Universal Electronics Inc 10-Q for FY2020 Q2
Universal Electronics Inc (UEIC)
10-Q
2020-08-07
For: 2020-06-30
View Original
Added on
April 06, 2026
About this 10-Q
Universal Electronics Inc filed this 10-Q on August 7, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $153.13M
- down 21.0% from $193.9M a year earlier
- Net income
- $14.4M
- compared with a net loss of $5.06M a year earlier
- Diluted EPS
- $1.02
- compared with -$0.37 a year earlier
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 June 30, 2020
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.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,931,552 shares of Common Stock, par value $0.01 per share, of the registrant were outstanding on August 4, 2020.
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 | ☒ | |||||
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)
June 30, 2020 | December 31, 2019 | ||||||
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, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding | |||||||
Common stock, $0.01 par value, 50,000,000 shares authorized; 24,268,744 and 24,118,088 shares issued on June 30, 2020 and December 31, 2019, respectively | |||||||
Paid-in capital | |||||||
Treasury stock, at cost, 10,346,473 and 10,174,199 shares on June 30, 2020 and December 31, 2019, respectively | ( | ) | ( | ) | |||
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 June 30, | Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||
Cost of sales | |||||||||||||||
Gross profit | |||||||||||||||
Research and development expenses | |||||||||||||||
Selling, general and administrative expenses | |||||||||||||||
Operating income (loss) | ( | ) | ( | ) | |||||||||||
Interest income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Accrued social insurance adjustment | |||||||||||||||
Other income (expense), net | ( | ) | |||||||||||||
Income (loss) before provision for income taxes | ( | ) | ( | ) | |||||||||||
Provision for income taxes | |||||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Earnings (loss) per share: | |||||||||||||||
Basic | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Diluted | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Shares used in computing earnings (loss) 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 June 30, | Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
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 and six months ended June 30, 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 (loss) | |||||||||||||||||||||||||||||
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 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Net income (loss) | |||||||||||||||||||||||||||||
Currency translation adjustment | ( | ) | ( | ) | |||||||||||||||||||||||||
Shares issued for employee benefit plan and compensation | |||||||||||||||||||||||||||||
Purchase of treasury shares | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Employee and director stock-based compensation | |||||||||||||||||||||||||||||
Performance-based common stock warrants | |||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
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 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Net income (loss) | ( | ) | ( | ) | |||||||||||||||||||||||||
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, 2019 | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Net income (loss) | ( | ) | ( | ) | |||||||||||||||||||||||||
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 June 30, 2019 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2020 | 2019 | ||||||
Cash provided by (used for) operating activities: | |||||||
Net income (loss) | $ | $ | ( | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | |||||||
Depreciation and amortization | |||||||
Provision for bad debts | |||||||
Deferred income taxes | |||||||
Shares issued for employee benefit plan | |||||||
Employee and director stock-based compensation | |||||||
Performance-based common stock warrants | |||||||
Impairment of long-term assets | |||||||
Accrued social insurance adjustment | ( | ) | |||||
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 provided by (used for) operating activities | |||||||
Cash provided by (used for) investing activities: | |||||||
Acquisitions of property, plant and equipment | ( | ) | ( | ) | |||
Acquisitions of intangible assets | ( | ) | ( | ) | |||
Payment on sale of Ohio call center | ( | ) | |||||
Net cash provided by (used for) investing activities | ( | ) | ( | ) | |||
Cash provided by (used for) financing activities: | |||||||
Borrowings under line of credit | |||||||
Repayments on line of credit | ( | ) | ( | ) | |||
Treasury stock purchased | ( | ) | ( | ) | |||
Contingent consideration payments in connection with business combinations | ( | ) | ( | ) | |||
Net cash provided by (used for) financing activities | ( | ) | ( | ) | |||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | |||
Net increase (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.
8
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
Note 1 — Basis of Presentation
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 ("SEC"). 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, 2020 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, 2019.
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; allowance for bad debts; inventory valuation; our review for impairment of long-lived assets, intangible assets and goodwill; leases; business combinations; income taxes; stock-based compensation expense and performance-based common stock warrants.
The recent 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.
See Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for a summary of our significant accounting policies.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", which updates existing guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred loss impairment model with an expected loss impairment model. Accordingly, financial assets are presented at amortized costs net of an allowance for expected credit losses over the lifetime of the assets. We adopted this new guidance on January 1, 2020 using the modified retrospective method. The adoption did not require an implementation adjustment and did not materially impact our consolidated statement of financial position, results of operations and cash flows. See Note 3 for further discussion on our allowance for bad debts.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Instead, if the carrying 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. Our adoption on January 1, 2020 did not have a material impact on our consolidated statement of financial position, results of operations and cash flows.
In November 2019, the FASB issued ASU 2019-08, "Improvements - Share-based Consideration Payable to a Customer", which clarifies the accounting for share-based payments issued as sales incentives to customers. The guidance requires that stock-based compensation expense is recorded as a reduction in the transaction price on the basis of the grant-date fair value. The grant-date fair value is calculated using the provisions defined under Accounting Standards Codification "Stock Compensation". The transition provisions require that equity-classified awards be measured at the adoption date fair value if the measurement date has not been
9
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
established prior to the adoption date. This guidance impacts the measurement date of our performance-based common stock warrants. 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. We adopted this guidance using the modified retrospective method. Our adoption did not result in a cumulative adjustment in our consolidated statement of financial position. See Note 15 for further discussion on the performance-based common stock warrants.
Recent Accounting Updates Not Yet Effective
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 existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this guidance 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) | June 30, 2020 | December 31, 2019 | |||||
United States | $ | $ | |||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||
(In thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Goods and services transferred at a point in time | $ | $ | $ | $ | |||||||||||
Goods and services transferred over time | |||||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||
10
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
Our net sales to external customers by geographic area were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(In thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||
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 June 30, | |||||||||||||
2020 | 2019 | ||||||||||||
$ (thousands) | % of Net Sales | $ (thousands) | % of Net Sales | ||||||||||
Comcast Corporation | $ | % | |||||||||||
Daikin Industries Ltd. | $ | % | (1) | (1) | |||||||||
Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | |||||||||||||
$ (thousands) | % of Net Sales | $ (thousands) | % of Net Sales | |||||||||||
Comcast Corporation | $ | % | $ | % | ||||||||||
DISH Network Corporation | (1) | (1) | $ | % | ||||||||||
(1) | Net sales to this customer did not total more than 10% of our total net sales in the indicated period. |
Accounts Receivable, Net
Accounts receivable, net were as follows:
(In thousands) | June 30, 2020 | December 31, 2019 | |||||
Trade receivables, gross | $ | $ | |||||
Allowance for bad debts | ( | ) | ( | ) | |||
Allowance for sales returns | ( | ) | ( | ) | |||
Net trade receivables | |||||||
Other | |||||||
Accounts receivable, net | $ | $ | |||||
11
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
Allowance for Bad Debts
Changes in the allowance for bad debts were as follows:
(In thousands) | Six Months Ended June 30, | ||||||
2020 | 2019 | ||||||
Balance at beginning of period | $ | $ | |||||
Additions to costs and expenses | |||||||
(Write-offs)/Foreign exchange effects | ( | ) | ( | ) | |||
Balance at end of period | $ | $ | |||||
Trade receivables associated with these significant customers that totaled more than 10% of our accounts receivable, net were as follows:
June 30, 2020 | December 31, 2019 | |||||||||||||
$ (thousands) | % of Accounts Receivable, Net | $ (thousands) | % of Accounts Receivable, Net | |||||||||||
Comcast Corporation | $ | % | (1) | (1) | ||||||||||
DISH Network Corporation | (1) | (1) | $ | % | ||||||||||
(1) | Trade receivables associated with this customer did not total more than 10% of our accounts receivable, net for the indicated period. |
Note 4 — Inventories and Significant Suppliers
Inventories were as follows:
(In thousands) | June 30, 2020 | December 31, 2019 | |||||
Raw materials | $ | $ | |||||
Components | |||||||
Work in process | |||||||
Finished goods | |||||||
Inventories | $ | $ | |||||
12
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
Significant Suppliers
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 June 30, | ||||||||||||
2020 | 2019 | |||||||||||
$ (thousands) | % of Total Inventory Purchases | $ (thousands) | % of Total Inventory Purchases | |||||||||
Qorvo International Pte Ltd. | $ | % | (1) | (1) | ||||||||
Six Months Ended June 30, | ||||||||||||
2020 | 2019 | |||||||||||
$ (thousands) | % of Total Inventory Purchases | $ (thousands) | % of Total Inventory Purchases | |||||||||
Qorvo International Pte Ltd. | $ | % | (1) | (1) | ||||||||
(1) | Purchases associated with this supplier did not total more than 10% of our total inventory purchases for the indicated period. |
The supplier that totaled more than 10% of our accounts payable, was as follows:
June 30, 2020 | December 31, 2019 | |||||||||||||
$ (thousands) | % of Accounts Payable | $ (thousands) | % of Accounts Payable | |||||||||||
Zhejiang Zhen You Electronics Co. Ltd. | $ | % | $ | % | ||||||||||
Note 5 — Leases
We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world. At June 30, 2020, our operating leases had remaining lease terms of up to 40 years.
Lease balances within our consolidated balance sheet were as follows:
(In thousands) | June 30, 2020 | December 31, 2019 | |||||
Assets: | |||||||
Operating lease right-of-use assets | $ | $ | |||||
Liabilities: | |||||||
Other accrued liabilities | $ | $ | |||||
Long-term operating lease obligations | |||||||
Total lease liabilities | $ | $ | |||||
13
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
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 June 30, | Six Months Ended June 30, | |||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
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 | $ | $ | $ | $ | |||||||||||
The weighted average remaining lease liability term and the weighted average discount rate were as follows:
June 30, 2020 | December 31, 2019 | ||||
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 June 30, 2020. The reconciliation excludes short-term leases that are not recorded on the balance sheet.
(In thousands) | June 30, 2020 | ||
2020 (remaining 6 months) | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total lease payments | |||
Less: imputed interest | ( | ) | |
Total lease liabilities | $ | ||
At June 30, 2020, we had one operating lease with a five-year term that had not yet commenced. The total initial lease liability of approximately $1.6 million is not reflected within the above maturity schedule.
Note 6 — Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
(In thousands) | |||
Balance at December 31, 2019 | $ | ||
Foreign exchange effects | |||
Balance at June 30, 2020 | $ | ||
14
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
The components of intangible assets, net were as follows:
June 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
(In thousands) | Gross (1) | Accumulated Amortization (1) | Net | Gross (1) | Accumulated Amortization (1) | Net | |||||||||||||||||
Distribution rights | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||
Patents | ( | ) | ( | ) | |||||||||||||||||||
Trademarks and trade names | ( | ) | ( | ) | |||||||||||||||||||
Developed and core technology | ( | ) | ( | ) | |||||||||||||||||||
Capitalized software development costs | |||||||||||||||||||||||
Customer relationships | ( | ) | ( | ) | |||||||||||||||||||
Total intangible assets, net | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||
(1) | This table excludes the gross value of fully amortized intangible assets totaling $ |
Estimated future annual amortization expense related to our intangible assets at June 30, 2020, was as follows:
(In thousands) | |||
2020 (remaining 6 months) | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total | $ | ||
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 $125.0 million revolving line of credit ("Credit Line") that expires on November 1, 2021. 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, 2020.
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
15
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
in effect at June 30, 2020 was 1.43 %. 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. At June 30, 2020, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.
At June 30, 2020, we had $73.0 million outstanding under the Credit Line. Our total interest expense on borrowings was $0.4 million and $1.2 million during the three months ended June 30, 2020 and 2019, respectively. Our total interest expense on borrowings was $1.1 million and $2.5 million during the six months ended June 30, 2020 and 2019, 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 $1.9 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively. We recorded income tax expense of $3.1 million and $1.2 million for the six months ended June 30, 2020 and 2019, respectively. The income tax expense for the six months ended June 30, 2020 increased primarily due to an increase in global pre-tax income, offset partially by an increase in income not subject to tax in foreign jurisdictions, research and development tax benefits received in China and the reversal of a reserve of an uncertain tax position related to our Guangzhou entity, which was sold in June 2018. The indemnification agreement related to the sale of our Guangzhou entity expired in June 2020.
At December 31, 2019, 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, 2019, we had a three-year cumulative operating loss for our U.S. operations and accordingly, have provided a full valuation allowance on our U.S. and state deferred tax assets. During the six months ended June 30, 2020, there was no change to our valuation allowance position.
At June 30, 2020, we had gross unrecognized tax benefits of $3.1 million, including interest and penalties, of which approximately $3.1 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 based on federal, state, and foreign statute expirations in various jurisdictions. 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 of $0.2 million at June 30, 2020 and $0.2 million at December 31, 2019 are included in the unrecognized tax benefits.
On March 18, 2020 and March 22, 2020, the Families First Coronavirus Response ("FFCR") Act and the Coronavirus Aid, Relief and Economic Security ("CARES") Act, respectively, were enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. We are currently evaluating the impact of this legislation on our consolidated financial position, results of operations, and cash flows. Future regulatory guidance under the FFCR and CARES Acts (as well as under the Tax Cuts and Jobs Act) remains forthcoming and such guidance may ultimately increase or decrease their impact on our business and financial condition. It is also possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which may impact us.
In April 2020, recent interpretations of a German law relating to withholding taxes on intellectual property rights emerged. We are currently evaluating this law and any related impact to our financial position and results of operations.
16
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
Note 9 — Accrued Compensation
In June 2018, we sold our Guangzhou entity via a stock deal and the terms of the agreement included a two-year indemnification period. In June 2020, the indemnification period expired and we determined we were no longer legally liable for any liabilities associated with our Guangzhou entity. Accordingly, we reversed the accrued social insurance by the amount associated with the Guangzhou entity which was approximately $9.5 million.
The components of accrued compensation were as follows:
(In thousands) | June 30, 2020 | December 31, 2019 | |||||
Accrued social insurance (1) | $ | $ | |||||
Accrued salary/wages | |||||||
Accrued vacation/holiday | |||||||
Accrued bonus | |||||||
Accrued commission | |||||||
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 at June 30, 2020 and December 31, 2019. |
Note 10 — Other Accrued Liabilities
The components of other accrued liabilities were as follows:
(In thousands) | June 30, 2020 | December 31, 2019 | |||||
Contract liabilities | $ | $ | |||||
Duties | |||||||
Freight and handling fees | |||||||
Operating lease obligations | |||||||
Product warranty claims costs | |||||||
Professional fees | |||||||
Sales taxes and VAT | |||||||
Short-term contingent consideration | |||||||
Other | |||||||
Total other accrued liabilities | $ | $ | |||||
17
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
Note 11 — Commitments and Contingencies
Product Warranties
Changes in the liability for product warranty claims costs were as follows:
(In thousands) | Six Months Ended June 30, | ||||||
2020 | 2019 | ||||||
Balance at beginning of period | $ | $ | |||||
Accruals for warranties issued during the period | |||||||
Settlements (in cash or in kind) during the period/Foreign exchange effects | ( | ) | |||||
Balance at end of period | $ | $ | |||||
Litigation
Ruwido Matters
On May 28, 2020, we entered into a confidential settlement agreement with Universal Electronics BV, our wholly owned subsidiary ("UEBV"), Telenet BVBA, a customer of UEBV ("Telenet"), Ruwido Austria GmbH ("Ruwido") and FM Marketing GmbH, an affiliated company to Ruwido ("FM Marketing"), whereby all court proceedings (first filed in 2015) between the parties have been dismissed with prejudice and the patent opposition appeal pending before the European Patent Office has been withdrawn. As a part of this agreement, in addition to allowing UEBV and Telenet to continue manufacturing and selling the remote control at issue and dismissing Ruwido’s and FM Marketing’s claims against UEBV and Telenet, FM Marketing paid an undisclosed amount to UEBV and Telenet.
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 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. 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 Party 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. We are in the early stages of this investigation, with discovery recently commencing.
Inter Partes Reviews
In September and October 2019, Roku filed Inter Partes Review ("IPR") requests with the PTAB on the nine patents at issue in the 2018 Lawsuit. Presently, the PTAB denied Roku’s request with respect to three of the nine patents and granted Roku’s request with respect to six of the nine patents. As for those IPRs for which the PTAB granted Roku’s request for review, we will vigorously defend our patents. In May and June 2020, Roku filed four IPR requests against three patents asserted in the ITC. UEI’s preliminary responses to these requests are due in August and September 2020.
18
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
Federal District Court Actions against each of Roku, TCL, Hisense, and Funai related to the ITC Matter
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. Each of the parties have accepted service and have not yet answered our complaint.
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 March 10, 2020, our Board of Directors replaced the repurchase plan approved in 2018 with a new repurchase plan authorizing the repurchase of up to 300,000 of our common stock ("2020 Plan"). As of June 30, 2020, we had 175,127 shares of common stock authorized for repurchase remaining under the 2020 Plan. We may repurchase shares of common stock in privately negotiated and/or open-market transactions, including pursuant to plans complying with Rule 10b5-1 promulgated under the Securities Exchange Act of 1934. While we have suspended repurchasing under our 2020 Plan due in part to the uncertainties surrounding the COVID-19 pandemic, management may resume such repurchasing when market and business conditions warrant.
Repurchased shares of our common stock were as follows:
Six Months Ended June 30, | |||||||
(In thousands) | 2020 | 2019 | |||||
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 13 — 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) | June 30, 2020 | December 31, 2019 | |||||
United States | $ | $ | |||||
People's Republic of China | |||||||
Mexico | |||||||
All other countries | |||||||
Total long-lived tangible assets | $ | $ | |||||
19
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(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) | 2020 | 2019 | 2020 | 2019 | |||||||||||
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 | $ | $ | $ | $ | |||||||||||
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, 2019 | $ | |||||||||||
Granted | ||||||||||||
Exercised | $ | |||||||||||
Forfeited/canceled/expired | ||||||||||||
Outstanding at June 30, 2020 (1) | $ | $ | ||||||||||
Vested and expected to vest at June 30, 2020 (1) | $ | $ | ||||||||||
Exercisable at June 30, 2020 (1) | $ | $ | ||||||||||
(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 2020 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, 2020. 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, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Weighted average fair value of grants | $ | $ | $ | $ | |||||||||||
Risk-free interest rate | % | % | % | % | |||||||||||
Expected volatility | % | % | % | % | |||||||||||
Expected life in years | |||||||||||||||
As of June 30, 2020, we expect to recognize $3.1 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 2.1 years.
20
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(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, 2019 | $ | |||||
Granted | ||||||
Vested | ( | ) | ||||
Forfeited | ( | ) | ||||
Non-vested at June 30, 2020 | $ | |||||
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 June 30, 2020, 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.
21
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
The FASB issued guidance in November 2019, which 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 June 30, 2020, 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 | |
Expected volatility | |
Expected life in years | |
Prior to the adoption of the new guidance on January 1, 2020, we adjusted the estimated weighted average fair value of the warrants each period. 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, 2019 | Six Months Ended June 30, 2019 | ||
Fair value | $ | $ | |
Price of Universal Electronics Inc. common stock | $ | $ | |
Risk-free interest rate | |||
Expected volatility | |||
Expected life in years | |||
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) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Reduction to net sales | $ | $ | $ | $ | |||||||||||
Income tax benefit | $ | $ | $ | $ | |||||||||||
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 estimated fair value of the warrants is recognized as a reduction to revenue over the related two-year vesting period. At June 30, 2020, the aggregate unrecognized estimated fair value of warrants we estimate will vest was $1.0 million.
22
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
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) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Net gain (loss) on foreign currency exchange contracts (1) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net gain (loss) on foreign currency exchange transactions | |||||||||||||||
Other income | |||||||||||||||
Other (expense), net | $ | $ | $ | $ | ( | ) | |||||||||
(1) | This represents the gains (losses) incurred on foreign currency hedging derivatives (see Note 18 for further details). |
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) | 2020 | 2019 | 2020 | 2019 | |||||||||||
BASIC | |||||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Weighted-average common shares outstanding | |||||||||||||||
Basic earnings (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
DILUTED | |||||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Weighted-average common shares outstanding for basic | |||||||||||||||
Dilutive effect of stock options, restricted stock and common stock warrants | |||||||||||||||
Weighted-average common shares outstanding on a diluted basis | |||||||||||||||
Diluted earnings (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
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) | 2020 | 2019 | 2020 | 2019 | |||||||
Stock options | |||||||||||
Restricted stock awards | |||||||||||
Performance-based warrants | |||||||||||
Note 18 — Derivatives
The following table sets forth the total net fair value of derivatives:
June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
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 | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
23
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(Unaudited)
We held foreign currency exchange contracts, which resulted in a net pre-tax loss of $0.7 million and a net pre-tax loss of $0.1 million for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, we had a net pre-tax loss of $0.5 million and a net pre-tax loss of $0.4 million, respectively (see Note 16).
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, 2020 | USD/Chinese Yuan Renminbi | CNY | $ | $ | ( | ) | July 24, 2020 | ||||||||||
June 30, 2020 | USD/Euro | USD | $ | $ | ( | ) | July 24, 2020 | ||||||||||
June 30, 2020 | USD/Brazilian Real | USD | $ | $ | July 24, 2020 | ||||||||||||
June 30, 2020 | USD/Mexican Peso | USD | $ | $ | July 24, 2020 | ||||||||||||
December 31, 2019 | USD/Chinese Yuan Renminbi | USD | $ | $ | January 23, 2020 | ||||||||||||
December 31, 2019 | USD/Brazilian Real | USD | $ | $ | ( | ) | January 24, 2020 | ||||||||||
December 31, 2019 | USD/Euro | USD | $ | $ | ( | ) | January 24, 2020 | ||||||||||
December 31, 2019 | USD/Brazilian Real | USD | $ | $ | ( | ) | January 24, 2020 | ||||||||||
(1) | Unrealized gains on foreign currency exchange contracts are recorded in prepaid expenses and other current assets. Unrealized losses on foreign currency exchange contracts are recorded in other accrued liabilities. |
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
Overview
We design, develop, manufacture and ship control and sensor technology solutions and a broad line of pre-programmed and universal control products, audio-video ("AV") accessories, and intelligent wireless security and smart home products that are used by the world's leading brands in the consumer electronics, subscription broadcast, home entertainment, automation, security, hospitality and climate control markets. Our offerings include:
• | easy-to-use, pre-programmed universal infrared ("IR") and radio frequency ("RF") remote controls that are sold primarily to subscription broadcast providers (cable, satellite and Internet Protocol television ("IPTV") and Over the Top services), original equipment manufacturers ("OEMs"), retailers, and private label customers; |
• | integrated circuits, on which our software and universal device control database is embedded, sold primarily to OEMs, subscription broadcast providers, and private label customers; |
• | software, firmware and technology solutions that can enable devices such as TVs, set-top boxes, audio systems, smartphones, tablets, game controllers and other consumer electronic devices to wirelessly connect and interact with home networks and interactive services to control and deliver digital entertainment and information; |
• | intellectual property which we license primarily to OEMs, software development companies, private label customers, and subscription broadcast providers; |
• | proprietary and standards-based RF sensors designed for residential security, safety and automation applications; |
• | wall-mount and handheld thermostat controllers and connected accessories for intelligent energy management systems, primarily to OEM customers as well as hospitality system integrators; and |
• | AV accessories sold, directly and indirectly, to consumers. |
Since our beginning in 1986, we have compiled an extensive device control knowledge library that includes nearly 12,000 brands comprising over 905,000 device models across AV and smart home platforms, supported by many common smart home protocols, including IR, HDMI-CEC, Zigbee, and Home Network or Cloud Control.
This device knowledge graph is backed by our unique device fingerprinting technology which includes nearly 4.3 million unique device fingerprints across both AV and smart home devices.
Our technology also includes other remote controlled home entertainment devices and home automation control modules, as well as wired Consumer Electronics Control ("CEC") and wireless Internet Protocol ("IP") control protocols commonly found on many of the latest HDMI and internet connected devices. Our proprietary software automatically detects, identifies and enables the appropriate control commands for any given home entertainment, automation and air conditioning device in the home. Our libraries are continuously updated with device control codes used in newly introduced AV and Internet of Things ("IOT") devices. These control codes are captured directly from original remote control devices or from the manufacturer's written specifications to ensure the accuracy and integrity of the library. Our proprietary software and know-how permit us to offer a device control code database that is more robust and efficient than similarly priced products of our competitors.
We have developed a comprehensive patent portfolio of over 560 issued and pending U.S. patents related to remote control, home security, safety and automation as well as hundreds of foreign counterpart patents and applications in various territories around the world.
We operate as one business segment. We have 2 domestic subsidiaries and 25 international subsidiaries located in Argentina, Brazil, British Virgin Islands, Cayman Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Korea, Mexico, the Netherlands, People's Republic of China (the "PRC") (7), Singapore, Spain and the United Kingdom.
To recap our results for the three months ended June 30, 2020:
• | Net sales decreased 21.0% to $153.1 million for the three months ended June 30, 2020 from $193.9 million for the three months ended June 30, 2019. |
• | Our gross margin percentage increased to 24.9% for the three months ended June 30, 2020 from 17.5% for the three months ended June 30, 2019. |
• | Operating expenses, as a percentage of net sales, increased to 20.7% for the three months ended June 30, 2020 from 19.5% for the three months ended June 30, 2019. |
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• | Our operating income increased to $6.5 million for the three months ended June 30, 2020 from a loss of $3.9 million for the three months ended June 30, 2019. Our operating income percentage increased to 4.2% for the three months ended June 30, 2020 from a loss of 2.0% for the three months ended June 30, 2019. |
• | Income tax expense increased to $1.9 million for the three months ended June 30, 2020 from $0.2 million for the three months ended June 30, 2019. |
Our strategic business objectives for 2020 include the following:
• | continue to develop and market the advanced remote control products and technologies that our customer base is adopting; |
• | continue to broaden our home control and automation product offerings; |
• | further penetrate international subscription broadcast markets; |
• | acquire new customers in historically strong regions; |
• | increase our share with existing customers; and |
• | continue to seek acquisitions or strategic partners that complement and strengthen our existing business. |
We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.
COVID-19 Impact
The COVID-19 pandemic has caused, and is expected to continue to cause, a global slowdown of economic activity (including the decrease in demand for goods and services), and significant volatility in and disruption to financial markets. Because the severity, magnitude and duration of the COVID-19 pandemic are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain. As COVID-19 has spread to other jurisdictions and has been declared a global pandemic, the full extent of this outbreak and the related governmental, business and travel restrictions in order to contain COVID-19 are continuing to evolve globally. In response, we have created a COVID-19 taskforce, which includes a cross-functional group of senior level executives, to manage and respond to the everchanging health and safety requirements across the globe and communicate our response to the pandemic to our global factory and office leaders.
Local government mandates required us, in the first quarter of 2020, to keep our China factories closed for a period of approximately two weeks beyond the end of the Chinese Lunar New Year. Our Mexico factory was closed for more than one week due to local health ordinance requirements during the second quarter of 2020. As a part of our response to this pandemic, our COVID-19 taskforce has developed and we have implemented additional safety measures for all factory employees across the globe including temperature scans upon entry, hand sanitizer stations located throughout the facilities, mandatory mask wearing, social distancing measures in gathering places and restricting all visitor access. All factories are up to or near labor capacity as of the issuance of this report.
We have also taken measures to safeguard the health and well-being of our employees in our office locations throughout the world including implementing work from home arrangements and a moratorium on all travel, except where essential and approved in advance. We have implemented enhanced safety measures upon the reopening of our office locations including more frequent office sanitation, temperature scans upon arrival, mandatory mask wearing, additional hand sanitizer locations, social distancing measures throughout locations and restricted visitor access. The reopening of our offices continues to follow suggested guidelines by the Centers for Disease Control and Prevention, the World Health Organization, and local governmental orders and recommendations. The continued safety and welfare of our employees will remain at the forefront of all decision-making.
We anticipate that these actions and the global health crisis caused by COVID-19 will continue to negatively impact business activity across the globe, including our business. We expect our sales demand to be negatively impacted for the third quarter and possibly the remainder of 2020 given the global reach and economic impact of COVID-19 and the various quarantine and social distancing measures put in place to contain the spread of COVID-19. We have also seen some disruptions in our supply chain that, if continued, may cause us difficulty in fulfilling customer orders. A closure of one of our factories for a sustained period of time would, in the short run, impact our ability to meet customer demand and would negatively impact our results.
We will continue to actively monitor the situation and may take further actions altering our business operations as necessary or as required by federal, state, or local authorities. The potential effects of any such alterations or modifications may have a material adverse impact on our business for the remainder of 2020 or future periods.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition; allowance for bad debts; inventory valuation; our review for impairment of long-lived assets, intangible assets and goodwill; leases; business combinations; income taxes; stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the six months ended June 30, 2020 to the items that we disclosed as our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019.
Recent Accounting Pronouncements
See Note 1 contained in the "Notes to Consolidated Financial Statements" for a discussion of recent accounting pronouncements.
Results of Operations
The following table sets forth our reported results of operations expressed as a percentage of net sales for the periods indicated.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | 75.1 | 82.5 | 73.4 | 80.5 | |||||||
Gross profit | 24.9 | 17.5 | 26.6 | 19.5 | |||||||
Research and development expenses | 4.8 | 3.7 | 5.0 | 3.7 | |||||||
Selling, general and administrative expenses | 15.9 | 15.8 | 16.8 | 16.4 | |||||||
Operating income (loss) | 4.2 | (2.0 | ) | 4.8 | (0.6 | ) | |||||
Interest income (expense), net | (0.2 | ) | (0.6 | ) | (0.3 | ) | (0.6 | ) | |||
Accrued social insurance adjustment | 6.2 | — | 3.1 | — | |||||||
Other income (expense), net | 0.4 | 0.1 | 0.1 | (0.1 | ) | ||||||
Income (loss) before provision for income taxes | 10.6 | (2.5 | ) | 7.7 | (1.3 | ) | |||||
Provision for income taxes | 1.2 | 0.1 | 1.1 | 0.3 | |||||||
Net income (loss) | 9.4 | % | (2.6 | )% | 6.6 | % | (1.6 | )% | |||
Three Months Ended June 30, 2020 versus Three Months Ended June 30, 2019
Net sales. Net sales for the three months ended June 30, 2020 were $153.1 million, a decrease of 21.0% compared to $193.9 million for the three months ended June 30, 2019. The decrease in net sales occurred primarily with our traditional home entertainment and security customers. The COVID-19 pandemic had an adverse effect on demand and on our supply chain which ultimately resulted in a decrease in net sales. Certain of our key suppliers continued to be impacted by the close orders of local authorities and certain customers reduced order quantities. We expect the COVID-19 pandemic to continue to negatively impact our net sales in the third quarter and possibly the remainder of 2020.
Gross profit. Gross profit for the three months ended June 30, 2020 was $38.1 million compared to $34.0 million for the three months ended June 30, 2019. Gross profit as a percentage of sales increased to 24.9% for the three months ended June 30, 2020 from 17.5% for the three months ended June 30, 2019. Gross profit as a percentage of sales was favorably impacted by a reduction in U.S. tariff expense, improved operational efficiencies in our Mexico-based manufacturing facility as it was no longer in a start-up phase, an increase in royalty revenue as certain consumer electronic companies are embedding our technology in their devices and the strengthening of the U.S. Dollar versus both the Chinese Yuan Renminbi and the Mexican Peso. Our manufacturing costs were negatively impacted by the COVID-19 pandemic as our Mexico-based manufacturing facility experienced a more than one
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week closure. The potential impact of the COVID-19 pandemic on our gross profit as a percentage of net sales in future periods is unknown to us at this time; however, the closure of any of our factories may result in excess manufacturing costs, additional tariffs if we were to import goods from China into North America and additional expenses to meet the demand of our customers.
Research and development ("R&D") expenses. R&D expenses increased 3.1% to $7.4 million for the three months ended June 30, 2020 from $7.2 million for the three months ended June 30, 2019 primarily due to our continued investment in the development of new products that enhance the user experience in home entertainment and home automation.
Selling, general and administrative ("SG&A") expenses. SG&A expenses decreased to $24.2 million for the three months ended June 30, 2020 from $30.8 million for the three months ended June 30, 2019, primarily due to a reduction in incentive compensation expense, a decrease in contingent consideration recorded in connection with our acquisition of the net assets of Ecolink Intelligent Technology, Inc. ("Ecolink") and a decrease in freight costs. We also reduced certain discretionary expenses as a result of the COVID-19 pandemic and expect this to continue through the remainder of the year.
Interest income (expense), net. Net interest expense decreased to $0.4 million for the three months ended June 30, 2020 from $1.1 million for the three months ended June 30, 2019 as a result of a lower average quarterly loan balance and a lower interest rate.
Accrued social insurance adjustment. During the three months ended June 30, 2020, we reversed approximately $9.5 million of accrued social insurance. In June 2018, we sold our Guangzhou entity via a stock deal and the terms of the agreement included a two-year indemnification period. In June 2020, the indemnification period expired and we determined we were no longer legally liable for any liabilities associated with our Guangzhou entity. Accordingly, we reversed the accrued social insurance amount associated with the Guangzhou entity which was approximately $9.5 million.
Other income (expense), net. Net other income was $0.7 million for the three months ended June 30, 2020, as a result of net foreign currency gains, compared to expense of $0.2 million for the three months ended June 30, 2019, as a result of net foreign currency losses.
Provision for income taxes. Income tax expense was $1.9 million for the three months ended June 30, 2020, representing an effective tax rate of 11.6%. During the three months ended June 30, 2020, we received two incentive tax refunds in China totaling approximately $1.1 million and we reversed a tax reserve of approximately $1.3 million that was no longer required. Partially offsetting these items is a pre-tax loss without benefit in the U.S. Income tax expense was $0.2 million for the three months ended June 30, 2019. The U.S. pre-tax loss incurred during the three months ended June 30, 2019 was not benefited as a result of a full valuation allowance being applied against the U.S. deferred tax assets. The $0.2 million of tax expense relates to pre-tax income generated in foreign jurisdictions.
Six Months Ended June 30, 2020 versus Six Months Ended June 30, 2019
Net sales. Net sales for the six months ended June 30, 2020 were $304.9 million, a decrease of 19.3% compared to $378.1 million for the six months ended June 30, 2019. The decrease in net sales occurred primarily with our traditional home entertainment and security customers as we experienced supply, production and demand disruptions caused by the COVID-19 pandemic. Our China-based manufacturing facilities were delayed in re-opening after the Lunar New Year holiday, certain of our key suppliers were ordered to close by local authorities, and certain customers reduced order quantities. We expect the COVID-19 pandemic to negatively impact our net sales in the third quarter and possibly the remainder of 2020.
Gross profit. Gross profit for the six months ended June 30, 2020 was $81.0 million compared to $73.9 million for the six months ended June 30, 2019. Gross profit as a percent of sales increased to 26.6% for the six months ended June 30, 2020 from 19.5% for the six months ended June 30, 2019. Gross profit as a percent of sales was favorably impacted by a reduction in U.S. tariff expense, improved operational efficiencies in our Mexico-based manufacturing facility as it was no longer in a start-up phase, an increase in royalty revenue as certain consumer electronic companies are embedding our technology in their devices, and the strengthening of the U.S. Dollar versus the Chinese Yuan Renminbi and the Mexican Peso. Our manufacturing costs were negatively impacted by the COVID-19 pandemic as our China-based manufacturing facilities were delayed in re-opening after the Lunar New Year holiday and our Mexico-based manufacturing facility experienced a more than one week closure. The potential impact of the COVID-19 pandemic on our gross profit as a percentage of net sales in future periods is unknown to us at this time; however, the closure of any of our factories may result in excess manufacturing costs, additional tariffs if we were to import goods from China into North America and additional expenses to meet the demand of our customers.
Research and development expenses. R&D expenses increased 9.5% to $15.3 million for the six months ended June 30, 2020 from $14.0 million for the six months ended June 30, 2019 primarily due to our continued investment in the development of new products that enhance the user experience in home entertainment and home automation.
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Selling, general and administrative expenses. SG&A expenses decreased to $51.2 million for the six months ended June 30, 2020 from $62.2 million for the six months ended June 30, 2019, primarily due to a reduction in incentive compensation expense, a decrease in contingent consideration recorded in connection with our acquisition of the net assets of Ecolink and a decrease in freight costs. We also reduced certain discretionary expenses as a result of the COVID-19 pandemic and expect this to continue for the remainder of the year.
Interest income (expense), net. Net interest expense decreased to $1.0 million for the six months ended June 30, 2020 from $2.3 million for the six months ended June 30, 2019 as a result of a lower average loan balance and a lower interest rate.
Accrued social insurance adjustment. During the six months ended June 30, 2019, we reversed approximately $9.5 million of accrued social insurance. In June 2018, we sold our Guangzhou entity via a stock deal and the terms of the agreement included a two-year indemnification period. In June 2020, the indemnification period expired and we determined we were no longer legally liable for any liabilities associated with our Guangzhou entity. Accordingly, we reversed the accrued social insurance amount associated with the Guangzhou entity which was approximately $9.5 million.
Other income (expense), net. Net other income was $0.4 million for the six months ended June 30, 2020, as a result of net foreign currency gains, compared to expense of $0.3 million for the six months ended June 30, 2019, as a result of net foreign currency losses.
Provision for income taxes. Income tax expense was $3.1 million for the six months ended June 30, 2020, representing an effective tax rate of 13.3%. During the six months ended June 30, 2020, we received two incentive tax refunds in China totaling approximately $1.1 million and we reversed a tax reserve of approximately $1.3 million that was no longer required. Partially offsetting these items is a pre-tax loss without benefit in the U.S. Income tax expense was $1.2 million for the six months ended June 30, 2019. We incurred a pre-tax loss for the six months ended June 30, 2019; however, losses were not benefited in the U.S. and we recognized tax expense resulting from the remeasurement of deferred taxes in China and the recording of pre-tax income in foreign jurisdictions.
Liquidity and Capital Resources
Sources and Uses of Cash
(In thousands) | Six Months Ended June 30, 2020 | Increase (Decrease) | Six Months Ended June 30, 2019 | ||||||||
Cash provided by (used for) operating activities | $ | 4,487 | $ | (15,746 | ) | $ | 20,233 | ||||
Cash provided by (used for) investing activities | (9,787 | ) | 1,566 | (11,353 | ) | ||||||
Cash provided by (used for) financing activities | (4,496 | ) | 7,659 | (12,155 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (5,674 | ) | (5,307 | ) | (367 | ) | |||||
Net increase (decrease) in cash and cash equivalents | $ | (15,470 | ) | $ | (11,828 | ) | $ | (3,642 | ) | ||
June 30, 2020 | Increase (Decrease) | December 31, 2019 | |||||||||
Cash and cash equivalents | $ | 58,832 | $ | (15,470 | ) | $ | 74,302 | ||||
Working capital | 128,701 | 16,405 | 112,296 | ||||||||
Net cash provided by operating activities was $4.5 million during the six months ended June 30, 2020 compared to $20.2 million during the six months ended June 30, 2019. Net income was $20.2 million for the six months ended June 30, 2020 compared to a net loss of $6.1 million for the six months ended June 30, 2019. Accounts payable and accrued liabilities resulted in net cash outflows of $40.9 million during the six months ended June 30, 2020 compared to cash inflows of $16.8 million during the six months ended June 30, 2019, largely as a result of timing of payments for accounts payable, accrued compensation and contingent consideration. Inventories decreased by $9.6 million during the six months ended June 30, 2020 compared to an increase of $4.4 million during the six months ended June 30, 2019. Inventory turns were 3.0 turns at June 30, 2020 compared to 3.5 turns at June 30, 2019. Days sales outstanding were 79 days at June 30, 2020 compared to 69 days at June 30, 2019.
Net cash used for investing activities during the six months ended June 30, 2020 was $9.8 million, of which $6.2 million was utilized for capital expenditures. Net cash used for investing activities during the six months ended June 30, 2019 was $11.4 million of which $10.1 million was utilized for capital expenditures.
Net cash used for financing activities was $4.5 million during the six months ended June 30, 2020 compared to $12.2 million during the six months ended June 30, 2019. The decrease in cash used for financing activities was driven primarily by borrowing
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and repayment activity on our line of credit. During the six months ended June 30, 2020 we had net borrowings of $5.0 million compared to net repayments of $6.5 million during the six months ended June 30, 2019. This was partially offset by an increase in treasury share repurchases in the current period.
During the six months ended June 30, 2020, we repurchased 172,274 shares of our common stock at a cost of $6.4 million compared to our repurchase of 47,100 shares at a cost of $1.4 million during the six months ended June 30, 2019. We hold these shares as treasury stock and they are available for reissue. Presently, we have no plans to distribute these shares, although we may change these plans if necessary to fulfill our on-going business objectives. In addition, while we have suspended repurchasing shares under our 2020 Plan due in part to the uncertainties surrounding the COVID-19 pandemic, management may resume such repurchasing when market and business conditions warrant. See Note 12 contained in "Notes to Consolidated Financial Statements" for further information regarding our share repurchase programs.
Contractual Obligations
The following table summarizes our contractual obligations and the effect these obligations are expected to have on our liquidity and cash flow in future periods.
Payments Due by Period | |||||||||||||||||||
(In thousands) | Total | Less than 1 year | 1 - 3 years | 4 - 5 years | After 5 years | ||||||||||||||
Operating lease obligations | $ | 22,758 | $ | 6,877 | $ | 10,660 | $ | 3,763 | $ | 1,458 | |||||||||
Purchase obligations (1) | 3,467 | 3,467 | — | — | — | ||||||||||||||
Contingent consideration (2) | 2,234 | 2,000 | 234 | — | — | ||||||||||||||
Total contractual obligations | $ | 28,459 | $ | 12,344 | $ | 10,894 | $ | 3,763 | $ | 1,458 | |||||||||
(1) | Purchase obligations primarily consist of contractual payments to purchase property, plant and equipment. |
(2) | Contingent consideration consists of contingent payments related to our purchases of the net assets of Ecolink and RCS Control Systems, Inc. ("RCS"). |
Liquidity
Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have been sufficient to support our business operations, capital expenditures and discretionary share repurchases. More recently, we have utilized our revolving line of credit to fund an increased level of share repurchases and our acquisitions of the net assets of Ecolink and RCS. We anticipate that we will continue to utilize both cash flows from operations and our revolving line of credit to support ongoing business operations, capital expenditures and future discretionary share repurchases. We believe our current cash balances, anticipated cash flow to be generated from operations and available borrowing resources will be sufficient to cover expected cash outlays during the next twelve months; however, because our cash is located in various jurisdictions throughout the world, we may at times need to increase borrowing from our revolving line of credit or take on additional debt until we are able to transfer cash among our various entities.
Our liquidity is subject to various risks including the risks discussed under "Item 3. Quantitative and Qualitative Disclosures about Market Risk."
(In thousands) | June 30, 2020 | December 31, 2019 | |||||
Cash and cash equivalents | $ | 58,832 | $ | 74,302 | |||
Available borrowing resources | 49,300 | 54,300 | |||||
Our cash balances are held in numerous locations throughout the world. The majority of our cash is held outside of the United States and may be repatriated to the United States but, under current law, may be subject to state income and foreign withholding taxes. Additionally, repatriation of some foreign balances is restricted by local laws. We have provided for the state income tax and the foreign withholding tax liabilities on these amounts for financial statement purposes.
On June 30, 2020, we had $8.6 million, $14.8 million, $9.8 million, $15.2 million and $10.4 million of cash and cash equivalents in the United States, the PRC, Asia (excluding the PRC), Europe, and South America, respectively. On December 31, 2019, we had $16.8 million, $13.7 million, $21.7 million, $9.1 million, and $13.0 million of cash and cash equivalents in the United States, the PRC, Asia (excluding the PRC), Europe and South America, respectively. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash and cash equivalents with financial institutions we believe are high quality.
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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, 2021. 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, 2020.
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 that 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, 2020 was 1.43%. 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, 2020, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.
At June 30, 2020, we had an outstanding balance of $73.0 million on our Credit Line and $49.3 million of availability.
Off-Balance Sheet Arrangements
We do not participate in any material off-balance sheet arrangements.
Factors That May Affect Financial Condition and Future Results
Forward-Looking Statements
We caution that the following important factors, among others (including but not limited to factors discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed in our 2019 Annual Report on Form 10-K, or in our other reports filed from time to time with the Securities and Exchange Commission), may affect our actual results and may contribute to or cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements. The factors included here are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results.
While we believe that the forward-looking statements made in this report are based on reasonable assumptions, the actual outcome of such statements is subject to a number of risks and uncertainties, including the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial position and liquidity; the significant percentage of our revenue attributable to a limited number of customers; the failure of our markets to continue growing and expanding in the manner we anticipated; the loss of market share due to competition; the delay by or failure of our customers to order products from us due to delays by them of their new product rollouts, their decision to purchase their products from an alternative or second source supplier, their efforts to refocus their operations to broadband and over-the-top ("OTT") versus traditional linear video, their failure to grow as we anticipated, their internal inventory control measures, including to mitigate effects due to increases in tariffs, or their loss of market share; the effects of natural or other events beyond our control, including the effects political unrest, war or terrorist activities may have on us or the economy; the economic environment's effect on us or our customers; the effects of doing business internationally, including the effects that changes in laws, regulations and policies may have on our business including the impact of new or additional tariffs and surcharges; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, including cable, satellite, consumer electronics, retail, and digital media and interactive technology; our inability to add profitable complementary products which are accepted by the marketplace; our inability to attract and retain a quality workforce at adequate levels in all regions of the world, and particularly those jurisdictions where we are moving our operations; our inability to continue to maintain our operating costs at acceptable levels through our cost containment efforts including moving our operations and manufacturing facilities to lower cost jurisdictions; an unfavorable ruling in any or all of the litigation matters to which we are party; our inability to continue selling our products or licensing our technologies at higher or
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profitable margins; our inability to obtain orders or maintain our order volume with new and existing customers; our inability to develop new and innovative technologies and products that are accepted by our customers; our inability to successfully, timely and profitably restructure and/or relocate our manufacturing facilities and activities; the possible dilutive effect our stock incentive programs may have on our earnings per share and stock price; the continued ability to identify and execute on opportunities that maximize stockholder value, including the effects repurchasing the Company's shares have on the Company's stock value; our inability to continue to obtain adequate quantities of component parts or secure adequate factory production capacity on a timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, procedures and internal processes governing our management of these risks and the use of financial instruments to mitigate our risk exposure.
Interest Rate Risk
We are exposed to interest rate risk related to our debt. From time to time we borrow amounts on our Credit Line for working capital and other liquidity needs. Under our Second Amended Credit Agreement, we may elect to pay interest on outstanding borrowings on our Credit Line based on LIBOR or a base rate (based on the prime rate of U.S. Bank) plus an applicable margin as defined in the Second Amended Credit Agreement. Accordingly, changes in interest rates would impact our results of operations in future periods. A 100 basis point increase in interest rates would have an approximately $0.5 million annual impact on net income based on our outstanding Credit Line balance at June 30, 2020.
We cannot make any assurances that we will not need to borrow additional amounts in the future or that funds will be extended to us under comparable terms or at all. If funding is not available to us at a time when we need to borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our operating results, financial position and cash flows.
Foreign Currency Exchange Rate Risk
At June 30, 2020, we had wholly-owned subsidiaries in Argentina, Brazil, the British Virgin Islands, Cayman Islands, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, the PRC, Singapore, Spain and the United Kingdom. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases, operating expenses, assets and liabilities denominated in currencies other than the U.S. Dollar. The most significant foreign currencies to our operations are the Chinese Yuan Renminbi, Mexican Peso, British Pound, Euro, Argentinian Peso, Brazilian Real, Indian Rupee, Japanese Yen and Philippine Peso. Our most significant foreign currency exposure is to the Chinese Yuan Renminbi as this is the functional currency of our China-based factories where the majority of our products are manufactured. If the Chinese Yuan Renminbi were to strengthen against the U.S. Dollar, our manufacturing costs would increase. We are generally a net payor of the Mexican Peso, Euro, Indian Rupee, Japanese Yen and Philippine Peso and therefore benefit from a stronger U.S. Dollar and are adversely affected by a weaker U.S. Dollar relative to the foreign currency. For the British Pound, Argentinian Peso and Brazilian Real, we are generally a net receiver of the foreign currency and therefore benefit from a weaker U.S. Dollar and are adversely affected by a stronger U.S. Dollar relative to the foreign currency. Even where we are a net receiver, a weaker U.S. Dollar may adversely affect certain expense figures taken alone.
From time to time, we enter into foreign currency exchange agreements to manage the foreign currency exchange rate risks inherent in our forecasted income and cash flows denominated in foreign currencies. The terms of these foreign currency exchange agreements normally last less than nine months. We recognize the gains and losses on these foreign currency contracts in the same period as the re-measurement losses and gains of the related foreign currency-denominated exposures.
It is difficult to estimate the impact of fluctuations on income, as it depends on the opening and closing rates, the average net balance sheet positions held in a foreign currency and the amount of income generated in local currency. We routinely forecast what these balance sheet positions and income generated in local currency may be and we take steps to minimize exposure as we deem appropriate. Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures, primarily if such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or the currency is difficult or too expensive to hedge. We do not enter into any derivative transactions for speculative purposes.
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The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an approximate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currency with all other variables held constant. The analysis includes all of our foreign currency contracts offset by the underlying exposures. Based on our overall foreign currency rate exposure at June 30, 2020, we believe that movements in foreign currency rates may have a material effect on our financial position and results of operations. We estimate that if the exchange rates for the Chinese Yuan Renminbi, Mexican Peso, British Pound, Euro, Argentinian Peso, Brazilian Real, Indian Rupee, Japanese Yen and Philippine Peso relative to the U.S. Dollar fluctuate 10% from June 30, 2020, net income in the third quarter of 2020 would fluctuate by approximately $6.4 million.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Exchange Act Rule 13a-15(d) defines "disclosure controls and procedures" to mean controls and procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The definition further states that disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to lawsuits arising out of the conduct of our business. The discussion of our litigation matters contained in "Notes to Consolidated Financial Statements - Note 11" is incorporated herein by reference.
ITEM 1A. RISK FACTORS
The reader should carefully consider, in connection with the other information in this report, the risk factors discussed in "Part I, Item 1A: Risk Factors" of the Company's 2019 Annual Report on Form 10-K incorporated herein by reference, as well as the risk factors set forth below. These factors may cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.
The COVID-19 pandemic has adversely affected and is expected to continue to pose risks to our business, results of operations, financial condition and cash flows, and other epidemics or outbreaks of infectious diseases may have a similar impact.
As previously disclosed, we face risks related to outbreaks of infectious diseases, including the ongoing COVID-19 pandemic. COVID-19 has spread across the globe during 2020 and is impacting economic activity worldwide. COVID-19 has caused disruption and volatility in the global capital markets and has authored an economic slowdown. The COVID-19 pandemic and its associated economic uncertainty negatively impacted our sales volumes in the first six months of 2020 in most geographies and across a variety of customers. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The measures we have taken to follow the COVID-19 guidelines from the Centers for Disease Control and Prevention ("CDC") and the various local governments where our facilities and operations are located concerning the health and safety of our personnel, have resulted in attenuating activity and, in some cases, required
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temporary closures of certain of our facilities, among other impacts. The duration of these measures is unknown, may be extended and additional measures may be imposed.
We further expect that the ultimate significance of the impact of the COVID-19 pandemic on our business will vary but will generally depend on the extent of measures taken affecting day-to-day life and the length of time that such measures remain in place to respond to the COVID-19 pandemic. At this point, it is impossible to predict such extent and duration and the degree to which supply and demand for our products and services will be affected. This uncertainty makes it challenging for management to estimate with precision the future performance of our business.
Among the potential effects of the COVID-19 pandemic and other similar outbreaks on the company include, but are not limited to, the following:
• | Reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending, which may adversely affect our results of operations by reducing our sales, margins and/or net income as a result of a slowdown in customer orders or order cancellations. In addition, volatility in the financial markets may increase the cost of capital and/or limit its availability. |
• | Economic uncertainty as a result of the COVID-19 pandemic is expected to make it difficult for us and our customers and suppliers to accurately forecast and plan future business activities. |
• | The potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ financial capabilities were to deteriorate, write-downs or write-offs may negatively affect our operating results and, if large, may have a material adverse effect on our business, financial condition, results of operations and cash flows. |
• | As a result of governmental orders, we may experience disruptions in our manufacturing operations and in our supply chain in connection with the sourcing of materials from geographic areas that continue to be impacted by the COVID-19 pandemic and by efforts to contain its spread. |
To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in this section and in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the three months ended June 30, 2020, our total stock repurchases, average price paid per share and the maximum number of shares that may yet be purchased on the open market under our plans or programs:
Period | Total Number of Shares Purchased (1) | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) | |||||||||
April 1, 2020 - April 30, 2020 | — | $ | — | — | 175,127 | ||||||||
May 1, 2020 - May 31, 2020 | 3,107 | 36.87 | — | 175,127 | |||||||||
June 1, 2020 - June 30, 2020 | — | — | — | 175,127 | |||||||||
Total | 3,107 | $ | 36.87 | — | 175,127 | ||||||||
(1) | Of the repurchases in May, 3,107 shares represent common shares of the Company that were owned and tendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted shares. |
(2) | On March 10, 2020, our Board of Directors replaced the repurchase plan approved in 2018 with a new repurchase plan authorizing the repurchase of up to 300,000 of our common stock ("2020 Plan"). As of June 30, 2020, we had 175,127 shares of common stock authorized for repurchase remaining under the 2020 Plan. We may repurchase shares of common stock in privately negotiated and/or open-market transactions, including pursuant to plans complying with Rule 10b5-1 promulgated under the Securities Exchange Act of 1934. While we have suspended repurchasing under our 2020 Plan due in part to the uncertainties surrounding the COVID-19 pandemic, management may resume such repurchasing when market and business conditions warrant. |
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ITEM 6. EXHIBITS
EXHIBIT INDEX
31.1 | ||
31.2 | ||
32 | ||
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: | August 6, 2020 | UNIVERSAL ELECTRONICS INC. | |||
By: | /s/ Bryan M. Hackworth | ||||
Bryan M. Hackworth | |||||
Chief Financial Officer (principal financial officer | |||||
and principal accounting officer) | |||||
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