UNIVERSAL ELECTRONICS INC

Previous wording

•Our gross margin percentage increased to 28.3% for the three months ended March 31, 2024 from 22.8% for the three months ended March 31, 2023.

Current wording

•Our gross margin percentage increased to 28.7% for the three months ended June 30, 2024 from 22.9% for the three months ended June 30, 2023.

Previous wording

•Operating expenses, as a percentage of net sales, decreased to 35.8% for the three months ended March 31, 2024 from 77.7% for the three months ended March 31, 2023.

Current wording

•Operating expenses, as a percentage of net sales, increased to 33.6% for the three months ended June 30, 2024 from 31.4% for the three months ended June 30, 2023.

Previous wording

•Our operating loss was $6.9 million for the three months ended March 31, 2024 compared to operating loss of $59.5 million for the three months ended March 31, 2023. Our operating loss percentage was 7.5% for the three months ended March 31, 2024, compared to an operating loss percentage of 54.9% for the three months ended March 31, 2023.

Current wording

•Our operating loss was $4.5 million for the three months ended June 30, 2024 compared to operating loss of $9.1 million for the three months ended June 30, 2023. Our operating loss percentage was 4.9% for the three months ended June 30, 2024, compared to 8.5% for the three months ended June 30, 2023.

Previous wording

We have been negatively impacted and we expect to continue to be negatively impacted by adverse macroeconomic conditions, in particular reduced consumer spending. We have also been adversely impacted due to inflationary pressures, including increased component and logistics costs and increases in wages and costs of borrowing funds. To help offset these increased costs, we have been able to increase sales prices on certain products, however such increases may not fully offset the impact of these cost increases which would negatively impact our gross margins and overall financial results. In addition, we expect recessionary pressures in the global economy to continue which will ultimately negatively impact our sales demand. Management will continue to seek ways to lessen the impact these pressures may have on our margins and overall financial results by continuing to seek price increases where appropriate, executing on our plan to reduce our manufacturing overhead and to locate alternative and less expensive sources of component parts and materials.

Current wording

We have been negatively impacted and we expect to continue to be negatively impacted by adverse macroeconomic conditions, in particular reduced consumer spending on durable goods. We have also been adversely impacted by inflationary pressures, including increased component and logistics costs and increases in wages and costs of borrowing funds. To help offset these negative impacts, we have implemented cost saving measures including rightsizing our manufacturing footprint and reducing operational and administrative headcount; however, such measures may not fully offset the impact of lower sales demand and cost increases, which would negatively impact our gross margins and overall financial results. Management will continue to seek ways to lessen the impact these pressures may have on our margins and overall financial results by executing on our plan to reduce our manufacturing overhead and to locate alternative and less expensive sources of component parts and materials.

Previous wording

We have been evaluating our global manufacturing footprint based upon our long-term factory planning strategy to reduce our manufacturing capacity due to decreased demand and a change in mix of our products. As part of this evaluation, we are working to downsize and streamline the Mexico operations by moving to a smaller, more efficient facility. We expect to commence operations in this downsized facility in the second quarter of 2024. We continue to evaluate our global factory footprint to identify ways to operate more efficiently and decisions may result in charges that could have a material effect on the consolidated the financial statements.

Current wording

We have been evaluating our global manufacturing footprint based upon our long-term factory planning strategy to reduce our manufacturing capacity due to decreased demand and a change in mix of our products. As part of this evaluation, we are working to downsize and streamline the Mexico operations by moving to a smaller, more efficient facility. We commenced operations in this downsized facility in the second quarter of 2024. We continue to evaluate our global factory footprint to identify ways to operate more efficiently. Decisions may result in charges that could have a material effect on the consolidated the financial statements.

Previous wording

The preparation of financial statements in conformity with U.S. GAAP 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 ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, impairment of long-lived assets, intangible assets and goodwill and income taxes. 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 statements.

Current wording

The preparation of financial statements in conformity with U.S. GAAP 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 ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, impairment of long-lived assets, intangible assets and income taxes. 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 statements.

Previous wording

An accounting estimate 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 months ended March 31, 2024 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 2023 Form 10-K.

Current wording

An accounting estimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the six months ended June 30, 2024 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 2023 Form 10-K.

Previous wording

Net sales. Net sales for the three months ended March 31, 2024 were $91.9 million compared to $108.4 million for the three months ended March 31, 2023. We have experienced lower customer demand in both our home entertainment and climate channels. Our home entertainment channel continues to be adversely affected by cord cutting while our climate control channel is experiencing a decrease in demand in Europe which we believe is a result of recent reductions in governmental subsidies for heat pump technology.

Current wording

Net sales. Net sales for the three months ended June 30, 2024 were $90.5 million compared to $107.4 million for the three months ended June 30, 2023. We have experienced lower customer demand in both our home entertainment and climate control channels. Our home entertainment channel continues to be adversely affected by cord cutting while our climate control channel is experiencing a decrease in demand in Europe, which we believe is a result of recent reductions in governmental subsidies for heat pump technology.

Previous wording

Gross profit. Gross profit for the three months ended March 31, 2024 was $26.0 million compared to $24.7 million for the three months ended March 31, 2023. Gross profit as a percentage of sales increased to 28.3% for the three months ended March 31, 2024 from 22.8% for the three months ended March 31, 2023. The execution of our factory footprint optimization plan has resulted in a significant reduction of excess manufacturing capacity, yielding a gross margin rate improvement of approximately 460 basis points. In addition, a stronger U.S. dollar resulted in a 90 basis point improvement in our gross margin rate.

Current wording

Gross profit. Gross profit for the three months ended June 30, 2024 was $26.0 million compared to $24.6 million for the three months ended June 30, 2023. Gross profit as a percentage of sales increased to 28.7% for the three months ended June 30, 2024 from 22.9% for the three months ended June 30, 2023. The execution of our factory footprint optimization plan has resulted in a significant reduction of excess manufacturing capacity, yielding a gross margin rate improvement of approximately 520 basis points. In addition, a stronger U.S. dollar resulted in a 60 basis point improvement in our gross margin rate.

Previous wording

Research and development ("R&D") expenses. R&D expenses decreased to $7.8 million for the three months ended March 31, 2024 from $8.4 million for the three months ended March 31, 2023 due primarily to reduced incentive compensation costs.

Current wording

Research and development ("R&D") expenses. R&D expenses decreased to $7.5 million for the three months ended June 30, 2024 from $8.5 million for the three months ended June 30, 2023 due primarily to reduced third party product development costs and a reduction in headcount.

Previous wording

Selling, general and administrative ("SG&A") expenses. SG&A expenses decreased to $24.0 million for the three months ended March 31, 2024 compared to $26.8 million for the three months ended March 31, 2023, due to a decrease in outside legal expenses related to a specific legal matter and variable expenses associated with lower sales volume.

Current wording

Selling, general and administrative ("SG&A") expenses. SG&A expenses decreased to $21.3 million for the three months ended June 30, 2024 compared to $25.3 million for the three months ended June 30, 2023, due primarily to a reduction in headcount and a decrease in variable expenses associated with lower sales volume.

Previous wording

Interest income (expense), net. Interest expense, net decreased to $0.9 million for the three months ended March 31, 2024 from $1.0 million for the three months ended March 31, 2023, as a result of a lower average loan balance, partially offset by a higher interest rate.

Current wording

Interest income (expense), net. Interest expense, net decreased to $0.8 million for the three months ended June 30, 2024 from $1.1 million for the three months ended June 30, 2023, primarily as a result of a lower average loan balance, partially offset by a higher interest rate.

Previous wording

Provision for income taxes. Income tax expense was $0.7 million for the three months ended March 31, 2024, relative to a pre-tax loss of $7.9 million, compared to income tax expense of $0.7 million for the three months ended March 31, 2023, relative to a pre-tax loss of $60.7 million. Consistent with 2023, we expect the U.S. to be in a pre-tax loss position without benefit for the full year 2024 resulting in an elevated effective tax rate. In the first quarter of 2023, we received the high technology exemption approval at our Yangzhou entity in China resulting in a lower tax rate. As a result, the deferred tax assets at our Yangzhou entity were remeasured resulting in an expense. Further, in the first quarter 2023, we also received a discrete benefit related to our goodwill impairment.

Current wording

Provision for income taxes. Income tax expense was $2.8 million for the three months ended June 30, 2024, relative to a pre-tax loss of $5.4 million, compared to income tax benefit of $0.5 million for the three months ended June 30, 2023, relative to a pre-tax loss of $10.9 million. Consistent with 2023, we expect the U.S. to be in a pre-tax loss position without benefit for the full year 2024, resulting in an elevated effective tax rate.

Previous wording

Factory restructuring charges. During the three months ended March 31, 2024, we recorded $1.1 million in expense, including severance and moving costs associated with the closure of our southern China factory and the streamlining of our factory in Mexico.

Current wording

Factory restructuring charges. During the six months ended June 30, 2024, we recorded $2.6 million in expense, including severance and moving costs associated with the streamlining of our factory in Mexico and the closure of our southern China factory.

Previous wording

Goodwill impairment. During the three months ended March 31, 2023, we recorded a non-cash goodwill impairment charge of $49.1 million, due to our market capitalization being significantly less than the carrying value of our equity.

Current wording

Goodwill impairment. During the six months ended June 30, 2023, we recorded a non-cash goodwill impairment charge of $49.1 million due to our market capitalization being significantly less than the carrying value of our equity.

Previous wording

Other income (expense), net. Other expense, net was $0.1 million for the three months ended March 31, 2024, compared to other expense, net of $0.2 million for the three months ended March 31, 2023. The improvement was due to a reduction in net foreign currency losses.

Current wording

Other income (expense), net. Other expense, net was $0.2 million for the six months ended June 30, 2024 compared to $0.9 million for the six months ended June 30, 2023. The improvement was primarily due to a reduction in net foreign currency losses.

Previous wording

Cash and cash equivalents– On March 31, 2024, we had $3.3 million, $6.9 million, $2.2 million, $2.6 million and $11.9 million of cash and cash equivalents in North America, 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.

Current wording

Cash and cash equivalents– On June 30, 2024, we had $1.8 million, $8.7 million, $2.5 million, $4.5 million and $5.6 million of cash and cash equivalents in North America, 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.

Previous wording

Available Borrowing Resources – Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") provides for a revolving line of credit ("Credit Line") that expires on April 30, 2025. We expect to renew our credit agreement with U.S. Bank prior to its expiration. The Credit Line has a maximum availability up to $100.0 million, subject to meeting certain financial conditions, including an accounts receivable coverage ratio ("AR Ratio"). This AR Ratio is calculated monthly and adjusts the current Credit Line total availability. At March 31, 2024, the Credit Line total availability was $52.2 million based upon the AR Ratio. At April 3, 2024, the Credit Line total availability was $61.3 million based upon the AR Ratio.

Current wording

Available Borrowing Resources – Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") provides for a revolving line of credit ("Credit Line") that expires on April 30, 2025. We expect to renew our credit agreement with U.S. Bank prior to its expiration, however no assurance can be given that future financing will be available or, if available, that we will be offered terms satisfactory to us. The Credit Line has a maximum availability up to $100.0 million, subject to meeting certain financial conditions, including an accounts receivable coverage ratio ("AR Ratio"). This AR Ratio is calculated monthly and adjusts the current Credit Line total availability. At June 30, 2024, the Credit Line total availability was $53.1 million based upon the AR Ratio. At July 18, 2024, the Credit Line total availability was $61.3 million based upon the AR Ratio.

Previous wording

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 none at March 31, 2024. At March 31, 2024, we had an outstanding balance of $46.0 million on our Credit Line and $6.2 million of availability.

Current wording

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 none at June 30, 2024. At June 30, 2024, we had an outstanding balance of $41.0 million on our Credit Line and $12.1 million of availability.

Previous wording

Net cash used for operating activities was $2.8 million during the three months ended March 31, 2024 compared to $2.0 million during the three months ended March 31, 2023. Net loss was $8.6 million for the three months ended March 31, 2024 compared to net loss of $61.4 million for the three months ended March 31, 2023, which includes the impairment of goodwill of $49.1 million. Inventories decreased by $4.1 million during the three months ended March 31, 2024 compared to a decrease of $18.1 million during the three months ended March 31, 2023. This significant decrease in inventories is primarily the result of cord cutting, as there is less demand for our video service products. In addition, lead times for components and raw materials have normalized, enabling more efficient production planning. Our inventory turns increased to 3.1 turns at March 31, 2024 from 2.7 turns at March 31, 2023. Changes in accounts receivable and contract assets resulted in cash inflows of $11.0 million during the three months ended March 31, 2024, largely as a result of a decrease in sales. Changes in accounts receivable and contract assets resulted in cash inflows of $7.7 million during the three months ended March 31, 2023, largely as a result of a decrease in sales offset partially by an increase in days sales outstanding. Days sales outstanding were 93 days at March 31, 2024 compared to 83 days at March 31, 2023. Changes in accounts payable and accrued liabilities resulted in cash outflows of $12.5 million during the three months ended March 31, 2024 due to a decrease in inventory purchases and timing of payments throughout the quarter. Changes in accounts payable and accrued liabilities resulted in cash outflows of $26.1 million during the three months ended March 31, 2023 due primarily to a decrease in inventory purchases.

Current wording

Net cash provided by operating activities was $2.7 million during the six months ended June 30, 2024 compared to $13.3 million during the six months ended June 30, 2023. Net loss was $16.8 million for the six months ended June 30, 2024 compared to net loss of $71.8 million for the six months ended June 30, 2023, which includes the impairment of goodwill of $49.1 million. Inventories increased by $0.9 million during the six months ended June 30, 2024 compared to a decrease of $33.2 million during the six months ended June 30, 2023. The significant decrease in inventories during the six months ended June 30, 2023 is primarily the result of cord cutting, as there was less demand for our video service products. In addition, lead times for components and raw materials have normalized, enabling more efficient production planning. Our inventory turns increased to 3.3 turns at June 30, 2024 from 3.0 turns at June 30, 2023. Changes in accounts receivable and contract assets resulted in cash inflows of $13.1 million during the six months ended June 30, 2024, largely as a result of a decrease in sales. Changes in accounts receivable and contract assets from lower sales volume resulted in cash inflows of $10.6 million during the six months ended June 30, 2023. Days sales outstanding were 91 days at June 30, 2024 compared to 83 days at June 30, 2023. Changes in accounts payable and accrued liabilities resulted in cash outflows of $5.5 million during the six months ended June 30, 2024 due to a decrease in inventory purchases and timing of payments throughout the quarter. Changes in accounts payable and accrued liabilities resulted in cash outflows of $26.5 million during the six months ended June 30, 2023 due primarily to a decrease in inventory purchases.

Previous wording

Net cash used for investing activities during the three months ended March 31, 2024 was $2.4 million, of which $1.4 million and $1.0 million was used for capital expenditures and the development of patents, respectively. Net cash used for investing activities during the three months ended March 31, 2023 was $4.8 million, of which $3.2 million and $1.6 million was used for capital expenditures and the development of patents, respectively.

Current wording

Net cash used for investing activities during the six months ended June 30, 2024 was $5.0 million, of which $2.7 million and $2.3 million was used for capital expenditures and the development of patents, respectively. Net cash used for investing activities during the six months ended June 30, 2023 was $9.1 million, of which $5.8 million and $3.3 million was used for capital expenditures and the development of patents, respectively.

Previous wording

Future cash flows used for investing activities are largely dependent on the timing and amount of capital expenditures. We estimate that we will incur between $7.0 million and $9.0 million during the remainder of 2024.

Current wording

Future cash flows used for investing activities are largely dependent on the timing and amount of capital expenditures. We estimate that we will incur between $4.0 million and $5.0 million during the remainder of 2024.

Previous wording

Net cash used for financing activities was $10.2 million during the three months ended March 31, 2024 compared to $3.8 million during the three months ended March 31, 2023. The primary financing activities during the three months ended March 31, 2024 and 2023 were borrowings and repayments on our Credit Line and repurchases of shares of our common stock. Net repayments on our Credit Line were $9.0 million during the three months ended March 31, 2024 compared to net repayments on our Credit Line of $3.0 million during the three months ended March 31, 2023. During the three months ended March 31, 2024, we repurchased 140,136 shares of our common stock at a cost of $1.2 million compared to our repurchase of 53,186 shares at a cost of $0.8 million during the three months ended March 31, 2023.

Current wording

Net cash used for financing activities was $15.8 million during the six months ended June 30, 2024 compared to $13.9 million during the six months ended June 30, 2023. The primary financing activities during the six months ended June 30, 2024 and 2023 were borrowings and repayments on our Credit Line and repurchases of shares of our common stock. Net repayments on our Credit Line were $14.0 million during the six months ended June 30, 2024 compared to $13.0 million during the six months ended June 30, 2023. During the six months ended June 30, 2024, we repurchased 195,125 shares of our common stock at a cost of $1.8 million compared to our repurchase of 57,973 shares at a cost of $0.9 million during the six months ended June 30, 2023.