ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We generally discuss 2024 and 2023 items and year-to-year comparisons between 2024 and 2023 in the section that follows. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report on Form 10-K may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 14, 2024.
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
Overview
We design, develop, manufacture, ship and support home entertainment control products, technology and software solutions, climate control solutions, wireless sensors and smart home control products and audio-video ("AV") accessories, that are used by the world's leading brands in the home entertainment, climate control, consumer electronics, security, home automation and home appliance markets. Our product and technology offerings include:
•Home Entertainment Products: Our industry-leading portfolio includes RF-capable, voice-enabled universal remote control products; low-power RF and energy-harvesting microcontrollers, as well as embedded and Cloud software for AV and Smart Home device and content discovery and control. These solutions are sold primarily to video service providers and consumer electronics OEMs. We also distribute a broad portfolio of replacement remote controls, powerful free-to-air antennae and television and soundbar wall mounts direct to retailers worldwide under the One For All brand.
•Climate Control Solutions: Our innovative climate control solutions include wall-mounted and handheld thermostat controllers and connected accessories for smart energy management systems. These products are primarily sold to original equipment manufacturer (“OEM”) customers, as well as hotels, hospitality and system integrators. Our UEI TIDE Family of Climate Control solutions feature advanced technologies such as Wi-Fi, BLE, Zigbee and Matter, along with sensors for temperature, humidity, proximity, occupancy and carbon dioxide sensing.
•Smart Home and Security Products: We offer proprietary and standards-based RF sensors designed for residential security, safety and home automation applications. Our integrated circuits, on which our software and universal control database is embedded, are sold primarily to OEMs, video service providers, smart home dealers and private label customers.
•Software and Cloud Services: Our software, firmware and technology solutions enable devices such as smart TVs, hybrid set-top boxes, audio systems, smart speakers, game consoles and other consumer electronic and smart home devices to wirelessly connect and interoperate within home networks. These solutions support control and delivery of home entertainment application services and content, smart home services and device or system information. New features include private, on-premise user presence and occupancy detection to enhance user experiences with their connected devices.
•Intellectual Property and Licensing: We license our intellectual property primarily to OEMs and video service providers. Our cloud-enabled software provides reliable firmware update provisioning and digital rights management validation services to major consumer electronics brands. We offer regular control library database and software updates to our licensing customers to ensure their systems are compatible with the latest devices entering the home.
We operate as one business segment. We have one domestic subsidiary and 24 international subsidiaries located in Brazil, British Virgin Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Korea, Mexico (2), the Netherlands, People's Republic of China (the "PRC") (6), Singapore, Spain, United Kingdom and Vietnam.
To recap our results for 2024:
•Net sales decreased 6.1% to $394.9 million in 2024 from $420.5 million in 2023.
•Our gross profit percentage increased to 28.9% in 2024 from 23.2% in 2023.
•Operating expenses, as a percent of sales, decreased to 32.7% in 2024 from 43.5% in 2023.
•Operating loss was $15.3 million in 2024 compared to $85.3 million in 2023, and our operating loss percentage was 3.9% in 2024, compared to 20.3% in 2023.
•Income tax expense was $5.4 million in 2024 compared to $6.0 million in 2023.
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Our strategic business objectives for 2025 include the following:
•Build long-term (3-5 year) revenue pipeline by engaging with industry leading brands and securing new and continuing product design wins with top 10 major HVAC OEMs;
•Commercially deploy the UEI TIDE family of products in multiple dwelling unit and utility channels and leverage initial deployments to validate, and promote, turnkey solution to address industry need;
•Create a footprint in broadband gateway platforms with expanded QuickSet Cloud software offerings;
•Expand QuickSet Cloud software penetration in the TV OS market through development and commercial deployment of QuickSet features such as content personalization, privacy-first presence detection and monitoring;
•Expand AI-powered cloud services, and on-device AI developments to generate opportunities for recurring revenue streams in software licensing;
•Position UEI as the development partner of choice in smart digital thermostat control through innovation and next generation products;
•Launch new product categories in direct-to-consumer channel and build a growth revenue business with sustainable gross margins;
•Expand our technology offerings and development capabilities in new standards such as WiFi6, Thread, Matter and Z-Wave Long Range;
•Seek potential acquisitions or strategic partners that complement and strengthen our existing commercial footprint, add new capabilities, and offer strong synergies; and
•Manage our long-term global manufacturing footprint by optimizing internal investments and seeking external manufacturing partnerships where appropriate.
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.
Macroeconomic Conditions
We have been negatively impacted and we expect to continue to be negatively impacted by adverse macroeconomic conditions, including new tariffs imposed or to be imposed on goods manufactured in the PRC, Mexico and Canada, and 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.
Manufacturing Footprint
We have been evaluating our global manufacturing footprint based upon our long-term factory planning strategy to (1) de-risk our reliance on a PRC-based supply chain and (2) reduce our manufacturing capacity due to decreased demand and a change in mix of our products. As part of this evaluation, we (1) opened a new factory in Vietnam which commenced operations in June 2023, (2) stopped production activities of our southwestern PRC factory in the third quarter 2023 and completed its shutdown in the first quarter 2024, (3) stopped production activities and shutdown operations of our smaller eastern PRC factory during the fourth quarter 2024, and (4) downsized and streamlined our Mexico operations throughout 2024. As a result of these decisions, we recorded severance and other restructuring expenses of $3.6 million and $4.0 million during the years ended December 31, 2024 and December 31, 2023, respectively. Additionally, we recorded impairment charges of $7.7 million during the year ended December 31, 2023. We will 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.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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
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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.
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. Management believes the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. In addition to the accounting policies mentioned below, see "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 2" for other significant accounting policies.
Revenue recognition
Revenue is recognized when control of a good or service is transferred to a customer. Our performance obligations are satisfied over time or at a point in time, depending on the nature of the product. Revenue is recognized over time when 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, including a reasonable margin, through a contractual commitment from the customer. Custom products are those products for which we are unable to redirect the asset to another customer in the foreseeable future without significant rework. There is significant judgment exercised by management in identifying and evaluating whether new contracts and/or products meet the criteria for over time or point in time revenue recognition. Significant judgments include the evaluation of legal terms and rights within each jurisdiction that we operate, specifically as it relates to our entitlement to gross margin at termination, and the evaluation of whether it is possible, contractually or economically, to repurpose or redirect products.
Inventories
Our finished good, component part, and raw material inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. We write down our inventory for the estimated difference between cost and estimated net realizable value based upon our best estimates of future demand and market conditions. We carry inventory in amounts necessary to satisfy our customers' inventory requirements on a timely basis. We continually monitor our inventory status to control inventory levels and write down any excess or obsolete inventories on hand. If actual market conditions become less favorable than those projected by management, additional inventory write-downs may be required, which may have a material impact on our financial statements. Such circumstances may include, but are not limited to, the development of new competing technology that impedes the marketability of our products or the occurrence of significant price decreases in our raw material or component parts, such as integrated circuits. Each percentage point change in the ratio of excess and obsolete inventory reserve to inventory would impact cost of sales by approximately $0.9 million.
Income Taxes
We calculate our current and deferred tax provisions based on estimates and assumptions that may differ from the actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed returns when we have identified and finalized them, which is generally in the third and fourth quarters of the subsequent year.
We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that we are more likely than not to realize. We have considered future market growth, forecasted earnings and tax rates, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period in which we make such determination. Likewise, if we later determine that we are more likely than not to realize the net deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. In order for us to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located. Any changes to the realizability of our deferred tax assets or liabilities may have a material impact on our financial statements.
We are subject to income taxes in the United States and foreign countries, and we are subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities could challenge certain positions which may not be fully sustained. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges in accordance with the accounting for uncertainty in income taxes
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prescribed by U.S. GAAP. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates.
We maintain reserves for uncertain tax positions, including related interest and penalties. We review our reserves quarterly, and we may adjust such reserves due to proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, execution of advanced pricing agreements, resolution with respect to individual audit issues, the resolution of entire audits, or the expiration of statutes of limitations. The amounts ultimately paid upon resolution of audits may be materially different from the amounts previously included in our income tax expense and, therefore, may have a material impact on our financial statements.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated.
Year Ended December 31,
Research and development expenses 7.5 7.4
Selling, general and administrative expenses 23.3 23.4
Factory restructuring charges 0.9 1.0
Legal judgment 1.1 —
Goodwill impairment — 11.7
Operating income (loss) (3.9) (20.3)
Interest income (expense), net (0.8) (1.0)
Other income (expense), net 0.0 (0.6)
Income (loss) before provision for income taxes (4.7) (21.9)
Provision for income taxes 1.4 1.4
Net income (loss) (6.1) % (23.3) %
Year Ended December 31, 2024 ("2024") Compared to Year Ended December 31, 2023 ("2023")
Net sales. Net sales for 2024 were $394.9 million, a decrease of 6.1% compared to $420.5 million in 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.
Gross profit. Gross profit in 2024 was $114.0 million compared to $97.6 million in 2023. Gross profit as a percent of sales increased to 28.9% in 2024 compared to 23.2% in 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 370 basis points. During the year ended December 31, 2023, we took a charge of $7.7 million for the impairment of fixed assets related to the execution of our factory footprint optimization plan, which negatively impacted the gross profit rate for that period by 180 basis points. In addition, a stronger U.S. dollar in 2024 compared to 2023 resulted in a 70 basis point improvement in our gross margin rate. Partially offsetting these improvements was an unfavorable product mix, which resulted in a 50 basis point decline in our gross margin rate.
Research and development ("R&D") expenses. R&D expenses decreased 5.0% to $29.7 million in 2024 from $31.3 million in 2023. The decrease in R&D expenses is primarily due to reduced third-party product development costs and a reduction in headcount.
Selling, general and administrative ("SG&A") expenses. SG&A expenses decreased 6.8% to $91.8 million in 2024 from $98.5 million in 2023, due to a decrease in compensation expenses associated with a reduction in headcount and a decrease in outside legal expenses related to a specific legal matter.
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Factory restructuring charges. During the year ended December 31, 2024, we recorded $3.6 million in expense, including severance and moving costs associated with the downsizing of our factory in Mexico and the closures of our southern and eastern PRC factories. During the year ended December 31, 2023, we recorded $4.0 million in expense, including severance and other closure related activities pertaining to our southern PRC factory, and moving costs associated with the transfer of equipment from our Mexico factory to our new facility in Vietnam.
Legal judgment. During the year ended December 31, 2024, we recorded $4.2 million in expense, relating to an adverse judgment against one of our subsidiaries located in the PRC. We have appealed this ruling and expect a decision on our appeal in early to mid-April 2025.
Goodwill impairment. During the year ended December 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.
Interest income (expense), net. Net interest expense decreased to $3.4 million in 2024 from $4.3 million in 2023, primarily as a result of a lower average loan balance.
Other income (expense), net. Other income, net was $0.1 million in 2024, compared to other expense, net of $2.6 million in 2023. The improvement was primarily due to a reduction in net foreign currency losses.
Provision for income taxes. Income tax expense was $5.4 million in 2024 compared to $6.0 million in 2023. Our effective tax rate in 2024 and 2023, (29.2)% and (6.5)%, respectively, differs from the U.S. statutory rate of 21% primarily as a result of our jurisdictional mix of pre-tax income/loss, as well as losses incurred in the U.S. which are not benefited due to a valuation allowance.
Liquidity and Capital Resources
Sources of Cash
Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have typically been sufficient to support our business operations, capital expenditures and discretionary share repurchases. When needed, we have utilized our revolving lines of credit to fund operations, share repurchases and acquisitions. We anticipate that we will continue to utilize both cash flows from operations and our revolving lines of credit to support ongoing business operations, capital expenditures, discretionary share repurchases and potential acquisitions. 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 for at least the next twelve months and for the foreseeable future thereafter; however, because our cash is located in various jurisdictions throughout the world, we may at times need to increase borrowing from our revolving lines 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 market risks identified in "ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK".
December 31,
Cash and cash equivalents – At December 31, 2024, we had $2.0 million, $10.1 million, $2.3 million, $7.1 million and $5.3 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.
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 federal and state income taxes and foreign withholding taxes. Additionally, repatriation of some foreign balances is restricted by local laws.
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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 ("U.S. Credit Line") that expires on April 30, 2026. The U.S. Credit Line has a maximum availability up to $75.0 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 U.S. Credit Line total availability. At December 31, 2024, the U.S. Credit Line total availability was $58.3 million based upon the AR Ratio. At February 18, 2025, the U.S. Credit Line total availability was $60.5 million based upon the AR Ratio.
The U.S. 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 U.S. Credit Line are reduced by the balance of any outstanding letters of credit, of which there were none at December 31, 2024. At December 31, 2024, we had an outstanding balance of $26.0 million on our U.S. Credit Line and $32.3 million of availability.
Our subsidiary, Gemstar Technology (Yangzhou) Co. Ltd. ("GTY"), has a Line of Credit Agreement ("Line of Credit Agreement") with the Bank of China, which provides for a revolving line of credit ("China Credit Line" and, together with the U.S. Credit Line, "Credit Lines") through July 24, 2025. We expect to renew the Line of Credit Agreement with the Bank of China 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 China Credit Line has a maximum availability up to RMB 80.0 million (approximately $11.0 million), subject to meeting certain financial conditions.
The China Credit Line may be used for working capital purposes. Amounts available for borrowing under the China Credit Line are reduced by the balance of any outstanding letters of credit, of which there were none at December 31, 2024. At December 31, 2024, we had an outstanding balance of RMB 80.0 million (approximately $11.0 million) on our China Credit Line and no remaining availability.
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 9" for further information regarding our Credit Lines.
Uses of Cash
Our cash flows were as follows:
Cash provided by (used for) operating activities $ 14,822 $ (10,368) $ 25,190
Cash provided by (used for) investing activities (8,428) 5,449 (13,877)
Net cash provided by operating activities was $14.8 million during 2024 compared to $25.2 million during 2023. Net loss was $24.2 million for the year ended December 31, 2024 compared to $98.2 million for the year ended December 31, 2023, which includes the impairments of goodwill of $49.1 million and long-lived assets of $8.0 million. Depreciation and amortization was $18.1 million for the year ended December 31, 2024 compared to $22.9 million during the year ended December 31, 2023, due to decreased purchases of property, plant and equipment over recent years. Inventories decreased by $6.2 million during the year ended December 31, 2024 compared to a decrease of $51.5 million during the year ended December 31, 2023. The significant decrease in inventories during the year ended December 31, 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 3.0 turns at December 31, 2024 compared to 2.8 turns at December 31, 2023. Changes in accounts receivables and contract assets resulted in cash outflows of $12.2 million during the
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year ended December 31, 2024 compared to cash inflows of $5.0 million during the year ended December 31, 2023, largely as a result of an increase in and timing of sales in the fourth quarter of 2024 compared to the fourth quarter of 2023 offset partially by a decrease in days sales outstanding. Days sales outstanding were 81 days at December 31, 2024 compared to 94 days at December 31, 2023. Changes in accounts payable and accrued liabilities resulted in cash inflows of $15.7 million during the year ended December 31, 2024 due primarily to the timing of payments in the fourth quarter. Changes in accounts payable and accrued liabilities resulted in cash outflows of $21.4 million during the year ended December 31, 2023 due primarily to a decrease in inventory purchases as a result of lower demand. Changes in accrued income taxes resulted in cash inflows of $1.3 million during the year ended December 31, 2024 compared to cash outflows of $3.5 million during the year ended December 31, 2023.
Net cash used for investing activities during 2024 was $8.4 million, of which $4.5 million and $3.9 million was used for capital expenditures and the development of patents, respectively. Net cash used for investing activities during 2023 was $13.9 million, of which $8.1 million and $5.8 million was used for capital expenditures and the development of patents, respectively.
Future cash flows used for investing activities are largely dependent on the timing and amount of capital expenditures and the development of patents. We estimate that we will incur between $9.0 million and $11.0 million during 2025.
Net cash used for financing activities was $19.8 million during 2024 compared to $34.8 million during 2023. The primary financing activities in 2024 and 2023 were borrowings and repayments on our Credit Lines and repurchases of shares of our common stock. Net repayments on our Credit Lines were $17.8 million in 2024 and $33.0 million in 2023. During 2024, we purchased 206,598 shares of our common stock at a cost of $2.0 million compared to 164,540 shares at a cost of $1.8 million during 2023.
Future cash flows used for financing activities are affected by our financing needs which are largely dependent on the level of cash provided by or used in operations and the level of cash used in investing activities. Additionally, potential future repurchases of shares of our common stock will impact our cash flows used for financing activities. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 14" for further information regarding our share repurchase programs.
Material Cash Commitments – The following table summarizes our material cash commitments and the effect these commitments are expected to have on our cash flows in future periods:
Payments Due by Period
(In thousands) Total Less than1 year 1 - 3years 4 - 5years After5 years
Property, plant, and equipment purchases 927 927 — — —
We anticipate meeting our material cash commitments with our cash generated from operations and available borrowing on our Credit Lines.
Recent Accounting Pronouncements
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 2" for a discussion of recent accounting pronouncements.
ITEM 7A. 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.
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Interest Rate Risk
We are exposed to interest rate risk related to our debt. From time to time, we borrow amounts on our Credit Lines for working capital and other liquidity needs. Under the Second Amended Credit Agreement with U.S. Bank, we may elect to pay interest on outstanding borrowings on our U.S. Credit Line based on the Secured Overnight Financing Rate ("SOFR") plus an applicable margin as defined in the Second Amended Credit Agreement. Under our Line of Credit Agreement with the Bank of China, we may elect to pay interest on outstanding borrowings on our China Credit Line based on the one-year rate from the National Interbank Funding Center, less a 0.1% margin. 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 approximate $0.3 million annual impact on net income based on our outstanding Credit Lines balance at December 31, 2024.
We cannot make any assurances that we will not need to borrow additional amounts in the future or that funds from the existing Credit Lines will continue to be available to us or that other 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 December 31, 2024, we had wholly-owned subsidiaries in Brazil, the British Virgin Islands, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, the PRC, Singapore, Spain, United Kingdom and Vietnam. 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, Mexican Peso, Vietnamese Dong, Indian Rupee, Hong Kong Dollar, Brazilian Real, Japanese Yen and Korean Won. Our most significant foreign currency exposure is to the Chinese Yuan Renminbi as this is the functional currency of our PRC-based factory where the majority of our products originate. 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 Chinese Yuan Renminbi, Mexican Peso, Vietnamese Dong, Indian Rupee, Hong Kong Dollar, Japanese Yen and Korean Won 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 Euro, British Pound 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 remeasurement 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 December 31, 2024, 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, Mexican Peso, Indian Rupee, Hong Kong Dollar, Brazilian Real, Japanese Yen, Korean Won and Vietnamese Dong relative to the U.S. Dollar fluctuate 10% from December 31, 2024, net income in the first quarter of 2025 would fluctuate by approximately $4.6 million.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) 42
Notes to Consolidated Financial Statements 49
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Universal Electronics Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Universal Electronics Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2024, and 2023, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated March 11, 2025 expressed an unqualified opinion.
Basis for opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition - Determination of over time versus point in time revenue recognition
As described further in Note 2 and Note 4 to the consolidated financial statements, product revenue is generated through manufacturing and delivering home entertainment control products, climate control solutions, wireless sensor and smart home control products and and audio-video accessories. The Company recognizes revenue over time when performance creates an asset with no alternative use (custom products) and when the Company has an enforceable right to payment for performance completed to date, including a reasonable margin, through a contractual commitment from the customer. Revenue is recognized at a point in time if the criteria for recognizing revenue over time are not met. For each new product and/or contract, management performs an analysis to determine whether the asset created is a product with no alternative use and whether the terms and conditions of the contract indicate the Company has an enforceable right to payment for performance completed to date, including a reasonable margin. We identified the determination of over time versus point in time revenue recognition as a critical audit matter.
The principal considerations for our determination that over time versus point in time revenue recognition is a critical audit matter is the significant judgment exercised by management in identifying and evaluating whether new products and/or
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contracts meet the criteria for over time or point in time revenue recognition. Significant judgments include the evaluation of whether it is possible, contractually or economically, to repurpose or redirect products for an alternative use, as well as the evaluation of contractual legal terms and rights within each jurisdiction in which the Company operates.
Our audit procedures related to the over time versus point in time revenue recognition included the following, among others:
•We tested the design and operating effectiveness of key controls associated with the Company's classification of new products, including those associated with the determination and classification of a product as having no alternative use.
•We tested the design and operating effectiveness of key controls over the Company's new and amended contract review process, specifically those related to the identification and evaluation of terms and conditions associated with an enforceable right to payment, including a reasonable margin.
•For a selection of products from the Company's active products listing, we performed testing to determine whether products identified as having no alternative use are restricted, either contractually or economically, to be repurposed or redirected. This includes evaluating management judgments regarding the economic feasibility of repurposing a finished product and evidence to support that the final product has no alternative use.
•For a selection of products, we traced the products into the Company's listing of active products and determined whether that product was appropriately classified as having no alternative use or not. For transactions selected with no alternative use, we also obtained and read the contract to determine whether the contract terms specifically identified an enforceable right to payment, including a reasonable margin, for performance completed to date. The two parts to this test serve to determine whether the revenue was appropriately recorded over time or at a point in time.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2005.
Phoenix, Arizona
March 11, 2025
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
ASSETS
Current assets:
Prepaid expenses and other current assets 9,478 7,325
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued sales discounts, rebates and royalties 5,204 5,796
Long-term liabilities:
Other long-term liabilities 723 817
Commitments and contingencies (Note 13)
Stockholders' equity:
Accumulated other comprehensive income (loss) (28,350) (20,758)
Total liabilities and stockholders' equity $ 323,354 $ 355,872
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
Factory restructuring charges (Note 13) 3,585 4,015 —
Legal judgment (Note 13) 4,172 — —
Goodwill impairment (Note 7) — 49,075 —
Earnings (loss) per share:
Shares used in computing earnings (loss) per share:
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
Other comprehensive income (loss):
Change in foreign currency translation adjustment (7,592) 429 (7,663)
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)
Shares Amount Shares Amount
Currency translation adjustment (7,663) (7,663)
Shares issued for employee benefit plan and compensation 212 2 1,197 1,199
Shares issued to directors 29 — — —
Employee and director stock-based compensation 10,013 10,013
Currency translation adjustment 429 429
Shares issued for employee benefit plan and compensation 317 3 1,290 1,293
Shares issued to directors 29 — — —
Employee and director stock-based compensation 8,809 8,809
Currency translation adjustment (7,592) (7,592)
Shares issued for employee benefit plan and compensation 338 4 1,059 1,063
Shares issued to directors 29 — — —
Employee and director stock-based compensation 6,700 6,700
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)
Year Ended December 31,
Cash flows from operating activities:
Impairment of goodwill — 49,075 —
Changes in operating assets and liabilities:
Cash flows from investing activities:
Purchase of term deposit — — (7,487)
Redemption of term deposit — — 7,803
Acquisition of the net assets of Qterics, Inc. — — (939)
Acquisitions of property, plant and equipment (4,572) (8,116) (14,006)
Net cash provided by (used for) investing activities (8,428) (13,877) (21,208)
Cash flows from financing activities:
Proceeds from stock options exercised — — 1,536
Net cash provided by (used for) financing activities (19,764) (34,779) 20,501
Net increase (decrease) in cash and cash equivalents (15,968) (23,989) 5,927
Supplemental cash flow information:
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
Note 1 — Description of Business
Universal Electronics Inc. ("UEI"), based in Scottsdale, Arizona, is a global leader in universal wireless control solutions for the home. We design, develop, manufacture, ship and support home entertainment control products, technology and software solutions, climate control solutions, wireless sensor and smart home control products and audio-video ("AV") accessories that are used by the world's leading brands in the home entertainment, climate control, consumer electronics, security, home automation and home appliance markets. In addition, over the past 38 years, we have developed a broad portfolio of patented technologies and cloud-based connectivity and control software solutions that we license to our customers, including many leading Fortune 500 companies.
Distribution methods for our control solutions vary depending on the sales channel. We distribute remote control devices, connected thermostats, integrated circuits ("ICs"), smart home automation and security sensors and AV accessories directly to video and security service providers and original equipment manufacturers ("OEMs"), both domestically and internationally. We distribute connected and smart thermostats and home security sensors to pro-security installers and hospitality system integrators in the United States and Europe through a network of national and regional distributors and dealers. Additionally, we sell our wireless control devices and AV accessories under the One For All®, Ecolink® and private label brand names to retailers in key markets, such as in the United States, United Kingdom, Germany, France and Spain. We utilize third-party distributors for the retail channel in countries where we do not have subsidiaries.
As used herein, the terms "we", "us" and "our" refer to Universal Electronics Inc. and its subsidiaries unless the context indicates the contrary.
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Reportable Segment
An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited extent. Our chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance. Accordingly, we only have a single operating and reportable segment.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for credit losses, inventory valuation, impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes and related valuation allowances and stock-based compensation expense. Actual results may differ from these assumptions and estimates, and they may be adjusted as more information becomes available. Any adjustment may be material.
Revenue Recognition
Revenue is recognized when control of a good or service is transferred to a customer. Control is considered to be transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of that good or service. Revenues are generated from manufacturing, shipping and supporting home entertainment products, climate control solutions, wireless sensor and smart home control products and AV accessories that are used in the home entertainment, climate
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
control, consumer electronics, security, home automation and home appliance markets, which are sold through multiple channels, and licensing intellectual property that is embedded in these products or licensed to others for use in their products. We also generate revenues from a cloud-based software solution enabling software updates, digital rights management provisioning and remote technical support to consumer electronics customers.
Revenue - Product revenue is generated through manufacturing, shipping and supporting our products, as described above. Our performance obligations are satisfied over time or at a point in time, depending on the nature of the product. Our contracts have an anticipated duration of less than a year and consideration may be variable based on indeterminate volumes.
Revenue is recognized over time 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, including a reasonable margin, through a contractual commitment from the customer. Custom products are those products for which we are unable to redirect the asset to another customer in the foreseeable future without significant rework or due to contract restrictions. The method for measuring progress towards satisfying a performance obligation for a custom product is based on the costs incurred to date (input method). We believe that the costs associated with production are most closely aligned with the revenue associated with those products.
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 (based upon the terms of the contract, which can be upon shipment or delivery) and we have a present right to payment.
While unit prices are generally fixed, we have variable consideration for certain of our customers, typically in the form of discounts and rebates based on product volumes and indeterminate volumes themselves. We utilize the most likely amount to estimate the effect of uncertainty on the amount of variable consideration to which we would be entitled. The most likely amount method considers the single most likely amount from a range of possible consideration amounts which, for us, is typically 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. We have concluded that our estimates of variable consideration are not constrained according to the definition within the accounting standard. Changes in such accruals may be required if future rebates and incentives differ from our estimates. Such discounts were $12.3 million, $10.5 million and $12.2 million at December 31, 2024, 2023 and 2022, respectively.
We allow product returns of certain products sold to business-to-consumer customers based upon contract terms. 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 sales in the period in which we make such a determination.
We license our symbolic intellectual property which includes our patented technologies and database of control codes. Royalty revenue is recognized for these licensing arrangements on an over time basis. We record license revenue for per-unit based licenses when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment. We record per-unit-based licenses with minimum guarantees ratably over the license period to which the minimum guarantee relates and any per-unit sales in excess of the minimum guarantee in the period in which the sale occurs. We record licenses with fixed consideration ratably over the license period. Tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers.
We recognize service revenues related to our cloud-based software solution on an over-time basis, as our customers simultaneously receive and consume the benefits provided by our performance. Revenues are recognized over the period during which the performance obligations are satisfied, and control of the service is transferred to the customers.
Contract assets - Contract assets represent the value of revenue recognized over time for which we have not yet invoiced the customer. Generally, we invoice the customer within 90 days of revenue recognition.
Contract liabilities - A contract liability is recorded when consideration is received from a customer prior to fully satisfying a performance obligation in a contract. Our contract liabilities primarily consist of cash received in advance of providing our cloud-based software services. These contract liabilities will be recognized as revenues when control of the related product or service is transferred to the customer. See Note 4 for further information concerning contract liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
Other sales-related matters - Trade receivables are recorded at the invoiced amount and do not bear interest. Payment terms typically range from 30 to 120 days, are typically on open credit terms consistent with industry practice and do not have significant financing components.
We provide our customers an assurance-type warranty, generally for periods of 12 to 36 months. Assurance-type warranties are not considered a performance obligation. A provision is recorded for estimated product warranty claim costs and is included in cost of sales. Estimates are based on analysis of product warranty claims and other known factors. Actual product warranty claim costs are inherently uncertain and thus may differ from our estimates. If actual product warranty claims costs are greater or lower than the reserves that we have established, we will record an increase or reduction to cost of sales in the period in which we make such determination.
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 our consolidated balance sheets until they are remitted to the government agency.
See Notes 4 and 13 for further information concerning revenue, contract assets, contract liabilities and other sales-related matters.
Income Taxes
We provide for income taxes utilizing the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are presented net as non-current by jurisdiction. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when a judgment is made that is considered more likely than not that a tax benefit will not be realized. A decision to record a valuation allowance results in an increase in income tax expense or a decrease in income tax benefit. If the valuation allowance is released in a future period, income tax expense will be reduced accordingly.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. The impact of an uncertain income tax position is recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, on a jurisdiction-by-jurisdiction basis, that some portion or all of the deferred tax assets will 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 continue to assess the need for a valuation allowance on deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.
The Tax Cuts and Jobs Act (the "Tax Act") subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income ("GILTI") earned by certain foreign subsidiaries. We have elected to account for GILTI in the year the tax is incurred as a period expense.
See Note 10 for further information concerning income taxes.
Research and Development
Research and development ("R&D") costs are expensed as incurred and consist primarily of salaries, employee benefits, supplies and materials.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
Advertising
Advertising costs are expensed as incurred. Advertising expense totaled $0.7 million, $0.6 million and $0.5 million for the years ended December 31, 2024, 2023 and 2022, respectively.
Shipping and Handling Fees and Costs
We include shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound freight or amounts reimbursable by customers are recorded in cost of sales. All other shipping and handling activities performed prior to or after the customer obtains control of a good are treated as part of fulfilling the promise of transferring the good to the customer and are including in selling, general and administrative ("SG&A") expenses. These costs recorded in SG&A expenses totaled $8.6 million, $8.3 million and $10.8 million for the years ended December 31, 2024, 2023 and 2022, respectively.
Stock-Based Compensation
We recognize the grant date fair value of stock-based compensation awards as expense in proportion to vesting during the derived service period, which ranges from one to three years. Forfeitures of stock-based awards are accounted for as they occur. Upon the vesting of restricted stock awards, the vesting of performance stock awards or exercise of stock options, newly issued shares of our common stock are issued. Our stock-based compensation awards are made at the discretion of the Compensation Committee and are not timed or coordinated with the release of material, non-public information.
We determine the fair value of restricted stock awards with a service condition utilizing the average of the high and low trading prices of our common shares on the date they were granted.
The fair value of performance stock awards with a service and market condition is determined utilizing a Monte Carlo simulation model as of the grant date. The assumptions utilized in a Monte Carlo simulation model include the risk-free interest rate, expected volatility, term of the award and dividend yield. The risk-free interest rate over the expected term is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility. The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.
The fair value of stock options awards is determined utilizing the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, expected life in years and dividend yield. The risk-free interest rate over the expected term is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the stock option. Expected life is computed utilizing historical exercise patterns and post-vesting behavior. The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future. See Note 15 for further information regarding stock-based compensation.
Performance-Based Common Stock Warrants
The measurement date for performance-based common stock warrants is the date on which the warrants vest. We recognize the fair value of performance-based common stock warrants as a reduction to net sales ratably as the warrants vest based on the projected number of warrants that will vest, the proportion of the performance criteria achieved by the customer within the period relative to the total performance required (aggregate purchase levels) for the warrants to vest and the fair value of the related unvested warrants. If we do not have a reliable forecast of future purchases to be made by the customer by which to estimate the number of warrants that will vest, then the maximum number of potential warrants is assumed until such time that a reliable forecast of future purchases is available. To the extent that our projections change in the future as to the number of warrants that will vest, a cumulative catch-up adjustment will be recorded in the period in which our estimates change. On January 1, 2023, all 275,000 of the vested and outstanding warrants expired unexercised.
Foreign Currency Translation and Foreign Currency Transactions
We use the U.S. Dollar as our functional currency for financial reporting purposes. The functional currency for most of our foreign subsidiaries is their local currency. The translation of foreign currencies into U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using the average
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
exchange rate during each period. The gains and losses resulting from the translation are included in the foreign currency translation adjustment account, a component of accumulated other comprehensive income in stockholders' equity, and are excluded from net income. The portions of intercompany accounts receivable and accounts payable that are intended for settlement are translated at exchange rates in effect at the balance sheet date. Our intercompany foreign investments and long-term debt that are not intended for settlement are translated using historical exchange rates.
Transaction gains and losses generated by the effect of changes in foreign currency exchange rates on recorded assets and liabilities denominated in a currency different than the functional currency of the applicable entity are recorded in other income (expense), net. See Note 16 for further information concerning transaction gains and losses.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares, including the dilutive effect of restricted stock, performance stock, stock options and common stock warrants, outstanding during the period. Dilutive potential common shares for all periods presented are computed utilizing the treasury stock method; however, dilutive potential common shares are excluded where their inclusion would be anti-dilutive. See Note 17 for further information concerning our earnings (loss) per share.
Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, term deposit, accounts receivable, accounts payable, accrued liabilities, debt and derivatives. The carrying value of our financial instruments, excluding derivatives, approximates fair value as a result of their short maturities. Our derivatives are carried at fair value. See Notes 3, 4, 9, 11, 12 and 18 for further information concerning our financial instruments.
Cash, Cash Equivalents and Term Deposit
Cash and cash equivalents include cash accounts and all investments purchased with initial maturities of three months or less. Our term deposit, entered into on January 24, 2022, had an initial maturity of one year, but was redeemed prior to December 31, 2022. Domestically, we generally maintain balances in excess of federally insured limits. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash, cash equivalents and term deposit with financial institutions we believe are high quality. These financial institutions are located in many different geographic regions. As part of our cash and risk management processes, we perform periodic evaluations of the relative credit standing of our financial institutions. We have not sustained credit losses from instruments held at financial institutions. See Note 3 for further information concerning cash, cash equivalents and term deposit.
Allowance for Credit Losses
We maintain an allowance for credit losses for estimated losses on our trade receivables, resulting from the inability of our customers to make payments for products sold or services rendered. The allowance for credit losses is based on a variety of factors, including credit reviews, historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior.
We also record specific provisions for individual accounts when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer change, our estimates of the recoverability of the receivables would be further adjusted. See Note 4 for further information concerning our allowance for credit losses.
Inventories
Inventories consist of remote controls, thermostats, wireless sensors and AV accessories, as well as the related component parts and raw materials. Inventoriable costs include materials, labor, freight-in and manufacturing overhead related to the purchase and production of inventories. We value our inventories at the lower of cost or net realizable value. Cost is determined using the
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
first-in, first-out method. We attempt to carry inventories in amounts necessary to satisfy our customer requirements on a timely basis. See Note 5 for further information concerning our inventories and suppliers.
Product innovations and technological advances may shorten a given product's life cycle. We continually monitor our inventories to identify any excess or obsolete items on hand. We write down our inventories for estimated excess and obsolescence in an amount equal to the difference between the cost of the inventories and estimated net realizable value. These estimates are based upon management's judgment about future demand and market conditions.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. The cost of property, plant, and equipment includes the purchase price of the asset and all expenditures necessary to prepare the asset for its intended use. We capitalize additions and improvements and expense maintenance and repairs as incurred.
We capitalize certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software.
For financial reporting purposes, depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included as a component of depreciation expense.
Estimated useful lives are as follows:
Buildings 25 years
Tooling and equipment 2-8 years
Computer equipment 3-5 years
Software 3-7 years
Furniture and fixtures 2-5 years
See Note 6 for further information concerning our property, plant, and equipment.
Goodwill
We record the excess purchase price of net tangible and intangible assets acquired over their estimated fair value as goodwill. We evaluate the carrying value of goodwill on December 31 of each year and between annual evaluations if events occur or circumstances change that may reduce the fair value of the reporting unit below its carrying amount. Such circumstances may include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) a decline in macroeconomic conditions, (3) a significant decline in our financial performance or (4) a significant decline in the price of our common stock for a sustained period of time.
We perform our annual impairment test, and any required interim tests, using the optional qualitative assessment, weighing the relative impact of factors that are specific to our single reporting unit including our market capitalization compared to the carrying value of our stockholders' equity, as well as industry and macroeconomic factors. Based on the qualitative assessment performed, we consider the aggregation of the relevant factors, and conclude whether it is more likely than not that the fair value of our single reporting unit is less than the carrying value. If we conclude that it is more likely than not that the fair value of our single reporting unit is less than the carrying value, or if we decide not to elect the optional qualitative assessment, we perform a quantitative impairment test, using cash flow projections, discounted by our weighted-average cost of capital. In addition to any quantitative impairment analysis, we also consider the implied control premium compared to our market capitalization.
See Note 7 for further information concerning goodwill and goodwill impairment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
Intangible Assets
Intangible assets consist of capitalized software development costs, customer relationships, developed and core technologies, patents and trademarks and trade names. Capitalized amounts related to patents represent external legal costs for the application, maintenance and extension of the useful life of patents. Intangible assets are amortized using the straight-line method over their estimated period of benefit.
Estimated useful lives are as follows:
Capitalized software development 2 years
Customer relationships 6-10 years
Developed and core technology 6-14 years
Patents 10 years
Trademarks and trade names 6-8 years
See Note 7 for further information concerning intangible assets.
Long-Lived and Intangible Assets Impairment
We assess the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which may trigger an impairment review may include the following, but are not limited to: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner or use of the assets, their physical condition or strategy for the overall business; (3) significant negative industry or economic trends; (4) a current expectation that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life; or (5) a significant decline in our stock price for a sustained period.
We conduct an impairment review when we determine that the carrying value of a long-lived or intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment. The asset is impaired if its carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
An impairment loss is the amount by which the carrying value of an asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model.
See Note 6 for further information concerning long-lived assets. See Note 7 for further information concerning intangible assets.
Leases
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 obligations 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 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 years to five years with two extensions at the then current market rate. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2024
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.
See Note 8 for further information concerning our leases.
Derivatives
Our foreign currency exposures are primarily concentrated in the Brazilian Real, British Pound, Chinese Yuan Renminbi, Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen, Korean Won, Mexican Peso and Vietnamese Dong. We periodically enter into foreign currency exchange contracts with terms normally lasting less than nine months, to protect against the adverse effects that exchange-rate fluctuations may have on our foreign currency-denominated receivables, payables, cash flows and reported income. We do not enter into financial instruments for speculation or trading purposes.
The derivatives we enter into have not qualified for hedge accounting. The gains and losses on both the derivatives and the foreign currency-denominated balances are recorded as foreign exchange transaction gains or losses and are classified in other income (expense), net. The gains and losses on the derivatives are reflected in cash provided by (used for) operating activities in our consolidated statements of cash flows. Derivatives are recorded on the balance sheet at fair value. The estimated fair value of derivative financial instruments represents the amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices. See Note 18 for further information concerning derivatives.
Fair-Value Measurements
We measure fair value using the framework established by the Financial Accounting Standards Board ("FASB") in ASC Topic 820 for fair value measurements and disclosures. This framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
The valuation techniques are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources. Unobservable inputs require management to make certain assumptions and judgments based on the best information available. Observable inputs are the preferred data source. These two types of inputs result in the following fair value hierarchy:
Level 1: Quoted prices (unadjusted) for identical instruments in active markets.
Business Combinations
We allocate the purchase price of acquired businesses to the tangible and intangible assets and the liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant fair value estimates and assumptions, especially with respect to intangible assets and contingent consideration. Management estimates the fair value of certain intangible assets and contingent consideration by utilizing the following (but not limited to):
•future cash flow from customer contracts, customer lists, distribution agreements, acquired developed technologies, trademarks, trade names and patents;
•expected costs to complete development of in-process technology into commercially viable products and cash flows from the products once they are completed;
•brand awareness and market position, as well as assumptions regarding the period of time the brand will continue to be used in our product portfolio; and
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•discount rates utilized in discounted cash flow models.
Results of operations and cash flows of acquired businesses are included in our operating results from the date of acquisition.
In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability at each reporting period and record changes in the fair value within operating expenses. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of earnings estimates or in the timing or likelihood of achieving earnings-based milestones. Contingent consideration is recorded in other accrued liabilities and long-term contingent consideration in our consolidated balance sheets.
Recently Adopted Accounting Pronouncements
In November 2023, the FASB issued Accounting Standards Update ("ASU") 2023-07, "Segment Reporting – Improvements to Reportable Segments Disclosures." The guidance enhances disclosures of significant segment expenses by requiring the disclosure of significant segment expenses regularly provided to the chief operating decision maker, extends certain annual disclosures to interim periods, and permits more than one measure of segment profit or loss to be reported under certain conditions. All disclosure requirements are also required for companies with a single reportable segment. We adopted this guidance in the fourth quarter of 2024, using the retrospective transition method. This guidance impacts our disclosures only, with no impact to our consolidated balance sheets, statements of operations or cash flows.
Accounting Pronouncements Not Yet Effective
In November 2024, the FASB issued ASU 2024-03 "Income Statement – Reporting Comprehensive Income (Topic 220): Disaggregation of Income Statement Expenses." This guidance requires additional disclosures by disaggregating the costs and expense line items that are presented on the face of the consolidated statements of operations. This guidance is effective for annual periods beginning in 2027 and interim periods beginning in 2028, with early adoption permitted. This guidance requires a public company to apply the amendments either prospectively to financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the financial statements. We are currently evaluating the impact of adopting this guidance on our disclosures.
In December 2023, the FASB issued ASU 2023-09, "Income Taxes – Improvements to Tax Disclosures." The guidance expands income tax disclosures by requiring public business entities, on an annual basis, to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. Additionally, this guidance requires that all entities disaggregate disclosures by jurisdiction on the amount of income taxes paid (net of refunds received), income or loss from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) from continuing operations. This guidance is effective for annual periods beginning after December 15, 2024, and therefore will be effective beginning with our financial statements issued for the year ending December 31, 2025. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements and disclosures.
We have assessed all other ASUs issued but not yet adopted and concluded that those not disclosed are not relevant to the Company or are not expected to have a material impact.
Note 3 — Cash, Cash Equivalents and Term Deposit
Cash and cash equivalents were held in the following geographic regions:
December 31,
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On January 25, 2022, we entered into a one-year term deposit cash account with Banco Santander (Brasil) S.A., denominated in Brazilian Real. The term deposit earned interest at a variable annual rate based upon the Brazilian CDI overnight interbank rate. As of December 31, 2022, all of this term deposit was redeemed.
Note 4 — Revenue and Accounts Receivable, Net
Revenue Details
The pattern of revenue recognition was as follows:
Year Ended December 31,
Our net sales to external customers by geographic area were as follows:
Year Ended December 31,
Specific identification of the customer billing location was the basis used for attributing revenues from external customers to geographic areas.
Accounts Receivable, Net
Accounts receivable, net were as follows:
December 31,
Allowance for credit losses (1,863) (815)
Allowance for sales returns (383) (532)
(1) Other accounts receivable is primarily comprised of supplier, supplier rebate and interest receivables.
(2) Accounts receivable, net at December 31, 2022 was $112.3 million.
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Allowance for Credit Losses
Changes in the allowance for credit losses were as follows:
(In thousands) Year Ended December 31,
Additions (reductions) to costs and expenses 1,081 70 (182)
Write-offs/Foreign exchange effects (33) (212) (146)
Contract Assets
Contract assets were $10.3 million, $4.2 million, and $8.0 million at December 31, 2024, 2023 and 2022, respectively. The change in balances between periods is due to the fluctuation of custom product inventory balances for which we have an enforceable right to payment for performance completed to date.
Contract Liabilities
We have current and non-current contract liability balances primarily consist of cash received in advance of providing our cloud-based software services. Contract liabilities are included within other accrued liabilities and other long-term liabilities in our consolidated balance sheets.
Changes in the carrying amount of contract liabilities were as follows:
(In thousands) Year Ended December 31,
Balance at beginning of period $ 3,501 $ 1,931
Foreign exchange effects (53) 19
Significant Customers
Net sales to the following customers totaled more than 10% of our net sales:
Year Ended December 31,
(1) Sales associated with this customer did not total more than 10% of our net sales for the indicated period.
There were no significant customers that totaled more than 10% of our accounts receivable at December 31, 2024 or December 31, 2023.
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Note 5 — Inventories
Inventories were as follows:
December 31,
Significant Supplier
We purchase integrated circuits, components and finished goods from multiple sources. Purchases from the following supplier totaled 10% of our total inventory purchases:
Year Ended December 31,
(1) Purchases associated with this supplier did not total more than 10% of our total inventory purchases for the indicated period.
There were no trade payable balances from suppliers that totaled more than 10% of our total accounts payable at December 31, 2024 and December 31, 2023.
Note 6 — Property, Plant, and Equipment, Net
Property, plant, and equipment, net ("PP&E") were as follows:
December 31,
Total property, plant, and equipment, net $ 34,207 $ 44,619
Depreciation expense was $12.9 million, $18.0 million and $19.9 million for the years ended December 31, 2024, 2023 and 2022, respectively.
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During the three months ended September 30, 2023, as part of our manufacturing footprint optimization efforts, we made the decision to close our southwestern PRC factory and manufacturing operations were stopped in September 2023. We also downsized and streamlined the Mexico operations by moving to a smaller, more efficient facility. As a result of these decisions, we recorded impairment charges of $7.7 million, of which $7.6 million and $0.1 million was recorded in cost of sales and SG&A expenses, respectively. In addition, during the year ended December 31, 2023, we recorded an additional $0.2 million of impairment charges, recorded in cost of sales, relating to the underutilization of property, plant and equipment in our other PRC-based factories. During the year ended December 31, 2022, we incurred $2.9 million in impairment charges, recorded in cost of sales, relating to the underutilization of certain property, plant and equipment in our Mexico factory.
Construction in progress was as follows:
December 31,
Leasehold and building improvements $ 102 $ 623
Machinery and equipment 483 738
Total construction in progress $ 1,312 $ 2,688
We expect that most of the assets under construction will be placed into service during the first six months of 2025. We will begin to depreciate the cost of these assets under construction once they are placed into service.
Long-lived tangible assets by geographic area, which include property, plant, and equipment, net and operating lease ROU assets, were as follows:
December 31,
Note 7 — Goodwill and Intangible Assets, Net
Goodwill
During the year ended December 31, 2023, a decline in our financial performance, overall negative trend in the video service provider channel and an uncertain economic environment contributed to a significant decline in our market capitalization. We considered this to be an impairment trigger. We, therefore, performed a quantitative valuation analysis under an income approach to estimate our reporting unit's fair value. The income approach used projections of estimated operating results and cash flows that were discounted using a discount rate based on the weighted-average cost of capital. The main assumptions supporting the cash flow projections include, but are not limited to, revenue growth, margins, discount rate, and terminal growth rate. The financial projections reflect our best estimate of economic and market conditions over the projected period, including forecasted revenue growth, margins, capital expenditures, depreciation and amortization. In addition to our valuation analysis under an income approach, we also considered the implied control premium compared to our market capitalization. We determined that the implied control premium over our market capitalization to be substantial; therefore, we recorded an impairment charge of $49.1 million during the year ended December 31, 2023.
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Changes in the carrying amount of goodwill were as follows:
(In thousands)
Goodwill impairment (49,075)
Foreign exchange effects (10)
Balance at December 31, 2023 $ —
Intangible Assets, Net
The components of intangible assets, net were as follows:
December 31,
(1)This table excludes the gross value of fully amortized intangible assets totaling $49.3 million and $45.0 million on December 31, 2024 and 2023, respectively.
Amortization expense is recorded in SG&A 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:
Year Ended December 31,
Selling, general and administrative expenses 4,438 4,440 3,969
Estimated future annual amortization expense related to our intangible assets at December 31, 2024 is as follows:
(In thousands)
The remaining weighted average amortization period of our intangible assets at December 31, 2024 is 6.3 years.
Note 8 — Leases
We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world. At December 31, 2024, our operating leases had remaining lease terms of up to 36 years, including any reasonably probable extensions.
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Lease balances within our consolidated balance sheets were as follows:
Assets:
Operating lease right-of-use assets $ 14,322 $ 18,693
Liabilities:
Other accrued liabilities $ 3,553 $ 4,813
Long-term operating lease obligations 9,232 12,560
We entered into lease amendments for our southwestern PRC and Mexico factories during the year ended December 31, 2023 as a part of our manufacturing footprint optimization efforts. As a result of these modifications, our operating lease right-of-use assets decreased by $1.2 million and our total lease liabilities decreased by $1.3 million.
Operating lease expense, operating lease cash flows and supplemental cash flow information were as follows:
Year Ended December 31,
Selling, general and administrative expenses 5,017 4,378 4,474
Operating cash outflows from operating leases $ 8,152 $ 7,736 $ 7,427
The weighted average remaining lease liability term and the weighted average discount rate were as follows:
Year Ended December 31,
Weighted average lease liability term (in years) 4.6 4.9
Weighted average discount rate 5.45 % 5.04 %
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 December 31, 2024. The reconciliation excludes short-term leases that are not recorded on the balance sheet.
(In thousands)
Total lease payments 14,615
Less: imputed interest (1,830)
Total lease liabilities $ 12,785
At December 31, 2024, we did not have any operating leases that had not yet commenced.
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Prepaid Land Lease
We operate one factory within the PRC on which the land is leased from the government as of December 31, 2024. This land lease was prepaid to the PRC government at the time our subsidiary occupied the land. We have obtained a land-use right certificate for the land pertaining to this factory.
The factory is located in the city of Yangzhou in the Jiangsu province. The remaining net book value of this operating lease ROU asset was $2.1 million at December 31, 2024, and is being amortized on a straight-line basis over the remaining term of approximately 34 years. The buildings located on this land had a net book value of $11.2 million at December 31, 2024 and are being depreciated over a remaining weighted average period of approximately 15 years.
Note 9 — Lines of Credit
U.S. Line of Credit
On December 16, 2024, we executed an amendment to our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank"), which provides for a revolving line of credit ("U.S. Credit Line") through April 30, 2026. The U.S. Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures.
The U.S. Credit Line has a maximum availability up to $75.0 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 U.S. Credit Line total availability. At December 31, 2024, the U.S. Credit Line availability was $58.3 million based upon the AR Ratio. At February 18, 2025, the U.S. Credit Line total availability was $60.5 million based upon the AR Ratio.
Amounts available for borrowing under the U.S. Credit Line are reduced by the balance of any outstanding letters of credit, of which there were none at December 31, 2024.
All obligations under the U.S. Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets, as well as a guaranty of the U.S. Credit Line by our wholly-owned subsidiary, Universal Electronics BV.
Under the Second Amended Credit Agreement, up through March 13, 2024, we may elect to pay interest on the U.S. Credit Line based on the Secured Overnight Financing Rate ("SOFR") plus an applicable margin (varying from 2.00% to 2.75%), 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 —% to 0.75%). Subsequent to March 13, 2024, we pay interest on the U.S. Credit Line based on SOFR plus a 3.00% margin. Additionally, subsequent to March 13, 2024, the Second Amended Credit Agreement also contains a facility fee of 0.25%. The interest rates in effect at December 31, 2024 and 2023 were 7.31% and 8.06%, respectively.
The Second Amended Credit Agreement includes financial covenants and contains other customary affirmative and negative covenants and events of default. From January 1, 2024 to September 30, 2024, our covenants were based upon EBITDA and a minimum accounts receivable coverage ratio. From October 1, 2024 to December 31, 2024, our covenants were based upon a minimum fixed charge coverage ratio. Subsequent to December 31, 2024, our covenants will be based upon a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. We were in compliance with the covenants and conditions of the Second Amended Credit Agreement at and during the years ended December 31, 2024 and 2023.
At December 31, 2024, we had $26.0 million outstanding under the U.S. Credit Line. At December 31, 2024, our remaining availability under the U.S. Credit Line was $32.3 million. Our total interest expense on borrowings under the U.S. Credit Line was $4.2 million, $6.0 million and $3.3 million during the years ended December 31, 2024, 2023 and 2022, respectively. Our total facility fee expense under the U.S. Credit Line was $0.2 million during the year ended December 31, 2024.
China Line of Credit
On August 29, 2024, our subsidiary Gemstar Technology (Yangzhou) Co. Ltd. ("GTY"), executed a Line of Credit Agreement (the "Line of Credit Agreement") with the Bank of China, which provides for a revolving line of credit ("China Credit Line")
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through July 24, 2025. We expect to renew our Line of Credit Agreement with the Bank of China 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 China Credit Line may be used for working capital purposes.
The China Credit Line has a maximum availability up to RMB 80.0 million (approximately $11.0 million), subject to meeting certain financial conditions.
Amounts available for borrowing under the China Credit Line are reduced by the balance of any outstanding letters of credit, of which there were none at December 31, 2024.
All obligations under the China Credit Line are secured by GTY's buildings and land use rights.
Under the Line of Credit Agreement, we pay interest on the China Credit Line based on the one-year rate from the National Interbank Funding Center less a 0.1% margin. There are no associated commitment fees on the China Credit Line. The interest rate in effect at December 31, 2024 was 3.07%.
The Line of Credit Agreement includes financial covenants and contains other customary affirmative and negative covenants and events of default. Our covenants are based on a debt to asset ratio and a dividends paid to net income ratio. We were in compliance with the covenants and conditions of the Line of Credit Agreement at and during the year ended December 31, 2024.
At December 31, 2024, we had RMB 80.0 million (approximately $11.0 million) outstanding under the China Credit Line. At December 31, 2024, we had no remaining availability under our China Credit Line. Our total interest expense on borrowings under the China Credit Line was RMB 0.5 million (approximately $0.1 million) during the year ended December 31, 2024.
Note 10 — Income Taxes
In 2024, 2023 and 2022, pre-tax income (loss) was attributed to the following jurisdictions:
Year Ended December 31,
The provision for income taxes charged to operations was as follows:
Year Ended December 31,
Current tax expense:
Deferred tax (benefit) expense:
State and local — (126) 36
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Net deferred tax assets were comprised of the following:
December 31,
Deferred tax assets:
Accounts receivable $ 464 $ —
Amortization of intangible assets 9,223 9,999
Capitalized research and development costs 10,245 8,035
Deferred tax liabilities:
Accounts receivable — (20)
Total deferred tax liabilities (4,508) (7,325)
Net deferred tax assets before valuation allowance 70,123 64,481
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The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from operations as a result of the following:
Year Ended December 31,
Tax provision (benefit) at statutory U.S. rate $ (3,906) $ (19,373) $ 2,392
Increase (decrease) in tax provision (benefit) resulting from:
Distribution of previously taxed foreign earnings and profits — (9,450) (16,776)
Federal research and development credits (816) (1,043) (715)
Foreign participation exemption — (12,571) —
Foreign undistributed earnings, net of credits 6,231 7,198 6,486
Goodwill impairment — 5,383 —