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 June 30, 2019
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.)
 
 
15147 N. Scottsdale Road, Suite H300
Scottsdale, Arizona
 
85254-2494
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's telephone number, including area code: (480) 530-3000
__________________________________ 
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 (or for such shorter period that the registrant was required to file such reports), 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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Common Stock, par value $0.01 per share
UEIC
The NASDAQ Stock Market LLC
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,879,232 shares of Common Stock, par value $0.01 per share, of the registrant were outstanding on August 6, 2019.



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)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
49,565

 
$
53,207

Accounts receivable, net
154,633

 
144,689

Contract assets
23,639

 
25,572

Inventories, net
148,909

 
144,350

Prepaid expenses and other current assets
9,047

 
11,638

Income tax receivable
3,149

 
997

Total current assets
388,942

 
380,453

Property, plant and equipment, net
93,867

 
95,840

Goodwill
48,472

 
48,485

Intangible assets, net
22,046

 
24,370

Operating lease right-of-use assets
20,306

 

Deferred income taxes
2,237

 
1,833

Other assets
2,423

 
4,615

Total assets
$
578,293

 
$
555,596

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
113,827

 
$
107,282

Line of credit
95,000

 
101,500

Accrued compensation
36,337

 
33,965

Accrued sales discounts, rebates and royalties
8,676

 
9,574

Accrued income taxes
517

 
3,524

Other accrued liabilities
36,087

 
24,011

Total current liabilities
290,444

 
279,856

Long-term liabilities:
 
 
 
Operating lease obligations
16,403

 

Contingent consideration
4,429

 
8,435

Deferred income taxes
4,486

 
930

Income tax payable
1,647

 
1,647

Other long-term liabilities
13

 
1,768

Total liabilities
317,422

 
292,636

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; 24,042,791 and 23,932,703 shares issued on June 30, 2019 and December 31, 2018, respectively
240

 
239

Paid-in capital
281,583

 
276,103

Treasury stock, at cost, 10,163,559 and 10,116,459 shares on June 30, 2019 and December 31, 2018, respectively
(277,293
)
 
(275,889
)
Accumulated other comprehensive income (loss)
(20,381
)
 
(20,281
)
Retained earnings
276,722

 
282,788

Total stockholders' equity
260,871

 
262,960

Total liabilities and stockholders' equity
$
578,293


$
555,596

See Note 4 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 STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
193,896

 
$
162,523

 
$
378,059

 
$
327,221

Cost of sales
159,903

 
135,764

 
304,192

 
263,260

Gross profit
33,993

 
26,759

 
73,867

 
63,961

Research and development expenses
7,163

 
6,059

 
13,954

 
12,110

Selling, general and administrative expenses
30,756

 
30,570

 
62,176

 
60,817

Operating loss
(3,926
)
 
(9,870
)
 
(2,263
)
 
(8,966
)
Interest income (expense), net
(1,098
)
 
(1,279
)
 
(2,304
)
 
(2,349
)
Gain on sale of Guangzhou factory

 
36,978

 

 
36,978

Other income (expense), net
188

 
(1,082
)
 
(278
)
 
(1,669
)
Income (loss) before provision for income taxes
(4,836
)
 
24,747

 
(4,845
)
 
23,994

Provision for income taxes
225

 
2,088

 
1,221

 
1,922

Net income (loss)
$
(5,061
)
 
$
22,659

 
$
(6,066
)
 
$
22,072

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.37
)
 
$
1.61

 
$
(0.44
)
 
$
1.57

Diluted
$
(0.37
)
 
$
1.60

 
$
(0.44
)
 
$
1.55

Shares used in computing earnings (loss) per share:
 
 
 
 
 
 
 
Basic
13,863

 
14,070

 
13,845

 
14,078

Diluted
13,863

 
14,158

 
13,845

 
14,195

See Note 4 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 (LOSS) STATEMENTS
(In thousands)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(5,061
)
 
$
22,659

 
$
(6,066
)
 
$
22,072

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(1,833
)
 
(5,058
)
 
(100
)
 
(1,412
)
Comprehensive income (loss)
$
(6,894
)

$
17,601

 
$
(6,166
)
 
$
20,660

See Note 4 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 STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

The following summarizes the changes in total equity for the three and six months ended June 30, 2019:
 
Common Stock
Issued
 
Common Stock
in Treasury
 
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Totals
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance at December 31, 2018
23,933

 
$
239

 
(10,116
)
 
$
(275,889
)
 
$
276,103

 
$
(20,281
)
 
$
282,788

 
$
262,960

Net income (loss)

 

 

 

 

 

 
(1,005
)
 
(1,005
)
Currency translation adjustment

 

 

 

 

 
1,733

 

 
1,733

Shares issued for employee benefit plan and compensation
78

 
1

 

 

 
346

 

 

 
347

Purchase of treasury shares

 

 
(43
)
 
(1,215
)
 

 

 

 
(1,215
)
Shares issued to directors
8

 

 


 


 

 

 

 

Employee and director stock-based compensation

 

 

 

 
1,918

 

 

 
1,918

Performance - based common stock warrants


 


 


 


 
434

 


 


 
434

Balance at March 31, 2019
24,019

 
240

 
(10,159
)
 
(277,104
)
 
278,801

 
(18,548
)
 
281,783

 
265,172

Net income (loss)

 

 

 

 

 

 
(5,061
)
 
(5,061
)
Currency translation adjustment

 

 

 

 

 
(1,833
)
 

 
(1,833
)
Shares issued for employee benefit plan and compensation
17

 

 

 

 
273

 

 

 
273

Purchase of treasury shares

 

 
(5
)
 
(189
)
 

 

 

 
(189
)
Shares issued to directors
7

 

 


 


 

 

 

 

Employee and director stock-based compensation

 

 

 

 
2,273

 

 

 
2,273

Performance-based common stock warrants


 


 


 


 
236

 


 


 
236

Balance at June 30, 2019
24,043

 
$
240

 
(10,164
)
 
$
(277,293
)
 
$
281,583

 
$
(20,381
)
 
$
276,722

 
$
260,871

See Note 4 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.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

The following summarizes the changes in total equity for the three and six months ended June 30, 2018:
 
Common Stock
Issued
 
Common Stock
in Treasury
 
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Totals
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance at December 31, 2017
23,760

 
$
238

 
(9,703
)
 
$
(262,065
)
 
$
265,195

 
$
(16,599
)
 
$
266,780

 
$
253,549

Impact to retained earnings from adoption of ASU 2014-09
 
 
 
 
 
 
 
 
 
 
 
 
4,084

 
4,084

Balance at January 1, 2018
23,760

 
238

 
(9,703
)
 
(262,065
)
 
265,195

 
(16,599
)
 
270,864

 
257,633

Net income (loss)

 

 

 

 

 

 
(587
)
 
(587
)
Currency translation adjustment

 

 

 

 

 
3,646

 

 
3,646

Shares issued for employee benefit plan and compensation
42

 

 

 

 
336

 

 

 
336

Purchase of treasury shares

 

 
(13
)
 
(615
)
 

 

 

 
(615
)
Stock options exercised
20

 

 

 

 
439

 

 

 
439

Shares issued to directors
8

 

 


 


 

 

 

 

Employee and director stock-based compensation

 

 

 

 
2,204

 

 

 
2,204

Performance - based common stock warrants


 


 


 


 
471

 


 


 
471

Balance at March 31, 2018
23,830

 
238

 
(9,716
)
 
(262,680
)
 
268,645

 
(12,953
)
 
270,277

 
263,527

Net income (loss)

 

 

 

 

 

 
22,659

 
22,659

Currency translation adjustment

 

 

 

 

 
(5,058
)
 

 
(5,058
)
Shares issued for employee benefit plan and compensation
14

 
1

 

 

 
253

 

 

 
254

Purchase of treasury shares

 

 
(212
)
 
(6,499
)
 

 

 

 
(6,499
)
Stock options exercised
10

 

 

 

 
265

 

 

 
265

Shares issued to directors
8

 

 


 


 

 

 

 

Employee and director stock-based compensation

 

 

 

 
2,465

 

 

 
2,465

Performance-based common stock warrants


 


 


 


 
(128
)
 


 


 
(128
)
Balance at June 30, 2018
23,862

 
$
239

 
(9,928
)
 
$
(269,179
)
 
$
271,500

 
$
(18,011
)
 
$
292,936

 
$
277,485

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

7

Table of Contents

UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
2019
 
2018
Cash provided by (used for) operating activities:
 
 
 
Net income (loss)
$
(6,066
)
 
$
22,072

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
15,871

 
16,913

Provision for doubtful accounts
5

 
2

Provision for inventory write-downs
7,016

 
5,078

Gain on sale of Guangzhou factory

 
(36,978
)
Deferred income taxes
3,203

 
(557
)
Shares issued for employee benefit plan
620

 
590

Employee and director stock-based compensation
4,191

 
4,669

Performance-based common stock warrants
670

 
343

Impairment of China factory equipment

 
2,763

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and contract assets
(8,108
)
 
6,164

Inventories
(11,403
)
 
(16,061
)
Prepaid expenses and other assets
2,578

 
(2,765
)
Accounts payable and accrued liabilities
16,822

 
(7,329
)
Accrued income taxes
(5,166
)
 
1,219

Net cash provided by (used for) operating activities
20,233

 
(3,877
)
Cash provided by (used for) investing activities:
 
 
 
Proceeds from sale of Guangzhou factory

 
51,291

Acquisitions of property, plant and equipment
(10,093
)
 
(13,416
)
Refund of deposit received toward sale of Guangzhou factory

 
(5,053
)
Acquisitions of intangible assets
(1,260
)
 
(1,248
)
Net cash provided by (used for) investing activities
(11,353
)

31,574

Cash provided by (used for) financing activities:
 
 
 
Borrowings under line of credit
40,000

 
23,000

Repayments on line of credit
(46,500
)
 
(50,000
)
Proceeds from stock options exercised

 
704

Treasury stock purchased
(1,404
)
 
(7,114
)
Contingent consideration payments in connection with business combinations
(4,251
)
 
(3,858
)
Net cash provided by (used for) financing activities
(12,155
)
 
(37,268
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(367
)
 
1,665

Net increase (decrease) in cash, cash equivalents and restricted cash
(3,642
)
 
(7,906
)
Cash, cash equivalents and restricted cash at beginning of year
53,207

 
67,339

Cash, cash equivalents and restricted cash at end of period
$
49,565

 
$
59,433

 
 
 
 
Supplemental cash flow information:
 
 
 
Income taxes paid
$
3,973

 
$
4,191

Interest paid
$
1,156

 
$
2,525

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

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Table of Contents

UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(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 and certain reclassifications have been made to prior year amounts in order to conform to the current year presentation. 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 six months ended June 30, 2019 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, 2018.
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 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.
Summary of Significant Accounting Policies

Revenue Recognition
We adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," and all related amendments as of January 1, 2018.
Our performance obligations primarily arise from manufacturing and delivering universal control, sensing and automation products and AV accessories, which are sold through multiple channels, and intellectual property that is embedded in these products or licensed to others. Our contracts have an anticipated duration of less than a year. These performance obligations are satisfied at a point in time or over time, as described below. Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components. Some contracts contain early payment discounts, which are recognized as a reduction to revenue if the customer typically meets the early payment conditions, and are insignificant to net sales. Consideration may be variable based on indeterminate volumes.
Effective January 1, 2018, revenue is recognized over time when the customer simultaneously receives and consumes the benefits provided by our performance, our performance creates or enhances an asset that the customer controls, or when our performance creates an asset with no alternative use to us (custom products) and we have an enforceable right to payment for performance completed to date through a contractual commitment from the customer. An asset does not have an alternative use if we are unable to redirect the asset to another customer in the foreseeable future without significant rework. The method for measuring progress towards satisfying a performance obligation for a custom product is based on the costs incurred to date (cost-to-cost method). We believe that the costs associated with production are most closely aligned with the revenue associated with those products. Revenue recognized over time, for which we have not yet invoiced the customer, is included in contract assets in our consolidated balance sheets. Generally, we invoice the customer within 90 days of revenue recognition.
We recognize revenue at a point in time if the criteria for recognizing revenue over time are not met, the title of the goods has transferred, and we have a present right to payment.
We typically recognize revenue for the sale of tooling at a point in time, which is generally upon completion of the tooling and, if applicable, acceptance by the customer.

9

Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


A provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net revenue in the period in which we make such a determination.
We accrue for discounts and rebates based on historical experience and our expectations regarding future sales to our customers. Accruals for discounts and rebates are recorded as a reduction to sales in the same period as the related revenue. Changes in such accruals may be required if future rebates and incentives differ from our estimates.
We license our intellectual property including our patented technologies, trademarks, and database of control codes. When license fees are paid on a per-unit basis, we record license revenue when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment. When a fixed up-front license fee is received in exchange for the delivery of a particular database of infrared codes or the contract contains a minimum guarantee provision, we record revenue when delivery of the intellectual property has occurred. Tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers.
Contract assets represent revenue which has been recognized based on our accounting policies but for which the customer has not yet been invoiced and thus an account receivable has not yet been recorded.
Under prior accounting standards, prior to January 1, 2018, we recognized revenue on the sale of products when title of the goods had transferred, there was persuasive evidence of an arrangement (such as a purchase order from the customer), the sales price was fixed or determinable and collectability was reasonably assured. Revenue for term license fees were recognized on a straight-line basis over the effective term of the license when we could not reliably predict in which periods, within the term of the license, the licensee would benefit from the use of our patented inventions.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Sales allowances are recognized as reductions of gross accounts receivable to arrive at accounts receivable, net if the sales allowances are distributed in customer account credits. See Note 4 for further information concerning our sales allowances.
Revenue for the sale of tooling is recognized when the related tooling has been provided, customer acceptance documentation has been obtained, the sales price is fixed or determinable, and collectability is reasonably assured. Consideration received in advance of us satisfying the performance obligation is included in other accrued liabilities as tooling in our consolidated balance sheets.
We generate service revenue, which is paid monthly, as a result of providing customer support programs to some of our customers through our call centers. These service revenues are recognized when services are performed, persuasive evidence of an arrangement exists (such as when a signed agreement is received from the customer), the sales price is fixed or determinable, and collectability is reasonably assured.
We present all non-income government-assessed taxes (sales, use and value added taxes) collected from our customers and remitted to governmental agencies on a net basis (excluded from revenue) in our financial statements. The government-assessed taxes are recorded in other accrued liabilities until they are remitted to the government agency.

Leases

We adopted Accounting Standards Update ("ASU") 2016-02, "Leases," and all related amendments as of January 1, 2019. The impact of this new guidance on our accounting policies and consolidated financial statements is also described below. There have been no other significant changes in our accounting policies during the three and six months ended June 30, 2019 compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018.

We determine if an arrangement is a lease at inception and determine the classification of the lease, as either operating or finance, at commencement. Operating leases are included in operating lease right-of-use (“ROU”) assets, other accrued liabilities and long-term operating lease liabilities on our consolidated balance sheets. We presently do not have any finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date, including the lease term, in

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


determining the present value of lease payments. Operating lease ROU assets also factor in any lease payments made, initial direct costs and lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Some of our leases include options to extend with a range of three to five years with up to two extensions at the then current market rate. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Leases with an initial term of twelve months or less are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. If applicable, we combine lease and non-lease components, which primarily relate to ancillary expenses associated with real estate leases such as common area maintenance charges and management fees.
Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 (with amendments issued in 2018), which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance also requires 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. We adopted ASU 2016-02 on January 1, 2019 using the modified retrospective optional transition method. Thus, the standard was applied starting January 1, 2019 and prior periods were not restated.
We applied the package of practical expedients permitted under the transition guidance. As a result, we did not reassess the identification, classification and initial direct costs of leases commencing before the effective date. We also applied the practical expedient to not separate lease and non-lease components to all new leases as well as leases commencing before the effective date.
Upon adoption, ASU 2016-02 resulted in the recognition of lease ROU assets, accrued liabilities and long-term liabilities related to operating leases of $20.7 million, $3.3 million and $17.0 million, respectively. In addition, assets and liabilities totaling $2.5 million and $2.3 million, respectively, were reclassified into the opening ROU asset balance. The adoption of ASU 2016-02 did not result in any cumulative-effect adjustment to the opening balance of retained earnings and did not have any impact on our results of operations, cash flows or debt covenants.
See Note 5 for additional information.
Other Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, "Improvements to Non-employee Share-Based Payment Accounting." This guidance expands the scope of Topic 718, "Compensation - Stock Compensation" to include share-based payment transactions for acquiring goods and services from non-employees, but excludes awards granted in conjunction with selling goods or services to a customer as part of a contract accounted for under ASC 606, "Revenue from Contracts with Customers." The adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which amends ASC 350-40, "Intangibles - Goodwill and Other - Internal-Use Software." The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and requires the capitalized implementation costs to be expensed over the term of the hosting arrangement. The accounting for the service element of a hosting arrangement that is a service contract is not affected. ASU 2018-15 is effective for fiscal periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-15, effective January 1, 2019, did not have a material impact on our consolidated financial statements.
Recent Accounting Updates Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This guidance updates existing guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This guidance simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Instead, if the carrying

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal periods beginning after December 31, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2017-04 to have a material impact on our consolidated financial statements.

Note 2 — Cash and Cash Equivalents
Cash and Cash Equivalents
Cash and cash equivalents were held in the following geographic regions:
(In thousands)
June 30, 2019
 
December 31, 2018
United States
$
6,996

 
$
1,156

People's Republic of China ("PRC")
12,967

 
20,885

Asia (excluding the PRC)
10,264

 
2,398

Europe
9,166

 
19,907

South America
10,172

 
8,861

Total cash and cash equivalents
$
49,565

 
$
53,207


Note 3 — Accounts Receivable, Net and Revenue Concentrations
Accounts receivable, net were as follows:
(In thousands)
June 30, 2019
 
December 31, 2018
Trade receivables, gross
$
150,779

 
$
133,774

Allowance for doubtful accounts
(1,122
)
 
(1,121
)
Allowance for sales returns
(582
)
 
(731
)
Net trade receivables
149,075

 
131,922

Other
5,558

 
12,767

Accounts receivable, net
$
154,633

 
$
144,689

Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts were as follows:
(In thousands)
Six Months Ended June 30,
2019
 
2018
Balance at beginning of period
$
1,121

 
$
1,064

Additions to costs and expenses
5

 
2

(Write-offs)/Foreign exchange effects
(4
)
 
(58
)
Balance at end of period
$
1,122

 
$
1,008


Significant Customers
Net sales to the following customers totaled more than 10% of our net sales:
 
Three Months Ended June 30,
 
 
2019
 
2018
 
 
$ (thousands)
 
% of Net Sales
 
$ (thousands)
 
% of Net Sales
 
Comcast Corporation
$
31,393

 
16.2
%
 
$
29,542

 
18.2
%
 


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


 
Six Months Ended June 30,
 
 
2019
 
2018
 
 
$ (thousands)
 
% of Net Sales
 
$ (thousands)
 
% of Net Sales
 
Comcast Corporation
$
60,639

 
16.0
%
 
$
67,517

 
20.6
%
 
Dish Network L.L.C.
$
38,851

 
10.3
%
 

(1) 

(1) 
(1) Net sales to this customer did not total more than 10% of our total net sales in the prior period.

Trade receivables associated with these significant customers that totaled more than 10% of our accounts receivable, net were as follows:
 
June 30, 2019
 
December 31, 2018
 
 
$ (thousands)
 
% of Accounts Receivable, Net
 
$ (thousands)
 
% of Accounts Receivable, Net
 
Dish Network L.L.C.
$
16,588

 
10.7
%
 

(1) 
(1) 
(1) Trade receivables associated with this customer did not total more than 10% of our accounts receivable, net at December 31, 2018.

Revenue Recognition Pattern
The pattern of revenue recognition was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Goods and services transferred at a point in time
$
99,632

 
$
83,661

 
$
201,776

 
$
177,600

Goods and services transferred over time
94,264

 
78,862

 
176,283

 
149,621

Net sales
$
193,896

 
$
162,523

 
$
378,059

 
$
327,221


Note 4 — Inventories, Net and Significant Suppliers
Inventories, net were as follows:
(In thousands)
June 30, 2019
 
December 31, 2018
Raw materials
$
69,991

 
$
68,834

Components
20,736

 
25,071

Work in process
5,336

 
5,577

Finished goods
60,265

 
50,006

Reserve for excess and obsolete inventory
(7,419
)
 
(5,138
)
Inventories, net
$
148,909

 
$
144,350

 

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Reserve for Excess and Obsolete Inventory
Changes in the reserve for excess and obsolete inventory were as follows:
(In thousands)
Six Months Ended June 30,
2019
 
2018
Balance at beginning of period
$
5,138

 
$
4,288

Additions charged to costs and expenses (1)
3,978

 
4,564

Sell through (2)
(643
)
 
(680
)
(Write-offs)/Foreign exchange effects
(1,054
)
 
(635
)
Balance at end of period
$
7,419

 
$
7,537


(1)
The additions charged to costs and expenses do not include inventory directly written-off that was scrapped during production totaling $3.0 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively. These amounts are production waste and manufacturing inefficiencies 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.
Significant Suppliers
We purchase integrated circuits, components and finished goods from multiple sources. No suppliers totaled more than 10% of our total inventory purchases for the three and six months ended June 30, 2019 and 2018.

Related Party Supplier
During the six months ended June 30, 2018, we purchased certain printed circuit board assemblies from a related party supplier. The supplier was considered a related party for financial reporting purposes because our Senior Vice President of Strategic Operations owned 40% of this supplier. In the second quarter of 2018, our Senior Vice President sold his interest in this supplier, and thus this supplier is no longer considered a related party.
Total inventory purchases made from this supplier while it was a related party were $1.1 million during the six months ended June 30, 2018.

Note 5 — Leases

We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world. At June 30, 2019, our operating leases had remaining lease terms of up to 42 years.
Lease balances within our consolidated balance sheet were as follows:
(In thousands)
June 30, 2019
Assets:
 
Operating lease right-of-use assets
$
20,306

Liabilities:
 
Other accrued liabilities
$
4,158

Long-term operating lease obligations
16,403

Total lease liabilities
$
20,561

Operating lease expense, including short-term and variable lease costs, which are insignificant to the total, and operating lease cash flows and supplemental cash flow information were as follows:

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


(In thousands)
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Cost of sales
$
612

$
1,204

Selling, general and administrative expenses
1,156

2,288

Total operating lease expense
$
1,768

$
3,492

Operating cash outflows from operating leases
$
1,579

$
3,094

Operating lease right-of-use assets obtained in exchange for lease obligations
$

$
1,524


The weighted average remaining lease term and the weighted average discount rate were as follows:
 
June 30, 2019
Weighted average lease term (in years)
9.10

Weighted average discount rate
4.76
%


The following table reconciles the undiscounted cash flows for each of the first five years and thereafter to the operating lease liabilities recognized in our consolidated balance sheet at June 30, 2019. The reconciliation excludes short-term leases that are not recorded on the balance sheet.
(In thousands)
June 30, 2019
2019 (remaining 6 months)
$
2,413

2020
5,111

2021
5,266

2022
4,429

2023
2,358

Thereafter
3,396

Total lease payments
22,973

Less: imputed interest
(2,412
)
Total lease liabilities
$
20,561

As of June 30, 2019, we have two operating leases that have not yet commenced with the total initial lease liability of approximately $2.6 million with three and five-year terms, which are not reflected within the maturity schedule above.
Note 6 — Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
(In thousands)
 
Balance at December 31, 2018
$
48,485

Foreign exchange effects
(13
)
Balance at June 30, 2019
$
48,472

 

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Intangible Assets, Net
The components of intangible assets, net were as follows:
 
June 30, 2019
 
December 31, 2018
(In thousands)
Gross (1)
 
Accumulated
Amortization (1)
 
Net
 
Gross (1)
 
Accumulated
Amortization (1)
 
Net
Distribution rights
$
326

 
$
(199
)
 
$
127

 
$
329

 
$
(188
)
 
$
141

Patents
15,254

 
(6,041
)
 
9,213

 
14,560

 
(5,704
)
 
8,856

Trademarks and trade names
2,786

 
(2,053
)
 
733

 
2,786

 
(1,900
)
 
886

Developed and core technology
12,560

 
(9,095
)
 
3,465

 
12,560

 
(8,087
)
 
4,473

Capitalized software development costs
288

 

 
288

 
155

 

 
155

Customer relationships
32,684

 
(24,464
)
 
8,220

 
32,534

 
(22,675
)
 
9,859

Total intangible assets, net
$
63,898

 
$
(41,852
)
 
$
22,046


$
62,924

 
$
(38,554
)
 
$
24,370

 
(1) 
This table excludes the gross value of fully amortized intangible assets totaling $7.2 million and $7.1 million at June 30, 2019 and December 31, 2018, 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 statement of operations caption was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Cost of sales
$

 
$
18

 
$

 
$
73

Selling, general and administrative expenses
1,800

 
1,758

 
3,584

 
3,505

Total amortization expense
$
1,800

 
$
1,776

 
$
3,584

 
$
3,578

 
Estimated future annual amortization expense related to our intangible assets at June 30, 2019, was as follows:
(In thousands)
 
2019 (remaining 6 months)
$
3,635

2020
6,137

2021
2,575

2022
2,354

2023
2,209

Thereafter
5,136

Total
$
22,046


Note 7 — Line of Credit

Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") provides for a $130.0 million revolving line of credit ("Credit Line") through June 30, 2019 and a $125.0 million Credit Line thereafter and through its expiration date on November 1, 2020. The Credit Line 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 $2.7 million at June 30, 2019.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


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 Second 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 Second Amended Credit 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 Second Amended Credit Agreement. The interest rate in effect at June 30, 2019 was 4.16%. There are no commitment fees or unused line fees under the Second Amended Credit Agreement.
The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. As of June 30, 2019, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.
At June 30, 2019, we had $95.0 million outstanding under the Credit Line. Our total interest expense on borrowings was $1.2 million and $1.4 million during the three months ended June 30, 2019 and 2018, respectively. Our total interest expense on borrowings was $2.5 million and $2.5 million during the six months ended June 30, 2019 and 2018, respectively.
Note 8 — 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 rate and multiplying it by the year-to-date pre-tax book income.

We recorded income tax expense of $0.2 million and $2.1 million for the three months ended June 30, 2019 and 2018, respectively. We recorded income tax expense of $1.2 million and $1.9 million for the six months ended June 30, 2019 and 2018, respectively. Income tax expense for the six months ended June 30, 2019 decreased primarily due to the mix of pre-tax income among jurisdictions, including losses not benefited as a result of a valuation allowance and the net effect of remeasurement of deferred taxes to recognize the High Technology Exemption ("HTE") approved for our Yangzhou factory located in northern China. For the six months ended June 30, 2018, the tax expense of $1.9 million is attributable to the gain on sale of our Guangzhou factory located in southern China.

At December 31, 2018, we assessed the realizability of the Company's deferred tax assets by considering whether it is "more likely than not" some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. At December 31, 2018, we had a three year cumulative operating loss for our U.S. operations and accordingly, provided a full valuation allowance on our U.S. and state deferred tax assets. During three months ended June 30, 2019, there has been no change to the Company's valuation allowance position.
At June 30, 2019, we had gross unrecognized tax benefits of $4.7 million, including interest and penalties, of which approximately $4.4 million of this amount, if not for the state Research and Experimentation income tax credit valuation allowance, 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 amounts of unrecognized tax benefits will significantly increase 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 $0.2 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 $0.5 million as of June 30, 2019 and $0.5 million at December 31, 2018 are included in the unrecognized tax benefits.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Note 9 — Accrued Compensation
The components of accrued compensation were as follows:
(In thousands)
June 30, 2019
 
December 31, 2018
Accrued social insurance (1)
$
16,709

 
$
16,735

Accrued salary/wages
8,641

 
8,783

Accrued vacation/holiday
2,971

 
2,954

Accrued bonus (2)
5,208

 
2,361

Accrued commission
815

 
1,432

Other accrued compensation
1,993

 
1,700

Total accrued compensation
$
36,337

 
$
33,965

 
(1) 
PRC employers are required by law to remit the applicable social insurance payments to their local government. Social insurance is comprised of various components such as pension, medical insurance, job industry 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 June 30, 2019 and December 31, 2018.
(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 $0.6 million and $0.4 million at June 30, 2019 and December 31, 2018, respectively.
Note 10 — Other Accrued Liabilities
The components of other accrued liabilities were as follows:
(In thousands)
June 30, 2019
 
December 31, 2018
Duties
$
4,258

 
$
4,865

Freight and handling fees
9,758

 
3,217

Operating lease obligations
4,158

 

Professional fees
1,157

 
1,930

Sales taxes and VAT
364

 
1,050

Short-term contingent consideration
4,951

 
4,190

Tooling (1)
2,100

 
1,770

Other
9,341

 
6,989

Total other accrued liabilities
$
36,087

 
$
24,011

 
(1) 
The tooling accrual balance relates to unearned revenue for tooling that will be sold to customers. Revenue recognized for the sale of tooling during the three and six months ended June 30, 2019 and 2018 was insignificant in relation to our net sales.


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Note 11 — Commitments and Contingencies
Product Warranties
Changes in the liability for product warranty claim costs were as follows:
(In thousands)
Six Months Ended June 30,
2019
 
2018
Balance at beginning of period
$
276

 
$
339

Accruals for warranties issued during the period

 
769

Settlements (in cash or in kind) during the period

 
(100
)
Balance at end of period
$
276

 
$
1,008

Restructuring Activities and Sale of Guangzhou Factory
In the first quarter of 2016, we implemented a plan to transition manufacturing activities from our southern-most China factory, located in the city of Guangzhou in the Guangdong province, to our other China factories. All operations ceased in our Guangzhou factory in the third quarter of 2017 and the transition to the other China factories was completed by the end of 2017.

On September 26, 2016, we entered into an agreement to sell our Guangzhou manufacturing facility for RMB 320 million. In accordance with the terms of the agreement, the buyer deposited 10% of the purchase price into an escrow account upon the execution of the agreement. In April 2018, we and the buyer mutually agreed to terminate the sale. The mutually agreed termination took effect immediately with no incremental penalty or costs to either party. In connection with this termination, the deposit was returned to the buyer.

On April 23, 2018, we entered into a new agreement to sell our Guangzhou manufacturing facility to a second buyer for RMB 339 million (approximately $51.4 million based on exchange rates in effect at the time of closing). On April 26, 2018, the second buyer paid to us a deposit of RMB 34 million (approximately $5.1 million based on exchange rates in effect at the time of closing), which under the terms of the agreement was nonrefundable. Upon receipt by the Governmental Agency of the second buyer’s application of approval of transfer, the second buyer was to pay to us RMB 237 million (approximately $35.8 million based on exchange rates in effect at the time of closing). Additionally, within two days after the second payment was made to us, the second buyer was to deposit the remaining consideration of RMB 68 million (approximately $10.3 million based on exchange rates in effect at the time of closing) into escrow, which was to be released to us upon the closing of the sale. Per the terms of the agreement, the sale was to be completed no later than June 30, 2018. On June 26, 2018, all conditions to closing were satisfied and the sale was completed, resulting in a pretax gain of $37.0 million ($32.1 million, net of income taxes).
Litigation
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 supplied to 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 product 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 and argued before the appellate court and we are awaiting the appellate court’s ruling. In addition, on or about February 9, 2016, Ruwido filed a writ of summons for proceeding on the merits with respect to the asserted patents. UEBV and Telenet have replied, denying all of Ruwido's allegations, and in June 2017, a hearing was held before the trial court. During this hearing, Ruwido sought to have a second product which we are currently selling to Telenet included in this case. In September 2017, the Court ruled in our favor that our current product cannot be made part of this case. The Court also refused to rule on whether the original product (which we are no longer selling) infringes the Ruwido patent, instead deciding to wait until the European Patent Office (the "EPO") has ruled on our Opposition (see below). Finally, the Court ruled that our original product (which we are no longer selling) infringes certain of Ruwido’s design rights, but stayed any decision of compensation and/or damages until all aspects of the case have been decided. We have filed an appeal as to the Court’s ruling of infringement. Subsequent to the Court's ruling that a second product could not be added to the first case on the merits, Ruwido filed a separate case on the merits with respect to this second product, claiming that it too infringes the same patent at issue in the first suit. We have denied these claims. According to the Court’s trial schedule, briefs from both parties were due during the second half of 2018 and early 2019 with a trial date set for January 2019. This trial date has since been postponed pending a request to submit additional pleadings

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


which the Court is expected to rule upon prior to the end of August 2019. At that time, the Court is expected to reschedule the trial to sometime in late 2019. In September 2015, UEBV filed an Opposition with the EPO seeking to invalidate the one utility patent asserted against UEBV and Telenet by Ruwido. The hearing on this opposition was held in July 2017. During this hearing the panel requested additional information. We have assembled this additional information and the final hearing was scheduled for January 29, 2019. The EPO held this hearing on January 29 and 30, 2019 and revoked Ruwido's patent as originally filed. The EPO, however, maintained the patent in an amended form with a much narrower claim. Once the EPO has issued its written opinion (which it has not yet done so), the parties will have the right to appeal the EPO's decision. At this time, neither have done so. On September 5, 2017, Ruwido and FMH filed a patent infringement case on the merits against UEBV and Telenet in the Netherlands alleging the same claims of infringement as in the Belgium Courts (see above). We have denied these claims and filed a counterclaim seeking to invalidate the Ruwido patent. A November 30, 2018 hearing date was set by the Court but it deferred its decision until the decision from the EPO has become final. Subsequently, the parties requested they each be allowed to submit additional pleadings. The Court is expected to rule on this request no later than the end of August 2019.

On September 5, 2018, we filed a lawsuit against Roku, Inc. (“Roku”) in the United States District Court, Central District of California (Universal Electronics Inc. v. Roku, Inc.) alleging that Roku is willfully infringing nine of our patents that are in four patent families related to remote control set-up and touchscreen remotes. On December 5, 2018, we amended our complaint to add additional details supporting our infringement and willfulness allegations. We have alleged that this complaint relates to multiple Roku streaming players and components therefore and certain universal control devices, including but not limited to the Roku App, Roku TV, Roku Express, Roku Streaming Stick, Roku Ultra, Roku Premiere, Roku 4, Roku 3, Roku 2, Roku Enhanced Remote and any other Roku product that provides for the remote control of an external device such as a TV, audiovisual receiver, sound bar or Roku TV Wireless Speakers. Roku has answered our complaint with a general denial. In December 2018, the Court set a trial date of June 16, 2020. On August 6, 2019, the Court heard arguments at its "Markman" hearing and we are expecting the Court to issue its final "Markman" order in the next few weeks. Finally, we are continuing with discovery and general motion practice.
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 consolidated 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.
Note 12 — 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. On October 30, 2018, our Board approved an adjustment to the amount of common stock that we could purchase under our existing repurchase plan to an amount not to exceed $5.0 million of our common stock. As of June 30, 2019, we had $3.9 million of authorized repurchases remaining under the Board's authorizations. We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.


20

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Repurchased shares of our common stock were as follows:
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
Shares repurchased
48

 
225

Cost of shares repurchased
$
1,404

 
$
7,114

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.
Note 13 — Foreign Operations
Foreign Operations
Our net sales to external customers by geographic area were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019

2018
 
2019
 
2018
United States
$
106,547

 
$
79,294

 
$
205,483

 
$
159,045

Asia (excluding PRC)
25,468

 
27,467

 
49,544

 
54,867

Europe
22,823

 
20,330

 
46,122

 
39,460

People's Republic of China
20,453

 
20,627

 
42,761

 
40,744

Latin America
10,119

 
6,636

 
17,906

 
16,666

Other
8,486

 
8,169

 
16,243

 
16,439

Total net sales
$
193,896

 
$
162,523

 
$
378,059

 
$
327,221

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)
June 30, 2019
 
December 31, 2018
United States
$
12,972

 
$
14,504

People's Republic of China
69,412

 
79,382

All other countries
13,906

 
6,569

Total long-lived tangible assets
$
96,290

 
$
100,455


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Note 14 — Stock-Based Compensation
Stock-based compensation expense for each employee and director is presented in the same statement of operations caption as their cash compensation. Stock-based compensation expense by statement of operations caption and the related income tax benefit were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Cost of sales
$
37

 
$
23

 
$
65

 
$
40

Research and development expenses
274

 
201

 
494

 
356

Selling, general and administrative expenses:
 
 
 
 
 
 
 
Employees
1,715

 
1,737

 
3,139

 
3,265

Outside directors
247

 
504

 
493

 
1,008

Total employee and director stock-based compensation expense
$
2,273


$
2,465


$
4,191


$
4,669

 
 
 
 
 
 
 
 
Income tax benefit
$
477

 
$
519

 
$
876

 
$
982


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, 2018
597

 
$
44.27

 
 
 
 
Granted
150

 
27.07

 
 
 
 
Exercised

 

 
 
 
$

Forfeited/canceled/expired

 

 
 
 
 
Outstanding at June 30, 2019 (1)
747

 
$
40.80

 
4.20
 
$
5,435

Vested and expected to vest at June 30, 2019(1)
747

 
$
40.80

 
4.20
 
$
5,435

Exercisable at June 30, 2019(1)
503

 
$
43.33

 
3.26
 
$
3,331

(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 second quarter of 2019 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 June 30, 2019. 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 June 30,
Six Months Ended June 30,
 
2019
 
2018
2019
 
2018
Weighted average fair value of grants
$

 
$

$
10.28

 
$
14.26

Risk-free interest rate
%
 
%
2.49
%
 
2.51
%
Expected volatility
%
 
%
41.64
%
 
33.09
%
Expected life in years
0.00

 
0.00

4.54

 
4.53

As of June 30, 2019, we expect to recognize $2.6 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 2.0 years.

22

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(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, 2018
204

 
$
49.23

Granted
228

 
28.51

Vested
(94
)
 
48.07

Forfeited
(13
)
 
36.86

Non-vested at June 30, 2019
325

 
$
35.52

As of June 30, 2019, we expect to recognize $9.5 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of 2.1 years.  
Note 15 — Performance-Based Common Stock Warrants
On March 9, 2016, we issued common stock purchase warrants to 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 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 warrants. 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. At June 30, 2019, 175,000 vested warrants were outstanding. To fully vest in the rights to purchase all of the remaining unearned 475,000 underlying shares, Comcast and its affiliates must purchase an aggregate of $680 million in goods and services from us during the period January 1, 2018 through December 31, 2021.
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. Through June 30, 2019, none of the warrants had vested for the two-year period beginning January 1, 2018.

23

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


The assumptions we utilized in the Black Scholes option pricing model and the resulting weighted average fair value of the warrants were the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Fair value
$10.61
 
$6.92
 
$10.61
 
$6.92
Price of Universal Electronics Inc. common stock
$40.69
 
$32.88
 
$40.69
 
$32.88
Risk-free interest rate
1.72%
 
2.71%
 
1.72%
 
2.71%
Expected volatility
46.32%
 
40.20%
 
46.32%
 
40.20%
Expected life in years
3.50
 
4.50
 
3.50
 
4.50

The impact to net sales recorded in connection with the warrants and the related income tax benefit were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019

2018
 
2019
 
2018
Reduction/(increase) to net sales
$
236

 
$
(128
)
 
$
670

 
$
343

Income tax benefit/(expense)
59

 
(32
)
 
167

 
86


We estimate the number of warrants that will vest based on projected future purchases that will be made by Comcast and its affiliates. These estimates may increase or decrease based on actual future purchases. The aggregate unrecognized estimated fair value of unvested warrants at June 30, 2019 was $4.2 million.

Note 16 — Other Income (Expense), Net
Other income (expense), net consisted of the following: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Net gain (loss) on foreign currency exchange contracts (1)
$
(105
)
 
$
1,865

 
$
(376
)
 
$
534

Net gain (loss) on foreign currency exchange transactions
158

 
(2,965
)
 
27

 
(2,240
)
Other income (expense)
135

 
18

 
71

 
37

Other income (expense), net
$
188

 
$
(1,082
)

$
(278
)

$
(1,669
)

(1) 
This represents the gains (losses) incurred on foreign currency hedging derivatives (see Note 18 for further details).


24

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Note 17 — Earnings (Loss) Per Share
Earnings (loss) per share was calculated as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per-share amounts)
2019
 
2018
 
2019
 
2018
BASIC
 
 
 
 
 
 
 
Net income (loss)
$
(5,061
)
 
$
22,659

 
$
(6,066
)
 
$
22,072

Weighted-average common shares outstanding
13,863

 
14,070

 
13,845

 
14,078

Basic earnings (loss) per share
$
(0.37
)
 
$
1.61

 
$
(0.44
)
 
$
1.57

 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
Net income (loss)
$
(5,061
)
 
$
22,659

 
$
(6,066
)
 
$
22,072

Weighted-average common shares outstanding for basic
13,863

 
14,070

 
13,845

 
14,078

Dilutive effect of stock options, restricted stock and common stock warrants

 
88

 

 
117

Weighted-average common shares outstanding on a diluted basis
13,863

 
14,158

 
13,845

 
14,195

Diluted earnings (loss) per share
$
(0.37
)
 
$
1.60

 
$
(0.44
)
 
$
1.55

The following number of stock options, shares of restricted stock and common stock warrants were excluded from the computation of diluted earnings per common share as their inclusion would have been anti-dilutive:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Stock options
382

 
382

 
462

 
357

Restricted stock awards
31

 
204

 
129

 
172

Performance-based warrants
175

 

 
175

 


Note 18 — Derivatives
The following table sets forth the total net fair value of derivatives:  
 
 
June 30, 2019
 
December 31, 2018
 
 
Fair Value Measurement Using
 
Total Balance
 
Fair Value Measurement Using
 
Total Balance
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
Foreign currency exchange contracts
 
$

 
$
(37
)
 
$

 
$
(37
)
 
$

 
$
(249
)
 
$

 
$
(249
)
We held foreign currency exchange contracts, which resulted in a net pre-tax loss of $0.1 million and a net pre-tax gain of $1.9 million for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, we had a net pre-tax loss of $0.4 million and a net pre-tax gain of $0.5 million, respectively (see Note 16).

25

Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)


Details of foreign currency exchange contracts held were as follows:
Date Held
 
Currency
 
Position Held
 
Notional Value
(in millions)
 
Forward Rate
 
Unrealized Gain/(Loss) Recorded at Balance Sheet
Date
(in thousands)(1)
 
Settlement Date
June 30, 2019
 
USD/Brazilian Real
 
USD
 
$
2.0

 
3.8677

 
$
(19
)
 
July 26, 2019
June 30, 2019
 
USD/Euro
 
USD
 
$
29.0

 
1.1394

 
$
(17
)
 
July 26, 2019
December 31, 2018
 
USD/Euro
 
USD
 
$
20.0

 
1.1421

 
$
(97
)
 
January 25, 2019
December 31, 2018
 
USD/Chinese Yuan Renminbi
 
USD
 
$
27.0

 
6.8969

 
$
(116
)
 
January 25, 2019
December 31, 2018