10-Q 1 uei-06302019x10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)

ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
OR

¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number: 0-21044
_______________________________________
UNIVERSAL ELECTRONICS INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware |  | 33-0204817
(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
15147 N. Scottsdale Road, Suite H300 Scottsdale, Arizona |  | 85254-2494
(Address of Principal Executive Offices) |  | (Zip Code)

Registrant's telephone number, including area code: (480) 530-3000
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer | ¨ | Accelerated filer | ý
Non-accelerated filer | ¨ | Smaller reporting company | ¨
|  | Emerging growth company | ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols | Name of each exchange on which registered
Common Stock, par value $0.01 per share | UEIC | The NASDAQ Stock Market LLC

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,879,232 shares of Common Stock, par value $0.01 per share, of the registrant were outstanding on August 6, 2019.

UNIVERSAL ELECTRONICS INC.
INDEX

| Page Number
PART I. FINANCIAL INFORMATION | 3
Item 1. Consolidated Financial Statements (Unaudited) | 3
Consolidated Balance Sheets | 3
Consolidated Statements of Operations | 4
Consolidated Comprehensive Income (Loss) Statements | 5
Consolidated Statements of Stockholders' Equity | 6
Consolidated Statements of Cash Flows | 8
Notes to Consolidated Financial Statements | 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 33
Item 4. Controls and Procedures | 34
PART II. OTHER INFORMATION | 35
Item 1. Legal Proceedings | 35
Item 1A. Risk Factors | 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 35
Item 6. Exhibits | 36
Signatures | 37

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
(Unaudited)

| June 30, 2019 |  | December 31, 2018
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 49,565 |  |  | $ | 53,207 |
Accounts receivable, net | 154,633 |  |  | 144,689 |
Contract assets | 23,639 |  |  | 25,572 |
Inventories, net | 148,909 |  |  | 144,350 |
Prepaid expenses and other current assets | 9,047 |  |  | 11,638 |
Income tax receivable | 3,149 |  |  | 997 |
Total current assets | 388,942 |  |  | 380,453 |
Property, plant and equipment, net | 93,867 |  |  | 95,840 |
Goodwill | 48,472 |  |  | 48,485 |
Intangible assets, net | 22,046 |  |  | 24,370 |
Operating lease right-of-use assets | 20,306 |  |  | — |
Deferred income taxes | 2,237 |  |  | 1,833 |
Other assets | 2,423 |  |  | 4,615 |
Total assets | $ | 578,293 |  |  | $ | 555,596 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 113,827 |  |  | $ | 107,282 |
Line of credit | 95,000 |  |  | 101,500 |
Accrued compensation | 36,337 |  |  | 33,965 |
Accrued sales discounts, rebates and royalties | 8,676 |  |  | 9,574 |
Accrued income taxes | 517 |  |  | 3,524 |
Other accrued liabilities | 36,087 |  |  | 24,011 |
Total current liabilities | 290,444 |  |  | 279,856 |
Long-term liabilities: |  |  |
Operating lease obligations | 16,403 |  |  | — |
Contingent consideration | 4,429 |  |  | 8,435 |
Deferred income taxes | 4,486 |  |  | 930 |
Income tax payable | 1,647 |  |  | 1,647 |
Other long-term liabilities | 13 |  |  | 1,768 |
Total liabilities | 317,422 |  |  | 292,636 |
Commitments and contingencies |  |  |  |  |
Stockholders' equity: |  |  |
Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding | — |  |  | — |
Common stock, $0.01 par value, 50,000,000 shares authorized; 24,042,791 and 23,932,703 shares issued on June 30, 2019 and December 31, 2018, respectively | 240 |  |  | 239 |
Paid-in capital | 281,583 |  |  | 276,103 |
Treasury stock, at cost, 10,163,559 and 10,116,459 shares on June 30, 2019 and December 31, 2018, respectively | (277,293 | ) |  | (275,889 | )
Accumulated other comprehensive income (loss) | (20,381 | ) |  | (20,281 | )
Retained earnings | 276,722 |  |  | 282,788 |
Total stockholders' equity | 260,871 |  |  | 262,960 |
Total liabilities and stockholders' equity | $ | 578,293 |  |  | $ | 555,596 |

See Note 4 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
3

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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Net sales | $ | 193,896 |  |  | $ | 162,523 |  |  | $ | 378,059 |  |  | $ | 327,221 |
Cost of sales | 159,903 |  |  | 135,764 |  |  | 304,192 |  |  | 263,260 |
Gross profit | 33,993 |  |  | 26,759 |  |  | 73,867 |  |  | 63,961 |
Research and development expenses | 7,163 |  |  | 6,059 |  |  | 13,954 |  |  | 12,110 |
Selling, general and administrative expenses | 30,756 |  |  | 30,570 |  |  | 62,176 |  |  | 60,817 |
Operating loss | (3,926 | ) |  | (9,870 | ) |  | (2,263 | ) |  | (8,966 | )
Interest income (expense), net | (1,098 | ) |  | (1,279 | ) |  | (2,304 | ) |  | (2,349 | )
Gain on sale of Guangzhou factory | — |  |  | 36,978 |  |  | — |  |  | 36,978 |
Other income (expense), net | 188 |  |  | (1,082 | ) |  | (278 | ) |  | (1,669 | )
Income (loss) before provision for income taxes | (4,836 | ) |  | 24,747 |  |  | (4,845 | ) |  | 23,994 |
Provision for income taxes | 225 |  |  | 2,088 |  |  | 1,221 |  |  | 1,922 |
Net income (loss) | $ | (5,061 | ) |  | $ | 22,659 |  |  | $ | (6,066 | ) |  | $ | 22,072 |
Earnings (loss) per share: |  |  |  |  |  |  |
Basic | $ | (0.37 | ) |  | $ | 1.61 |  |  | $ | (0.44 | ) |  | $ | 1.57 |
Diluted | $ | (0.37 | ) |  | $ | 1.60 |  |  | $ | (0.44 | ) |  | $ | 1.55 |
Shares used in computing earnings (loss) per share: |  |  |  |  |  |  |
Basic | 13,863 |  |  | 14,070 |  |  | 13,845 |  |  | 14,078 |
Diluted | 13,863 |  |  | 14,158 |  |  | 13,845 |  |  | 14,195 |

See Note 4 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED COMPREHENSIVE INCOME (LOSS) STATEMENTS
(In thousands)
(Unaudited)

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Net income (loss) | $ | (5,061 | ) |  | $ | 22,659 |  |  | $ | (6,066 | ) |  | $ | 22,072 |
Other comprehensive income (loss): |  |  |  |  |  |  |
Change in foreign currency translation adjustment | (1,833 | ) |  | (5,058 | ) |  | (100 | ) |  | (1,412 | )
Comprehensive income (loss) | $ | (6,894 | ) |  | $ | 17,601 |  |  | $ | (6,166 | ) |  | $ | 20,660 |

See Note 4 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
The following summarizes the changes in total equity for the three and six months ended June 30, 2019:

| Common Stock Issued |  | Common Stock in Treasury |  | Paid-in Capital |  | Accumulated Other Comprehensive Income (Loss) |  | Retained Earnings |  | Totals
| Shares |  | Amount |  | Shares |  | Amount |  |  |
Balance at December 31, 2018 | 23,933 |  |  | $ | 239 |  |  | (10,116 | ) |  | $ | (275,889 | ) |  | $ | 276,103 |  |  | $ | (20,281 | ) |  | $ | 282,788 |  |  | $ | 262,960 |
Net income (loss) |  |  |  |  |  |  |  |  |  |  |  |  | (1,005 | ) |  | (1,005 | )
Currency translation adjustment |  |  |  |  |  |  |  |  |  |  | 1,733 |  |  |  |  | 1,733 |
Shares issued for employee benefit plan and compensation | 78 |  |  | 1 |  |  |  |  |  |  | 346 |  |  |  |  |  |  | 347 |
Purchase of treasury shares |  |  |  |  | (43 | ) |  | (1,215 | ) |  |  |  |  |  |  |  | (1,215 | )
Shares issued to directors | 8 |  |  | — |  |  |  |  |  |  |  |  | — |  |  |  |  |  |  | — |
Employee and director stock-based compensation |  |  |  |  |  |  |  |  | 1,918 |  |  |  |  |  |  | 1,918 |
Performance - based common stock warrants |  |  |  |  |  |  |  |  |  |  |  |  | 434 |  |  |  |  |  |  |  |  | 434 |
Balance at March 31, 2019 | 24,019 |  |  | 240 |  |  | (10,159 | ) |  | (277,104 | ) |  | 278,801 |  |  | (18,548 | ) |  | 281,783 |  |  | 265,172 |
Net income (loss) |  |  |  |  |  |  |  |  |  |  |  |  | (5,061 | ) |  | (5,061 | )
Currency translation adjustment |  |  |  |  |  |  |  |  |  |  | (1,833 | ) |  |  |  | (1,833 | )
Shares issued for employee benefit plan and compensation | 17 |  |  | — |  |  |  |  |  |  | 273 |  |  |  |  |  |  | 273 |
Purchase of treasury shares |  |  |  |  | (5 | ) |  | (189 | ) |  |  |  |  |  |  |  | (189 | )
Shares issued to directors | 7 |  |  | — |  |  |  |  |  |  |  |  | — |  |  |  |  |  |  | — |
Employee and director stock-based compensation |  |  |  |  |  |  |  |  | 2,273 |  |  |  |  |  |  | 2,273 |
Performance-based common stock warrants |  |  |  |  |  |  |  |  |  |  |  |  | 236 |  |  |  |  |  |  |  |  | 236 |
Balance at June 30, 2019 | 24,043 |  |  | $ | 240 |  |  | (10,164 | ) |  | $ | (277,293 | ) |  | $ | 281,583 |  |  | $ | (20,381 | ) |  | $ | 276,722 |  |  | $ | 260,871 |

See Note 4 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
The following summarizes the changes in total equity for the three and six months ended June 30, 2018:

| Common Stock Issued |  | Common Stock in Treasury |  | Paid-in Capital |  | Accumulated Other Comprehensive Income (Loss) |  | Retained Earnings |  | Totals
| Shares |  | Amount |  | Shares |  | Amount |  |  |
Balance at December 31, 2017 | 23,760 |  |  | $ | 238 |  |  | (9,703 | ) |  | $ | (262,065 | ) |  | $ | 265,195 |  |  | $ | (16,599 | ) |  | $ | 266,780 |  |  | $ | 253,549 |
Impact to retained earnings from adoption of ASU 2014-09 |  |  |  |  |  |  |  |  |  |  |  |  | 4,084 |  |  | 4,084 |
Balance at January 1, 2018 | 23,760 |  |  | 238 |  |  | (9,703 | ) |  | (262,065 | ) |  | 265,195 |  |  | (16,599 | ) |  | 270,864 |  |  | 257,633 |
Net income (loss) |  |  |  |  |  |  |  |  |  |  |  |  | (587 | ) |  | (587 | )
Currency translation adjustment |  |  |  |  |  |  |  |  |  |  | 3,646 |  |  |  |  | 3,646 |
Shares issued for employee benefit plan and compensation | 42 |  |  | — |  |  |  |  |  |  | 336 |  |  |  |  |  |  | 336 |
Purchase of treasury shares |  |  |  |  | (13 | ) |  | (615 | ) |  |  |  |  |  |  |  | (615 | )
Stock options exercised | 20 |  |  | — |  |  |  |  |  |  | 439 |  |  |  |  |  |  | 439 |
Shares issued to directors | 8 |  |  | — |  |  |  |  |  |  |  |  | — |  |  |  |  |  |  | — |
Employee and director stock-based compensation |  |  |  |  |  |  |  |  | 2,204 |  |  |  |  |  |  | 2,204 |
Performance - based common stock warrants |  |  |  |  |  |  |  |  |  |  |  |  | 471 |  |  |  |  |  |  |  |  | 471 |
Balance at March 31, 2018 | 23,830 |  |  | 238 |  |  | (9,716 | ) |  | (262,680 | ) |  | 268,645 |  |  | (12,953 | ) |  | 270,277 |  |  | 263,527 |
Net income (loss) |  |  |  |  |  |  |  |  |  |  |  |  | 22,659 |  |  | 22,659 |
Currency translation adjustment |  |  |  |  |  |  |  |  |  |  | (5,058 | ) |  |  |  | (5,058 | )
Shares issued for employee benefit plan and compensation | 14 |  |  | 1 |  |  |  |  |  |  | 253 |  |  |  |  |  |  | 254 |
Purchase of treasury shares |  |  |  |  | (212 | ) |  | (6,499 | ) |  |  |  |  |  |  |  | (6,499 | )
Stock options exercised | 10 |  |  | — |  |  |  |  |  |  | 265 |  |  |  |  |  |  | 265 |
Shares issued to directors | 8 |  |  | — |  |  |  |  |  |  |  |  | — |  |  |  |  |  |  | — |
Employee and director stock-based compensation |  |  |  |  |  |  |  |  | 2,465 |  |  |  |  |  |  | 2,465 |
Performance-based common stock warrants |  |  |  |  |  |  |  |  |  |  |  |  | (128 | ) |  |  |  |  |  |  |  | (128 | )
Balance at June 30, 2018 | 23,862 |  |  | $ | 239 |  |  | (9,928 | ) |  | $ | (269,179 | ) |  | $ | 271,500 |  |  | $ | (18,011 | ) |  | $ | 292,936 |  |  | $ | 277,485 |

See Note 4 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

| Six Months Ended June 30,
| 2019 |  | 2018
Cash provided by (used for) operating activities: |  |  |
Net income (loss) | $ | (6,066 | ) |  | $ | 22,072 |
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |  |  |
Depreciation and amortization | 15,871 |  |  | 16,913 |
Provision for doubtful accounts | 5 |  |  | 2 |
Provision for inventory write-downs | 7,016 |  |  | 5,078 |
Gain on sale of Guangzhou factory | — |  |  | (36,978 | )
Deferred income taxes | 3,203 |  |  | (557 | )
Shares issued for employee benefit plan | 620 |  |  | 590 |
Employee and director stock-based compensation | 4,191 |  |  | 4,669 |
Performance-based common stock warrants | 670 |  |  | 343 |
Impairment of China factory equipment | — |  |  | 2,763 |
Changes in operating assets and liabilities: |  |  |
Accounts receivable and contract assets | (8,108 | ) |  | 6,164 |
Inventories | (11,403 | ) |  | (16,061 | )
Prepaid expenses and other assets | 2,578 |  |  | (2,765 | )
Accounts payable and accrued liabilities | 16,822 |  |  | (7,329 | )
Accrued income taxes | (5,166 | ) |  | 1,219 |
Net cash provided by (used for) operating activities | 20,233 |  |  | (3,877 | )
Cash provided by (used for) investing activities: |  |  |
Proceeds from sale of Guangzhou factory | — |  |  | 51,291 |
Acquisitions of property, plant and equipment | (10,093 | ) |  | (13,416 | )
Refund of deposit received toward sale of Guangzhou factory | — |  |  | (5,053 | )
Acquisitions of intangible assets | (1,260 | ) |  | (1,248 | )
Net cash provided by (used for) investing activities | (11,353 | ) |  | 31,574 |
Cash provided by (used for) financing activities: |  |  |
Borrowings under line of credit | 40,000 |  |  | 23,000 |
Repayments on line of credit | (46,500 | ) |  | (50,000 | )
Proceeds from stock options exercised | — |  |  | 704 |
Treasury stock purchased | (1,404 | ) |  | (7,114 | )
Contingent consideration payments in connection with business combinations | (4,251 | ) |  | (3,858 | )
Net cash provided by (used for) financing activities | (12,155 | ) |  | (37,268 | )
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (367 | ) |  | 1,665 |
Net increase (decrease) in cash, cash equivalents and restricted cash | (3,642 | ) |  | (7,906 | )
Cash, cash equivalents and restricted cash at beginning of year | 53,207 |  |  | 67,339 |
Cash, cash equivalents and restricted cash at end of period | $ | 49,565 |  |  | $ | 59,433 |
Supplemental cash flow information: |  |  |
Income taxes paid | $ | 3,973 |  |  | $ | 4,191 |
Interest paid | $ | 1,156 |  |  | $ | 2,525 |

See Note 4 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Note 1 — Basis of Presentation and Significant Accounting Policies
In the opinion of management, the accompanying consolidated financial statements of Universal Electronics Inc. and its subsidiaries contain all the adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature and certain reclassifications have been made to prior year amounts in order to conform to the current year presentation. Information and footnote disclosures normally included in financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. As used herein, the terms "Company," "we," "us," and "our" refer to Universal Electronics Inc. and its subsidiaries, unless the context indicates to the contrary.
Our results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk," and the "Financial Statements and Supplementary Data" included in Items 1A, 7, 7A, and 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2018.
Estimates, Judgments and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for doubtful accounts, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes, stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these estimates and assumptions, and they may be adjusted as more information becomes available.
Summary of Significant Accounting Policies
Revenue Recognition
We adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," and all related amendments as of January 1, 2018.
Our performance obligations primarily arise from manufacturing and delivering universal control, sensing and automation products and AV accessories, which are sold through multiple channels, and intellectual property that is embedded in these products or licensed to others. Our contracts have an anticipated duration of less than a year. These performance obligations are satisfied at a point in time or over time, as described below. Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components. Some contracts contain early payment discounts, which are recognized as a reduction to revenue if the customer typically meets the early payment conditions, and are insignificant to net sales. Consideration may be variable based on indeterminate volumes.
Effective January 1, 2018, revenue is recognized over time when the customer simultaneously receives and consumes the benefits provided by our performance, our performance creates or enhances an asset that the customer controls, or when our performance creates an asset with no alternative use to us (custom products) and we have an enforceable right to payment for performance completed to date through a contractual commitment from the customer. An asset does not have an alternative use if we are unable to redirect the asset to another customer in the foreseeable future without significant rework. The method for measuring progress towards satisfying a performance obligation for a custom product is based on the costs incurred to date (cost-to-cost method). We believe that the costs associated with production are most closely aligned with the revenue associated with those products. Revenue recognized over time, for which we have not yet invoiced the customer, is included in contract assets in our consolidated balance sheets. Generally, we invoice the customer within 90 days of revenue recognition.
We recognize revenue at a point in time if the criteria for recognizing revenue over time are not met, the title of the goods has transferred, and we have a present right to payment.
We typically recognize revenue for the sale of tooling at a point in time, which is generally upon completion of the tooling and, if applicable, acceptance by the customer.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
A provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net revenue in the period in which we make such a determination.
We accrue for discounts and rebates based on historical experience and our expectations regarding future sales to our customers. Accruals for discounts and rebates are recorded as a reduction to sales in the same period as the related revenue. Changes in such accruals may be required if future rebates and incentives differ from our estimates.
We license our intellectual property including our patented technologies, trademarks, and database of control codes. When license fees are paid on a per-unit basis, we record license revenue when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment. When a fixed up-front license fee is received in exchange for the delivery of a particular database of infrared codes or the contract contains a minimum guarantee provision, we record revenue when delivery of the intellectual property has occurred. Tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers.
Contract assets represent revenue which has been recognized based on our accounting policies but for which the customer has not yet been invoiced and thus an account receivable has not yet been recorded.
Under prior accounting standards, prior to January 1, 2018, we recognized revenue on the sale of products when title of the goods had transferred, there was persuasive evidence of an arrangement (such as a purchase order from the customer), the sales price was fixed or determinable and collectability was reasonably assured. Revenue for term license fees were recognized on a straight-line basis over the effective term of the license when we could not reliably predict in which periods, within the term of the license, the licensee would benefit from the use of our patented inventions.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Sales allowances are recognized as reductions of gross accounts receivable to arrive at accounts receivable, net if the sales allowances are distributed in customer account credits. See Note 4 for further information concerning our sales allowances.
Revenue for the sale of tooling is recognized when the related tooling has been provided, customer acceptance documentation has been obtained, the sales price is fixed or determinable, and collectability is reasonably assured. Consideration received in advance of us satisfying the performance obligation is included in other accrued liabilities as tooling in our consolidated balance sheets.
We generate service revenue, which is paid monthly, as a result of providing customer support programs to some of our customers through our call centers. These service revenues are recognized when services are performed, persuasive evidence of an arrangement exists (such as when a signed agreement is received from the customer), the sales price is fixed or determinable, and collectability is reasonably assured.
We present all non-income government-assessed taxes (sales, use and value added taxes) collected from our customers and remitted to governmental agencies on a net basis (excluded from revenue) in our financial statements. The government-assessed taxes are recorded in other accrued liabilities until they are remitted to the government agency.
Leases
We adopted Accounting Standards Update ("ASU") 2016-02, "Leases," and all related amendments as of January 1, 2019. The impact of this new guidance on our accounting policies and consolidated financial statements is also described below. There have been no other significant changes in our accounting policies during the three and six months ended June 30, 2019 compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018.
We determine if an arrangement is a lease at inception and determine the classification of the lease, as either operating or finance, at commencement. Operating leases are included in operating lease right-of-use (“ROU”) assets, other accrued liabilities and long-term operating lease liabilities on our consolidated balance sheets. We presently do not have any finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date, including the lease term, in
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
determining the present value of lease payments. Operating lease ROU assets also factor in any lease payments made, initial direct costs and lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Some of our leases include options to extend with a range of three to five years with up to two extensions at the then current market rate. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Leases with an initial term of twelve months or less are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. If applicable, we combine lease and non-lease components, which primarily relate to ancillary expenses associated with real estate leases such as common area maintenance charges and management fees.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 (with amendments issued in 2018), which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance also requires lessees to recognize a right-of-use asset and a lease liability at the commencement date for all leases with terms greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018. We adopted ASU 2016-02 on January 1, 2019 using the modified retrospective optional transition method. Thus, the standard was applied starting January 1, 2019 and prior periods were not restated.
We applied the package of practical expedients permitted under the transition guidance. As a result, we did not reassess the identification, classification and initial direct costs of leases commencing before the effective date. We also applied the practical expedient to not separate lease and non-lease components to all new leases as well as leases commencing before the effective date.
Upon adoption, ASU 2016-02 resulted in the recognition of lease ROU assets, accrued liabilities and long-term liabilities related to operating leases of $20.7 million, $3.3 million and $17.0 million, respectively. In addition, assets and liabilities totaling $2.5 million and $2.3 million, respectively, were reclassified into the opening ROU asset balance. The adoption of ASU 2016-02 did not result in any cumulative-effect adjustment to the opening balance of retained earnings and did not have any impact on our results of operations, cash flows or debt covenants.
See Note 5 for additional information.
Other Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, "Improvements to Non-employee Share-Based Payment Accounting." This guidance expands the scope of Topic 718, "Compensation - Stock Compensation" to include share-based payment transactions for acquiring goods and services from non-employees, but excludes awards granted in conjunction with selling goods or services to a customer as part of a contract accounted for under ASC 606, "Revenue from Contracts with Customers." The adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which amends ASC 350-40, "Intangibles - Goodwill and Other - Internal-Use Software." The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and requires the capitalized implementation costs to be expensed over the term of the hosting arrangement. The accounting for the service element of a hosting arrangement that is a service contract is not affected. ASU 2018-15 is effective for fiscal periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-15, effective January 1, 2019, did not have a material impact on our consolidated financial statements.
Recent Accounting Updates Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This guidance updates existing guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This guidance simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Instead, if the carrying
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal periods beginning after December 31, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2017-04 to have a material impact on our consolidated financial statements.
Note 2 — Cash and Cash Equivalents
Cash and Cash Equivalents
Cash and cash equivalents were held in the following geographic regions:

(In thousands) | June 30, 2019 |  | December 31, 2018
United States | $ | 6,996 |  |  | $ | 1,156 |
People's Republic of China ("PRC") | 12,967 |  |  | 20,885 |
Asia (excluding the PRC) | 10,264 |  |  | 2,398 |
Europe | 9,166 |  |  | 19,907 |
South America | 10,172 |  |  | 8,861 |
Total cash and cash equivalents | $ | 49,565 |  |  | $ | 53,207 |

Note 3 — Accounts Receivable, Net and Revenue Concentrations
Accounts receivable, net were as follows:

(In thousands) | June 30, 2019 |  | December 31, 2018
Trade receivables, gross | $ | 150,779 |  |  | $ | 133,774 |
Allowance for doubtful accounts | (1,122 | ) |  | (1,121 | )
Allowance for sales returns | (582 | ) |  | (731 | )
Net trade receivables | 149,075 |  |  | 131,922 |
Other | 5,558 |  |  | 12,767 |
Accounts receivable, net | $ | 154,633 |  |  | $ | 144,689 |

Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts were as follows:

(In thousands) | Six Months Ended June 30,
2019 |  | 2018
Balance at beginning of period | $ | 1,121 |  |  | $ | 1,064 |
Additions to costs and expenses | 5 |  |  | 2 |
(Write-offs)/Foreign exchange effects | (4 | ) |  | (58 | )
Balance at end of period | $ | 1,122 |  |  | $ | 1,008 |

Significant Customers
Net sales to the following customers totaled more than 10% of our net sales:

| Three Months Ended June 30, |
| 2019 |  | 2018 |
| $ (thousands) |  | % of Net Sales |  | $ (thousands) |  | % of Net Sales |
Comcast Corporation | $ | 31,393 |  |  | 16.2 | % |  | $ | 29,542 |  |  | 18.2 | % |

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

| Six Months Ended June 30, |
| 2019 |  | 2018 |
| $ (thousands) |  | % of Net Sales |  | $ (thousands) |  | % of Net Sales |
Comcast Corporation | $ | 60,639 |  |  | 16.0 | % |  | $ | 67,517 |  |  | 20.6 | % |
Dish Network L.L.C. | $ | 38,851 |  |  | 10.3 | % |  | — |  | (1) | — |  | (1)

(1) Net sales to this customer did not total more than 10% of our total net sales in the prior period.
Trade receivables associated with these significant customers that totaled more than 10% of our accounts receivable, net were as follows:

| June 30, 2019 |  | December 31, 2018 |
| $ (thousands) |  | % of Accounts Receivable, Net |  | $ (thousands) |  | % of Accounts Receivable, Net |
Dish Network L.L.C. | $ | 16,588 |  |  | 10.7 | % |  | — |  | (1) | — | (1)

(1) Trade receivables associated with this customer did not total more than 10% of our accounts receivable, net at December 31, 2018.
Revenue Recognition Pattern
The pattern of revenue recognition was as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Goods and services transferred at a point in time | $ | 99,632 |  |  | $ | 83,661 |  |  | $ | 201,776 |  |  | $ | 177,600 |
Goods and services transferred over time | 94,264 |  |  | 78,862 |  |  | 176,283 |  |  | 149,621 |
Net sales | $ | 193,896 |  |  | $ | 162,523 |  |  | $ | 378,059 |  |  | $ | 327,221 |

Note 4 — Inventories, Net and Significant Suppliers
Inventories, net were as follows:

(In thousands) | June 30, 2019 |  | December 31, 2018
Raw materials | $ | 69,991 |  |  | $ | 68,834 |
Components | 20,736 |  |  | 25,071 |
Work in process | 5,336 |  |  | 5,577 |
Finished goods | 60,265 |  |  | 50,006 |
Reserve for excess and obsolete inventory | (7,419 | ) |  | (5,138 | )
Inventories, net | $ | 148,909 |  |  | $ | 144,350 |

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Reserve for Excess and Obsolete Inventory
Changes in the reserve for excess and obsolete inventory were as follows:

(In thousands) | Six Months Ended June 30,
2019 |  | 2018
Balance at beginning of period | $ | 5,138 |  |  | $ | 4,288 |
Additions charged to costs and expenses (1) | 3,978 |  |  | 4,564 |
Sell through (2) | (643 | ) |  | (680 | )
(Write-offs)/Foreign exchange effects | (1,054 | ) |  | (635 | )
Balance at end of period | $ | 7,419 |  |  | $ | 7,537 |

(1) | The additions charged to costs and expenses do not include inventory directly written-off that was scrapped during production totaling $3.0 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively. These amounts are production waste and manufacturing inefficiencies and are not included in management's reserve for excess and obsolete inventory.

(2) | These amounts represent the reduction in reserves associated with inventory items that were sold during the period.

Significant Suppliers
We purchase integrated circuits, components and finished goods from multiple sources. No suppliers totaled more than 10% of our total inventory purchases for the three and six months ended June 30, 2019 and 2018.
Related Party Supplier
During the six months ended June 30, 2018, we purchased certain printed circuit board assemblies from a related party supplier. The supplier was considered a related party for financial reporting purposes because our Senior Vice President of Strategic Operations owned 40% of this supplier. In the second quarter of 2018, our Senior Vice President sold his interest in this supplier, and thus this supplier is no longer considered a related party.
Total inventory purchases made from this supplier while it was a related party were $1.1 million during the six months ended June 30, 2018.
Note 5 — Leases
We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world. At June 30, 2019, our operating leases had remaining lease terms of up to 42 years.
Lease balances within our consolidated balance sheet were as follows:

(In thousands) | June 30, 2019
Assets: |
Operating lease right-of-use assets | $ | 20,306 |
Liabilities: |
Other accrued liabilities | $ | 4,158 |
Long-term operating lease obligations | 16,403 |
Total lease liabilities | $ | 20,561 |

Operating lease expense, including short-term and variable lease costs, which are insignificant to the total, and operating lease cash flows and supplemental cash flow information were as follows:
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)

(In thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019
Cost of sales | $ | 612 |  | $ | 1,204 |
Selling, general and administrative expenses | 1,156 |  | 2,288 |
Total operating lease expense | $ | 1,768 |  | $ | 3,492 |
Operating cash outflows from operating leases | $ | 1,579 |  | $ | 3,094 |
Operating lease right-of-use assets obtained in exchange for lease obligations | $ | — |  | $ | 1,524 |

The weighted average remaining lease term and the weighted average discount rate were as follows:

| June 30, 2019
Weighted average lease term (in years) | 9.10 |
Weighted average discount rate | 4.76 | %

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

(In thousands) | June 30, 2019
2019 (remaining 6 months) | $ | 2,413 |
2020 | 5,111 |
2021 | 5,266 |
2022 | 4,429 |
2023 | 2,358 |
Thereafter | 3,396 |
Total lease payments | 22,973 |
Less: imputed interest | (2,412 | )
Total lease liabilities | $ | 20,561 |

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

(In thousands) |
Balance at December 31, 2018 | $ | 48,485 |
Foreign exchange effects | (13 | )
Balance at June 30, 2019 | $ | 48,472 |

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Intangible Assets, Net
The components of intangible assets, net were as follows:

| June 30, 2019 |  | December 31, 2018
(In thousands) | Gross (1) |  | Accumulated Amortization (1) |  | Net |  | Gross (1) |  | Accumulated Amortization (1) |  | Net
Distribution rights | $ | 326 |  |  | $ | (199 | ) |  | $ | 127 |  |  | $ | 329 |  |  | $ | (188 | ) |  | $ | 141 |
Patents | 15,254 |  |  | (6,041 | ) |  | 9,213 |  |  | 14,560 |  |  | (5,704 | ) |  | 8,856 |
Trademarks and trade names | 2,786 |  |  | (2,053 | ) |  | 733 |  |  | 2,786 |  |  | (1,900 | ) |  | 886 |
Developed and core technology | 12,560 |  |  | (9,095 | ) |  | 3,465 |  |  | 12,560 |  |  | (8,087 | ) |  | 4,473 |
Capitalized software development costs | 288 |  |  | — |  |  | 288 |  |  | 155 |  |  | — |  |  | 155 |
Customer relationships | 32,684 |  |  | (24,464 | ) |  | 8,220 |  |  | 32,534 |  |  | (22,675 | ) |  | 9,859 |
Total intangible assets, net | $ | 63,898 |  |  | $ | (41,852 | ) |  | $ | 22,046 |  |  | $ | 62,924 |  |  | $ | (38,554 | ) |  | $ | 24,370 |

(1) | This table excludes the gross value of fully amortized intangible assets totaling $7.2 million and $7.1 million at June 30, 2019 and December 31, 2018, respectively.

Amortization expense is recorded in selling, general and administrative expenses, except amortization expense related to capitalized software development costs, which is recorded in cost of sales. Amortization expense by statement of operations caption was as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Cost of sales | $ | — |  |  | $ | 18 |  |  | $ | — |  |  | $ | 73 |
Selling, general and administrative expenses | 1,800 |  |  | 1,758 |  |  | 3,584 |  |  | 3,505 |
Total amortization expense | $ | 1,800 |  |  | $ | 1,776 |  |  | $ | 3,584 |  |  | $ | 3,578 |

Estimated future annual amortization expense related to our intangible assets at June 30, 2019, was as follows:

(In thousands) |
2019 (remaining 6 months) | $ | 3,635 |
2020 | 6,137 |
2021 | 2,575 |
2022 | 2,354 |
2023 | 2,209 |
Thereafter | 5,136 |
Total | $ | 22,046 |

Note 7 — Line of Credit
Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") provides for a $130.0 million revolving line of credit ("Credit Line") through June 30, 2019 and a $125.0 million Credit Line thereafter and through its expiration date on November 1, 2020. The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $2.7 million at June 30, 2019.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary which controls our manufacturing factories in the PRC.
Under the Second Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Second Amended Credit Agreement) plus an applicable margin (varying from 0.00% to 0.50%). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Second Amended Credit Agreement. The interest rate in effect at June 30, 2019 was 4.16%. There are no commitment fees or unused line fees under the Second Amended Credit Agreement.
The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. As of June 30, 2019, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.
At June 30, 2019, we had $95.0 million outstanding under the Credit Line. Our total interest expense on borrowings was $1.2 million and $1.4 million during the three months ended June 30, 2019 and 2018, respectively. Our total interest expense on borrowings was $2.5 million and $2.5 million during the six months ended June 30, 2019 and 2018, respectively.
Note 8 — Income Taxes
We utilize our estimated annual effective tax rate to determine our provision for income taxes for interim periods. The income tax provision is computed by taking the estimated annual effective rate and multiplying it by the year-to-date pre-tax book income.
We recorded income tax expense of $0.2 million and $2.1 million for the three months ended June 30, 2019 and 2018, respectively. We recorded income tax expense of $1.2 million and $1.9 million for the six months ended June 30, 2019 and 2018, respectively. Income tax expense for the six months ended June 30, 2019 decreased primarily due to the mix of pre-tax income among jurisdictions, including losses not benefited as a result of a valuation allowance and the net effect of remeasurement of deferred taxes to recognize the High Technology Exemption ("HTE") approved for our Yangzhou factory located in northern China. For the six months ended June 30, 2018, the tax expense of $1.9 million is attributable to the gain on sale of our Guangzhou factory located in southern China.
At December 31, 2018, we assessed the realizability of the Company's deferred tax assets by considering whether it is "more likely than not" some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. At December 31, 2018, we had a three year cumulative operating loss for our U.S. operations and accordingly, provided a full valuation allowance on our U.S. and state deferred tax assets. During three months ended June 30, 2019, there has been no change to the Company's valuation allowance position.
At June 30, 2019, we had gross unrecognized tax benefits of $4.7 million, including interest and penalties, of which approximately $4.4 million of this amount, if not for the state Research and Experimentation income tax credit valuation allowance, would affect the annual effective tax rate, if these tax benefits are realized. Further, we are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next twelve months. However, based on federal, state and foreign statute expirations in various jurisdictions, we anticipate a decrease in unrecognized tax benefits of approximately $0.2 million within the next twelve months. We have classified uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year.
We have elected to classify interest and penalties as a component of tax expense. Accrued interest and penalties of $0.5 million as of June 30, 2019 and $0.5 million at December 31, 2018 are included in the unrecognized tax benefits.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Note 9 — Accrued Compensation
The components of accrued compensation were as follows:

(In thousands) | June 30, 2019 |  | December 31, 2018
Accrued social insurance (1) | $ | 16,709 |  |  | $ | 16,735 |
Accrued salary/wages | 8,641 |  |  | 8,783 |
Accrued vacation/holiday | 2,971 |  |  | 2,954 |
Accrued bonus (2) | 5,208 |  |  | 2,361 |
Accrued commission | 815 |  |  | 1,432 |
Other accrued compensation | 1,993 |  |  | 1,700 |
Total accrued compensation | $ | 36,337 |  |  | $ | 33,965 |

(1) | PRC employers are required by law to remit the applicable social insurance payments to their local government. Social insurance is comprised of various components such as pension, medical insurance, job industry insurance, unemployment insurance, and a housing assistance fund, and is administered in a manner similar to social security in the United States. This amount represents our estimate of the amounts due to the PRC government for social insurance on June 30, 2019 and December 31, 2018.

(2) | Accrued bonus includes an accrual for an extra month of salary ("13 th month salary") to be paid to employees in certain geographies where it is the customary business practice. This 13 th month salary is paid to these employees if they remain employed with us through December 31st. The total accrued for the 13 th month salary was $0.6 million and $0.4 million at June 30, 2019 and December 31, 2018, respectively.

Note 10 — Other Accrued Liabilities
The components of other accrued liabilities were as follows:

(In thousands) | June 30, 2019 |  | December 31, 2018
Duties | $ | 4,258 |  |  | $ | 4,865 |
Freight and handling fees | 9,758 |  |  | 3,217 |
Operating lease obligations | 4,158 |  |  | — |
Professional fees | 1,157 |  |  | 1,930 |
Sales taxes and VAT | 364 |  |  | 1,050 |
Short-term contingent consideration | 4,951 |  |  | 4,190 |
Tooling (1) | 2,100 |  |  | 1,770 |
Other | 9,341 |  |  | 6,989 |
Total other accrued liabilities | $ | 36,087 |  |  | $ | 24,011 |

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

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Note 11 — Commitments and Contingencies
Product Warranties
Changes in the liability for product warranty claim costs were as follows:

(In thousands) | Six Months Ended June 30,
2019 |  | 2018
Balance at beginning of period | $ | 276 |  |  | $ | 339 |
Accruals for warranties issued during the period | — |  |  | 769 |
Settlements (in cash or in kind) during the period | — |  |  | (100 | )
Balance at end of period | $ | 276 |  |  | $ | 1,008 |

Restructuring Activities and Sale of Guangzhou Factory
In the first quarter of 2016, we implemented a plan to transition manufacturing activities from our southern-most China factory, located in the city of Guangzhou in the Guangdong province, to our other China factories. All operations ceased in our Guangzhou factory in the third quarter of 2017 and the transition to the other China factories was completed by the end of 2017.
On September 26, 2016, we entered into an agreement to sell our Guangzhou manufacturing facility for RMB 320 million. In accordance with the terms of the agreement, the buyer deposited 10% of the purchase price into an escrow account upon the execution of the agreement. In April 2018, we and the buyer mutually agreed to terminate the sale. The mutually agreed termination took effect immediately with no incremental penalty or costs to either party. In connection with this termination, the deposit was returned to the buyer.
On April 23, 2018, we entered into a new agreement to sell our Guangzhou manufacturing facility to a second buyer for RMB 339 million (approximately $51.4 million based on exchange rates in effect at the time of closing). On April 26, 2018, the second buyer paid to us a deposit of RMB 34 million (approximately $5.1 million based on exchange rates in effect at the time of closing), which under the terms of the agreement was nonrefundable. Upon receipt by the Governmental Agency of the second buyer’s application of approval of transfer, the second buyer was to pay to us RMB 237 million (approximately $35.8 million based on exchange rates in effect at the time of closing). Additionally, within two days after the second payment was made to us, the second buyer was to deposit the remaining consideration of RMB 68 million (approximately $10.3 million based on exchange rates in effect at the time of closing) into escrow, which was to be released to us upon the closing of the sale. Per the terms of the agreement, the sale was to be completed no later than June 30, 2018. On June 26, 2018, all conditions to closing were satisfied and the sale was completed, resulting in a pretax gain of $37.0 million ($32.1 million, net of income taxes).
Litigation
On or about June 10, 2015, FM Marketing GmbH ("FMH") and Ruwido Austria GmbH ("Ruwido") filed a Summons in Summary Proceedings in Belgium court against one of our subsidiaries, Universal Electronics BV ("UEBV"), and one of its customers, Telenet N.V. ("Telenet"), claiming that one of the products UEBV supplied to Telenet violates two design patents and one utility patent owned by FMH and/or Ruwido. By this summons, FMH and Ruwido sought to enjoin Telenet and UEBV from continued distribution and use of the product at issue. After the September 29, 2015 hearing, the court issued its ruling in our and Telenet’s favor, rejecting FMH and Ruwido’s request entirely. On October 22, 2015, Ruwido filed its notice of appeal in this ruling. The parties have fully briefed and argued before the appellate court and we are awaiting the appellate court’s ruling. In addition, on or about February 9, 2016, Ruwido filed a writ of summons for proceeding on the merits with respect to the asserted patents. UEBV and Telenet have replied, denying all of Ruwido's allegations, and in June 2017, a hearing was held before the trial court. During this hearing, Ruwido sought to have a second product which we are currently selling to Telenet included in this case. In September 2017, the Court ruled in our favor that our current product cannot be made part of this case. The Court also refused to rule on whether the original product (which we are no longer selling) infringes the Ruwido patent, instead deciding to wait until the European Patent Office (the "EPO") has ruled on our Opposition (see below). Finally, the Court ruled that our original product (which we are no longer selling) infringes certain of Ruwido’s design rights, but stayed any decision of compensation and/or damages until all aspects of the case have been decided. We have filed an appeal as to the Court’s ruling of infringement. Subsequent to the Court's ruling that a second product could not be added to the first case on the merits, Ruwido filed a separate case on the merits with respect to this second product, claiming that it too infringes the same patent at issue in the first suit. We have denied these claims. According to the Court’s trial schedule, briefs from both parties were due during the second half of 2018 and early 2019 with a trial date set for January 2019. This trial date has since been postponed pending a request to submit additional pleadings
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
which the Court is expected to rule upon prior to the end of August 2019. At that time, the Court is expected to reschedule the trial to sometime in late 2019. In September 2015, UEBV filed an Opposition with the EPO seeking to invalidate the one utility patent asserted against UEBV and Telenet by Ruwido. The hearing on this opposition was held in July 2017. During this hearing the panel requested additional information. We have assembled this additional information and the final hearing was scheduled for January 29, 2019. The EPO held this hearing on January 29 and 30, 2019 and revoked Ruwido's patent as originally filed. The EPO, however, maintained the patent in an amended form with a much narrower claim. Once the EPO has issued its written opinion (which it has not yet done so), the parties will have the right to appeal the EPO's decision. At this time, neither have done so. On September 5, 2017, Ruwido and FMH filed a patent infringement case on the merits against UEBV and Telenet in the Netherlands alleging the same claims of infringement as in the Belgium Courts (see above). We have denied these claims and filed a counterclaim seeking to invalidate the Ruwido patent. A November 30, 2018 hearing date was set by the Court but it deferred its decision until the decision from the EPO has become final. Subsequently, the parties requested they each be allowed to submit additional pleadings. The Court is expected to rule on this request no later than the end of August 2019.
On September 5, 2018, we filed a lawsuit against Roku, Inc. (“Roku”) in the United States District Court, Central District of California (Universal Electronics Inc. v. Roku, Inc.) alleging that Roku is willfully infringing nine of our patents that are in four patent families related to remote control set-up and touchscreen remotes. On December 5, 2018, we amended our complaint to add additional details supporting our infringement and willfulness allegations. We have alleged that this complaint relates to multiple Roku streaming players and components therefore and certain universal control devices, including but not limited to the Roku App, Roku TV, Roku Express, Roku Streaming Stick, Roku Ultra, Roku Premiere, Roku 4, Roku 3, Roku 2, Roku Enhanced Remote and any other Roku product that provides for the remote control of an external device such as a TV, audiovisual receiver, sound bar or Roku TV Wireless Speakers. Roku has answered our complaint with a general denial. In December 2018, the Court set a trial date of June 16, 2020. On August 6, 2019, the Court heard arguments at its "Markman" hearing and we are expecting the Court to issue its final "Markman" order in the next few weeks. Finally, we are continuing with discovery and general motion practice.
There are no other material pending legal proceedings to which we or any of our subsidiaries is a party or of which our respective property is the subject. However, as is typical in our industry and to the nature and kind of business in which we are engaged, from time to time, various claims, charges and litigation are asserted or commenced by third parties against us or by us against third parties arising from or related to product liability, infringement of patent or other intellectual property rights, breach of warranty, contractual relations, or employee relations. The amounts claimed may be substantial but may not bear any reasonable relationship to the merits of the claims or the extent of any real risk of court awards assessed against us or in our favor. However, no assurances can be made as to the outcome of any of these matters, nor can we estimate the range of potential losses to us. In our opinion, final judgments, if any, which might be rendered against us in potential or pending litigation would not have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Moreover, we believe that our products do not infringe any third parties' patents or other intellectual property rights.
We maintain directors' and officers' liability insurance which insures our individual directors and officers against certain claims, as well as attorney's fees and related expenses incurred in connection with the defense of such claims.
Note 12 — Treasury Stock
From time to time, our Board of Directors authorizes management to repurchase shares of our issued and outstanding common stock on the open market. On October 30, 2018, our Board approved an adjustment to the amount of common stock that we could purchase under our existing repurchase plan to an amount not to exceed $5.0 million of our common stock. As of June 30, 2019, we had $3.9 million of authorized repurchases remaining under the Board's authorizations. We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Repurchased shares of our common stock were as follows:

| Six Months Ended June 30,
(In thousands) | 2019 |  | 2018
Shares repurchased | 48 |  |  | 225 |
Cost of shares repurchased | $ | 1,404 |  |  | $ | 7,114 |

Repurchased shares are recorded as shares held in treasury at cost. We hold these shares for future use as management and the Board of Directors deem appropriate.
Note 13 — Foreign Operations
Foreign Operations
Our net sales to external customers by geographic area were as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
United States | $ | 106,547 |  |  | $ | 79,294 |  |  | $ | 205,483 |  |  | $ | 159,045 |
Asia (excluding PRC) | 25,468 |  |  | 27,467 |  |  | 49,544 |  |  | 54,867 |
Europe | 22,823 |  |  | 20,330 |  |  | 46,122 |  |  | 39,460 |
People's Republic of China | 20,453 |  |  | 20,627 |  |  | 42,761 |  |  | 40,744 |
Latin America | 10,119 |  |  | 6,636 |  |  | 17,906 |  |  | 16,666 |
Other | 8,486 |  |  | 8,169 |  |  | 16,243 |  |  | 16,439 |
Total net sales | $ | 193,896 |  |  | $ | 162,523 |  |  | $ | 378,059 |  |  | $ | 327,221 |

Specific identification of the customer billing location was the basis used for attributing revenues from external customers to geographic areas.
Long-lived tangible assets by geographic area were as follows:

(In thousands) | June 30, 2019 |  | December 31, 2018
United States | $ | 12,972 |  |  | $ | 14,504 |
People's Republic of China | 69,412 |  |  | 79,382 |
All other countries | 13,906 |  |  | 6,569 |
Total long-lived tangible assets | $ | 96,290 |  |  | $ | 100,455 |

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Note 14 — Stock-Based Compensation
Stock-based compensation expense for each employee and director is presented in the same statement of operations caption as their cash compensation. Stock-based compensation expense by statement of operations caption and the related income tax benefit were as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Cost of sales | $ | 37 |  |  | $ | 23 |  |  | $ | 65 |  |  | $ | 40 |
Research and development expenses | 274 |  |  | 201 |  |  | 494 |  |  | 356 |
Selling, general and administrative expenses: |  |  |  |  |  |  |
Employees | 1,715 |  |  | 1,737 |  |  | 3,139 |  |  | 3,265 |
Outside directors | 247 |  |  | 504 |  |  | 493 |  |  | 1,008 |
Total employee and director stock-based compensation expense | $ | 2,273 |  |  | $ | 2,465 |  |  | $ | 4,191 |  |  | $ | 4,669 |
Income tax benefit | $ | 477 |  |  | $ | 519 |  |  | $ | 876 |  |  | $ | 982 |

Stock Options
Stock option activity was as follows:

| Number of Options (in 000's) |  | Weighted-Average Exercise Price |  | Weighted-Average Remaining Contractual Term (in years) |  | Aggregate Intrinsic Value (in 000's)
Outstanding at December 31, 2018 | 597 |  |  | $ | 44.27 |  |  |  |  |
Granted | 150 |  |  | 27.07 |  |  |  |  |
Exercised | — |  |  | — |  |  |  |  | $ | — |
Forfeited/canceled/expired | — |  |  | — |  |  |  |  |
Outstanding at June 30, 2019 (1) | 747 |  |  | $ | 40.80 |  |  | 4.20 |  | $ | 5,435 |
Vested and expected to vest at June 30, 2019(1) | 747 |  |  | $ | 40.80 |  |  | 4.20 |  | $ | 5,435 |
Exercisable at June 30, 2019(1) | 503 |  |  | $ | 43.33 |  |  | 3.26 |  | $ | 3,331 |

(1) | The aggregate intrinsic value represents the total pre-tax value (the difference between our closing stock price on the last trading day of the second quarter of 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on June 30, 2019. This amount will change based on the fair market value of our stock.

The assumptions we utilized in the Black-Scholes option pricing model and the resulting weighted average fair value of stock option grants were the following:

| Three Months Ended June 30, | Six Months Ended June 30,
| 2019 |  | 2018 | 2019 |  | 2018
Weighted average fair value of grants | $ | — |  |  | $ | — |  | $ | 10.28 |  |  | $ | 14.26 |
Risk-free interest rate | — | % |  | — | % | 2.49 | % |  | 2.51 | %
Expected volatility | — | % |  | — | % | 41.64 | % |  | 33.09 | %
Expected life in years | 0.00 |  |  | 0.00 |  | 4.54 |  |  | 4.53 |

As of June 30, 2019, we expect to recognize $2.6 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 2.0 years.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Restricted Stock
Non-vested restricted stock award activity was as follows:

| Shares (in 000's) |  | Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2018 | 204 |  |  | $ | 49.23 |
Granted | 228 |  |  | 28.51 |
Vested | (94 | ) |  | 48.07 |
Forfeited | (13 | ) |  | 36.86 |
Non-vested at June 30, 2019 | 325 |  |  | $ | 35.52 |

As of June 30, 2019, we expect to recognize $9.5 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of 2.1 years.
Note 15 — Performance-Based Common Stock Warrants
On March 9, 2016, we issued common stock purchase warrants to Comcast to purchase up to 725,000 shares of our common stock at a price of $54.55 per share. The right to exercise the warrants is subject to vesting over three successive two-year periods (with the first two-year period commencing on January 1, 2016) based on the level of purchases of goods and services from us by Comcast and its affiliates, as defined in the warrants. The table below presents the purchase levels and number of warrants that will vest in each period based upon achieving these purchase levels.

| Incremental Warrants That Will Vest
Aggregate Level of Purchases by Comcast and Affiliates | January 1, 2016 - December 31, 2017 |  | January 1, 2018 - December 31, 2019 |  | January 1, 2020 - December 31, 2021
$260 million | 100,000 |  |  | 100,000 |  |  | 75,000 |
$300 million | 75,000 |  |  | 75,000 |  |  | 75,000 |
$340 million | 75,000 |  |  | 75,000 |  |  | 75,000 |
Maximum Potential Warrants Earned by Comcast | 250,000 |  |  | 250,000 |  |  | 225,000 |

If total aggregate purchases by Comcast and its affiliates are below $260 million in any of the two-year periods above, no warrants will vest related to that two-year period. If total aggregate purchases of goods and services by Comcast and its affiliates exceed $340 million during either the first or second two-year period, the amount of any such excess will count toward aggregate purchases in the following two-year period. At June 30, 2019, 175,000 vested warrants were outstanding. To fully vest in the rights to purchase all of the remaining unearned 475,000 underlying shares, Comcast and its affiliates must purchase an aggregate of $680 million in goods and services from us during the period January 1, 2018 through December 31, 2021.
Any and all warrants that vest will expire on January 1, 2023. The warrants provide for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions. Additionally, in connection with the common stock purchase warrants, we have also entered into a registration rights agreement with Comcast under which Comcast may from time to time request that we register the shares of common stock underlying vested warrants with the SEC.
Because the warrants contain performance criteria under which Comcast must achieve specified aggregate purchase levels for the warrants to vest, as detailed above, the measurement date for the warrants is the date on which the warrants vest. Through June 30, 2019, no ne of the warrants had vested for the two-year period beginning January 1, 2018.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
The assumptions we utilized in the Black Scholes option pricing model and the resulting weighted average fair value of the warrants were the following:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Fair value | $10.61 |  | $6.92 |  | $10.61 |  | $6.92
Price of Universal Electronics Inc. common stock | $40.69 |  | $32.88 |  | $40.69 |  | $32.88
Risk-free interest rate | 1.72% |  | 2.71% |  | 1.72% |  | 2.71%
Expected volatility | 46.32% |  | 40.20% |  | 46.32% |  | 40.20%
Expected life in years | 3.50 |  | 4.50 |  | 3.50 |  | 4.50

The impact to net sales recorded in connection with the warrants and the related income tax benefit were as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Reduction/(increase) to net sales | $ | 236 |  |  | $ | (128 | ) |  | $ | 670 |  |  | $ | 343 |
Income tax benefit/(expense) | 59 |  |  | (32 | ) |  | 167 |  |  | 86 |

We estimate the number of warrants that will vest based on projected future purchases that will be made by Comcast and its affiliates. These estimates may increase or decrease based on actual future purchases. The aggregate unrecognized estimated fair value of unvested warrants at June 30, 2019 was $4.2 million.
Note 16 — Other Income (Expense), Net
Other income (expense), net consisted of the following:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Net gain (loss) on foreign currency exchange contracts (1) | $ | (105 | ) |  | $ | 1,865 |  |  | $ | (376 | ) |  | $ | 534 |
Net gain (loss) on foreign currency exchange transactions | 158 |  |  | (2,965 | ) |  | 27 |  |  | (2,240 | )
Other income (expense) | 135 |  |  | 18 |  |  | 71 |  |  | 37 |
Other income (expense), net | $ | 188 |  |  | $ | (1,082 | ) |  | $ | (278 | ) |  | $ | (1,669 | )

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

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Note 17 — Earnings (Loss) Per Share
Earnings (loss) per share was calculated as follows:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands, except per-share amounts) | 2019 |  | 2018 |  | 2019 |  | 2018
BASIC |  |  |  |  |  |  |
Net income (loss) | $ | (5,061 | ) |  | $ | 22,659 |  |  | $ | (6,066 | ) |  | $ | 22,072 |
Weighted-average common shares outstanding | 13,863 |  |  | 14,070 |  |  | 13,845 |  |  | 14,078 |
Basic earnings (loss) per share | $ | (0.37 | ) |  | $ | 1.61 |  |  | $ | (0.44 | ) |  | $ | 1.57 |
DILUTED |  |  |  |  |  |  |
Net income (loss) | $ | (5,061 | ) |  | $ | 22,659 |  |  | $ | (6,066 | ) |  | $ | 22,072 |
Weighted-average common shares outstanding for basic | 13,863 |  |  | 14,070 |  |  | 13,845 |  |  | 14,078 |
Dilutive effect of stock options, restricted stock and common stock warrants | — |  |  | 88 |  |  | — |  |  | 117 |
Weighted-average common shares outstanding on a diluted basis | 13,863 |  |  | 14,158 |  |  | 13,845 |  |  | 14,195 |
Diluted earnings (loss) per share | $ | (0.37 | ) |  | $ | 1.60 |  |  | $ | (0.44 | ) |  | $ | 1.55 |

The following number of stock options, shares of restricted stock and common stock warrants were excluded from the computation of diluted earnings per common share as their inclusion would have been anti-dilutive:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Stock options | 382 |  |  | 382 |  |  | 462 |  |  | 357 |
Restricted stock awards | 31 |  |  | 204 |  |  | 129 |  |  | 172 |
Performance-based warrants | 175 |  |  | — |  |  | 175 |  |  | — |

Note 18 — Derivatives
The following table sets forth the total net fair value of derivatives:

|  | June 30, 2019 |  | December 31, 2018
|  | Fair Value Measurement Using |  | Total Balance |  | Fair Value Measurement Using |  | Total Balance
(In thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  |  | Level 1 |  | Level 2 |  | Level 3 |
Foreign currency exchange contracts |  | $ | — |  |  | $ | (37 | ) |  | $ | — |  |  | $ | (37 | ) |  | $ | — |  |  | $ | (249 | ) |  | $ | — |  |  | $ | (249 | )

We held foreign currency exchange contracts, which resulted in a net pre-tax loss of $0.1 million and a net pre-tax gain of $1.9 million for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, we had a net pre-tax loss of $0.4 million and a net pre-tax gain of $0.5 million, respectively (see Note 16).
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Details of foreign currency exchange contracts held were as follows:

Date Held |  | Currency |  | Position Held |  | Notional Value (in millions) |  | Forward Rate |  | Unrealized Gain/(Loss) Recorded at Balance Sheet Date (in thousands)(1) |  | Settlement Date
June 30, 2019 |  | USD/Brazilian Real |  | USD |  | $ | 2.0 |  |  | 3.8677 |  |  | $ | (19 | ) |  | July 26, 2019
June 30, 2019 |  | USD/Euro |  | USD |  | $ | 29.0 |  |  | 1.1394 |  |  | $ | (17 | ) |  | July 26, 2019
December 31, 2018 |  | USD/Euro |  | USD |  | $ | 20.0 |  |  | 1.1421 |  |  | $ | (97 | ) |  | January 25, 2019
December 31, 2018 |  | USD/Chinese Yuan Renminbi |  | USD |  | $ | 27.0 |  |  | 6.8969 |  |  | $ | (116 | ) |  | January 25, 2019
December 31, 2018 |  | USD/Chinese Yuan Renminbi |  | USD |  | $ | 5.0 |  |  | 6.9245 |  |  | $ | (41 | ) |  | January 25, 2019
December 31, 2018 |  | USD/Brazilian Real |  | USD |  | $ | 1.0 |  |  | 3.8651 |  |  | $ | 5 |  |  | January 25, 2019

(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.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
Overview
We develop control and sensor technology solutions and manufacture a broad line of pre-programmed and universal remote control products, AV accessories and intelligent wireless security and smart home products dedicated to redefining the home entertainment, automation and security experience. Our customers operate primarily in the consumer electronics market and include subscription broadcasters, OEMs, international retailers, private label brands, pro-security installers and companies in the computing industry. We also sell integrated circuits, on which our software and device control database is embedded, and license our device control database to OEMs that manufacture televisions, digital audio and video players, streamer boxes, cable converters, satellite receivers, set-top boxes, room air conditioning equipment, game consoles, and wireless mobile phones and tablets.
Since our beginning in 1986, we have compiled an extensive device control code database that covers over one million individual device functions and approximately 8,800 unique consumer electronic brands. QuickSet®, our proprietary software, can automatically detect, identify and enable the appropriate control commands for home entertainment, automation and appliances like air conditioners. Our library is regularly updated with new control functions captured directly from devices, remote controls and manufacturer specifications to ensure the accuracy and integrity of our database and control engine. Our universal remote control library contains device codes that are capable of controlling virtually all set-top boxes, televisions, audio components, DVD players, Blu-Ray players, and CD players, as well as most other remote controlled home entertainment devices and home automation control modules worldwide.
With the wider adoption of more advanced control technologies, emerging radio frequency ("RF") technologies, such as RF4CE, Bluetooth, and Bluetooth Smart, have increasingly become a focus in our development efforts. Several new recently released platforms utilize RF to effectively implement popular features like voice search.
We have developed a comprehensive patent portfolio of over 500 issued and pending United States 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 24 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") (6), Singapore, Spain, and the United Kingdom.
To recap our results for the three months ended June 30, 2019:

• | Net sales increased 19.3% to $193.9 million for the three months ended June 30, 2019 from $162.5 million for the three months ended June 30, 2018.

• | Our gross margin percentage increased from 16.5% for the three months ended June 30, 2018 to 17.5% for the three months ended June 30, 2019.

• | Operating expenses, as a percent of net sales, decreased from 22.6% for the three months ended June 30, 2018 to 19.5% for the three months ended June 30, 2019.

• | Our operating loss decreased from $9.9 million for the three months ended June 30, 2018 to $3.9 million for the three months ended June 30, 2019. Our operating loss percentage decreased from 6.1% for the three months ended June 30, 2018 to 2.0% for the three months ended June 30, 2019.

• | Income tax expense decreased from $2.1 million for the three months ended June 30, 2018 to $0.2 million for the three months ended June 30, 2019.

Our strategic business objectives for 2019 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 broadcasting markets;

• | acquire new customers in historically strong regions;

• | increase our share with existing customers; and

• | continue to seek acquisitions or strategic partners that complement and strengthen our existing business.

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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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowances for doubtful accounts, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes, stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the three and six months ended June 30, 2019 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, 2018.
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,
| 2019 |  | 2018 |  | 2019 |  | 2018
Net sales | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
Cost of sales | 82.5 |  |  | 83.5 |  |  | 80.5 |  |  | 80.5 |
Gross profit | 17.5 |  |  | 16.5 |  |  | 19.5 |  |  | 19.5 |
Research and development expenses | 3.7 |  |  | 3.7 |  |  | 3.7 |  |  | 3.7 |
Selling, general and administrative expenses | 15.8 |  |  | 18.9 |  |  | 16.4 |  |  | 18.5 |
Operating loss | (2.0 | ) |  | (6.1 | ) |  | (0.6 | ) |  | (2.7 | )
Interest income (expense), net | (0.6 | ) |  | (0.8 | ) |  | (0.6 | ) |  | (0.7 | )
Gain on sale of Guangzhou factory | — |  |  | 22.8 |  |  | — |  |  | 11.3 |
Other income (expense), net | 0.1 |  |  | (0.7 | ) |  | (0.1 | ) |  | (0.5 | )
Income (loss) before provision for income taxes | (2.5 | ) |  | 15.2 |  |  | (1.3 | ) |  | 7.4 |
Provision for income taxes | 0.1 |  |  | 1.3 |  |  | 0.3 |  |  | 0.6 |
Net income (loss) | (2.6 | )% |  | 13.9 | % |  | (1.6 | )% |  | 6.8 | %

Three Months Ended June 30, 2019 versus Three Months Ended June 30, 2018
Net sales. Net sales for the three months ended June 30, 2019 were $193.9 million, an increase of 19.3% compared to $162.5 million for the three months ended June 30, 2018. The increase in net sales was primarily due to the recent launches of higher end platforms by existing customers, both in the subscription broadcasting and OEM channels, a newly acquired customer and continued strength in home automation.
Gross profit. Gross profit for the three months ended June 30, 2019 was $34.0 million compared to $26.8 million for the three months ended June 30, 2018. Gross profit as a percent of sales increased to 17.5% for the three months ended June 30, 2019 from 16.5% for the three months ended June 30, 2018. The gross margin percentage was favorably impacted by lower raw material costs during the three months ended June 30, 2019 and foreign currency as the U.S. Dollar strengthened by approximately 650
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basis points versus the Chinese Yuan. These savings were partially offset by higher U.S tariffs on many of our products that are manufactured in China and imported into the U.S. In an effort to mitigate the effect of the increased tariffs, we are in the process of transitioning the production of goods destined for the U.S. from our China factories to our factory in Mexico. In connection with this transition, which began in the fourth quarter of 2018, we have incurred costs related to the movement of materials, duplicative labor efforts and indirect costs including unabsorbed duplicative overhead and manufacturing inefficiencies. We expect this manufacturing transition to be completed in the latter half of 2019. Until then, we expect that our gross margin rate will continue to be negatively impacted by increased U.S. tariffs and manufacturing transition inefficiencies.
Research and development ("R&D") expenses. R&D expenses increased 18.2% to $7.2 million for the three months ended June 30, 2019 from $6.1 million for the three months ended June 30, 2018 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 were $30.8 million for the three months ended June 30, 2019 compared to $30.6 million for the three months ended June 30, 2018. Contingent consideration, recorded in connection with our acquisitions of the net assets of Ecolink Intelligent Technology, Inc. ("Ecolink") and Residential Control Systems, Inc. ("RCS"), decreased. Payroll expense also decreased as a result of our ongoing corporate restructuring initiatives. Offsetting these savings was an increase to incentive-based compensation.
Interest income (expense), net. Net interest expense decreased to $1.1 million for the three months ended June 30, 2019 from $1.3 million for the three months ended June 30, 2018 as a result of a lower average quarterly loan balance.
Gain on sale of Guangzhou factory. In June 2018, we completed the sale of our Guangzhou manufacturing facility in exchange for cash proceeds of $51.3 million, resulting in a pre-tax gain of $37.0 million.
Other income (expense), net. Net other income was $0.2 million for the three months ended June 30, 2019 compared to net other expense of $1.1 million for the three months ended June 30, 2018. This change was driven primarily by foreign currency losses associated with fluctuations in the Argentinian Peso and Chinese Yuan Renminbi exchange rates versus the U.S. Dollar in the prior year period.
Provision for income taxes. Income tax expense was $0.2 million for the three months ended June 30, 2019 compared to $2.1 million for the three months ended June 30, 2018. As a result of a full valuation allowance being applied against the U.S. deferred tax assets, the U.S. pre-tax loss incurred in the quarter ending June 30, 2019 was not benefited. The $0.2 million tax expense relates to pre-tax income generated in foreign jurisdictions. For the three months ended June 30, 2018, the tax expense of $2.1 million is attributable to the gain on sale of our Guangzhou factory located in southern China.
Six Months Ended June 30, 2019 versus Six Months Ended June 30, 2018
Net sales. Net sales for the six months ended June 30, 2019 were $378.1 million, an increase of 15.5% compared to $327.2 million for the six months ended June 30, 2018. The increase in net sales was primarily due to the recent launches of higher end platforms by existing customers, both in the subscription broadcasting and OEM channels, a newly acquired customer and continued strength in home automation.
Gross profit. Gross profit for the six months ended June 30, 2019 was $73.9 million compared to $64.0 million for the six months ended June 30, 2018. Gross profit as a percent of sales was unchanged at 19.5% for both the six months ended June 30, 2019 and the six months ended June 30, 2018. The gross margin percentage was favorably impacted by lower raw material costs during the six months ended June 30, 2019 and foreign currency as the U.S. Dollar strengthened by approximately 610 basis points versus the Chinese Yuan. The gross margin percentage was unfavorably impacted by higher U.S tariffs on many of our products that are manufactured in China and imported into the U.S. In an effort to mitigate the effect of the increased tariffs, we are in the process of transitioning the production of goods destined for the U.S. from our China factories to our factory in Mexico. In connection with this transition, which began in the fourth quarter of 2018, we have incurred costs related to the movement of materials, duplicative labor efforts and indirect costs including unabsorbed duplicative overhead and manufacturing inefficiencies. We expect this manufacturing transition to be completed by the latter half of 2019. Until then, we expect that our gross margin rate will continue to be negatively impacted by increased U.S. tariffs and manufacturing transition inefficiencies.
Research and development ("R&D") expenses. R&D expenses increased 15.2% to $14.0 million for the six months ended June 30, 2019 from $12.1 million for the six months ended June 30, 2018 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 increased to $62.2 million for the six months ended June 30, 2019 from $60.8 million for the six months ended June 30, 2018, primarily due to increases in incentive compensation expense and additional freight costs associated with our manufacturing transition from China to Mexico. These increases were partially offset by a decrease in payroll related expenses in connection with ongoing corporate restructuring initiatives.
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Interest income (expense), net. Net interest expense was $2.3 million for both the six months ended June 30, 2019 and the six months ended June 30, 2018.
Gain on sale of Guangzhou factory. In June 2018, we completed the sale of our Guangzhou manufacturing facility in exchange for cash proceeds of $51.3 million, resulting in a pre-tax gain of $37.0 million.
Other income (expense), net. Net other expense was $0.3 million for the six months ended June 30, 2019 compared to $1.7 million for the six months ended June 30, 2018. This change was driven primarily by foreign currency losses associated with fluctuations in the Argentinian Peso, Chinese Yuan Renminbi and Euro exchange rates versus the U.S. Dollar in the prior year period.
Provision for income taxes. Income tax expense was $1.2 million for the six months ended June 30, 2019 compared to $1.9 million for the six months ended June 30, 2018. Income tax expense for the six months ended June 30, 2019 decreased primarily due to the mix of pre-tax income among jurisdictions, including losses not benefited in the U.S. as a result of a valuation allowance and the net effect of a remeasurement of deferred taxes to recognize the High Technology Exemption ("HTE") approved for our Yangzhou factory located in northern China. For the six months ended June 30, 2018, the tax expense of $1.9 million is attributable to the gain on sale of our Guangzhou factory located in southern China.
Liquidity and Capital Resources
Sources and Uses of Cash

(In thousands) | Six Months Ended June 30, 2019 |  | Increase (Decrease) |  | Six Months Ended June 30, 2018
Cash provided by (used for) operating activities | $ | 20,233 |  |  | $ | 24,110 |  |  | $ | (3,877 | )
Cash provided by (used for) investing activities | (11,353 | ) |  | (42,927 | ) |  | 31,574 |
Cash provided by (used for) financing activities | (12,155 | ) |  | 25,113 |  |  | (37,268 | )
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (367 | ) |  | (2,032 | ) |  | 1,665 |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (3,642 | ) |  | $ | 4,264 |  |  | $ | (7,906 | )

| June 30, 2019 |  | Increase (Decrease) |  | December 31, 2018
Cash and cash equivalents | $ | 49,565 |  |  | $ | (3,642 | ) |  | $ | 53,207 |
Working capital | 98,498 |  |  | (2,099 | ) |  | 100,597 |

Net cash provided by operating activities was $20.2 million during the six months ended June 30, 2019 compared to $3.9 million of net cash used for operating activities during the six months ended June 30, 2018. Accounts payable and accrued liabilities produced net cash inflows of $16.8 million during the six months ended June 30, 2019 versus cash outflows of $7.3 million during the six months ended June 30, 2018, largely as a result of timing of payments. Accounts receivable and contract assets produced cash outflows of $8.1 million during the six months ended June 30, 2019 compared to cash inflows of $6.2 million during the six months ended June 30, 2018 largely due to strong sales growth in the first half of 2019 offset partially by a decrease in days sales outstanding of 69 days at June 30, 2019 compared to 83 days at June 30, 2018. Inventory turns increased from 3.2 turns at June 30, 2018 to 3.5 turns at June 30, 2019. We expect inventory turns to continue to improve as we complete the transition of manufacturing U.S. bound products from our China factories to our factory in Mexico.
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 provided by investing activities during the six months ended June 30, 2018 was $31.6 million which included cash proceeds relating to the sale of our Guangzhou factory of $51.3 million offset partially by $13.4 million of capital expenditures.
Net cash used for financing activities was $12.2 million during the six months ended June 30, 2019 compared to $37.3 million during the six months ended June 30, 2018. The change in financing activity cash flows was driven primarily by borrowing and repayment activity on our line of credit. During the six months ended June 30, 2019 we had net repayments of $6.5 million compared to $27.0 million during the six months ended June 30, 2018.
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During the six months ended June 30, 2019, we repurchased 47,100 shares of our common stock at a cost of $1.4 million compared to our repurchase of 224,979 shares at a cost of $7.1 million during the six months ended June 30, 2018. 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. 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 | $ | 27,811 |  |  | $ | 6,128 |  |  | $ | 12,630 |  |  | $ | 5,903 |  |  | $ | 3,150 |
Purchase obligations (1) | 4,342 |  |  | 4,342 |  |  | — |  |  | — |  |  | — |
Contingent consideration (2) | 9,380 |  |  | 4,951 |  |  | 4,270 |  |  | 159 |  |  | — |
Total contractual obligations | $ | 41,533 |  |  | $ | 15,421 |  |  | $ | 16,900 |  |  | $ | 6,062 |  |  | $ | 3,150 |

(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.

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, 2019 |  | December 31, 2018
Cash and cash equivalents | $ | 49,565 |  |  | $ | 53,207 |
Available borrowing resources | 32,300 |  |  | 28,500 |

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 taxes and foreign withholding taxes. Additionally, repatriation of some foreign balances is restricted by local laws. We have provided for the state income tax liability and the foreign withholding tax on these amounts for financial statement purposes.
On June 30, 2019, we had $7.0 million, $13.0 million, $10.3 million, $9.2 million and $10.2 million of cash and cash equivalents in the United States, the PRC, Asia (excluding the PRC), Europe, and South America, respectively. On December 31, 2018, we had $1.2 million, $20.9 million, $2.4 million, $19.9 million, and $8.9 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.
Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") provides for a $130.0 million revolving line of credit ("Credit Line") through June 30, 2019 and a $125.0 million Credit Line thereafter and through its expiration date on November 1, 2020. The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $2.7 million at June 30, 2019.
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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, 2019 was 4.16%. There are no commitment fees or unused line fees under the Second Amended Credit Agreement.
The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. As of June 30, 2019, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.
At June 30, 2019, we had an outstanding balance of $95.0 million on our Credit Line and $32.3 million of availability. As of July 1, 2019, we have $27.3 million available on our Credit Line.
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 2018 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 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 efforts to refocus their operations to broadband and 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 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; 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
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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 $0.7 million annual impact on net income based on our outstanding line of credit balance at June 30, 2019.
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, 2019, 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, Euro, British Pound, Argentinian Peso, Mexican Peso, Brazilian Real, Indian Rupee, Philippine Peso and Japanese Yen. 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 Euro, Mexican Peso, Indian Rupee, Philippine Peso and Japanese Yen 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 reported 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.
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, 2019, 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, Euro, British Pound, Argentinian Peso, Mexican Peso, Brazilian Real, Indian Rupee, Philippine Peso and Japanese Yen relative to the U.S. Dollar fluctuate 10% from June 30, 2019, net income in the second quarter of 2019 would fluctuate by approximately $10.2 million.
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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
During the first quarter of 2019, we implemented the provisions of ASU 2016-02, which impacted certain of our accounting processes and polices around accounting for leases. As a result, we added and/or enhanced certain internal controls around the accumulation of accounting information and recording of right-of-use lease assets and lease liabilities.
Except as described above, there have been no other 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.
.
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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 2018 Annual Report on Form 10-K incorporated herein by reference. These factors may cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the three months ended June 30, 2019, 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 |  | Total Dollar Value of Shares Purchased as Part of Publicly Announced Plans or Programs (2) |  | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3)
April 1, 2019 - April 30, 2019 |  | — |  |  | $ | — |  |  | — |  |  | $ | — |  |  | $ | 3,934,261 |
May 1, 2019 - May 31, 2019 |  | 3,663 |  |  | 43.94 |  |  | — |  |  | — |  |  | 3,934,261 |
June 1, 2019 - June 30, 2019 |  | 691 |  |  | 40.22 |  |  | — |  |  | — |  |  | 3,934,261 |
Total |  | 4,354 |  |  | $ | 43.35 |  |  | — |  |  | $ | — |  |  |  |

(1) | Of the repurchases in May and June, 3,663 and 691 shares, respectively, 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) | Amounts in this column reflect the weighted average price paid for shares purchased under our share repurchase authorizations, inclusive of commissions paid to brokers.

(3) | On October 30, 2018, our board of directors approved a repurchase plan authorizing the repurchase of up to $5.0 million of our common stock. Under these authorizations, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. As of June 30, 2019, we had $3.9 million of authorized repurchases remaining under the Board's authorizations.

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ITEM 6. EXHIBITS
EXHIBIT INDEX

31.1 |  | Rule 13a-14(a) Certifications of Paul D. Arling, Chief Executive Officer (principal executive officer) of Universal Electronics Inc.
31.2 |  | Rule 13a-14(a) Certifications of Bryan M. Hackworth, Chief Financial Officer (principal financial officer and principal accounting officer) of Universal Electronics Inc.
32 |  | Section 1350 Certifications of Paul D. Arling, Chief Executive Officer (principal executive officer) of Universal Electronics Inc., and Bryan M. Hackworth, Chief Financial Officer (principal financial officer and principal accounting officer) of Universal Electronics Inc., pursuant to 18 U.S.C. Section 1350
101.INS |  | XBRL Instance Document
101.SCH |  | XBRL Taxonomy Extension Schema Document
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document

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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 8, 2019 |  | 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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