounts Receivable, Net and Revenue Concentrations
Accounts receivable, net were as follows:
(In thousands)
September 30, 2016
 
December 31, 2015
Trade receivables, gross
$
131,229

 
$
119,090

Allowance for doubtful accounts
(960
)
 
(822
)
Allowance for sales returns
(490
)
 
(507
)
Net trade receivables
129,779

 
117,761

Other
4,659

 
4,040

Accounts receivable, net
$
134,438

 
$
121,801

Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts were as follows:
(In thousands)
Nine Months Ended September 30,
2016
 
2015
Balance at beginning of period
$
822

 
$
616

Additions (reductions) to costs and expenses
123

 
189

(Write-offs)/Foreign exchange effects
15

 
(77
)
Balance at end of period
$
960

 
$
728

Sales Returns
The allowance for sales returns at September 30, 2016 and December 31, 2015 included reserves for items returned prior to period-end that were not completely processed, and therefore had not yet been removed from the allowance for sales returns balance. If these returns had been fully processed, the allowance for sales returns balance would have been approximately $0.3 million and $0.3 million on September 30, 2016 and December 31, 2015, respectively. The value of these returned goods was included in our inventory balance at September 30, 2016 and December 31, 2015.
Significant Customers
Net sales to the following customers totaled more than 10% of our net sales:
 
Three Months Ended September 30,
 
2016
 
2015
 
$ (thousands)
 
% of Net Sales
 
$ (thousands)
 
% of Net Sales
Comcast Corporation
$
35,554

 
21.0
%
 
$
42,675

 
26.6
%
DIRECTV
19,642

 
11.6

 
21,957

 
13.7


 
Nine Months Ended September 30,
 
2016
 
2015
 
$ (thousands)
 
% of Net Sales
 
$ (thousands)
 
% of Net Sales
Comcast Corporation
$
111,529

 
22.7
%
 
$
88,633

 
20.1
%
DIRECTV
56,496

 
11.5

 
57,447

 
13.0



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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Trade receivables associated with these significant customers that totaled more than 10% of our accounts receivable, net were as follows:
 
September 30, 2016
 
December 31, 2015
 
$ (thousands)
 
% of Accounts Receivable, Net
 
$ (thousands)
 
% of Accounts Receivable, Net
Comcast Corporation
$
29,733

 
22.1
%
 
$
29,404

 
24.1
%
Note 4 — Inventories, Net and Significant Supplier
Inventories, net were as follows:
(In thousands)
September 30, 2016
 
December 31, 2015

Raw materials
$
36,289

 
$
29,290

Components
18,362

 
12,228

Work in process
5,144

 
5,671

Finished goods
67,954

 
78,222

Reserve for excess and obsolete inventory
(3,658
)
 
(3,045
)
Inventories, net
$
124,091

 
$
122,366

 
Reserve for Excess and Obsolete Inventory
Changes in the reserve for excess and obsolete inventory were as follows:
(In thousands)
Nine Months Ended September 30,
2016
 
2015
Balance at beginning of period
$
3,045

 
$
2,539

Additions charged to costs and expenses (1)
2,120

 
2,012

Sell through (2)
(781
)
 
(774
)
Write-offs/Foreign exchange effects
(726
)
 
(1,201
)
Balance at end of period
$
3,658

 
$
2,576


(1)
The additions charged to costs and expenses do not include inventory directly written-off that was scrapped during production totaling $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively. These amounts are production waste and are not included in management's reserve for excess and obsolete inventory.
(2)
These amounts represent the reduction in reserves associated with inventory items that were sold during the period.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Significant Supplier
We purchase integrated circuits, components and finished goods from multiple sources. Texas Instruments provided $12.4 million, or 13.0%, of total inventory purchases during the three months ended September 30, 2016 and $32.3 million, or 11.9%, of total inventory purchases during the nine months ended September 30, 2016.

Related Party Supplier
We purchase certain printed circuit board assemblies from a related party supplier. The supplier is considered a related party for financial reporting purposes because our Senior Vice President of Strategic Operations owns 40% of this vendor. Inventory purchases from this supplier were as follows:
 
Three Months Ended September 30,
 
2016
 
2015
 
$ (thousands)
 
% of Total
Inventory Purchases
 
$ (thousands)
 
% of Total
Inventory Purchases
Related party supplier
$
1,382

 
1.5
%
 
$
2,115

 
2.3
%
 
Nine Months Ended September 30,
 
2016
 
2015
 
$ (thousands)
 
% of Total
Inventory Purchases
 
$ (thousands)
 
% of Total
Inventory Purchases
Related party supplier
$
4,971

 
1.8
%
 
$
6,566

 
2.6
%
Total accounts payable to this supplier were as follows:
 
September 30, 2016
 
December 31, 2015
 
$ (thousands)
 
% of Accounts Payable
 
$ (thousands)
 
% of Accounts Payable
Related party supplier
$
1,755

 
1.7
%
 
$
2,361

 
2.5
%
Our payment terms and pricing with this supplier are consistent with the terms offered by other suppliers in the ordinary course of business. The accounting policies that we apply to our transactions with our related party supplier are consistent with those applied in transactions with independent third parties. Corporate management routinely monitors purchases from our related party supplier to ensure these purchases remain consistent with our business objectives. 
Note 5 — Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
(In thousands)
 
Balance at December 31, 2015
$
43,116

Foreign exchange effects
46

Balance at September 30, 2016
$
43,162

 


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Intangible Assets, Net
The components of intangible assets, net were as follows:
 
September 30, 2016
 
December 31, 2015
(In thousands)
Gross (1)
 
Accumulated
Amortization (1)
 
Net
 
Gross (1)
 
Accumulated
Amortization (1)
 
Net
Distribution rights
$
322

 
$
(120
)
 
$
202

 
$
312

 
$
(96
)
 
$
216

Patents
11,710

 
(4,671
)
 
7,039

 
11,425

 
(4,737
)
 
6,688

Trademarks and trade names
2,400

 
(1,245
)
 
1,155

 
2,401

 
(1,053
)
 
1,348

Developed and core technology
12,585

 
(3,564
)
 
9,021

 
12,587

 
(2,144
)
 
10,443

Capitalized software development costs
301

 
(160
)
 
141

 
167

 
(97
)
 
70

Customer relationships
27,700

 
(15,643
)
 
12,057

 
27,715

 
(13,554
)
 
14,161

Total intangible assets, net
$
55,018

 
$
(25,403
)
 
$
29,615

 
$
54,607

 
$
(21,681
)
 
$
32,926

 
(1) 
This table excludes the gross value of fully amortized intangible assets totaling $9.9 million and $9.0 million at September 30, 2016 and December 31, 2015, respectively.
Amortization expense is recorded in selling, general and administrative expenses, except amortization expense related to capitalized software development costs which is recorded in cost of sales. Amortization expense by income statement caption was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Cost of sales
$
21

 
$
31

 
$
63

 
$
100

Selling, general and administrative expenses
1,551

 
1,187

 
4,618

 
3,206

Total amortization expense
$
1,572

 
$
1,218


$
4,681


$
3,306

 
Estimated future annual amortization expense related to our intangible assets at September 30, 2016, is as follows:
(In thousands)
 
2016 (remaining 3 months)
$
1,594

2017
6,348

2018
6,313

2019
6,249

2020
5,159

Thereafter
3,952

Total
$
29,615

Note 6 — Line of Credit

On September 16, 2016, we extended the term of our Amended and Restated Credit Agreement ("Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") to November 1, 2018. The Amended Credit Agreement provides for an $85.0 million line of credit ("Credit Line") that may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $13 thousand at September 30, 2016.
All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary which controls our manufacturing factories in the PRC.
Under the Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Amended Credit

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Agreement) plus an applicable margin (varying from 0.00% to 0.50%). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Amended Credit Agreement. The interest rate in effect at September 30, 2016 was 1.77%. There are no commitment fees or unused line fees under the Amended Credit Agreement.
The Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Amended Credit Agreement also contains other customary affirmative and negative covenants and events of default. As of September 30, 2016, we were in compliance with the covenants and conditions of the Amended Credit Agreement.
At September 30, 2016, we had $35.0 million outstanding under the Credit Line. Our total interest expense on borrowings was $0.3 million and $0.1 million during the three months ended September 30, 2016 and 2015, respectively. Our total interest expense on borrowings was $0.9 million and $0.1 million during the nine months ended September 30, 2016 and 2015, respectively.
Note 7 — Income Taxes
We utilize our estimated annual effective tax rate to determine our provision for income taxes for interim periods. The income tax provision is computed by taking the estimated annual effective tax rate and multiplying it by the year-to-date pre-tax book income.
We recorded income tax expense of $0.4 million and $2.2 million for the three months ended September 30, 2016 and 2015, respectively. Our effective tax rate was 5.1% and 25.8% during the three months ended September 30, 2016 and 2015, respectively. Our effective tax rate was lower in the current year period primarily due to the recording of $1.8 million in tax refunds during the three months ended September 30, 2016, of which $1.4 million related to tax incentives in China for 2015 and $0.4 million related to certain deductible research and development expenses incurred in China during 2015. This impact was partially offset by the recording of a $0.7 million decrease to the carrying value of certain deferred tax assets to reflect the lower statutory tax rate that will be applied as a result of tax incentives at one of our China manufacturing facilities.
We recorded income tax expense of $3.0 million and $5.6 million for the nine months ended September 30, 2016 and 2015, respectively. Our effective tax rate was 14.7% and 22.1% during the nine months ended September 30, 2016 and 2015, respectively. Our effective tax rate was lower in the current year period primarily due to (a) the recording of an additional $1.3 million in tax refunds during the nine months ended September 30, 2016, of which $0.9 million related to tax incentives in China for previous tax years and $0.4 million related to certain deductible research and development expenses incurred in China during 2015; and (b) lower tax rates in certain jurisdictions within China due to local tax incentives. These impacts were partially offset by the recording of a $0.7 million decrease to the carrying value of certain deferred tax assets to reflect the lower statutory tax rate that will be applied as a result of tax incentives at one of our China manufacturing facilities.
At September 30, 2016, we had gross unrecognized tax benefits of $3.7 million, including interest and penalties, of which $2.1 million would affect the annual effective tax rate if these tax benefits are realized. Further, we are unaware of any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within the next twelve months. However, based on federal, state and foreign statute expirations in various jurisdictions, we anticipate a decrease in unrecognized tax benefits of approximately $0.1 million within the next twelve months. We have classified uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year.
We have elected to classify interest and penalties as a component of tax expense. Accrued interest and penalties of $0.3 million and $0.2 million at September 30, 2016 and December 31, 2015, respectively, are included in our unrecognized tax benefits.
We file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. On September 30, 2016, the open statutes of limitations in our significant tax jurisdictions were as follows: federal 2013 through 2015, state 2011 through 2015, and foreign 2009 through 2015.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Note 8 — Accrued Compensation
The components of accrued compensation were as follows:
(In thousands)
September 30, 2016
 
December 31, 2015
Accrued social insurance (1)
$
18,262

 
$
18,923

Accrued salary/wages
6,283

 
7,549

Accrued vacation/holiday
2,653

 
2,227

Accrued bonus (2)
2,939

 
5,914

Accrued commission
751

 
1,084

Accrued medical insurance claims
122

 
218

Other accrued compensation
1,396

 
1,537

Total accrued compensation
$
32,406

 
$
37,452

 
(1) 
Effective January 1, 2008, the Chinese Labor Contract Law was enacted in the PRC. This law mandated that PRC employers remit the applicable social insurance payments to their local government. Social insurance is comprised of various components such as pension, medical insurance, job injury insurance, unemployment insurance, and a housing assistance fund, and is administered in a manner similar to social security in the United States. This amount represents our estimate of the amounts due to the PRC government for social insurance on September 30, 2016 and December 31, 2015.
(2) 
Accrued bonus includes an accrual for an extra month of salary ("13th month salary") to be paid to employees in certain geographies where it is the customary business practice. This 13th month salary is paid to these employees if they remain employed with us through December 31st. The total accrued for the 13th month salary was $0.7 million and $0.7 million at September 30, 2016 and December 31, 2015, respectively.
Note 9 — Other Accrued Expenses
The components of other accrued expenses were as follows:
(In thousands)
September 30, 2016
 
December 31, 2015
Advertising and marketing
$
238

 
$
191

Deferred revenue
1,451

 
1,434

Duties
803

 
1,318

Freight and handling fees
2,459

 
1,942

Product development
390

 
630

Product warranty claim costs
135

 
35

Professional fees
1,528

 
1,714

Property, plant, and equipment
1,350

 
551

Sales taxes and VAT
2,730

 
3,170

Third-party commissions
801

 
585

Tooling (1)
1,449

 
1,173

Unrealized loss on foreign currency exchange contracts
186

 
1,164

URC settlement accrual (Notes 2 and 10)
6,618

 
4,629

Utilities
398

 
278

Other
2,752

 
2,652

Total other accrued expenses
$
23,288

 
$
21,466

 
(1) 
The tooling accrual balance relates to unearned revenue for tooling that will be sold to customers.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Related Party Vendor
We have obtained certain engineering support services for our India subsidiary from JAP Techno Solutions ("JAP"). The owner of JAP is the spouse of the managing director of our India operations. Total fees paid to JAP for the three and nine months ended September 30, 2015 were $25 thousand and $77 thousand, respectively. No amounts were paid to this vendor during the nine months ended September 30, 2016.
Note 10 — Commitments and Contingencies
Product Warranties
Changes in the liability for product warranty claim costs were as follows:
(In thousands)
Nine Months Ended September 30,
2016
 
2015
Balance at beginning of period
$
35

 
$
353

Accruals for warranties issued during the period
100

 
12

Settlements (in cash or in kind) during the period

 
(329
)
Balance at end of period
$
135

 
$
36

Restructuring Activities and Sale of Guangzhou Factory
In the first quarter of 2016, we implemented a plan to reduce our manufacturing costs by transitioning manufacturing activities from our southern-most China factory, located in the city of Guangzhou in the Guangdong province, to our other three China factories where labor rates are lower. As a result, we incurred severance costs of $0.1 million and $1.6 million during the three and nine months ended September 30, 2016, which are included within selling, general and administrative expenses. We expect to incur additional severance costs of approximately $10 million as we continue to execute this transition over the next 12-15 months. Because severance costs relate to involuntary terminations, we record the related liability at the communication date. At September 30, 2016, we had $0.1 million of unpaid severance costs included within accrued compensation.
On September 26, 2016, we entered into an agreement to sell our Guangzhou manufacturing facility for RMB 320 million (approximately $48 million). Under the terms of this agreement, we have up to 24 months to cease all operations within the facility. The closing of the sale will be subject to customary due diligence and local regulatory approval and is expected to be completed within approximately 28 months from the execution of the agreement. In accordance with the terms of the agreement, the buyer deposited 10% of the purchase price into an escrow account at agreement inception, which we have presented as long-term restricted cash in our consolidated balance sheet (also refer to Note 2). The remaining balance of the purchase price is to be placed into the escrow account prior to the closing of the sale and will be released to us upon closing.
Litigation

On June 28, 2016, in connection with previously disclosed litigation matters, we entered into a confidential agreement in principal with Universal Remote Control, Inc. (“URC”), Ohsung Electronics Co., Ltd., and Ohsung Electronics USA, Inc. (collectively the “URC Parties”) to settle all litigation matters (including the malicious prosecution litigation described below) between us and the URC Parties. By and during the term of this agreement, we and the URC Parties will dismiss all litigation matters and appeals. While the terms of this agreement in principal are confidential, the $4.6 million surety bond previously placed by us in connection with these litigation matters will be released to URC. Additionally, the URC Parties will receive a limited paid up license to the technologies covered by the patents in this litigation and a limited covenant not to sue with respect to certain of URC’s products existing as of the settlement date. We expect to finalize the definitive settlement agreement and other documents in the near future. Thus, during the nine months ended September 30, 2016, we recorded $2.0 million of estimated litigation settlement costs within selling, general and administrative expenses. While we have been negotiating the settlement agreement and other documents, the underlying litigation with respect to the second litigation matter we filed against URC (Universal Electronics Inc. v. Universal Remote Control, Inc., SACV13-00987 JAK (SHx)) has been stayed with a status conference set for November 14, 2016. In addition, on October 17, 2016, the United States Court of Appeals for the Federal Circuit15-1410-CB Universal Electronics, Inc. v. Universal

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Remote Control, Inc. "Opinion filed" (8:12-cv-00329-AG-JPR) ruled in our favor denying URC’s appeal of the lower court’s ruling in the first litigation matter we filed against URC in which URC sought to obtain more attorney fees and costs.

On April 28, 2016, URC filed a malicious prosecution lawsuit against us in the Superior Court of California, County of Orange (Universal Remote Control, Inc. v. Universal Electronics Inc., 30-2016-00849239-CU-BT-CJC) seeking additional monetary damages against us in connection with the litigation matters we filed against them. This lawsuit has been stayed while we have been negotiating a settlement of all our disputes (see discussion above). Further, we believe that this action by URC is without merit, and we have denied all of URC’s allegations and should we not settle all of our disputes (including this one), we intend to vigorously defend against this lawsuit.

On or about June 10, 2015, FM Marketing GmbH ("FMH") and Ruwido Austria GmbH ("Ruwido"), filed a Summons in Summary Proceedings in Belgium court against one of our subsidiaries, Universal Electronics BV ("UEBV") and one of its customers, Telenet N.V. ("Telenet"), claiming that one of the products UEBV supplies Telenet violates two design patents and one utility patent owned by FMH and/or Ruwido. By this summons, FMH and Ruwido sought to enjoin Telenet and UEBV from continued distribution and use of the products at issue. After the September 29, 2015 hearing, the Court issued its ruling in our and Telenet’s favor, rejecting FMH and Ruwido’s request entirely. On October 22, 2015, Ruwido filed its notice of appeal in this ruling. The parties have fully briefed the appeal and on February 15, 2016, the appellate court heard oral arguments. While awaiting the appellate court’s ruling, we requested and received permission to submit additional filings in support of our position. As such, the court set a new date for all new filings to be submitted and set a status conference for January 2017. In addition, in September 2015, UEBV filed an Opposition with the European Patent Office seeking to invalidate the one utility patent asserted against UEBV and Telenet by Ruwido. The hearing on this opposition has been set for July 2017. Finally, on or about February 9, 2016, Ruwido filed a writ of summons for proceeding on the merits with respect to asserted patents. UEBV and Telenet have replied, denying all of Ruwido's allegations and we intend to vigorously defend against these claims with the hearing on this matter set for February 2017.
There are no other material pending legal proceedings to which we or any of our subsidiaries is a party or of which our respective property is the subject. However, as is typical in our industry and to the nature and kind of business in which we are engaged, from time to time, various claims, charges and litigation are asserted or commenced by third parties against us or by us against third parties arising from or related to product liability, infringement of patent or other intellectual property rights, breach of warranty, contractual relations, or employee relations. The amounts claimed may be substantial but may not bear any reasonable relationship to the merits of the claims or the extent of any real risk of court awards assessed against us or in our favor. However, no assurances can be made as to the outcome of any of these matters, nor can we estimate the range of potential losses to us. In our opinion, final judgments, if any, which might be rendered against us in potential or pending litigation would not have a material adverse effect on our financial condition, results of operations, or cash flows. Moreover, we believe that our products do not infringe any third parties' patents or other intellectual property rights.
We maintain directors' and officers' liability insurance which insures our individual directors and officers against certain claims, as well as attorney's fees and related expenses incurred in connection with the defense of such claims.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Note 11 — Treasury Stock
From time to time, our Board of Directors authorizes management to repurchase shares of our issued and outstanding common stock on the open market. Repurchases may be made to manage dilution created by shares issued under our stock incentive plans or whenever we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board. As of September 30, 2016, we had 375,000 shares available for repurchase on the open market under the Board's authorizations. On November 2, 2016, our Board increased these repurchase authorizations by 125,000 shares bringing the total authorization as of the approval date to 500,000 shares. Shares may also be tendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock.
Repurchased shares of our common stock were as follows:
 
Nine Months Ended September 30,
(In thousands, except share data)
2016
 
2015
Shares repurchased
39,531

 
1,593,420

Cost of shares repurchased
$
2,188

 
$
78,708

Repurchased shares are recorded as shares held in treasury at cost. We hold these shares for future use as management and the Board of Directors deem appropriate, which has included compensating our outside directors.
Note 12 — Business Segment and Foreign Operations
Reportable Segment
An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited extent. Our chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance. Accordingly, we only have a single operating and reportable segment.
Foreign Operations
Our net sales to external customers by geographic area were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
United States
$
88,243

 
$
83,059

 
$
263,053

 
$
200,167

Asia (excluding PRC)
22,099

 
25,763

 
64,290

 
87,428

People's Republic of China
19,899

 
19,804

 
59,978

 
57,008

Europe
19,389

 
15,055

 
53,716

 
46,189

Latin America
13,032

 
8,848

 
32,273

 
29,766

Other
6,523

 
7,938

 
17,519

 
20,165

Total net sales
$
169,185

 
$
160,467


$
490,829


$
440,723

Specific identification of the customer billing location was the basis used for attributing revenues from external customers to geographic areas.
Long-lived tangible assets by geographic area were as follows:
(In thousands)
September 30, 2016
 
December 31, 2015
United States
$
10,187

 
$
7,015

People's Republic of China
93,313

 
83,794

All other countries
4,682

 
4,571

Total long-lived tangible assets
$
108,182

 
$
95,380


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Note 13 — Stock-Based Compensation
Stock-based compensation expense for each employee and director is presented in the same income statement caption as their cash compensation. Stock-based compensation expense by income statement caption and the related income tax benefit were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Cost of sales
$
14

 
$
10

 
$
43

 
$
29

Research and development expenses
136

 
94

 
409

 
305

Selling, general and administrative expenses:
 
 
 
 
 
 
 
Employees
1,748

 
1,459

 
5,324

 
4,465

Outside directors
770

 
377

 
1,862

 
1,124

Total stock-based compensation expense
$
2,668


$
1,940


$
7,638


$
5,923

 
 
 
 
 
 
 
 
Income tax benefit
$
812

 
$
550

 
$
2,281

 
$
1,684


Stock Options

Stock option activity was as follows:
 
Number of Options
(in 000's)
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
(in 000's)
Outstanding at December 31, 2015
648

 
$
30.50

 
 
 
 
Granted
243

 
49.67

 
 
 
 
Exercised
(191
)
 
25.21

 
 
 
$
8,065

Forfeited/canceled/expired

 

 
 
 
 
Outstanding at September 30, 2016 (1)
700

 
$
38.60

 
4.95
 
$
25,113

Vested and expected to vest at September 30, 2016 (1)
700

 
$
38.60

 
4.95
 
$
25,105

Exercisable at September 30, 2016 (1)
392

 
$
29.36

 
4.07
 
$
17,663

(1) 
The aggregate intrinsic value represents the total pre-tax value (the difference between our closing stock price on the last trading day of the third quarter of 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on September 30, 2016. This amount will change based on the fair market value of our stock.
The assumptions we utilized in the Black-Scholes option pricing model and the resulting weighted average fair value of stock option grants were the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Weighted average fair value of grants
$

 
$

 
$
17.96

 
$
24.77

Risk-free interest rate
%
 
%
 
1.36
%
 
1.38
%
Expected volatility
%
 
%
 
41.38
%
 
43.50
%
Expected life in years
0.00

 
0.00

 
4.55

 
4.56

As of September 30, 2016, we expect to recognize $4.5 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 2.1 years.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Restricted Stock
Non-vested restricted stock award activity was as follows:
 
Shares
(in 000's)
 
Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2015
225

 
$
51.31

Granted
76

 
63.23

Vested
(57
)
 
50.18

Forfeited
(2
)
 
55.80

Non-vested at September 30, 2016
242

 
$
55.32

As of September 30, 2016, we expect to recognize $9.8 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of 1.7 years.  

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Note 14 — Performance-Based Common Stock Warrants
On March 9, 2016, we issued common stock purchase warrants to Comcast Corporation ("Comcast") to purchase up to 725,000 shares of our common stock at a price of $54.55 per share. The right to exercise the warrants under this agreement is subject to vesting over three successive two-year periods (with the first two-year period commencing on January 1, 2016) based on the level of purchases of goods and services from us by Comcast and its affiliates, as defined in the warrant agreement. The table below presents the purchase levels and number of warrants that will vest in each period based upon achieving these purchase levels.
 
Incremental Warrants That Will Vest
Aggregate Level of Purchases by Comcast and Affiliates
January 1, 2016 - December 31, 2017
 
January 1, 2018 - December 31, 2019
 
January 1, 2020 - December 31, 2021
$260 million
100,000

 
100,000

 
75,000

$300 million
75,000

 
75,000

 
75,000

$340 million
75,000

 
75,000

 
75,000

Maximum Potential Warrants Earned by Comcast
250,000

 
250,000

 
225,000

If total aggregate purchases by Comcast and its affiliates are below $260 million in any of the two-year periods above, no warrants will vest related to that two-year period. If total aggregate purchases of goods and services by Comcast and its affiliates exceed $340 million during either the first or second two-year period, the amount of any such excess will count toward aggregate purchases in the following two-year period. To fully vest in the rights to purchase all of the underlying shares, Comcast and its affiliates must purchase an aggregate of $1.02 billion in goods and services from us during the six-year vesting period.
Any and all warrants that vest will expire on January 1, 2023. The warrants provide for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions. Additionally, in connection with the common stock purchase warrants, we have also entered into a registration rights agreement with Comcast under which Comcast may from time to time request that we register the shares of common stock underlying vested warrants with the SEC.
Because the warrants contain performance criteria under which Comcast must achieve specified aggregate purchase levels for the warrants to vest, as detailed above, the measurement date for the warrants is the date on which the warrants vest. The estimated fair value of warrants is being recorded as a reduction to net sales ratably as the warrants vest based on the projected number of warrants that will vest, the proportion of purchases by Comcast and its affiliates within the period relative to the aggregate purchase levels required for the warrants to vest and the then-current fair value of the related unvested warrants. If management does not have a reliable forecast of future purchases to be made by Comcast and its affiliates by which to estimate the number of warrants that will vest, then the maximum number of potential warrants is assumed until such time that a reliable forecast of future purchases is available. To the extent that our projections change in the future as to the number of warrants that will vest, a cumulative catch-up adjustment will be recorded in the period in which our estimates change. At September 30, 2016, none of the warrants had vested.
The fair value of the warrants is determined using the Black-Scholes option pricing model. The assumptions we utilized and the resulting fair value of the warrants were the following:
 
September 30, 2016
Fair value
$38.32
Price of Universal Electronics Inc. common stock
$74.99
Risk-free interest rate
1.32%
Expected volatility
40.54%
Expected life in years
6.25

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


For the three and nine months ended September 30, 2016, we recorded $1.1 million and $3.2 million, respectively, as a reduction to net sales in connection with the common stock warrants. The aggregate unrecognized estimated fair value of unvested warrants at September 30, 2016 was $24.6 million.
Note 15 — Other Income (Expense), Net
Other income (expense), net consisted of the following: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Net gain (loss) on foreign currency exchange contracts (1)
$
(218
)
 
$
(80
)
 
$
(894
)
 
$
787

Net gain (loss) on foreign currency exchange transactions
439

 
(553
)
 
2,455

 
(1,229
)
Other income (expense)
114

 
75

 
165

 
170

Other income (expense), net
$
335

 
$
(558
)

$
1,726


$
(272
)
 
(1) 
This represents the gains (losses) incurred on foreign currency hedging derivatives (see Note 18 for further details).
Note 16 — Earnings Per Share
Earnings per share was calculated as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per-share amounts)
2016
 
2015
 
2016
 
2015
BASIC
 
 
 
 
 
 
 
Net income attributable to Universal Electronics Inc.
$
7,807

 
$
6,271

 
$
17,118

 
$
19,835

Weighted-average common shares outstanding
14,510

 
14,966

 
14,441

 
15,535

Basic earnings per share attributable to Universal Electronics Inc.
$
0.54

 
$
0.42


$
1.19


$
1.28

 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
Net income attributable to Universal Electronics Inc.
$
7,807

 
$
6,271

 
$
17,118

 
$
19,835

Weighted-average common shares outstanding for basic
14,510

 
14,966

 
14,441

 
15,535

Dilutive effect of stock options and restricted stock
338

 
264


299


299

Weighted-average common shares outstanding on a diluted basis
14,848

 
15,230

 
14,740

 
15,834

Diluted earnings per share attributable to Universal Electronics Inc.
$
0.53

 
$
0.41


$
1.16


$
1.25

The number of stock options and shares of restricted stock excluded from the computation of diluted earnings per common share were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Stock options

 
74

 
111

 
62

Restricted stock awards
5

 
23

 
8

 
13


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Note 17 — Stockholders' Equity and Noncontrolling Interest
A reconciliation of common stock outstanding, treasury stock and the total carrying amount of Universal Electronics Inc. stockholders’ equity, stockholders’ equity attributable to noncontrolling interest and total stockholders' equity for the nine months ended September 30, 2016 is as follows:
 
Shares
 
Stockholders' Equity
(In thousands)
Common Stock
 
Treasury Stock
 
Universal Electronics Inc. Stockholders' Equity
 
Noncontrolling Interest
 
Total
Balance at December 31, 2015
23,176

 
(8,825
)
 
$
257,609

 
$
299

 
$
257,908

Net income
 
 
 
 
17,118

 
30

 
17,148

Currency translation adjustment
 
 
 
 
(1,858
)
 
 
 
(1,858
)
Shares issued for employee benefit plan and compensation
46

 
 
 
763

 
 
 
763

Purchase of treasury shares
 
 
(39
)
 
(2,188
)
 
 
 
(2,188
)
Stock options exercised
191

 
 
 
4,813

 
 
 
4,813

Shares issued to Directors
23

 
 
 

 
 
 

Employee and director stock-based compensation
 
 
 
 
7,638

 
 
 
7,638

Tax benefit from exercise of non-qualified stock options and vested restricted stock
 
 
 
 
2,230

 
 
 
2,230

Performance-based warrant stock-based compensation
 
 
 
 
3,219

 
 
 
3,219

Deconsolidation of Encore Controls LLC (Note 19)
 
 
 
 
 
 
(329
)
 
(329
)
Balance at September 30, 2016
23,436

 
(8,864
)
 
$
289,344

 
$

 
$
289,344

Note 18 — Derivatives
We periodically enter into foreign currency exchange contracts with terms normally lasting less than nine months to protect against the adverse effects that exchange-rate fluctuations may have on our foreign currency-denominated receivables, payables, cash flows and reported income. We are exposed to market risks from foreign currency exchange rates, which may adversely affect our operating results and financial position. Our foreign currency exposures are primarily concentrated in the Argentinian Peso, Brazilian Real, British Pound, Chinese Yuan Renminbi, Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen and Mexican Peso. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. We do not use leveraged derivative financial instruments and these derivatives have not qualified for hedge accounting.
Gains and losses on the derivatives are recorded in other income (expense), net. Derivatives are recorded on the balance sheet at fair value. The estimated fair values of our derivative financial instruments represent the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. We have determined that the fair value of our derivatives are derived from level 2 inputs in the fair value hierarchy. The following table sets forth the total net fair value of derivatives:  
 
 
September 30, 2016
 
December 31, 2015
 
 
Fair Value Measurement Using
 
Total
 
Fair Value Measurement Using
 
Total
(In thousands)
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance
Foreign currency exchange contracts
 
$

 
$
(138
)
 
$

 
$
(138
)
 
$

 
$
(1,146
)
 
$

 
$
(1,146
)
We held foreign currency exchange contracts which resulted in a net pre-tax loss of $0.2 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, we had a net pre-tax loss of $0.9 million and a net pre-tax gain of $0.8 million, respectively (see Note 15).

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


Details of foreign currency exchange contracts held were as follows:
Date Held
 
Type
 
Position Held
 
Notional Value
(in millions)
 
Forward Rate
 
Unrealized Gain/(Loss) Recorded at Balance Sheet
Date
(in thousands)(1)
 
Settlement Date
September 30, 2016
 
USD/Euro
 
USD
 
$
15.0

 
1.1209

 
$
(57
)
 
October 28, 2016
September 30, 2016
 
USD/Chinese Yuan Renminbi
 
Chinese Yuan Renminbi
 
$
10.0

 
6.6757

 
$
(51
)
 
January 13, 2017
September 30, 2016
 
USD/Chinese Yuan Renminbi
 
Chinese Yuan Renminbi
 
$
25.0

 
6.7230

 
$
48

 
January 13, 2017
September 30, 2016
 
USD/Brazilian Real
 
USD
 
$
2.0

 
3.4775

 
$
(78
)
 
January 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
USD/Euro
 
USD
 
$
7.0

 
1.0864

 
$
(7
)
 
January 22, 2016
December 31, 2015
 
USD/Chinese Yuan Renminbi
 
Chinese Yuan Renminbi
 
$
22.5

 
6.2565

 
$
(1,100
)
 
January 15, 2016
December 31, 2015
 
USD/Brazilian Real
 
Brazilian Real
 
$
1.0

 
3.7461

 
$
(57
)
 
January 15, 2016
December 31, 2015
 
USD/Brazilian Real
 
USD
 
$
3.0

 
3.9503

 
$
18

 
January 15, 2016
(1) 
Unrealized gains on foreign currency exchange contracts are recorded in prepaid expenses and other current assets. Unrealized losses on foreign currency exchange contracts are recorded in other accrued expenses.
Note 19 — Business Combination
On August 4, 2015, we entered into an Asset Purchase Agreement (the "APA") to acquire substantially all of the net assets of Ecolink Intelligent Technology, Inc. ("Ecolink"), a leading developer of smart home technology that designs, develops and manufactures a wide range of intelligent wireless security and home automation products. This transaction closed on August 31, 2015. The purchase price of $24.1 million was comprised of $12.9 million in cash, and $11.2 million of contingent consideration. Additionally, we incurred $0.2 million in acquisition costs, consisting primarily of legal and accounting expenses, which were recorded within selling, general and administrative expenses for the year ended December 31, 2015. The acquisition of these assets will allow us to extend our product offerings to include home security and automation products previously marketed by Ecolink and to sell these products to our existing customers.
Included in the net assets acquired from Ecolink was a 50% ownership interest in Encore Controls LLC ("Encore"), a developer of smart home technology that designs and sells intelligent wireless fire safety products for use in home security systems.
At the time of acquisition, management determined that we were the primary beneficiary of Encore due to our ability to direct the activities that most significantly impacted the economic performance of Encore, and thus we consolidated the financial statements of Encore commencing on the acquisition date. The aggregate fair value of Encore’s net assets on the acquisition date was $0.7 million, of which $0.4 million was attributable to the noncontrolling interest. The fair value attributable to the noncontrolling interest was based on the noncontrolling interest's ownership percentage in the fair values of the assets and liabilities of Encore.
On April 21, 2016, we sold our ownership interest in Encore to Encore’s noncontrolling interest holder in exchange for full rights and ownership of Encore’s patents and developed technology as well as the noncontrolling interest’s portion of certain of Encore’s tangible net assets. Additionally, as a condition of the sale of our ownership interest in Encore, we agreed to grant a royalty-free license to Encore for the use of Encore’s developed technology and patents in connection with selling specific products to specific customers. As a result of this transaction, we no longer have any involvement with Encore other than the granting of this limited license. Upon deconsolidation, we recorded a gain of $65 thousand, based on the difference between the fair value of the net assets received and our ownership interest in Encore. This gain is presented in our consolidated income statement within other income (expense), net for the nine months ended September 30, 2016.
Our consolidated income statement for the three months ended September 30, 2016 includes net sales of $0.9 million and a net loss of $0.9 million attributable to Ecolink. Our consolidated income statement for the nine months ended September 30, 2016 includes net sales of $3.7 million and a net loss of $1.5 million attributable to Ecolink. Our consolidated income statement for the

23

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


three and nine months ended September 30, 2015 includes net sales of $0.3 million and a net loss of $0.2 million attributable to Ecolink for the period commencing on August 31, 2015.

Contingent Consideration

We are required to make additional earnout payments upon the achievement of certain operating income levels attributable to Ecolink over each of the next 5 years. The amount of contingent consideration has no upper limit and is calculated at the end of each calendar year based upon certain percentages of operating income target levels as defined in the APA. Ecolink's operating income will be calculated using certain revenues, costs and expenses directly attributable to Ecolink as specified in the APA. At the acquisition date, the value of earnout contingent consideration was estimated using a valuation methodology based on projections of future operating income calculated in accordance with the APA. Such projections were then discounted using an average discount rate of 15.5% to reflect the risk in achieving the projected operating income levels as well as the time value of money. The fair value measurement of the earnout contingent consideration was based primarily on significant inputs not observable in an active market and thus represents a Level 3 measurement as defined under U.S. GAAP. At December 31, 2015 the fair value of the earnout contingent consideration was $11.8 million. The fair value of the earnout contingent consideration increased $0.6 million and decreased $0.2 million during the three and nine months ended September 30, 2016, respectively, primarily to reflect adjustments to the timing of earnout payments and the related accretion driven by the time value of money. These adjustments were recorded within selling, general and administrative expenses. The fair value of the earnout contingent consideration at September 30, 2016 was $11.6 million. The fair value of earnout contingent consideration is presented as long term contingent consideration in our consolidated balance sheet.
Purchase Price Allocation
Using the acquisition method of accounting, the acquisition date fair value of the consideration transferred was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. The goodwill is expected to be deductible for income tax purposes. Management's purchase price allocation was the following:
(in thousands)
Estimated Lives
 
Fair Value
Cash and cash equivalents
 
 
$
685

Accounts receivable
 
 
374

Inventories
 
 
1,412

Prepaid expenses and other current assets
 
 
253

Property, plant and equipment
1-4 years
 
16

Non-interest bearing liabilities
 
 
(1,557
)
Net tangible assets acquired
 
 
1,183

Trade name
7 years
 
400

Developed technology
4-14 years
 
9,080

Customer relationships
5 years
 
1,300

Goodwill
 
 
12,564

Total purchase price
 
 
24,527

Noncontrolling interest in Encore
 
 
(378
)
Net purchase price
 
 
24,149

Less: Contingent consideration
 
 
(11,200
)
Cash paid
 
 
$
12,949

Management's determination of the fair value of intangible assets acquired was based primarily on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under U.S. GAAP.
The fair value assigned to Ecolink’s trade name intangible asset was determined utilizing a relief from royalty method. Under the relief from royalty method, the fair value of the intangible asset is estimated to be the present value of the royalties saved because

24

Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)


the company owns the intangible asset. Revenue projections and estimated useful life were significant inputs into estimating the value of Ecolink’s trade name.
The fair value assigned to Ecolink's developed technology was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and utilizes revenue and cost projections, including an assumed contributory asset charge.
The fair value assigned to Ecolink's customer relationships intangible asset was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings utilizing the existing Ecolink customer base versus projected earnings based on starting with no customers and reacquiring the customer base. Revenue and earnings projections were significant inputs into estimating the value of Ecolink’s customer relationships.
The trade name, developed technology and customer relationships intangible assets are expected to be deductible for income tax purposes.
Pro Forma Results (Unaudited)
The following unaudited pro forma financial information presents the combined results of our operations and the operations of Ecolink as if this transaction had occurred on January 1, 2014. This unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been achieved had the acquisition actually been completed as of January 1, 2014, and should not be taken as a projection of the future consolidated results of our operations.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per-share amounts)
2016
 
2015
 
2016
 
2015
Net sales
$
169,185

 
$
161,392

 
$
490,829

 
$
444,762

Net income
$
7,813

 
$
6,203

 
$
17,223

 
$
19,505

Net income attributable to Universal Electronics Inc.
$
7,813

 
$
6,197

 
$
17,184

 
$
19,440

Basic earnings per share attributable to Universal Electronics Inc.
$
0.54

 
$
0.41

 
$
1.19

 
$
1.25

Diluted earnings per share attributable to Universal Electronics Inc.
$
0.53

 
$
0.41

 
$
1.17

 
$
1.23

For purposes of determining pro forma net income attributable to Universal Electronics Inc., adjustments were made to each period presented in the table above. Pro forma net income and pro forma net income attributable to Universal Electronics Inc. assume that amortization of acquired intangible assets and of fair value adjustments related to inventories began at January 1, 2014 rather than on September 1, 2015. The result is a net decrease in amortization expense of $10 thousand and $0.1 million for the three and nine months ended September 30, 2016, respectively, and a net increase in amortization expense of $0.3 million and $1.3 million for the three and nine months ended September 30, 2015, respectively. Additionally, acquisition costs totaling $0.2 million are excluded from pro forma net income and pro forma net income attributable to Universal Electronics Inc. All adjustments have been made net of their related tax effects.

25

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
Overview
We develop and manufacture a broad line of pre-programmed universal remote control products, AV accessories, software and intelligent wireless automation components dedicated to redefining the home entertainment and automation experience. Our customers operate primarily in the consumer electronics market and include subscription broadcasters, OEMs, international retailers, private label brands, pro-security installers and companies in the computing industry. We also sell integrated circuits, on which our software and device control database is embedded, and license our device control database to OEMs that manufacture televisions, digital audio and video players, streamer boxes, cable converters, satellite receivers, set-top boxes, room air conditioning equipment, game consoles, and wireless mobile phones and tablets.
Since our beginning in 1986, we have compiled an extensive device control code database that covers over 982,000 individual device functions and approximately 7,700 unique consumer electronic brands. QuickSet®, our proprietary software, can automatically detect, identify and enable the appropriate control commands for home entertainment, automation and appliances like air conditioners. Our library is regularly updated with new control functions captured directly from devices, remote controls and manufacturer specifications to ensure the accuracy and integrity of our database and control engine. Our universal remote control library contains device codes that are capable of controlling virtually all set-top boxes, televisions, audio components, DVD players, Blu-Ray players, and CD players, as well as most other remote controlled home entertainment devices and home automation control modules worldwide.
With the wider adoption of more advanced technologies, emerging radio frequency ("RF") technologies, such as RF4CE, Bluetooth, and Bluetooth Smart, have increasingly become a focus in our development efforts. Several new recently released platforms utilize RF to effectively implement popular features like voice search.
We have developed a comprehensive patent portfolio of almost 400 pending and issued patents related to remote controls and home automation.
We operate as one business segment. We have twenty-two international subsidiaries located in Argentina, Brazil, British Virgin Islands, Cayman Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Mexico, the Netherlands, People's Republic of China (5), Singapore, Spain, and the United Kingdom.
To recap our results for the three months ended September 30, 2016:
Net sales increased 5.4% to $169.2 million for the three months ended September 30, 2016 from $160.5 million for the three months ended September 30, 2015.
Our gross margin percentage decreased from 26.7% for the three months ended September 30, 2015 to 24.7% for the three months ended September 30, 2016.
Operating expenses, as a percent of net sales, decreased from 21.1% for the three months ended September 30, 2015 to 19.9% for the three months ended September 30, 2016.
Our operating income decreased from $9.0 million for the three months ended September 30, 2015 to $8.1 million for the three months ended September 30, 2016, and our operating margin percentage decreased from 5.6% for the three months ended September 30, 2015 to 4.8% for the three months ended September 30, 2016.
Our effective tax rate decreased to 5.1% for the three months ended September 30, 2016, compared to 25.8% for the three months ended September 30, 2015.
Our strategic business objectives for 2016 include the following:
continue to develop and market the advanced remote control products and technologies our customer base is adopting;
continue to broaden our home control and automation product offerings;
further penetrate international subscription broadcasting markets;
acquire new customers in historically strong regions;
increase our share with existing customers; and
continue to seek acquisitions or strategic partners that complement and strengthen our existing business.
We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period

26

Table of Contents

to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowances for sales returns and doubtful accounts, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes, stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. The critical accounting policy below supplements the items that we disclosed as our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015.
Performance-Based Common Stock Warrants
The measurement date for performance-based common stock warrants is the date on which the warrants vest. We recognize the fair value of performance-based common stock warrants as a reduction to net sales ratably as the warrants vest based on the projected number of warrants that will vest, the proportion of the performance criteria achieved by the customer within the period relative to the total performance required (aggregate purchase levels) for the warrants to vest and the then-current fair value of the related unvested warrants. If we do not have a reliable forecast of future purchases to be made by the customer by which to estimate the number of warrants that will vest, then the maximum number of potential warrants is assumed until such time that a reliable forecast of future purchases is available. To the extent that our projections change in the future as to the number of warrants that will vest, a cumulative catch-up adjustment will be recorded in the period in which our estimates change.
The fair value of performance-based common stock warrants is determined utilizing the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the price of our common stock, the risk-free interest rate, expected volatility, and expected life in years. The price of our common stock is equal to the average of the high and low trade prices of our common stock on the measurement date. The risk-free interest rate over the expected life is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the warrant. Expected life is equal to the remaining contractual term of the warrant. The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.
Recent Accounting Pronouncements
See Note 1 contained in the "Notes to Consolidated Financial Statements" for a discussion of recent accounting pronouncements.

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Table of Contents

Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
%
Cost of sales
75.3

 
73.3

 
75.0

 
72.7

Gross profit
24.7

 
26.7

 
25.0

 
27.3

Research and development expenses
2.9

 
2.6

 
3.1

 
2.9

Selling, general and administrative expenses
17.0

 
18.5

 
18.0

 
18.6

Operating income
4.8

 
5.6

 
3.9


5.8

Interest income (expense), net
(0.1
)
 
(0.0
)
 
(0.2
)
 
0.0

Other income (expense), net
0.2

 
(0.3
)
 
0.4

 
(0.0

Income before provision for income taxes
4.9

 
5.3

 
4.1

 
5.8

Provision for income taxes
0.3

 
1.4

 
0.6

 
1.3

Net income
4.6

 
3.9

 
3.5

 
4.5

Net income (loss) attributable to noncontrolling interest

 
0.0

 
0.0

 
0.0

Net income attributable to Universal Electronics Inc.
4.6
 %
 
3.9
 %
 
3.5
 %
 
4.5
%
Three Months Ended September 30, 2016 versus Three Months Ended September 30, 2015
Net sales. Net sales for the three months ended September 30, 2016 were $169.2 million, an increase of 5.4% compared to $160.5 million for the three months ended September 30, 2015. Net sales by our Business and Consumer lines were as follows:
 
Three Months Ended September 30,
 
2016
 
2015
 
$ (millions)
 
% of total
 
$ (millions)
 
% of total
Business
$
157.2

 
92.9
%
 
$
148.6

 
92.6
%
Consumer
12.0

 
7.1

 
11.9

 
7.4

Total net sales
$
169.2

 
100.0
%
 
$
160.5

 
100.0
%
Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were 92.9% of net sales for the three months ended September 30, 2016 compared to 92.6% for the three months ended September 30, 2015. Net sales in our Business lines for the three months ended September 30, 2016 increased by 5.8% to $157.2 million from $148.6 million driven by an increased demand in both the subscription broadcasting and OEM markets for our advanced products which include features such as voice control and two-way RF technologies.
Net sales in our Consumer lines (One For All® retail and private label) were 7.1% of net sales for the three months ended September 30, 2016 compared to 7.4% for the three months ended September 30, 2015. Net sales in our Consumer lines for the three months ended September 30, 2016 increased modestly by 0.8% to $12.0 million from $11.9 million in the three months ended September 30, 2015. There was stronger demand for our accessory products in Europe which was partially offset by decreased sales in the Americas.
Gross profit. Gross profit for the three months ended September 30, 2016 was $41.8 million compared to $42.8 million for the three months ended September 30, 2015. Gross profit as a percent of sales decreased to 24.7% for the three months ended September 30, 2016 compared to 26.7% for the three months ended September 30, 2015. The gross margin percentage was unfavorably impacted by price reductions granted to certain large customers, temporary manufacturing inefficiencies related to a factory transition, and the weakening of the British Pound relative to the U.S. Dollar. The impact of these unfavorable items was partially offset by the weakening of the Chinese Yuan Renminbi relative to the U.S. Dollar.
Research and development ("R&D") expenses. R&D expenses increased 19.9% to $5.0 million for the three months ended September 30, 2016 from $4.1 million for the three months ended September 30, 2015 as we continue to develop new product offerings in existing categories as well as new categories such as home security.

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Table of Contents

Selling, general and administrative ("SG&A") expenses. SG&A expenses decreased 3.1% to $28.7 million for the three months ended September 30, 2016 from $29.6 million for the three months ended September 30, 2015. The decrease was primarily due to a $4.6 million unfavorable court order issued during the three months ended September 30, 2015 related to a patent litigation lawsuit. This decrease was partially offset by increased payroll costs driven by additional headcount required to support product development efforts and additional headcount related to our August 2015 acquisition of Ecolink Intelligent Technology, Inc.
Interest income (expense), net. Net interest expense was $0.2 million for the three months ended September 30, 2016 compared to net interest expense of $16 thousand for the three months ended September 30, 2015 as a result of an increased level of borrowings on our line of credit.
Other income (expense), net. Net other income was $0.3 million for the three months ended September 30, 2016 compared to net other expense of $0.6 million for the three months ended September 30, 2015. This change was driven primarily by foreign currency gains associated with fluctuations in the Chinese Yuan Renminbi, British Pound, and Euro exchange rates versus the U.S. Dollar and decreased foreign currency losses associated with fluctuations in the Brazilian Real exchange rate versus the U.S. Dollar.
Provision for income taxes. Income tax expense was $0.4 million for the three months ended September 30, 2016 compared to $2.2 million for the three months ended September 30, 2015. Our effective tax rate was 5.1% for the three months ended September 30, 2016 compared to 25.8% for the three months ended September 30, 2015. The decrease in our effective tax rate was primarily due to the recording of $1.8 million in tax refunds during the three months ended September 30, 2016, of which $1.4 million related to tax incentives in China for 2015 and $0.4 million related to certain deductible research and development expenses incurred in China during 2015. This impact was partially offset by the recording of a $0.7 million decrease to the carrying value of certain deferred tax assets to reflect the lower statutory tax rate that will be applied as a result of tax incentives at one of our China manufacturing facilities.
Nine Months Ended September 30, 2016 versus Nine Months Ended September 30, 2015
Net sales. Net sales for the nine months ended September 30, 2016 were $490.8 million, an increase of 11.4% compared to $440.7 million for the nine months ended September 30, 2015. Net sales by our Business and Consumer lines were as follows:
 
Nine Months Ended September 30,
 
2016
 
2015
 
$ (millions)
 
% of total
 
$ (millions)
 
% of total
Business
$
456.3

 
93.0
%
 
$
405.6

 
92.0
%
Consumer
34.5

 
7.0

 
35.1

 
8.0

Total net sales
$
490.8

 
100.0
%
 
$
440.7

 
100.0
%
Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were 93.0% of net sales for the nine months ended September 30, 2016 compared to 92.0% for the nine months ended September 30, 2015. Net sales in our Business lines for the nine months ended September 30, 2016 increased by 12.5% to $456.3 million from $405.6 million driven primarily by strong demand and increased market share with North American subscription broadcasters as more customers transition from lower end platforms to higher end platforms. Partially offsetting this increase was a decrease in net sales to consumer electronics companies in Asia.
Net sales in our Consumer lines (One For All® retail and private label) were 7.0% of net sales for the nine months ended September 30, 2016 compared to 8.0% for the nine months ended September 30, 2015. Net sales in our Consumer lines for the nine months ended September 30, 2016 decreased by 1.7% to $34.5 million from $35.1 million in the nine months ended September 30, 2015. This decrease was mainly due to decreased sales in the Latin American market.
Gross profit. Gross profit for the nine months ended September 30, 2016 was $122.9 million compared to $120.5 million for the nine months ended September 30, 2015. Gross profit as a percent of sales decreased to 25.0% for the nine months ended September 30, 2016 compared to 27.3% for the nine months ended September 30, 2015. The gross margin percentage was unfavorably impacted by an increase in sales to certain large customers that yield a lower gross margin rate than our company average, pricing pressure and a decrease in royalty revenue associated with the TV and mobile device markets. The impact of these unfavorable items was partially offset by the weakening of the Chinese Yuan Renminbi relative to the U.S. Dollar.
Research and development expenses. R&D expenses increased 20.8% to $15.3 million for nine months ended September 30, 2016 from $12.7 million for the nine months ended September 30, 2015 as we continue to develop new product offerings in existing categories as well as new categories such as home security.

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Selling, general and administrative expenses. SG&A expenses increased 7.5% to $88.5 million for the nine months ended September 30, 2016 from $82.3 million for the nine months ended September 30, 2015. This increase was driven primarily by increased payroll costs as well as severance costs associated with a factory transition. Payroll costs increased as a result of additional headcount required to support product development efforts as well as additional headcount related to our August 2015 acquisition of Ecolink Intelligent Technology, Inc. Severance costs were incurred related to the transition of manufacturing activities from our higher cost factory located in southern China to our lower cost factories located in other regions within China. We expect this transition to continue over the next 12-15 months. These increases were partially offset by a lower level of patent litigation related costs as well as the weakening of the Chinese Yuan Renminbi and Brazilian Real versus the U.S. Dollar.
Interest income (expense), net. Net interest expense was $0.8 million for the nine months ended September 30, 2016 compared to net interest income of $0.2 million for the nine months ended September 30, 2015 as a result of an increased level of borrowings on our line of credit.
Other income (expense), net. Net other income was $1.7 million for the nine months ended September 30, 2016 compared to net other expense of $0.3 million for the nine months ended September 30, 2015. This change was driven primarily by foreign currency gains associated with fluctuations in the Chinese Yuan Renminbi exchange rate versus the U.S. Dollar.
Provision for income taxes. Income tax expense was $3.0 million for the nine months ended September 30, 2016 compared to $5.6 million for the nine months ended September 30, 2015. Our effective tax rate was 14.7% for the nine months ended September 30, 2016 compared to 22.1% for the nine months ended September 30, 2015. The decrease in our effective tax rate was primarily due to (a) the recording of an additional $1.3 million in tax refunds during the nine months ended September 30, 2016, of which $0.9 million related to tax incentives in China for previous tax years and $0.4 million related to certain deductible research and development expenses incurred in China during 2015; and (b) lower tax rates in certain jurisdictions within China due to local tax incentives. These impacts were partially offset by the recording of a $0.7 million decrease to the carrying value of certain deferred tax assets to reflect the lower statutory tax rate that will be applied as a result of tax incentives at one of our China manufacturing facilities.
Liquidity and Capital Resources
Sources and Uses of Cash
(In thousands)
Nine Months Ended September 30, 2016
 
Increase
(Decrease)
 
Nine Months Ended September 30, 2015
Cash provided by (used for) operating activities
$
38,681

 
$
16,151

 
$
22,530

Cash used for investing activities
(30,239
)
 
10,496

 
(40,735
)
Cash provided by (used for) financing activities
(10,083
)
 
18,906

 
(28,989
)
Effect of exchange rate changes on cash
(3,184
)
 
(2,165
)
 
(1,019
)
 
 
September 30, 2016
 
Increase
(Decrease)
 
December 31, 2015
Cash and cash equivalents
$
48,141

 
$
(4,825
)