10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 0-21044
_______________________________________ 
UNIVERSAL ELECTRONICS INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
33-0204817
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
201 E. Sandpointe Avenue, 8th Floor
Santa Ana, California
 
92707
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's telephone number, including area code: (714) 918-9500
__________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 14,432,424 shares of Common Stock, par value $0.01 per share, of the registrant were outstanding on May 5, 2016.



UNIVERSAL ELECTRONICS INC.
 
INDEX
 
 
Page
Number




Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
(Unaudited)
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
56,077

 
$
52,966

Restricted cash
4,623

 
4,623

Accounts receivable, net
110,992

 
121,801

Inventories, net
117,692

 
122,366

Prepaid expenses and other current assets
7,902

 
6,217

Income tax receivable
38

 
55

Deferred income taxes
7,210

 
7,296

Total current assets
304,534

 
315,324

Property, plant, and equipment, net
93,535

 
90,015

Goodwill
43,184

 
43,116

Intangible assets, net
31,935

 
32,926

Deferred income taxes
10,513

 
8,474

Other assets
5,335

 
5,365

Total assets
$
489,036

 
$
495,220

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
79,800

 
$
93,843

Line of credit
57,987

 
50,000

Accrued compensation
32,804

 
37,452

Accrued sales discounts, rebates and royalties
6,558

 
7,618

Accrued income taxes
2,401

 
4,745

Other accrued expenses
20,497

 
21,466

Total current liabilities
200,047

 
215,124

Long-term liabilities:
 
 
 
Long-term contingent consideration
10,504

 
11,751

Deferred income taxes
9,415

 
7,891

Income tax payable
629

 
629

Other long-term liabilities
1,891

 
1,917

Total liabilities
222,486

 
237,312

Commitments and contingencies


 


Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding

 

Common stock, $0.01 par value, 50,000,000 shares authorized; 23,286,653 and 23,176,277 shares issued on March 31, 2016 and December 31, 2015, respectively
233

 
232

Paid-in capital
234,523

 
228,269

Treasury stock, at cost, 8,857,702 and 8,824,768 shares on March 31, 2016 and December 31, 2015, respectively
(212,057
)
 
(210,333
)
Accumulated other comprehensive income (loss)
(14,431
)
 
(15,799
)
Retained earnings
257,961

 
255,240

Universal Electronics Inc. stockholders' equity
266,229

 
257,609

Noncontrolling interest
321

 
299

Total stockholders' equity
266,550

 
257,908

Total liabilities and stockholders' equity
$
489,036

 
$
495,220

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

UNIVERSAL ELECTRONICS INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited) 
 
Three Months Ended March 31,
 
2016
 
2015
Net sales
$
150,658

 
$
132,705

Cost of sales
113,011

 
95,296

Gross profit
37,647

 
37,409

Research and development expenses
5,186

 
4,434

Selling, general and administrative expenses
29,420

 
26,872

Operating income
3,041

 
6,103

Interest income (expense), net
(267
)
 
110

Other income (expense), net
720

 
230

Income before provision for income taxes
3,494

 
6,443

Provision for income taxes
751

 
1,254

Net income
2,743

 
5,189

Net income (loss) attributable to noncontrolling interest
22

 

Net income attributable to Universal Electronics Inc.
$
2,721


$
5,189

 
 
 
 
Earnings per share attributable to Universal Electronics Inc.:
 
 
 
Basic
$
0.19

 
$
0.33

Diluted
$
0.19

 
$
0.32

Shares used in computing earnings per share:
 
 
 
Basic
14,373

 
15,907

Diluted
14,637

 
16,243

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.


4

Table of Contents

UNIVERSAL ELECTRONICS INC.
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(In thousands)
(Unaudited) 
 
Three Months Ended March 31,
 
2016
 
2015
Net income
$
2,743

 
$
5,189

Other comprehensive income (loss):
 
 
 
Change in foreign currency translation adjustment
1,368

 
(4,258
)
Total comprehensive income (loss)
4,111


931

Comprehensive income (loss) attributable to noncontrolling interest
22

 

Comprehensive income (loss) attributable to Universal Electronics Inc.
$
4,089


$
931

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Three Months Ended March 31,
 
2016
 
2015
Cash provided by (used for) operating activities:
 
 
 
Net income
$
2,743

 
$
5,189

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
5,929

 
4,667

Provision for doubtful accounts
(40
)
 
2

Provision for inventory write-downs
756

 
906

Deferred income taxes
(407
)
 
(806
)
Tax benefit from exercise of stock options and vested restricted stock
616

 
567

Excess tax benefit from stock-based compensation
(668
)
 
(587
)
Shares issued for employee benefit plan
345

 
391

Employee and director stock-based compensation
2,493

 
1,959

Performance-based warrant stock-based compensation
866

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
12,255

 
342

Inventories
5,095

 
(5,993
)
Prepaid expenses and other assets
(1,604
)
 
755

Accounts payable and accrued expenses
(22,900
)
 
(12,209
)
Accrued income taxes
(2,338
)
 
(832
)
Net cash provided by (used for) operating activities
3,141

 
(5,649
)
Cash used for investing activities:
 
 
 
Acquisition of property, plant, and equipment
(7,480
)
 
(7,210
)
Acquisition of intangible assets
(564
)
 
(681
)
Net cash used for investing activities
(8,044
)
 
(7,891
)
Cash provided by (used for) financing activities:
 
 
 
Borrowings under line of credit
42,987

 

Repayments on line of credit
(35,000
)
 

Proceeds from stock options exercised
1,935

 
989

Treasury stock purchased
(1,724
)
 
(4,021
)
Excess tax benefit from stock-based compensation
668

 
587

Net cash provided by (used for) financing activities
8,866

 
(2,445
)
Effect of exchange rate changes on cash
(852
)
 
566

Net increase (decrease) in cash and cash equivalents
3,111

 
(15,419
)
Cash and cash equivalents at beginning of year
52,966

 
112,521

Cash and cash equivalents at end of period
$
56,077

 
$
97,102

 
 
 
 
Supplemental cash flow information:
 
 
 
Income taxes paid
$
2,933

 
$
2,000

Interest paid
$
302

 
$

See Notes 4 and 9 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.

6

Table of Contents

UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)
Note 1 — Basis of Presentation and Significant Accounting Policies
In the opinion of management, the accompanying consolidated financial statements of Universal Electronics Inc. and its subsidiaries contain all the adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Information and footnote disclosures normally included in financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. As used herein, the terms "Company," "we," "us," and "our" refer to Universal Electronics Inc. and its subsidiaries, unless the context indicates to the contrary.
Our results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk," and the "Financial Statements and Supplementary Data" included in Items 1A, 7, 7A, and 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2015.
Estimates, Judgments and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for sales returns and doubtful accounts, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes and stock-based compensation expense. Actual results may differ from these estimates and assumptions, and they may be adjusted as more information becomes available. Any adjustment may be material.
See Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a summary of our significant accounting policies.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which will supersede most existing U.S. GAAP revenue recognition guidance. This new standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 contains expanded disclosure requirements relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal periods beginning after December 15, 2016 and permits the use of either the full retrospective or cumulative effect transition method. On July 9, 2015, the FASB postponed the effective date of the new revenue standard by one year; however, early adoption is permitted as of the original effective date. We have not yet selected a transition method and are evaluating the impact that this new standard will have on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which amends Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other". The amendments provide guidance as to whether a cloud computing arrangement includes a software license, and based on that determination, how to account for such arrangements. ASU 2015-05 is effective for fiscal periods beginning after December 15, 2015 and permits the use of either the prospective or retrospective transition method. The adoption of ASU 2015-05 did not have a material impact on our consolidated financial position or results of operations.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory", which states that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal periods beginning after December 15, 2016 and must be applied prospectively. Early adoption is permitted. We are currently evaluating the impact that ASU 2015-11 will have on our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-period Adjustments." This new guidance requires an acquirer in a business combination to recognize adjustments to the provisional amounts that are identified during the measurement period to be reported in the period in which the adjustment amounts are determined. In addition, the effect

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Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


on earnings of changes in depreciation, amortization and other items as a result of the change to the provisional amounts, calculated as if the accounting had been complete as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal periods beginning after December 15, 2015 and must be applied prospectively. The adoption of ASU 2015-16 did not have a material impact on our consolidated financial position or results of operations.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." This new guidance requires all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. ASU 2015-17 is effective for fiscal periods beginning after December 15, 2016 and may be adopted either prospectively or retrospectively. Early adoption is permitted. We have not yet selected a transition method and are currently evaluating the impact that ASU 2015-17 will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases", which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance will require lessees to recognize a right of use asset and a lease liability at the commencement date for all leases with terms greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018 and must be adopted using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,"Improvements to Employee Share-Based Payment Accounting", which amends ASC 718, "Compensation - Stock Compensation". ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-09 will have on our consolidated financial statements.
Note 2 — Cash and Cash Equivalents and Restricted Cash
Cash and Cash Equivalents
Cash and cash equivalents were held in the following geographic regions:
(In thousands)
March 31, 2016
 
December 31, 2015
United States
$
10,229

 
$
8,458

People's Republic of China ("PRC")
29,596

 
28,681

Asia (excluding the PRC)
5,313

 
5,346

Europe
8,251

 
8,093

South America
2,688

 
2,388

Total cash and cash equivalents
$
56,077

 
$
52,966

Restricted Cash
In connection with the court order issued on September 4, 2015, we placed $4.6 million of cash into a collateralized surety bond. This bond has certain restrictions for liquidation and has therefore been classified as restricted cash. Refer to Note 10 for further information about this ongoing litigation.

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Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Note 3 — Accounts Receivable, Net and Revenue Concentrations
Accounts receivable, net were as follows:
(In thousands)
March 31, 2016
 
December 31, 2015
Trade receivables, gross
$
108,831

 
$
119,090

Allowance for doubtful accounts
(799
)
 
(822
)
Allowance for sales returns
(424
)
 
(507
)
Net trade receivables
107,608

 
117,761

Other
3,384

 
4,040

Accounts receivable, net
$
110,992

 
$
121,801

Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts were as follows:
(In thousands)
Three Months Ended March 31,
2016
 
2015
Balance at beginning of period
$
822

 
$
616

Additions (reductions) to costs and expenses
(40
)
 
2

(Write-offs)/Foreign exchange effects
17

 
(18
)
Balance at end of period
$
799

 
$
600

Sales Returns
The allowance for sales returns at March 31, 2016 and December 31, 2015 included reserves for items returned prior to period-end that were not completely processed, and therefore had not yet been removed from the allowance for sales returns balance. If these returns had been fully processed, the allowance for sales returns balance would have been approximately $0.3 million and $0.3 million on March 31, 2016 and December 31, 2015, respectively. The value of these returned goods was included in our inventory balance at March 31, 2016 and December 31, 2015.
Significant Customers
Net sales to the following customers totaled more than 10% of our net sales:
 
Three Months Ended March 31,
 
2016
 
2015
 
$ (thousands)
 
% of Net Sales
 
$ (thousands)
 
% of Net Sales
Comcast Corporation
$
39,609

 
26.3
%
 
$
15,577

 
11.7
%
DIRECTV
16,819

 
11.2

 
17,365

 
13.1


Trade receivables associated with these significant customers that totaled more than 10% of our accounts receivable, net were as follows:
 
March 31, 2016
 
December 31, 2015
 
 
$ (thousands)
 
% of Net Sales
 
$ (thousands)
 
% of Net Sales
 
Comcast Corporation
27,126

 
24.4
%
 
29,404

 
24.1
%
 
DIRECTV
12,769

 
11.5
%
 

(1) 
%
(1) 

(1) Trade receivables associated with this customer did not total more than 10% of our accounts receivable, net at December 31, 2015.

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Table of Contents
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Note 4 — Inventories, Net and Significant Supplier
Inventories, net were as follows:
(In thousands)
March 31, 2016
 
December 31, 2015

Raw materials
$
28,051

 
$
29,290

Components
13,694

 
12,228

Work in process
6,350

 
5,671

Finished goods
72,889

 
78,222

Reserve for excess and obsolete inventory
(3,292
)
 
(3,045
)
Inventories, net
$
117,692

 
$
122,366

 
Reserve for Excess and Obsolete Inventory
Changes in the reserve for excess and obsolete inventory were as follows:
(In thousands)
Three Months Ended March 31,
2016
 
2015
Balance at beginning of period
$
3,045

 
$
2,539

Additions charged to costs and expenses (1)
693

 
811

Sell through (2)
(211
)
 
(406
)
Write-offs/Foreign exchange effects
(235
)
 
(407
)
Balance at end of period
$
3,292

 
$
2,537


(1)
The additions charged to costs and expenses do not include inventory directly written-off that was scrapped during production totaling $63 thousand and $95 thousand for the three months ended March 31, 2016 and 2015, respectively. These amounts are production waste and are not included in management's reserve for excess and obsolete inventory.
(2)
These amounts represent the reduction in reserves associated with inventory items that were sold during the period.
Significant Supplier
We purchase integrated circuits, components and finished goods from multiple sources. Texas Instruments provided $8.5 million or 10.8%, of total inventory purchases during the three months ended March 31, 2016. Victory Chemical Co., Ltd. provided $8.2 million or 11.2%, of total inventory purchases during the three months ended March 31, 2015.

Related Party Supplier
We purchase certain printed circuit board assemblies from a related party supplier. The supplier is considered a related party for financial reporting purposes because our Senior Vice President of Strategic Operations owns 40% of this vendor. Inventory purchases from this supplier were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
 
$ (thousands)
 
% of Total
Inventory Purchases
 
$ (thousands)
 
% of Total
Inventory Purchases
Related party supplier
$
1,612

 
2.0
%
 
$
2,094

 
2.9
%

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Total accounts payable to this supplier were as follows:
 
March 31, 2016
 
December 31, 2015
 
$ (thousands)
 
% of Accounts Payable
 
$ (thousands)
 
% of Accounts Payable
Related party supplier
$
1,638

 
2.1
%
 
$
2,361

 
2.5
%
Our payable terms and pricing with this supplier are consistent with the terms offered by other suppliers in the ordinary course of business. The accounting policies that we apply to our transactions with our related party supplier are consistent with those applied in transactions with independent third parties. Corporate management routinely monitors purchases from our related party supplier to ensure these purchases remain consistent with our business objectives. 
Note 5 — Goodwill and Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill were as follows:
(In thousands)
 
Balance at December 31, 2015
$
43,116

Foreign exchange effects
68

Balance at March 31, 2016
$
43,184

 

Intangible Assets, Net
The components of intangible assets, net were as follows:
 
March 31, 2016
 
December 31, 2015
(In thousands)
Gross (1)
 
Accumulated
Amortization (1)
 
Net
 
Gross (1)
 
Accumulated
Amortization (1)
 
Net
Distribution rights
$
327

 
$
(107
)
 
$
220

 
$
312

 
$
(96
)
 
$
216

Patents
11,468

 
(4,580
)
 
6,888

 
11,425

 
(4,737
)
 
6,688

Trademarks and trade names
2,400

 
(1,117
)
 
1,283

 
2,401

 
(1,053
)
 
1,348

Developed and core technology
12,585

 
(2,611
)
 
9,974

 
12,587

 
(2,144
)
 
10,443

Capitalized software development costs
235

 
(118
)
 
117

 
167

 
(97
)
 
70

Customer relationships
27,697

 
(14,244
)
 
13,453

 
27,715

 
(13,554
)
 
14,161

Total intangible assets, net
$
54,712

 
$
(22,777
)
 
$
31,935

 
$
54,607

 
$
(21,681
)
 
$
32,926

 
(1) 
This table excludes the gross value of fully amortized intangible assets totaling $9.4 million and $9.0 million at March 31, 2016 and December 31, 2015, respectively.
Amortization expense is recorded in selling, general and administrative expenses, except amortization expense related to capitalized software development costs which is recorded in cost of sales. Amortization expense by income statement caption was as follows:
 
Three Months Ended March 31,
(In thousands)
2016
 
2015
Cost of sales
$
21

 
$
35

Selling, general and administrative expenses
1,533

 
1,004

Total amortization expense
$
1,554

 
$
1,039

 

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Estimated future annual amortization expense related to our intangible assets at March 31, 2016, is as follows:
(In thousands)
 
2016 (remaining 9 months)
$
4,778

2017
6,303

2018
6,250

2019
6,235

2020
5,495

Thereafter
2,874

Total
$
31,935

Note 6 — Line of Credit

On October 9, 2014, we extended the term of our Amended and Restated Credit Agreement ("Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") to November 1, 2017. The Amended Credit Agreement provided for a $55.0 million line of credit ("Credit Line") that may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. On September 3, 2015, we entered into the Second Amendment to the Amended Credit Agreement in which the Credit Line was increased to $65.0 million. On November 10, 2015, we entered into the Third Amendment to the Amended Credit Agreement in which the Credit Line was increased to $85.0 million. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $13 thousand at March 31, 2016.
All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary which controls our manufacturing factories in the PRC.
Under the Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Amended Credit Agreement) plus an applicable margin (varying from 0.00% to 0.50%). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Amended Credit Agreement. The interest rate in effect at March 31, 2016 was 1.69%. There are no commitment fees or unused line fees under the Amended Credit Agreement.
The Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Amended Credit Agreement also contains other customary affirmative and negative covenants and events of default. As of March 31, 2016, we were in compliance with the covenants and conditions of the Amended Credit Agreement.
At March 31, 2016, we had $58.0 million outstanding under the Credit Line. Our total interest expense on borrowings was $0.3 million during the three months ended March 31, 2016. We had no interest expense or borrowings during the three months ended March 31, 2015.
Note 7 — Income Taxes
We utilize our estimated annual effective tax rate to determine our provision for income taxes for interim periods. The income tax provision is computed by taking the estimated annual effective tax rate and multiplying it by the year-to-date pre-tax book income.
We recorded income tax expense of $0.8 million and $1.3 million for the three months ended March 31, 2016 and 2015, respectively. Our effective tax rate was 21.5% and 19.5% during the three months ended March 31, 2016 and 2015, respectively. Our effective tax rate was lower in the prior year primarily due to the recording of a $0.3 million tax refund in China during the three months ended March 31, 2015 related to certain deductible research and development expenses incurred in 2013.
At March 31, 2016, we had gross unrecognized tax benefits of $3.7 million, including interest and penalties, of which $3.3 million would affect the annual effective tax rate if these tax benefits are realized. Further, we are unaware of any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within the next twelve months. However, based on federal, state and foreign statute expirations in various jurisdictions, we anticipate a decrease in unrecognized tax benefits of approximately $0.1 million within the next twelve months. We have classified uncertain tax positions as non-current

12

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


income tax liabilities unless expected to be paid within one year.
We have elected to classify interest and penalties as a component of tax expense. Accrued interest and penalties of $0.2 million and $0.2 million at March 31, 2016 and December 31, 2015, respectively, are included in our unrecognized tax benefits.
We file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. On March 31, 2016, the open statutes of limitations in our significant tax jurisdictions were as follows: federal 2012 through 2014, state 2011 through 2014, and foreign 2009 through 2014.
Note 8 — Accrued Compensation
The components of accrued compensation were as follows:
(In thousands)
March 31, 2016
 
December 31, 2015
Accrued social insurance (1)
$
18,893

 
$
18,923

Accrued salary/wages
7,143

 
7,549

Accrued vacation/holiday
2,839

 
2,227

Accrued bonus (2)
1,454

 
5,914

Accrued commission
335

 
1,084

Accrued medical insurance claims
258

 
218

Other accrued compensation
1,882

 
1,537

Total accrued compensation
$
32,804

 
$
37,452

 
(1) 
Effective January 1, 2008, the Chinese Labor Contract Law was enacted in the PRC. This law mandated that PRC employers remit the applicable social insurance payments to their local government. Social insurance is comprised of various components such as pension, medical insurance, job injury insurance, unemployment insurance, and a housing assistance fund, and is administered in a manner similar to social security in the United States. This amount represents our estimate of the amounts due to the PRC government for social insurance on March 31, 2016 and December 31, 2015.
(2) 
Accrued bonus includes an accrual for an extra month of salary ("13th month salary") to be paid to employees in certain geographies where it is the customary business practice. This 13th month salary is paid to these employees if they remain employed with us through December 31st. The total accrued for the 13th month salary was $0.3 million and $0.7 million at March 31, 2016 and December 31, 2015, respectively.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Note 9 — Other Accrued Expenses
The components of other accrued expenses were as follows:
(In thousands)
March 31, 2016
 
December 31, 2015
Advertising and marketing
$
285

 
$
191

Deferred revenue
1,416

 
1,434

Duties
771

 
1,318

Freight and handling fees
1,652

 
1,942

Product development
442

 
630

Product warranty claim costs
35

 
35

Professional fees
1,343

 
1,714

Property, plant, and equipment
665

 
551

Sales taxes and VAT
1,915

 
3,170

Short-term contingent consideration (Note 19)
1,214

 

Third-party commissions
890

 
585

Tooling (1)
1,495

 
1,173

Unrealized loss on foreign currency exchange futures contracts
546

 
1,164

URC court order (Notes 2 and 10)
4,633

 
4,629

Utilities
242

 
278

Other
2,953

 
2,652

Total other accrued expenses
$
20,497

 
$
21,466

 
(1) 
The tooling accrual balance relates to unearned revenue for tooling that will be sold to customers.
Related Party Vendor
We have obtained certain engineering support services for our India subsidiary from JAP Techno Solutions ("JAP"). The owner of JAP is the spouse of the managing director of our India operations. Total fees paid to JAP for the three months ended March 31, 2016 and 2015 were $0 thousand and $26 thousand, respectively.
Note 10 — Commitments and Contingencies
Product Warranties
Changes in the liability for product warranty claim costs were as follows:
(In thousands)
Three Months Ended March 31,
2016
 
2015
Balance at beginning of period
$
35

 
$
353

Accruals for warranties issued during the period

 

Settlements (in cash or in kind) during the period

 
(180
)
Balance at end of period
$
35

 
$
173


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Restructuring Activities
During the three months ended March 31, 2016, we implemented a plan to reduce our manufacturing costs by transitioning some of our manufacturing activities from our southern-most China factory, located in the city of Guangzhou in the Guangdong province, to our other China factories where labor rates are lower. As a result, we incurred severance costs of $1.4 million during the three months ended March 31, 2016, which are included within selling, general and administrative expenses. We expect to incur additional severance costs of approximately $8 million as we continue to execute this transition over the next 12-18 months. Because severance costs relate to involuntary terminations, we record the related liability at the communication date. At March 31, 2016, we had $0.2 million of unpaid severance costs included within accrued compensation.
Litigation

On March 2, 2012, we filed a lawsuit against Universal Remote Control, Inc. ("URC") in the United States District Court, Central District of California (Universal Electronics Inc. v. Universal Remote Control, Inc., SACV12-0039 AG (JPRx)) alleging that URC was infringing, directly and indirectly, four of our patents related to remote control technology. Following a jury verdict in favor of URC, on September 4, 2015 the District Court awarded URC $4.6 million in attorneys’ fees and costs, approximately 50% of the attorneys’ fees and costs URC claims it incurred. Both parties filed Notices of Appeal. URC is appealing various portions of the judgment and the District Court’s decision to award less than the full amount of attorneys’ fees. We have elected not to appeal the award of attorneys’ fees. URC has filed its opening appellate brief and we filed our response on February 26, 2016. We expect oral arguments in the summer of 2016, with a decision approximately six months later. We fully accrued the amount awarded in 2015, and the liability is included within other accrued expenses. Thus, there was no additional amount accrued for the three months ended March 31, 2016. Additionally, as described in Note 2, we placed $4.6 million into a surety bond as collateral for this court order.

On June 28, 2013, we filed a second lawsuit against URC, also in the United States District Court, Central District of California (Universal Electronics Inc. v. Universal Remote Control, Inc., SACV13-00987 JAK (SHx)) claiming that URC has violated ten patents not implicated in our first lawsuit against it. Of the ten patents, four of them have expired. In mid-November 2013, we filed a motion to add affiliated URC suppliers, Ohsung Electronics Co, Ltd., a South Korean entity, and Ohsung Electronics USA, Inc., a California entity, (collectively "Ohsung"), to the lawsuit. In late June and early July of 2014, URC and Ohsung requested inter partes review ("IPR") with the US Patent and Trademark Office Appeal Board ("PTAB") for each of the ten patents pending in the second URC lawsuit. On July 9, 2014, the Court entered stipulated stay, pending the IPR outcome. In January 2016, the PTAB issued its decisions in all of the IPR proceedings, sustaining most of the claims of the six unexpired patents and invalidating the majority of the claims of the four expired patents. URC filed a notice of appeal with respect to the PTAB’s ruling against it. We have elected to not appeal the PTAB’s rulings. At a status conference held on March 21, 2016, the Court requested briefing on whether the stay should be continued. The briefing has been completed and we are awaiting the Court’s ruling.

On or about June 10, 2015, FM Marketing GmbH ("FMH") and Ruwido Austria GmbH ("Ruwido"), filed a Summons in Summary Proceedings in Belgium court against one of our subsidiaries, Universal Electronics BV ("UEBV") and one of its customers, Telenet N.V. ("Telenet"), claiming that one of the products UEBV supplies Telenet violates two design patents and one utility patent owned by FMH and/or Ruwido. By this summons, FMH and Ruwido sought to enjoin Telenet and UEBV from continued distribution and use of the products at issue. After the September 29, 2015 hearing, the Court issued its ruling in our and Telenet’s favor, rejecting FMH and Ruwido’s request entirely. On October 22, 2015, Ruwido filed its notice of appeal in this ruling. The parties have fully briefed the appeal and on February 15, 2016, the appellate court heard oral arguments. We expect the appellate court’s ruling on the motion in the next three to six months. In addition, in September 2015, UEBV filed an Opposition with the European Patent Office seeking to invalidate the one utility patent asserted against UEBV and Telenet by Ruwido. Finally, on or about February 9, 2016, Ruwido filed a writ of summons for proceeding on the merits with respect to asserted patents. UEBV and Telenet intend to vigorously defend against Ruwido's claims.
There are no other material pending legal proceedings to which we or any of our subsidiaries is a party or of which our respective property is the subject. However, as is typical in our industry and to the nature and kind of business in which we are engaged, from time to time, various claims, charges and litigation are asserted or commenced by third parties against us or by us against third parties arising from or related to product liability, infringement of patent or other intellectual property rights, breach of warranty, contractual relations, or employee relations. The amounts claimed may be substantial but may not bear any reasonable relationship to the merits of the claims or the extent of any real risk of court awards assessed against us or in our favor. However, no assurances can be made as to the outcome of any of these matters, nor can we estimate the range of potential losses to us. In our opinion, final

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


judgments, if any, which might be rendered against us in potential or pending litigation would not have a material adverse effect on our financial condition, results of operations, or cash flows. Moreover, we believe that our products do not infringe any third parties' patents or other intellectual property rights.
We maintain directors' and officers' liability insurance which insures our individual directors and officers against certain claims, as well as attorney's fees and related expenses incurred in connection with the defense of such claims.
Note 11 — Treasury Stock
From time to time, our Board of Directors authorizes management to repurchase shares of our issued and outstanding common stock on the open market. Repurchases may be made to manage dilution created by shares issued under our stock incentive plans or whenever we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board. As of March 31, 2016, we had 375,000 shares available for repurchase on the open market under the Board's authorizations.
Repurchased shares of our common stock were as follows:
 
Three Months Ended March 31,
(In thousands, except share data)
2016
 
2015
Shares repurchased
32,934

 
69,460

Cost of shares repurchased
$
1,724

 
$
4,021

Repurchased shares are recorded as shares held in treasury at cost. We hold these shares for future use as management and the Board of Directors deem appropriate, which has included compensating our outside directors.
Note 12 — Business Segment and Foreign Operations
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.
Foreign Operations
Our net sales to external customers by geographic area were as follows:
 
Three Months Ended March 31,
(In thousands)
2016
 
2015
United States
$
83,938

 
$
54,759

Asia (excluding PRC)
21,573

 
31,020

People's Republic of China
16,926

 
15,836

Europe
15,783

 
15,022

Latin America
7,555

 
10,522

Other
4,883

 
5,546

Total net sales
$
150,658

 
$
132,705

Specific identification of the customer billing location was the basis used for attributing revenues from external customers to geographic areas.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Long-lived tangible assets by geographic area were as follows:
(In thousands)
March 31, 2016
 
December 31, 2015
United States
$
7,524

 
$
7,015

People's Republic of China
86,419

 
83,794

All other countries
4,927

 
4,571

Total long-lived tangible assets
$
98,870

 
$
95,380

Note 13 — Stock-Based Compensation
Stock-based compensation expense for each employee and director is presented in the same income statement caption as their cash compensation. Stock-based compensation expense by income statement caption and the related income tax benefit were as follows:
 
Three Months Ended March 31,
(In thousands)
2016
 
2015
Cost of sales
$
14

 
$
9

Research and development expenses
136

 
105

Selling, general and administrative expenses:
 
 
 
Employees
1,845

 
1,471

Outside directors
498

 
374

Total stock-based compensation expense
$
2,493

 
$
1,959

 
 
 
 
Income tax benefit
$
733

 
$
560


Stock Options

Stock option activity was as follows:
 
Number of Options
(in 000's)
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
(in 000's)
Outstanding at December 31, 2015
648

 
$
30.50

 
 
 
 
Granted
244

 
49.67

 
 
 
 
Exercised
(77
)
 
25.25

 
 
 
$
2,415

Forfeited/canceled/expired

 

 
 
 
 
Outstanding at March 31, 2016 (1)
815

 
$
36.72

 
5.36
 
$
20,847

Vested and expected to vest at March 31, 2016 (1)
814

 
$
36.72

 
5.36
 
$
20,840

Exercisable at March 31, 2016 (1)
469

 
$
27.15

 
4.57
 
$
16,422

(1) 
The aggregate intrinsic value represents the total pre-tax value (the difference between our closing stock price on the last trading day of the first quarter of 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on March 31, 2016. This amount will change based on the fair market value of our stock.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


The assumptions we utilized in the Black-Scholes option pricing model and the resulting weighted average fair value of stock option grants were the following:
 
Three Months Ended March 31,
 
2016
 
2015
Weighted average fair value of grants
$
17.96

 
$
24.77

Risk-free interest rate
1.36
%
 
1.38
%
Expected volatility
41.38
%
 
43.50
%
Expected life in years
4.55

 
4.56

As of March 31, 2016, we expect to recognize $5.9 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 2.5 years.
Restricted Stock
Non-vested restricted stock award activity was as follows:
 
Shares
(in 000's)
 
Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2015
225

 
$
51.31

Granted
37

 
51.39

Vested
(28
)
 
45.92

Forfeited
(2
)
 
55.85

Non-vested at March 31, 2016
232

 
$
51.95

As of March 31, 2016, we expect to recognize $10.6 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of 2.1 years.  

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Note 14 — Performance-Based Common Stock Warrants
On March 9, 2016, we issued common stock purchase warrants to Comcast Corporation ("Comcast") to purchase up to 725,000 shares of our common stock at a price of $54.55 per share. The right to exercise the warrants under this agreement is subject to vesting over three successive two-year periods (with the first two-year period commencing on January 1, 2016) based on the level of purchases of goods and services from us by Comcast and its affiliates, as defined in the warrant agreement. The table below presents the purchase levels and number of warrants that will vest in each period based upon achieving these purchase levels.
 
Incremental Warrants That Will Vest
Aggregate Level of Purchases by Comcast and Affiliates
January 1, 2016 - December 31, 2017
 
January 1, 2018 - December 31, 2019
 
January 1, 2020 - December 31, 2021
$260 million
100,000

 
100,000

 
75,000

$300 million
75,000

 
75,000

 
75,000

$340 million
75,000

 
75,000

 
75,000

Maximum Potential Warrants Earned by Comcast
250,000

 
250,000

 
225,000

If total aggregate purchases by Comcast and its affiliates are below $260 million in any of the two-year periods above, no warrants will vest related to that two-year period. If total aggregate purchases of goods and services by Comcast and its affiliates exceed $340 million during either the first or second two-year period, the amount of any such excess will count toward aggregate purchases in the following two-year period. To fully vest in the rights to purchase all of the underlying shares, Comcast and its affiliates must purchase an aggregate of $1.02 billion in goods and services from us during the six-year vesting period.
Any and all warrants that vest will expire on January 1, 2023. The warrants provide for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions. Additionally, in connection with the common stock purchase warrants, we have also entered into a registration rights agreement with Comcast under which Comcast may from time to time request that we register the shares of common stock underlying vested warrants with the SEC.
Because the warrants contain performance criteria under which Comcast must achieve specified aggregate purchase levels for the warrants to vest, as detailed above, the measurement date for the warrants is the date on which the warrants vest. The estimated fair value of warrants is being recorded as a reduction to net sales ratably as the warrants vest based on the projected number of warrants that will vest, the proportion of purchases by Comcast and its affiliates within the period relative to the aggregate purchase levels required for the warrants to vest and the then-current fair value of the related unvested warrants. 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. At March 31, 2016, none of the warrants had vested.
The fair value of the warrants is determined using the Black-Scholes option pricing model. The assumptions we utilized and the resulting fair value of the warrants were the following:
 
Three Months Ended March 31, 2016
Fair value
$29.86
Risk-free interest rate
1.50%
Expected volatility
41.49%
Expected life in years
6.75
For the three months ended March 31, 2016, we recorded $0.9 million as a reduction to net sales in connection with the common stock warrants, and the aggregate unrecognized estimated fair value of unvested warrants at March 31, 2016 was $20.8 million.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Note 15 — Other Income (Expense), Net
Other income (expense), net consisted of the following: 
 
Three Months Ended March 31,
(In thousands)
2016
 
2015
Net gain (loss) on foreign currency exchange contracts (1)
$
(199
)
 
$
1,034

Net gain (loss) on foreign currency exchange transactions
911

 
(854
)
Other income (expense)
8

 
50

Other income (expense), net
$
720

 
$
230

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

Note 16 — Earnings Per Share
Earnings per share was calculated as follows:
 
Three Months Ended March 31,
(In thousands, except per-share amounts)
2016
 
2015
BASIC
 
 
 
Net income attributable to Universal Electronics Inc.
$
2,721

 
$
5,189

Weighted-average common shares outstanding
14,373

 
15,907

Basic earnings per share attributable to Universal Electronics Inc.
$
0.19

 
$
0.33

 
 
 
 
DILUTED
 
 
 
Net income attributable to Universal Electronics Inc.
$
2,721

 
$
5,189

Weighted-average common shares outstanding for basic
14,373

 
15,907

Dilutive effect of stock options and restricted stock
264

 
336

Weighted-average common shares outstanding on a diluted basis
14,637

 
16,243

Diluted earnings per share attributable to Universal Electronics Inc.
$
0.19

 
$
0.32

The number of stock options and shares of restricted stock excluded from the computation of diluted earnings per common share were as follows:
 
Three Months Ended March 31,
(In thousands)
2016
 
2015
Stock options
256

 
40

Restricted stock awards
20

 
16


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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Note 17 — Stockholders' Equity and Noncontrolling Interest
A reconciliation of common stock outstanding, treasury stock and the total carrying amount of Universal Electronics Inc. stockholders’ equity, stockholders’ equity attributable to noncontrolling interest and total stockholders' equity for the three months ended March 31, 2016 is as follows:
 
Shares
 
Stockholders' Equity
(In thousands)
Common Stock
 
Treasury Stock
 
Universal Electronics Inc. Stockholders' Equity
 
Noncontrolling Interest
 
Total
Balance at December 31, 2015
23,176

 
(8,825
)
 
$
257,609

 
$
299

 
$
257,908

Net income
 
 
 
 
2,721

 
22

 
2,743

Currency translation adjustment
 
 
 
 
1,368

 
 
 
1,368

Shares issued for employee benefit plan and compensation
26

 
 
 
345

 
 
 
345

Purchase of treasury shares
 
 
(33
)
 
(1,724
)
 
 
 
(1,724
)
Stock options exercised
77

 
 
 
1,935

 
 
 
1,935

Shares issued to Directors
8

 
 
 

 
 
 

Employee and director stock-based compensation
 
 
 
 
2,493

 
 
 
2,493

Tax benefit from exercise of non-qualified stock options and vested restricted stock
 
 
 
 
616

 
 
 
616

Performance-based warrant stock-based compensation
 
 
 
 
866

 
 
 
866

Balance at March 31, 2016
23,287

 
(8,858
)
 
$
266,229

 
$
321

 
$
266,550

Note 18 — Derivatives
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 are exposed to market risks from foreign currency exchange rates, which may adversely affect our operating results and financial position. Our foreign currency exposures are primarily concentrated in the Argentinian Peso, Brazilian Real, British Pound, Chinese Yuan Renminbi, Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen and Mexican Peso. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. We do not use leveraged derivative financial instruments and these derivatives have not qualified for hedge accounting.
Gains and losses on the derivatives are recorded in other income (expense), net. Derivatives are recorded on the balance sheet at fair value. The estimated fair values of our derivative financial instruments represent the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. We have determined that the fair value of our derivatives are derived from level 2 inputs in the fair value hierarchy. The following table sets forth the total net fair value of derivatives:  
 
 
March 31, 2016
 
December 31, 2015
 
 
Fair Value Measurement Using
 
Total
 
Fair Value Measurement Using
 
Total
(In thousands)
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance
Foreign currency exchange futures contracts
 
$

 
$
202

 
$

 
$
202

 
$

 
$
(1,146
)
 
$

 
$
(1,146
)
We held foreign currency exchange contracts which resulted in a net pre-tax loss of $0.2 million for the three months ended March 31, 2016 and a net pre-tax gain of $1.0 million for the three months ended March 31, 2015, respectively (see Note 15).

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


Details of futures contracts held were as follows:
Date Held
 
Type
 
Position Held
 
Notional Value
(in millions)
 
Forward Rate
 
Unrealized Gain/(Loss) Recorded at Balance Sheet
Date
(in thousands)(1)
 
Settlement Date
March 31, 2016
 
USD/Euro
 
USD
 
$
14.0

 
1.1201

 
$
(240
)
 
April 22, 2016
March 31, 2016
 
USD/Chinese Yuan Renminbi
 
Chinese Yuan Renminbi
 
$
20.0

 
6.7391

 
$
748

 
July 15, 2016
March 31, 2016
 
USD/Brazilian Real
 
USD
 
$
2.0

 
4.1570

 
$
(306
)
 
April 15, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
USD/Euro
 
USD
 
$
7.0

 
1.0864

 
$
(7
)
 
January 22, 2016
December 31, 2015
 
USD/Chinese Yuan Renminbi
 
Chinese Yuan Renminbi
 
$
22.5

 
6.2565

 
$
(1,100
)
 
January 15, 2016
December 31, 2015
 
USD/Brazilian Real
 
Brazilian Real
 
$
1.0

 
3.7461

 
$
(57
)
 
January 15, 2016
December 31, 2015
 
USD/Brazilian Real
 
USD
 
$
3.0

 
3.9503

 
$
18

 
January 15, 2016
(1) 
Gains on futures contracts are recorded in prepaid expenses and other current assets. Losses on futures contracts are recorded in other accrued expenses.
Note 19 — Business Combination
On August 4, 2015, we entered into an Asset Purchase Agreement (the "APA") to acquire substantially all of the net assets of Ecolink Intelligent Technology, Inc. ("Ecolink"), a leading developer of smart home technology that designs, develops and manufactures a wide range of intelligent wireless security and home automation products. This transaction closed on August 31, 2015. The purchase price of $24.1 million was comprised of $12.9 million in cash, and $11.2 million of contingent consideration. Additionally, we incurred $0.2 million in acquisition costs, consisting primarily of legal and accounting expenses, which were recorded within selling, general and administrative expenses for the year ended December 31, 2015. The acquisition of these assets will allow us to extend our product offerings to include home security and automation products previously marketed by Ecolink and to sell these products to our existing customers.
Included in the net assets acquired from Ecolink was a 50% ownership interest in Encore Controls LLC ("Encore"), a developer of smart home technology that designs and sells intelligent wireless fire safety products for use in home security systems.
Management has determined that we are the primary beneficiary of Encore due to our ability to direct the activities that most significantly impact the economic performance of Encore, and thus we have consolidated the financial statements of Encore commencing on the acquisition date. The aggregate fair value of Encore’s net assets on the acquisition date was $0.7 million, of which $0.4 million was attributable to the noncontrolling interest. The fair value attributable to the noncontrolling interest was based on the noncontrolling interest's ownership percentage in the fair values of the assets and liabilities of Encore. The carrying amount of Encore's assets and liabilities consolidated at March 31, 2016 did not materially change from the opening balances at the acquisition date. The operations of Encore are financed through cash flows from operations, and we do not intend to provide support to Encore beyond our respective ownership obligation. Furthermore, the creditors of Encore do not have any recourse to our general credit.
Our consolidated income statement for the three months ended March 31, 2016 includes net sales of $1.0 million and a net loss of $0.5 million attributable to Ecolink.
Contingent Consideration
We are required to make additional earnout payments upon the achievement of certain operating income levels attributable to Ecolink over each of the next 5 years. The amount of contingent consideration has no upper limit and is calculated at the end of each calendar year based upon certain percentages of operating income target levels as defined in the APA. Ecolink's operating income will be calculated using certain revenues, costs and expenses directly attributable to Ecolink as specified in the APA. At the acquisition date, the value of earnout contingent consideration was estimated using a valuation methodology based on projections

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


of future operating income calculated in accordance with the APA. Such projections were then discounted using an average discount rate of 15.5% to reflect the risk in achieving the projected operating income levels as well as the time value of money. The fair value measurement of the earnout contingent consideration was based primarily on significant inputs not observable in an active market and thus represents a Level 3 measurement as defined under U.S. GAAP. At December 31, 2015 the fair value of the earnout contingent consideration was $11.8 million. During the three months ended March 31, 2016, the fair value of the earnout contingent consideration decreased to $11.7 million, primarily to reflect adjustments to the timing of earnout payments and the related accretion driven by the time value of money. This adjustment was recorded within selling, general and administrative expenses for the three months ended March 31, 2016.
The current portion of the contingent consideration liability is included within other accrued expenses, and the long-term portion of the contingent consideration liability is presented as long-term contingent consideration.
Purchase Price Allocation
Using the acquisition method of accounting, the acquisition date fair value of the consideration transferred was allocated to the net tangible and intangible assets acquired and 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. The goodwill is expected to be deductible for income tax purposes. Management's purchase price allocation was the following:
(in thousands)
Estimated Lives
 
Fair Value
Cash and cash equivalents
 
 
$
685

Accounts receivable
 
 
374

Inventories
 
 
1,412

Prepaid expenses and other current assets
 
 
253

Property, plant and equipment
1-4 years
 
16

Non-interest bearing liabilities
 
 
(1,557
)
Net tangible assets acquired
 
 
1,183

Trade name
7 years
 
400

Developed technology
4-14 years
 
9,080

Customer relationships
5 years
 
1,300

Goodwill
 
 
12,564

Total purchase price
 
 
24,527

Noncontrolling interest
 
 
(378
)
Net purchase price
 
 
24,149

Less: Contingent consideration
 
 
(11,200
)
Cash paid
 
 
$
12,949

Management's determination of the fair value of intangible assets acquired was based primarily on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under U.S. GAAP.
The fair value assigned to Ecolink’s trade name intangible asset was determined utilizing a relief from royalty method. Under the relief from royalty method, the fair value of the intangible asset is estimated to be the present value of the royalties saved because the company owns the intangible asset. Revenue projections and estimated useful life were significant inputs into estimating the value of Ecolink’s trade name.
The fair value assigned to Ecolink's developed technology was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and utilizes revenue and cost projections, including an assumed contributory asset charge.
The fair value assigned to Ecolink's customer relationships intangible asset was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings utilizing the existing Ecolink customer base versus projected earnings based on starting with no customers and reacquiring the customer base. Revenue and earnings projections were significant inputs into estimating the value of Ecolink’s customer relationships.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)


The trade name, developed technology and customer relationships intangible assets are expected to be deductible for income tax purposes.
Pro Forma Results (Unaudited)
The following unaudited pro forma financial information presents the combined results of our operations and the operations of Ecolink as if this transaction had occurred on January 1, 2014. This unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been achieved had the acquisition actually been completed as of January 1, 2014, and should not be taken as a projection of the future consolidated results of our operations.
 
Three Months Ended March 31,
(In thousands, except per-share amounts)
2016
 
2015
Net sales
$
150,658

 
$
134,211

Net income
$
2,789

 
$
5,032

Net income attributable to Universal Electronics Inc.
$
2,758

 
$
5,007

Basic earnings per share attributable to Universal Electronics Inc.
$
0.19

 
$
0.31

Diluted earnings per share attributable to Universal Electronics Inc.
$
0.19

 
$
0.31

For purposes of determining pro forma net income attributable to Universal Electronics Inc., adjustments were made to each period presented in the table above. The pro forma net income and net income attributable to Universal Electronics Inc. assumes that amortization of acquired intangible assets and of fair value adjustments related to inventories began at January 1, 2014 rather than on September 1, 2015. The result is a net increase in amortization expense of $0.5 million for the three months ended March 31, 2015 and a net decrease in amortization expense of $0.1 million for the three months ended March 31, 2016. Additionally, acquisition costs totaling $0.2 million are excluded from pro forma net income and pro forma net income attributable to Universal Electronics Inc. All adjustments have been made net of their related tax effects.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
Overview
We develop and manufacture a broad line of pre-programmed universal remote control products, AV accessories, software and intelligent wireless automation components dedicated to redefining the home entertainment and automation experience. Our customers operate primarily in the consumer electronics market and include subscription broadcasters, OEMs, international retailers, private label brands, pro-security installers and companies in the computing industry. We also sell integrated circuits, on which our software and device control database is embedded, and license our device control database to OEMs that manufacture televisions, digital audio and video players, streamer boxes, cable converters, satellite receivers, set-top boxes, room air conditioning equipment, game consoles, and wireless mobile phones and tablets.
Since our beginning in 1986, we have compiled an extensive device control code database that covers over 941,000 individual device functions and approximately 7,600 unique consumer electronic brands. QuickSet®, our proprietary software, can automatically detect, identify and enable the appropriate control commands for home entertainment, automation and appliances like air conditioners. Our library is regularly updated with new control functions captured directly from devices, remote controls and manufacturer specifications to ensure the accuracy and integrity of our database and control engine. Our universal remote control library contains device codes that are capable of controlling virtually all set-top boxes, televisions, audio components, DVD players, Blu-Ray players, and CD players, as well as most other remote controlled home entertainment devices and home automation control modules worldwide.
With the wider adoption of more advanced technologies, emerging radio frequency ("RF") technologies, such as RF4CE, Bluetooth, and Bluetooth Smart, have increasingly become a focus in our development efforts. Several new recently released platforms utilize RF to effectively implement popular features like voice search.
We have developed a comprehensive patent portfolio of 373 pending and issued patents related to remote controls and home automation.
We operate as one business segment. We have twenty-two international subsidiaries located in Argentina, Brazil, British Virgin Islands, Cayman Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Mexico, the Netherlands, People's Republic of China (5), Singapore, Spain, and the United Kingdom.
To recap our results for the three months ended March 31, 2016:
Net sales increased 13.5% to $150.7 million for the three months ended March 31, 2016 from $132.7 million for the three months ended March 31, 2015.
Our gross margin percentage decreased from 28.2% for the three months ended March 31, 2015 to 25.0% for the three months ended March 31, 2016.
Operating expenses, as a percent of net sales, decreased from 23.6% for the three months ended March 31, 2015 to 23.0% for the three months ended March 31, 2016.
Our operating income decreased from $6.1 million for the three months ended March 31, 2015 to $3.0 million for the three months ended March 31, 2016, and our operating margin percentage decreased from 4.6% for the three months ended March 31, 2015 to 2.0% for the three months ended March 31, 2016.
Our effective tax rate increased to 21.5% for the three months ended March 31, 2016, compared to 19.5% for the three months ended March 31, 2015.
Our strategic business objectives for 2016 include the following:
continue to develop and market the advanced remote control products and technologies our customer base is adopting;
continue to broaden our home control and automation product offerings;
further penetrate the international subscription broadcasting markets;
acquire new customers in historically strong regions;
increase our share with existing customers; and
continue to seek acquisitions or strategic partners that complement and strengthen our existing business.
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

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to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowances for sales returns and doubtful accounts, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes and stock-based compensation expense. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. The critical accounting policy below supplements the items that we disclosed as our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015.
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 then-current fair value of the related unvested warrants. 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.
The fair value of performance-based common stock warrants 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, and expected life in years. The risk-free interest rate over the expected life 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 warrant. Expected life is equal to the remaining contractual term of the warrant. 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.
Recent Accounting Pronouncements
See Note 1 contained in the "Notes to Consolidated Financial Statements" for a discussion of recent accounting pronouncements.

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Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated.
 
Three Months Ended March 31,
 
2016
 
2015
Net sales
100.0
 %
 
100.0
%
Cost of sales
75.0

 
71.8

Gross profit
25.0

 
28.2

Research and development expenses
3.5

 
3.4

Selling, general and administrative expenses
19.5

 
20.2

Operating income
2.0

 
4.6

Interest income (expense), net
(0.2
)
 
0.1

Other income (expense), net
0.5

 
0.2

Income before provision for income taxes
2.3

 
4.9

Provision for income taxes
0.5

 
1.0

Net income
1.8

 
3.9

Net income (loss) attributable to noncontrolling interest
0.0

 

Net income attributable to Universal Electronics Inc.
1.8
 %
 
3.9
%
Three Months Ended March 31, 2016 versus Three Months Ended March 31, 2015
Net sales. Net sales for the three months ended March 31, 2016 were $150.7 million, an increase of 13.5% compared to $132.7 million for the three months ended March 31, 2015. Net sales by our Business and Consumer lines were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
 
$ (millions)
 
% of total
 
$ (millions)
 
% of total
Business
$
140.7

 
93.4
%
 
$
121.5

 
91.6
%
Consumer
10.0

 
6.6

 
11.2

 
8.4

Total net sales
$
150.7

 
100.0
%
 
$
132.7

 
100.0
%
Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were 93.4% of net sales for the three months ended March 31, 2016 compared to 91.6% for the three months ended March 31, 2015. Net sales in our Business lines for the three months ended March 31, 2016 increased by 15.8% to $140.7 million from $121.5 million driven primarily by strong demand and increased market share with North American subscription broadcasters as more customers transition from lower end platforms to higher end platforms. Partially offsetting this increase was a decrease in net sales to consumer electronics companies in Asia.
Net sales in our Consumer lines (One For All® retail and private label) were 6.6% of net sales for the three months ended March 31, 2016 compared to 8.4% for the three months ended March 31, 2015. Net sales in our Consumer lines for the three months ended March 31, 2016 decreased by 10.7% to $10.0 million from $11.2 million in the three months ended March 31, 2015. This decrease was mainly due to decreased sales in the Latin American market.
Gross profit. Gross profit for the three months ended March 31, 2016 was $37.6 million compared to $37.4 million for the three months ended March 31, 2015. Gross profit as a percent of sales decreased to 25.0% for the three months ended March 31, 2016 compared to 28.2% for the three months ended March 31, 2015. The gross margin percentage was unfavorably impacted by a decrease in royalty revenue associated with the TV and mobile device markets and an increase in sales to certain large customers that yield a lower gross margin rate than our company average. The impact of these unfavorable items was partially offset by the weakening of the Chinese Yuan Renminbi relative to the U.S. Dollar.
Research and development ("R&D") expenses. R&D expenses increased 17.0% to $5.2 million for the three months ended March 31, 2016 from $4.4 million for the three months ended March 31, 2015 2015 as we continue to develop new product offerings in existing categories as well as new categories such as the home security channel.

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Selling, general and administrative ("SG&A") expenses. SG&A expenses increased 9.5% to $29.4 million for the three months ended March 31, 2016 from $26.9 million for the three months ended March 31, 2015. The increase was primarily attributable to severance costs incurred resulting from the transitioning of certain manufacturing activities from our higher cost factory located in southern China to our lower cost factories located in other regions within China. We expect this transition to continue over the next 12-18 months. In addition, payroll costs increased as a result of annual merit increases and additional headcount to support product development efforts. These increases were partially offset by the weakening of the Chinese Yuan Renminbi, Brazilian Real and Euro versus the U.S. dollar.
Interest income (expense), net. Net interest expense was $267 thousand for the three months ended March 31, 2016 compared to net interest income of $110 thousand for the three months ended March 31, 2015 as a result of borrowings on our line of credit over the last 12 months.
Other income (expense), net. Net other income was $0.7 million for the three months ended March 31, 2016 compared to net other income of $0.2 million for the three months ended March 31, 2015. This change was driven primarily by foreign currency gains associated with fluctuations in the Chinese Yuan Renminbi exchange rate versus the U.S. dollar, partially offset by foreign currency losses in the current year period associated with fluctuations in the foreign currency exchange rate related to the Euro versus the U.S. dollar.
Provision for income taxes. Income tax expense was $0.8 million for the three months ended March 31, 2016 compared to $1.3 million for the three months ended March 31, 2015. Our effective tax rate was 21.5% for the three months ended March 31, 2016 compared to 19.5% for the three months ended March 31, 2015. Our effective tax rate was lower in the prior year primarily due to the recording of a $0.3 million tax refund in China during the three months ended March 31, 2015 related to certain deductible research and development expenses incurred in 2013.
Liquidity and Capital Resources
Sources and Uses of Cash
(In thousands)
Three Months Ended March 31, 2016
 
Increase
(Decrease)
 
Three Months Ended March 31, 2015
Cash provided by operating activities
$
3,141

 
$
8,790

 
$
(5,649
)
Cash used for investing activities
(8,044
)
 
(153
)
 
(7,891
)
Cash provided by (used for) financing activities
8,866

 
11,311

 
(2,445
)
Effect of exchange rate changes on cash
(852
)
 
(1,418
)
 
566

 
 
March 31, 2016
 
Increase
(Decrease)
 
December 31, 2015
Cash and cash equivalents
$
56,077

 
$
3,111

 
$
52,966

Working capital
104,487

 
4,287

 
100,200

Net cash provided by operating activities was $3.1 million during the three months ended March 31, 2016 compared to $5.6 million of cash used by operating activities during the three months ended March 31, 2015, primarily due to the net impact of changes in working capital needs associated with accounts receivable, inventories and accounts payable. Cash inflows relating to accounts receivable increased in the quarter ended March 31, 2016 compared to the prior year period primarily due to a larger quarter-over-quarter decrease in net sales in the current year period as well as collection timing. For the three months ended March 31, 2016, we experienced cash inflows resulting from a decrease in inventory levels. We deliberately increased our inventory levels in the quarter ended December 31, 2015 because of the timing of Chinese New Year, which each year results in our factories being shut down for a temporary period of time. An additional reason for the increase in inventories in the fourth quarter of 2015 was to mitigate the impact of transitioning certain manufacturing activities from our higher cost factory in southern China to two of our lower cost Chinese factories. Increased cash outflows relating to accounts payable were largely attributable to changes in inventory levels.
Net cash used for investing activities during the three months ended March 31, 2016 was $8.0 million compared to $7.9 million during the three months ended March 31, 2015 with both periods consisting of investments in property, plant and equipment as well as internally developed patents. We have increased our investment in machinery and equipment over the past two years relating to manufacturing automation in an effort to mitigate the rising cost of labor in China. Based on our current projections, we anticipate that property, plant and equipment purchases in 2016 will total between $22 and $26 million as we continue to invest in manufacturing automation as well as implement a new ERP system in Asia and North America.

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Net cash provided by financing activities was $8.9 million during the three months ended March 31, 2016 compared to net cash used for financing activities of $2.4 million during the three months ended March 31, 2015. The increase in cash provided for financing activities was driven primarily by net borrowings on our line of credit of $8.0 million in the current year period, a decrease of $2.3 million in treasury stock purchases and an increase of $1.0 million in proceeds from stock options exercised during the current year period.
During the three months ended March 31, 2016, we repurchased 32,934 shares of our common stock at a cost of $1.7 million compared to our repurchase of 69,460 shares at a cost of $4.0 million during the three months ended March 31, 2015. We hold these shares as treasury stock and they are available for reissue. Presently, we have no plans to distribute these shares, although we may change these plans if necessary to fulfill our on-going business objectives.
From time to time, our Board of Directors authorizes management to repurchase shares of our issued and outstanding common stock on the open market. Repurchases may be made to manage dilution created by shares issued under our stock incentive plans or whenever we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board. As of March 31, 2016, we had 375,000 shares available for repurchase on the open market under the Board's authorizations.
Contractual Obligations
The following table summarizes our contractual obligations and the effect these obligations are expected to have on our liquidity and cash flow in future periods. 
 
Payments Due by Period
(In thousands)
Total
 
Less than
1 year
 
1 - 3
years
 
4 - 5
years
 
After
5  years
Operating lease obligations
$
14,296

 
$
3,608

 
$
6,073

 
$
2,536

 
$
2,079

Capital lease obligations
28

 
20

 
8

 

 

Purchase obligations(1)
4,652

 
4,652

 

 

 

Contingent consideration (2)
11,718

 
1,214

 
5,549

 
4,955

 

Total contractual obligations
$
30,694

 
$
9,494

 
$
11,630

 
$
7,491

 
$
2,079

 
(1) 
Purchase obligations primarily consist of contractual payments to purchase property, plant and equipment.
(2) 
Contingent consideration consists of contingent payments related to our purchase of the net assets of Ecolink Intelligent Technology, Inc.
Liquidity
Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have been sufficient to support our business operations, capital expenditures and discretionary share repurchases. More recently we have utilized our revolving line of credit to fund an increased level of share repurchases and our acquisition of the net assets of Ecolink Intelligent Technology, Inc. We anticipate that we will continue to utilize both cash flows from operations and our revolving line of credit to support ongoing business operations, capital expenditures and future discretionary share repurchases. Our working capital needs have typically been greatest during the third and fourth quarters when accounts receivable and inventories increase in connection with the fourth quarter holiday selling season and when inventory levels increase in anticipation of factory closures in observance of Chinese New Year. We believe our current cash balances, anticipated cash flow to be generated from operations and available borrowing resources will be sufficient to cover expected cash outlays during the next twelve months; however, because our cash is located in various jurisdictions throughout the world, we may at times need to increase borrowing from our revolving line of credit or take on additional debt until we are able to transfer cash among our various entities.
Our liquidity is subject to various risks including the risks discussed under "Item 3. Quantitative and Qualitative Disclosures about Market Risk."
(In thousands)
March 31, 2016
 
December 31, 2015
Cash and cash equivalents
$
56,077

 
$
52,966

Available borrowing resources
$
27,000

 
$
34,987

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, would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws. We have not provided for the United States federal tax liability on these amounts for financial statement purposes as this cash is considered indefinitely reinvested

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outside of the United States. Our intent is to meet our domestic liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.
On March 31, 2016, we had $10.2 million, $29.6 million, $5.3 million, $8.3 million and $2.7 million of cash and cash equivalents in the United States, the People's Republic of China ("PRC"), Asia (excluding the PRC), Europe, and South America, respectively. On December 31, 2015, we had $8.5 million, $28.7 million, $5.3 million, $8.1 million, and $2.4 million of cash and cash equivalents in the United States, the PRC, Asia (excluding the PRC), Europe and South America, respectively. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash and cash equivalents with financial institutions we believe are high quality.
On October 9, 2014, we extended the term of our Amended and Restated Credit Agreement ("Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") to November 1, 2017. The Amended Credit Agreement provides for a $55.0 million line of credit ("Credit Line") that may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. On September 3, 2015, we entered into the Second Amendment to the Amended Credit Agreement in which the Credit Line was increased to $65.0 million. On November 10, 2015, we entered into the Third Amendment to the Amended Credit Agreement in which the Credit Line was increased to $85.0 million. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $13 thousand at March 31, 2016.
All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary which controls our manufacturing factories in the PRC.
Under the Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Amended Credit Agreement) plus an applicable margin (varying from 0.00% to 0.50%). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Amended Credit Agreement. The interest rate in effect at March 31, 2016 was 1.69%. There are no commitment fees or unused line fees under the Amended Credit Agreement.
The Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Amended Credit Agreement also contains other customary affirmative and negative covenants and events of default. As of March 31, 2016, we were in compliance with the covenants and conditions of the Amended Credit Agreement.
At March 31, 2016, we had an outstanding balance of $58.0 million on our Credit Line.
Off Balance Sheet Arrangements
We do not participate in any material off balance sheet arrangements.

Factors That May Affect Financial Condition and Future Results

Forward-Looking Statements
We caution that the following important factors, among others (including but not limited to factors discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed in our 2015 Annual Report on Form 10-K, or in our other reports filed from time to time with the Securities and Exchange Commission), may affect our actual results and may contribute to or cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements. The factors included here are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results.
While we believe that the forward-looking statements made in this report are based on reasonable assumptions, the actual outcome of such statements is subject to a number of risks and uncertainties, including the significant percentage of our revenue attributable to a limited number of customers; the failure of our markets to continue growing and expanding in the manner we anticipated; the failure of our customers to grow and expand as we anticipated; the effects of natural or other events beyond our control, including the effects political unrest, war or terrorist activities may have on us or the economy; the economic environment's effect on us or

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our customers; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, including cable, satellite, consumer electronics, retail, and digital media and interactive technology; our successful integration of the Ecolink assets and business lines; our inability to add profitable complementary products which are accepted by the marketplace; our inability to attract and retain a quality workforce at adequate levels in all regions of the world, and particularly Asia; our inability to continue to maintain our operating costs at acceptable levels through our cost containment efforts; an unfavorable ruling in any or all of the litigation matters to which we are party; our inability to continue selling our products or licensing our technologies at higher or profitable margins; our inability to obtain orders or maintain our order volume with new and existing customers; our inability to develop new and innovative technologies and products that are accepted by our customers; the possible dilutive effect our stock incentive programs may have on our earnings per share and stock price; the continued ability to identify and execute on opportunities that maximize stockholder value, including the effects repurchasing the company's shares have on the company's stock value; our inability to continue to obtain adequate quantities of component parts or secure adequate factory production capacity on a timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, procedures and internal processes governing our management of these risks and the use of financial instruments to mitigate our risk exposure.
Interest Rate Risk
We are exposed to interest rate risk related to our debt. From time to time we borrow amounts on our Credit Line for working capital and other liquidity needs. Under the Amended Credit Agreement that became effective on October 2, 2012, we may elect to pay interest on outstanding borrowings on our Credit Line based on LIBOR or a base rate (based on the prime rate of U.S. Bank) plus an applicable margin as defined in the Amended Credit Agreement. Accordingly, changes in interest rates would impact our results of operations in future periods. A 100 basis point increase in interest rates would have an approximately $0.4 million annual impact on net income based on our outstanding line of credit balance at March 31, 2016.
We cannot make any assurances that we will not need to borrow additional amounts in the future or that funds will be extended to us under comparable terms or at all. If funding is not available to us at a time when we need to borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our operating results, financial position and cash flows.
Foreign Currency Exchange Rate Risk
At March 31, 2016 we had wholly-owned subsidiaries in Argentina, Brazil, Cayman Islands, France, Germany, Hong Kong, India, Italy, Japan, Mexico, the Netherlands, the PRC, Singapore, Spain and the United Kingdom. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases, operating expenses, assets and liabilities denominated in currencies other than the U.S. Dollar. The most significant foreign currencies to our operations are the Chinese Yuan Renminbi, Euro, British Pound, Argentinian Peso, Mexican Peso, Brazilian Real, Indian Rupee and Japanese Yen. Our most significant foreign currency exposure is to the Chinese Yuan Renminbi as this is the functional currency of our China-based factories where the majority of our products are manufactured. If the Chinese Yuan Renminbi were to strengthen against the U.S. Dollar, our manufacturing costs would increase. We are generally a net payor of the Euro, Mexican Peso, Indian Rupee and Japanese Yen and therefore benefit from a stronger U.S. Dollar and are adversely affected by a weaker U.S. Dollar relative to the foreign currency. For the British Pound, Argentinian Peso and Brazilian Real, we are generally a net receiver of the foreign currency and therefore benefit from a weaker U.S. Dollar and are adversely affected by a stronger U.S. Dollar relative to the foreign currency. Even where we are a net receiver, a weaker U.S. Dollar may adversely affect certain expense figures taken alone.
From time to time, we enter into foreign currency exchange agreements to manage the foreign currency exchange rate risks inherent in our forecasted income and cash flows denominated in foreign currencies. The terms of these foreign currency exchange agreements normally last less than nine months. We recognize the gains and losses on these foreign currency contracts in the same period as the 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.

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The sensitivity of earnings and cash flows to the 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 covers all of our foreign currency contracts offset by the underlying exposures. Based on our overall foreign currency rate exposure at March 31, 2016, we believe that movements in foreign currency rates may have a material effect on our financial position and results of operations. We estimate that if the exchange rates for the Chinese Yuan Renminbi, Euro, British Pound, Argentinian Peso, Mexican Peso, Brazilian Real and Indian Rupee relative to the U.S. Dollar fluctuate 10% from March 31, 2016, net income in the second quarter of 2016 would fluctuate by approximately $9.9 million.

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ITEM 4. CONTROLS AND PROCEDURES
Exchange Act Rule 13a-15(d) defines "disclosure controls and procedures" to mean controls and procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. The definition further states that disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management to allow timely decisions regarding required disclosures.

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to lawsuits arising out of the conduct of our business. The discussion of our litigation matters contained in "Notes to Consolidated Financial Statements - Note 10" is incorporated herein by reference.
ITEM 1A. RISK FACTORS
The reader should carefully consider, in connection with the other information in this report, the factors discussed in "Part I, Item
1A: Risk Factors" of the Company's 2015 Annual Report on Form 10-K incorporated herein by reference. These factors may cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2016, we repurchased 32,934 shares of our issued and outstanding common stock for $1.7 million under the ongoing and systematic programs approved by our Board of Directors. We make stock repurchases to manage the dilution created by shares issued under our stock incentive plans or when we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board from time to time. On March 31, 2016, we had 375,000 shares available for repurchase on the open market under the Board's authorizations.
The following table sets forth, for the three months ended March 31, 2016, our total stock repurchases, average price paid per share and the maximum number of shares that may yet be purchased on the open market under our plans or programs:
Period
 
Total Number of Shares Purchased (1)
 
Weighted Average
Price Paid
per Share (2)
 
Total Number  of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (3)
January 1, 2016 - January 31, 2016
 
146

 
$
47.92

 

 
400,000

February 1, 2016 - February 29, 2016
 
32,184

 
52.18

 
25,000

 
375,000

March 1, 2016 - March 31, 2016
 
604

 
61.73

 

 
375,000

Total
 
32,934

 
$
52.34

 
25,000

 
375,000


(1) 
Of the repurchases in January, February and March, 146, 7,184 and 604 shares, respectively, represent common shares of the Company that were owned and tendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted shares.
(2) 
For shares tendered in connection with the vesting of restricted shares, the average price paid per share is an average calculated using the daily high and low of the Company's common stock at the time of vesting.
(3) 
The Company may purchase shares from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans.

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ITEM 6. EXHIBITS

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



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SIGNATURE
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 



 
 
 
 
 
 
Dated:
May 9, 2016
 
UNIVERSAL ELECTRONICS INC.
 
 
 
 
 
 
 
 
By:
 
/s/ Bryan M. Hackworth
 
 
 
 
 
Bryan M. Hackworth
 
 
 
 
 
Chief Financial Officer (principal financial officer
 
 
 
 
 
and principal accounting officer)



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EXHIBIT INDEX
 
Exhibit No.
 
Description
31.1
 
Rule 13a-14(a) Certifications of Paul D. Arling, Chief Executive Officer (principal executive officer) of Universal Electronics Inc.
 
 
31.2
 
Rule 13a-14(a) Certifications of Bryan M. Hackworth, Chief Financial Officer (principal financial officer and principal accounting officer) of Universal Electronics Inc.
 
 
32
 
Section 1350 Certifications of Paul D. Arling, Chief Executive Officer (principal executive officer) of Universal Electronics Inc., and Bryan M. Hackworth, Chief Financial Officer (principal financial officer and principal accounting officer) of Universal Electronics Inc. pursuant to 18 U.S.C. Section 1350
 
 
101.INS
 
XBRL Instance Document
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

























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