UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2021
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
_______________________________________
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||||||||
(Address of principal executive offices and zip code)
(480 ) 530-3000
(Registrant's telephone number, including area code)
_____________________
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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 ☒ 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 ☒ 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.
| Large accelerated filer | ☐ | ☒ | ||||||||||||||||||||||||
| 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 Exchange Act).Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,764,520 shares of Common Stock, par value $0.01 per share, of the registrant were outstanding on May 4, 2021.
UNIVERSAL ELECTRONICS INC.
INDEX
Page Number | |||||
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
(Unaudited)
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Contract assets | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income tax receivable | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Line of credit | |||||||||||
| Accrued compensation | |||||||||||
| Accrued sales discounts, rebates and royalties | |||||||||||
| Accrued income taxes | |||||||||||
| Other accrued liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Operating lease obligations | |||||||||||
| Contingent consideration | |||||||||||
| Deferred income taxes | |||||||||||
| Income tax payable | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Paid-in capital | |||||||||||
Treasury stock, at cost, | ( | ( | |||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross profit | |||||||||||
| Research and development expenses | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Operating income | |||||||||||
| Interest income (expense), net | ( | ( | |||||||||
| Other income (expense), net | ( | ||||||||||
| Income before provision for income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Shares used in computing earnings per share: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED COMPREHENSIVE INCOME (LOSS) STATEMENTS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss): | |||||||||||
| Change in foreign currency translation adjustment | ( | ( | |||||||||
| Comprehensive income (loss) | $ | $ | ( | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
The following summarizes the changes in total equity for the three months ended March 31, 2021:
| 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, 2020 | $ | ( | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for employee benefit plan and compensation | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to directors | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Employee and director stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||
| Performance-based common stock warrants | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | ( | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
The following summarizes the changes in total equity for the three months ended March 31, 2020:
| 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, 2019 | $ | ( | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for employee benefit plan and compensation | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to directors | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Employee and director stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||
| Performance-based common stock warrants | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | ( | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used for operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for credit losses | |||||||||||
| Deferred income taxes | |||||||||||
| Shares issued for employee benefit plan | |||||||||||
| Employee and director stock-based compensation | |||||||||||
| Performance-based common stock warrants | |||||||||||
| Loss on sale of Ohio call center | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable and contract assets | ( | ||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Accrued income taxes | ( | ( | |||||||||
| Net cash used for operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions of property, plant and equipment | ( | ( | |||||||||
| Acquisitions of intangible assets | ( | ( | |||||||||
| Payment on sale of Ohio call center | ( | ||||||||||
| Net cash used for investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under line of credit | |||||||||||
| Repayments on line of credit | ( | ( | |||||||||
| Proceeds from stock options exercised | |||||||||||
| Treasury stock purchased | ( | ( | |||||||||
| Contingent consideration payments in connection with business combinations | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Income taxes paid | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Note 1 — Basis of Presentation
Our results of operations for the three months ended March 31, 2021 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, 2020.
Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates 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; allowance for credit losses; inventory valuation; impairment of long-lived assets, intangible assets and goodwill; business combinations; income taxes and related valuation allowances; stock-based compensation expense and performance-based common stock warrants.
The coronavirus ("COVID-19") pandemic and the mitigation efforts by governments to attempt to control its spread have created uncertainties and disruptions in the economic and financial markets. While we are not currently aware of events or circumstances that would require an update to our estimates, judgments or adjustments to the carrying values of our assets or liabilities, these estimates may change as developments occur and we obtain additional information. These future developments are highly uncertain and the outcomes are unpredictable. Actual results may differ from those estimates, and such differences may be material to the financial statements.
Summary of Significant Accounting policies
With the exception of the following policy, our significant accounting policies are unchanged from those disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Revenue Recognition
We license our symbolic intellectual property which includes our patented technologies and database of control codes. Revenue is recognized for these licensing arrangements on an over-time basis. We record license revenue for per-unit based licenses when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment. We record per-unit-based licenses with minimum guarantees ratably over the license period to which the minimum guarantee relates and any per-unit sales in excess of the minimum guarantee in the period in which the sale occurs. We record licenses with fixed consideration ratably over the license period. Tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers.
8
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes", which, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under previous guidance, an entity recognized the effects of the enacted tax law change on the effective income tax rate in the period that included the effective date of the tax law. Our adoption on January 1, 2021 did not have a material impact on our consolidated statement of financial position, results of operations and cash flows.
Recent Accounting Updates Not Yet Effective
In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting" and in January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform". This guidance is intended to provide temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The amendments in these ASUs are elective and are effective upon issuance for all entities through December 31, 2022. These amendments are not expected to have a material impact on our consolidated statement of financial position, results of operations and cash flows.
Note 2 — Cash and Cash Equivalents
Cash and cash equivalents were held in the following geographic regions:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| North America | $ | $ | |||||||||
| People's Republic of China ("PRC") | |||||||||||
| Asia (excluding the PRC) | |||||||||||
| Europe | |||||||||||
| South America | |||||||||||
Total cash and cash equivalents | $ | $ | |||||||||
Note 3 — Revenue and Accounts Receivable, Net
Revenue Details
The pattern of revenue recognition was as follows:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Goods and services transferred at a point in time | $ | $ | |||||||||
| Goods and services transferred over time | |||||||||||
| Net sales | $ | $ | |||||||||
9
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Our net sales to external customers by geographic area were as follows:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| United States | $ | $ | |||||||||
| Asia (excluding PRC) | |||||||||||
| Europe | |||||||||||
| People's Republic of China | |||||||||||
| Latin America | |||||||||||
| Other | |||||||||||
| Total net sales | $ | $ | |||||||||
Specific identification of the customer billing location was the basis used for attributing revenues from external customers to geographic areas.
Net sales to the following customers totaled more than 10% of our net sales:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| $ (thousands) | % of Net Sales | $ (thousands) | % of Net Sales | |||||||||||||||||||||||
| Comcast Corporation | $ | % | $ | % | ||||||||||||||||||||||
| Daikin Industries Ltd. | $ | % | (1) | (1) | ||||||||||||||||||||||
(1)Sales associated with this customer did not total more than 10% of our net sales for the indicated period.
Accounts Receivable, Net
Accounts receivable, net were as follows:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Trade receivables, gross | $ | $ | |||||||||
| Allowance for credit losses | ( | ( | |||||||||
| Allowance for sales returns | ( | ( | |||||||||
| Trade receivables, net | |||||||||||
| Other | |||||||||||
| Accounts receivable, net | $ | $ | |||||||||
Allowance for Credit Losses
Changes in the allowance for credit losses were as follows:
| (In thousands) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Additions to costs and expenses | |||||||||||
| Write-offs/Foreign exchange effects | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
10
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Trade receivables associated with this significant customer that totaled more than 10% of our accounts receivable, net were as follows:
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| $ (thousands) | % of Accounts Receivable, Net | $ (thousands) | % of Accounts Receivable, Net | |||||||||||||||||||||||
| Comcast Corporation | $ | % | $ | % | ||||||||||||||||||||||
Note 4 — Inventories and Significant Supplier
Inventories were as follows:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Raw materials | $ | $ | |||||||||
| Components | |||||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Inventories | $ | $ | |||||||||
Significant Supplier
We purchase integrated circuits, components and finished goods from multiple sources. Purchases from the following supplier totaled more than 10% of our total inventory purchases:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| $ (thousands) | % of Total Inventory Purchases | $ (thousands) | % of Total Inventory Purchases | |||||||||||||||||||||||
| Qorvo International Pte Ltd. | $ | % | $ | % | ||||||||||||||||||||||
Note 5 — Long-lived Tangible Assets
Long-lived tangible assets by geographic area, which include property, plant, and equipment, net and operating lease right-of-use assets, were as follows:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| United States | $ | $ | |||||||||
| People's Republic of China | |||||||||||
| Mexico | |||||||||||
| All other countries | |||||||||||
| Total long-lived tangible assets | $ | $ | |||||||||
Property, plant, and equipment are shown net of accumulated depreciation of $157.3 million and $154.2 million at March 31, 2021 and December 31, 2020, respectively.
11
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Note 6 — Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
| (In thousands) | |||||
Balance at December 31, 2020 | $ | ||||
| Foreign exchange effects | ( | ||||
Balance at March 31, 2021 | $ | ||||
Intangible Assets, Net
The components of intangible assets, net were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (In thousands) | Gross (1) | Accumulated Amortization (1) | Net | Gross (1) | Accumulated Amortization (1) | Net | |||||||||||||||||||||||||||||
| Capitalized software development costs | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Customer relationships | ( | ( | |||||||||||||||||||||||||||||||||
| Developed and core technology | ( | ( | |||||||||||||||||||||||||||||||||
| Distribution rights | ( | ( | |||||||||||||||||||||||||||||||||
| Patents | ( | ( | |||||||||||||||||||||||||||||||||
| Trademarks and trade names | ( | ( | |||||||||||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
(1)This table excludes the gross value of fully amortized intangible assets totaling $42.8 million and $42.7 million at March 31, 2021 and December 31, 2020, 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:
| (In thousands) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Cost of sales | $ | $ | |||||||||
| Selling, general and administrative expenses | |||||||||||
| Total amortization expense | $ | $ | |||||||||
Estimated future annual amortization expense related to our intangible assets at March 31, 2021, was as follows:
| (In thousands) | |||||
| 2021 (remaining 9 months) | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
12
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Note 7 — Leases
We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world. At March 31, 2021, our operating leases had remaining lease terms of up to 40 years, including any reasonably probable extensions.
Lease balances within our consolidated balance sheet were as follows:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Assets: | |||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||
| Liabilities: | |||||||||||
| $ | $ | ||||||||||
| Long-term operating lease obligations | |||||||||||
| Total lease liabilities | $ | $ | |||||||||
Operating lease expense, including variable and short-term lease costs which were insignificant to the total, operating lease cash flows and supplemental cash flow information were as follows:
| (In thousands) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Cost of sales | $ | $ | |||||||||
| Selling, general and administrative expenses | |||||||||||
| Total operating lease expense | $ | $ | |||||||||
| Operating cash outflows from operating leases | $ | $ | |||||||||
| Operating lease right-of-use assets obtained in exchange for lease obligations | $ | $ | |||||||||
Non-cash release of operating lease obligations (1) | $ | $ | |||||||||
(1)During the three months ended March 31, 2021, we were released from our guarantee of the lease obligation related to our Ohio call center which was sold in February 2020.
The weighted average remaining lease liability term and the weighted average discount rate were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Weighted average lease liability term (in years) | |||||||||||
| Weighted average discount rate | % | % | |||||||||
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 March 31, 2021. The reconciliation excludes short-term leases that are not recorded on the balance sheet.
| (In thousands) | March 31, 2021 | ||||
| 2021 (remaining 9 months) | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: imputed interest | ( | ||||
| Total lease liabilities | $ | ||||
13
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Note 8 — 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 $125.0 million revolving line of credit ("Credit Line") that expires on November 1, 2022. 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
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 rates in effect at March 31, 2021 and December 31, 2020 were 1.37 % and 1.39 %, respectively. There are no commitment fees or unused line fees under the Second Amended Credit Agreement.
On December 31, 2021, the process of cessation of LIBOR as a reference rate will begin. LIBOR may continue to be used for new and existing borrowings on the Credit Line through December 31, 2021. After that date, new borrowings will no longer use LIBOR as a reference rate. Instead, these borrowings will be subject to an interest rate based on either the Secured Overnight Financing Rate ("SOFR"), which is deemed a replacement benchmark for LIBOR under the Second Amended Credit Agreement, or an alternate index to be agreed upon. Between December 31, 2021 and June 30, 2023, any legacy borrowings may continue to use LIBOR as the basis for interest rates. After June 30, 2023, however, all borrowings will be based on SOFR or the alternate index.
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. At March 31, 2021, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.
At March 31, 2021 and December 31, 2020, we had $40.0 million and $20.0 million outstanding under the Credit Line, respectively. Our total interest expense on borrowings was $0.1 million and $0.7 million during the three months ended March 31, 2021 and 2020, respectively.
Note 9 — 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 $1.5 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively. The income tax expense for the three months ended March 31, 2021 increased primarily due to an increase in global pre-tax income and the mix of pre-tax income among jurisdictions, including losses not benefited as a result of a valuation allowance.
At December 31, 2020, we assessed the realizability of our 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, 2020, we had a three-year
14
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
cumulative operating loss for our U.S. operations and accordingly, have provided a full valuation allowance on our U.S. federal and state deferred tax assets. During the three months ended March 31, 2021, there was no change to our valuation allowance position.
At March 31, 2021, we had gross unrecognized tax benefits of $3.1 million, including interest and penalties, which, 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. Based on federal, state and foreign statute expirations in various jurisdictions, we do not anticipate a decrease in unrecognized tax benefits within the next twelve months. We have classified uncertain tax positions as non-current income tax liabilities unless they are 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 are immaterial at March 31, 2021 and December 31, 2020 and are included in the unrecognized tax benefits.
Note 10 — Accrued Compensation
The components of accrued compensation were as follows:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Accrued bonus | $ | $ | |||||||||
| Accrued commission | |||||||||||
| Accrued salary/wages | |||||||||||
Accrued social insurance (1) | |||||||||||
| Accrued vacation/holiday | |||||||||||
| Other accrued compensation | |||||||||||
| Total accrued compensation | $ | $ | |||||||||
(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 March 31, 2021 and December 31, 2020.
Note 11 — Other Accrued Liabilities
The components of other accrued liabilities were as follows:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Duties | $ | $ | |||||||||
| Expense associated with fulfilled performance obligations | |||||||||||
| Freight and handling fees | |||||||||||
| Operating lease obligations | |||||||||||
| Product warranty claims costs | |||||||||||
| Professional fees | |||||||||||
| Sales and value added taxes | |||||||||||
| Short-term contingent consideration | |||||||||||
Other (1) | |||||||||||
| Total other accrued liabilities | $ | $ | |||||||||
(1)Includes $0.5 million and $0.3 million of contract liabilities at March 31, 2021 and December 31, 2020, respectively.
15
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Note 12 — Commitments and Contingencies
Product Warranties
Changes in the liability for product warranty claims costs were as follows:
| (In thousands) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Accruals for warranties issued during the period | |||||||||||
| Settlements (in cash or in kind) during the period | ( | ||||||||||
| Foreign currency translation gain (loss) | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
Litigation
Roku Matters
2018 Lawsuit
On September 5, 2018, we filed a lawsuit against Roku, Inc. ("Roku") in the United States District Court, Central District of California, 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 therefor 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. In October 2019, the Court stayed this lawsuit pending action by the Patent Trial and Appeals Board (the "PTAB") with respect to Roku's Inter Partes Review requests (see discussion below).
International Trade Commission Investigation of Roku, TCL, Hisense and Funai
On April 16, 2020, we filed a complaint with the International Trade Commission (the "ITC") against Roku, TCL Electronics Holding Limited and related entities (collectively, "TCL"), Hisense Co., Ltd. and related entities (collectively, "Hisense"), and Funai Electric Company, Ltd. and related entities (collectively, "Funai") claiming that certain of their televisions, set-top boxes, remote control devices, human interface devices, streaming devices, and sound bars infringe certain of our patents. We asked the ITC to issue a permanent limited exclusion order prohibiting the importation of these infringing products into the United States and a cease and desist order to stop these parties from continuing their infringing activities. On May 18, 2020, the ITC announced that it instituted its investigation as requested by us. The trial ended on April 23, 2021. The parties will each submit post-trial briefing in May and the initial determination from the Administrative Law Judge is expected in early July 2021.
2020 Lawsuit
As a companion case to our ITC complaint, on April 9, 2020, we filed separate actions against each of Roku, TCL, Hisense, and Funai in the United States District Court, Central District of California, alleging that Roku is willfully infringing five of our patents and TCL, Hisense, and Funai are willfully infringing six of our patents by incorporating our patented technology into certain of their televisions, set-top boxes, remote control devices, human interface devices, streaming devices, and sound bars. These matters had been stayed pending the results of the ITC investigation mentioned above.
Inter Partes Reviews
Throughout these litigation matters against Roku and the others identified above, Roku has filed multiple Inter Partes Review ("IPR") requests with the PTAB on all patents at issue in the 2018 Lawsuit, the ITC Action, and the 2020 Lawsuit (see discussion above). To date, the PTAB has denied Roku's request seven times, granted Roku's request four times and we are awaiting the PTAB's institution decision with respect to the remaining nine IPR requests. Of the four IPR requests granted by the PTAB, the results were mixed, with the PTAB validating many of our patent claims and invalidating others. We will appeal any PTAB decision that resulted in an invalidation of our patent claims.
16
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
International Trade Commission Investigation Request Made by Roku against UEI and certain UEI Customers
On April 8, 2021, Roku made a request to the ITC to initiate an investigation against us and certain of our customers claiming that certain of our and those customers’ remote control devices and televisions infringe two of Roku’s recently acquired patents. The ITC has not yet decided to initiate the requested investigation, but if it does we will vigorously defend against them. As a companion to its ITC request, Roku also filed a lawsuit against us in Federal District court in the Central District of California alleging that we are infringing the same patents they alleged being infringed in the ITC request explained above. We will vigorously defend these allegations as well.
Court of International Trade Action against the United States of America, et. al.
On October 9, 2020, we and our subsidiaries, Ecolink Intelligent Technology, Inc. ("Ecolink") and RCS Technology, LLC ("RCS"), filed an amended complaint (20-cv-00670) in the Court of International Trade (the "CIT") against the United States of America; the Office of the United States Trade Representative; Robert E. Lighthizer, U.S. Trade Representative; U.S. Customs & Border Protection; and Mark A. Morgan, U.S. Customs & Border Protection Acting Commissioner, challenging both the substantive and procedural processes followed by the United States Trade Representative ("USTR") when instituting Section 301 Tariffs on imports from China under Lists 3 and 4A.
Pursuant to this complaint, we, Ecolink and RCS are alleging that USTR's institution of Lists 3 and 4A tariffs violated the Trade Act of 1974 (the "Trade Act") on the grounds that the USTR failed to make a determination or finding that there was an unfair trade practice that required a remedy and moreover, that Lists 3 and 4A tariffs were instituted beyond the 12-month time limit provided for in the governing statute. We, Ecolink and RCS also allege that the manner in which the Lists 3 and 4A tariff actions were implemented violated the Administrative Procedures Act (the "APA") by failing to provide adequate opportunity for comments, failed to consider relevant factors when making its decision and failed to connect the record facts to the choices it made by not explaining how the comments received by USTR came to shape the final implementation of Lists 3 and 4A.
We, Ecolink and RCS are asking the CIT to declare that the defendants' actions resulting in the tariffs on products covered by Lists 3 and 4A are unauthorized by and contrary to the Trade Act and were arbitrarily and unlawfully promulgated in violation of the APA; to vacate the Lists 3 and 4A tariffs; to order a refund (with interest) of any Lists 3 and 4A duties paid by us, Ecolink and RCS; to permanently enjoin the U.S. government from applying Lists 3 and 4A duties against us, Ecolink and RCS; and award us, Ecolink and RCS our costs and reasonable attorney's fees.
The defendants have requested an automatic stay of all pending cases challenging the Lists 3 and 4A tariffs except for one or more "test cases." It proposed the first-filed case—the case filed by HMTX—as the test case. The government also asked the court to appoint a "steering committee" consisting of several lead counsel for the plaintiffs to direct the litigation. The government proposed a bifurcated briefing schedule, under which the parties would first brief the government's upcoming motion to dismiss before briefing the merits of plaintiffs' claims. We will agree to a stay in our case. HMTX has filed a response agreeing to the stay and to being the test case but opposed the defendants' proposed briefing schedule.
On February 10, 2021, the CIT's three-judge panel issued an order establishing a master case for filings that relate to some or all of the Section 301 cases. The order also established a deadline of March 12, 2021 for the government to file a "master answer" to all the complaints.
On March 31, 2021, the CIT issued an order stating that it would proceed with the HMTX case as the sample case and staying all other Section 301 cases. The CIT directed the HMTX plaintiffs and the government to file a proposed briefing schedule and joint status report on the issue of refunds. After the parties did so, the CIT adopted a briefing schedule that requires briefing to be completed by November 15, 2021. The CIT also scheduled a status conference for April 26, 2021 to discuss the issue of availability of refunds. In advance of that status conference, the HMTX plaintiffs filed a motion seeking a preliminary injunction seeking to enjoin the further liquidation of entries pending the outcome of the case. It is our hope that this issue will be resolved at the status conference with the court ruling to either (1) declare that such refunds will be available if plaintiffs prevail or (2) enjoin the further liquidation of entries pending the outcome of the case.
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,
17
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
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 13 — Treasury Stock
From time to time, our Board of Directors authorizes management to repurchase shares of our issued and outstanding common stock. On February 11, 2021, our Board approved a new share repurchase program with an effective date of February 23, 2021 (the "February 2021 Program"). Pursuant to the February 2021 Program, we may, from time to time until May 6, 2021, repurchase up to 300,000 shares of our common stock. On April 28, 2021, our Board approved a new share repurchase program with an effective date of May 11, 2021 (the "May 2021 Program"). Pursuant to the May 2021 Program, we may, from time to time until August 5, 2021, repurchase up to 300,000 shares of our common stock. We may utilize various methods to effect the repurchases, which may 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.
Repurchased shares of our common stock were as follows:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Shares repurchased | |||||||||||
| Cost of shares repurchased | $ | $ | |||||||||
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 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 March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cost of sales | $ | $ | |||||||||
| Research and development expenses | |||||||||||
| Selling, general and administrative expenses: | |||||||||||
Employees | |||||||||||
Outside directors | |||||||||||
| Total employee and director stock-based compensation expense | $ | $ | |||||||||
| Income tax benefit | $ | $ | |||||||||
18
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Stock Options
Stock option activity was as follows:
| Number of Options (in thousands) | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
Outstanding at December 31, 2020 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | $ | |||||||||||||||||||||
| Forfeited/canceled/expired | |||||||||||||||||||||||
Outstanding at March 31, 2021 (1) | $ | $ | |||||||||||||||||||||
Vested and expected to vest at March 31, 2021 (1) | $ | $ | |||||||||||||||||||||
Exercisable at March 31, 2021 (1) | $ | $ | |||||||||||||||||||||
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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Weighted average fair value of grants | $ | $ | |||||||||
| Risk-free interest rate | % | % | |||||||||
| Expected volatility | % | % | |||||||||
| Expected life in years | |||||||||||
As of March 31, 2021, we expect to recognize $3.7 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 2.2 years.
Restricted Stock
Non-vested restricted stock award activity was as follows:
| Shares (in thousands) | Weighted-Average Grant Date Fair Value | ||||||||||
Non-vested at December 31, 2020 | $ | $ | |||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
Non-vested at March 31, 2021 | $ | $ | |||||||||
As of March 31, 2021, we expect to recognize $13.0 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of 2.2 years.
19
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Unaudited)
Note 15 — 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 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 potential number of warrants to vest in each period based upon achieving the purchase levels.
| Potential Warrants To 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 | ||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
| $ | |||||||||||||||||
| Maximum Potential Warrants Earned by Comcast | |||||||||||||||||
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 would count toward aggregate purchases in the following two-year period. This threshold was not met in either the first or second two-year period. For the two-year period ended December 31, 2017, Comcast earned and vested in 175,000 out of the maximum potential 250,000 warrants. For the two-year period ended December 31, 2019, Comcast earned and vested in 100,000 out of the maximum potential 250,000 warrants. At March 31, 2021, 275,000 vested warrants were outstanding. To fully vest in the rights to purchase all of the remaining unearned 225,000 underlying shares, Comcast and its affiliates must purchase an aggregate of $340 million in goods and services from us during the period January 1, 2020 through December 31, 2021.
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.
As 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 for the first two-year successive periods was the date on which the warrants vested.
The FASB issued guidance in November 2019 that clarifies the accounting for share-based payments issued as sales incentives to customers. The guidance requires that stock-based compensation expense be recorded as a reduction in the transaction price on the basis of the grant-date fair value. The transition provisions require that equity-classified awards be measured at the adoption date fair value if the measurement date has not been established prior to the adoption date. The measurement periods for the first two successive two-year periods of our outstanding performance-based common stock warrants were completed prior to adoption and were not impacted by this updated guidance. The measurement period for the final two-year period began on January 1, 2020, and, accordingly, we measured the fair value of the award as of our adoption date on January 1, 2020 using the Black-Scholes option pricing model. Through March 31, 2021, no ne of the warrants had vested for the two-year period beginning January 1, 2020.
The assumptions we utilized in the Black-Scholes option pricing model and the resulting grant-date fair value of the warrants as of January 1, 2020 were the following:
| Fair value | $ | ||||
| Price of Universal Electronics Inc. common stock | $ | ||||
| Risk-free interest rate | % | ||||