WASHINGTON, D.C. 20549
UNIVERSAL ELECTRONICS INC.
Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 2017.2022.
UNIVERSAL ELECTRONICS INC.
ITEM 1. BUSINESS
Universal Electronics Inc. ("UEI") was incorporated under the laws of Delaware in 1986 and began operations in 1987. The principal executive offices are located at 201 E. Sandpointe Avenue, 8th Floor, Santa Ana, California 92707.15147 N. Scottsdale Road, Suite H300, Scottsdale, Arizona 85254. As used herein, the terms "we", "us" and "our" refer to UEI and its subsidiaries unless the context indicates to the contrary.
Additional information regarding UEI may be obtained at www.uei.com. Our website address is not intended to function as a hyperlink and the information available at our website address is not incorporated by reference into this Annual Report on Form 10-K. We make our periodic and current reports, together with amendments to these reports, available on our website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission ("SEC"). The SEC maintains a website at www.sec.gov that contains the reports, proxy and other information that we file electronically with the SEC.
We continue to place significant emphasis on expanding our sales and marketing efforts to subscription broadcastersvideo service providers and home entertainment OEMs in Asia, Latin America and Europe. OwningIn the markets for video services we include cable, satellite, IPTV and operatingOTT service providers. In recent years, we have seen a significant change in our own factoriesmarkets with the rise of the direct-to-consumer streaming video apps that are enabled on smart TVs and streaming devices as well as advanced set-top boxes. This has resulted in a change in mix in our customer base, especially in the People's RepublicU.S., where our traditional customers in cable and satellite have been complimented with new customers in the digital media streaming domain. Today our portfolio includes universal control products compatible with Apple's tvOS and Google's AndroidTV platforms designed for the Multichannel Video Programming Distributor ("MVPD") market allowing subscribers access to subscription-based channels through hybrid and OTT streaming platforms.
Our One For All® brand name remote controls and accessories sold within the international retail markets accounted for 7.1%, 7.2%, and 8.1% of our total net sales for the years ended December 31, 2017, 2016, and 2015, respectively.
Financial information relating to our international operations for the years ended December 31, 2017, 2016, and 2015 is included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 15".
Intellectual Property and Technology
A key factor in creating products and software for control of entertainment and smart home devices is our proprietary device knowledge. Each year our device control library continues to grow across AV and smart home platforms, supporting many common smart home protocols, including IR, HDMI-CEC, Bluetooth and its variants, Zigbee (Rf4CE), Z-Wave, Thread, Matter and IP networks.
We have developed a broad portfolio of patented technologies and the industry's leading database of device setup and control software. We ship integrated circuits, on which our software and control code libraries are embedded and that connect to our cloud services, directly to manufacturers for inclusion in their products. In addition, we license our software and technology to manufacturers.
Our technology also includes other remote controlled home entertainment devices and home automation control modules, as well as wired CEC and wireless IP control protocols commonly found on many of the latest HDMI and internet connected devices. Our proprietary software automatically detects, identifies and enables the appropriate control commands for many home entertainment and automation devices in the home. Our libraries are continuously updated with device control codes used in newly introduced AV and IoT devices. These control codes are captured directly from original control devices or from the manufacturers' written specifications to ensure the accuracy and integrity of the library.
Smart devices are becoming a more prevalent part of the home entertainment experience, and we offer several solutions to enable entertainment device control via smart phones, tablets, smart TVs, smart speakers or digital assistants. In our smart device control solutions, we offer the elements needed for device control ranging from IR and RF controller chips to IP-device control libraries to graphical and voice user interfaces, as well as artificial intelligence systems that deliver context aware device interactions.
We hold a number ofand apply for patents in the United States and abroad related to our products and technology, and have filed domestic and foreign applications for other patents that are pending. At the end of 2017, we had over 400 issued and pending United States patents related to remote control, home security, safety, climate control, and automation as well as hundreds of foreign counterpart patents and applications in various territories around the world.
technologies. Our patents have remaining lives ranging from one to 18 years. We have also obtained copyright registration and claim copyright protection for certain proprietary software and libraries of our device control codes. Additionally, the names of many of our products are registered, or are being registered, as trademarks in the United States Patent and Trademark Office and in most of the other countries in which such products are sold. These registrations are valid for terms ranging up to 20 years and may be renewed as long as the trademarks continue to be used and are deemed by management to be important to our operations. While we follow the practice of obtaining patent, copyright and trademark registrations on new developments whenever advisable, in certain cases we have elected common law trade secret protection in lieu of obtaining such other protection.
A key factor in creating products
Manufacturing and software for control of entertainment devices is the device control code database. Since our beginning in 1986, we have compiled an extensive device control code database that covers over one million individual device functionsSupply
We currently operate vertically integrated manufacturing and approximately 8,100 individual consumer electronic equipment brand names, including virtually all IR controlled set-top boxes, televisions, audio components, DVD players, Blu-Ray players, and other remote controlled home entertainment devices and home automation control modules, as well as wired Consumer Electronics Control ("CEC") and wireless Internet Protocol ("IP") control protocols commonly found on many of the latest HDMI and internet connected devices. Our proprietary software automatically detects, identifies and enables the appropriate control commands for any given home entertainment, automation and air conditioning deviceassembly factories in the home. Our libraries are continuously updated with device control codes used in newly introduced AVPRC, Mexico and IoT devices. These control codes are captured directly from original remote control devices or from the manufacturer's written specifications to ensure the accuracy and integrity of the database. Our proprietary software and know-how permitBrazil, which allows us to offer a device control code database that is more robust and efficient than similarly priced products of our competitors.
Our goal is to provide universal control solutions that require minimal or no user set-up and deliver consistent and intuitive one-touch control of all connected content sources and devices. QuickSet® is a software application that is currently embedded in hundreds of millions of devices worldwide. QuickSet may be embedded in an AV device, set-top box, or other host device, or
delivered as a Cloud-based service to enable universal remote setup and control. QuickSet enables universal device control set-up using automated and guided on-screen instructions and a wireless two-way communication link between the remote and the QuickSet enabled device. The two-way connection allows device control code data and configuration settings to be sent to the remote control from the device and greatly simplifies the universal control set-up process and can enable other time saving features. QuickSet utilizes data transmitted over HDMI or IP networks to automatically detect various attributes of the connected device and downloads the appropriate control codes and functions into the remote control without the need for the user to enter any additional information. The user does not need to know the brand or model number to set up the deviceproduce in the remote. Any compatible new device that is connected is recognized. Consumers can quicklyregional markets and easily set up their control interface to control multiple devices. Recently added features in QuickSet address common consumer challenges in universal device control, such as mode confusion and input switching. With QuickSet, consumers switch easily between activities and reliably view their chosen content source with a single touch. QuickSet handles the device-specific control. A QuickSet user experience can be delivered via a tactile remote, touchscreen interface, on-screen graphical user interface ("GUI") or voice-enabled system. Licensees of QuickSet include service providers such as Comcast, AT&T and Echostar Technologies; smart TV manufacturers such as Sony and Samsung; leading game console manufacturer Microsoft on its Xbox One game system; and mobile and tablet device manufacturers LG, OPPO, Huawei and LeTV on some of their mobile handset platforms.
Smart devices are becoming a more prevalent part of the home entertainment experience, and UEI offers several solutionsscale our production to enable entertainment device control with a smart phone, tablet or smart TV. In its smart device control solutions, UEI offers all of the elements needed for device control ranging from IR and RF controller chips to device control libraries to graphical and voice user interfaces, as well as artificial intelligence systems that deliver context aware device interactions. Designed for Android, Nevo® Home is UEI's device and service discovery and control application, currently available for download at Google Play.
Methods of Distribution
Distribution methods for our control solutions vary depending on the sales channel. We distribute remote control devices, sensors, connected thermostats and AV accessories directly to subscription broadcasters and OEMs, both domestically and internationally.meet growing demand. We also distribute home security sensors to pro-security installers in the United States through a network of dealers. Outside of North America, we sell our wireless control devices and AV accessories under the One For All® and private label brand names to retailers through our international subsidiaries. We utilize third-party distributors for the retail channel in countries where we do not have subsidiaries.
We have developed a broad portfolio of patented technologies and the industry's leading database of device control codes. We ship integrated circuits, on which our software and control code database are embedded, directly to manufacturers for inclusion in their products. In addition, we license our software and technology to manufacturers. Licenses are delivered upon the transfer of a product master or on a per unit basis when the software or technology is used in a customer device.
We provide domestic and international consumer support to our various universal control marketers, including manufacturers, cable and satellite providers, retail distributors, and audio and video OEMs through our live and automated call centers. We also make available a web-based support resource, www.urcsupport.com, designed specifically for subscription broadcasters. This solution offers videos and online tools to help users easily set up their universal remote controls, and as a result reduce call volume at customer support centers. Additionally, the UEI Technical Support Services call center provides customer interaction management services from technical service and support to customer retention. Services include pre-repair calls, post-install surveys, and inbound calls for cable customers to provide greater bottom-line efficiencies.
Our 24 international subsidiaries are the following:
C.G. Development Ltd., established in Hong Kong;
CG Mexico Remote Controls, S.R.L. de C.V., established in Mexico;
Enson Assets Ltd., established in the British Virgin Islands;
Gemstar Polyfirst Ltd., established in Hong Kong;
Gemstar Technology (China) Co. Ltd., established in the PRC;
Gemstar Technology (Qinzhou) Co. Ltd., established in the PRC;
Gemstar Technology (Yangzhou) Co. Ltd., established in the PRC;
Guangzhou Universal Electronics Service Co., Ltd., established in the PRC;
One For All Argentina S.R.L., established in Argentina;
One For All France S.A.S., established in France;
One For All GmbH, established in Germany;
One for All Iberia S.L., established in Spain;
One For All UK Ltd., established in the United Kingdom;
UE Japan Ltd., established in Japan;
UE Singapore Pte. Ltd., established in Singapore;
UEI Cayman Inc., established in the Cayman Islands;
UEI do Brasil Controles Remotos Ltda., established in Brazil;
UEI Electronics Pte. Ltd., established in India;
UEI Hong Kong Pte. Ltd., established in Hong Kong;
UE Korea Ltd., established in South Korea;
Universal Electronics B.V., established in the Netherlands;
Universal Electronics Italia S.R.L., established in Italy;
Universal Electronics Trading Co., Ltd., established in the PRC; and
Universal Electronics Yangzhou Co. Ltd., established in the PRC.
Raw Materials and Dependence on Suppliers
We utilize our own manufacturing plants anduse selected third-party manufacturers and suppliers primarily located withinin Asia.
Our long-term factory planning strategy is to de-risk our reliance on a PRC-based supply chain by (1) reducing our manufacturing concentration in the PRC, (2) pursuing lower cost jurisdictions for manufacturing to producehelp ensure market competitive products and (3) offering customers a flexible and globally diverse manufacturing footprint to provide a reliable and cost-efficient supply chain. To this end, in 2022, we leased factory space in Vietnam and expect to commence manufacturing operations in 2023, pending approval of local government permits and licenses. Construction is complete on the facility, with equipment installed. We are beginning to hire key members of the staff to train in anticipation of commencing manufacturing operations, and while the opening of this factory may result in manufacturing inefficiencies, we are evaluating our controlmanufacturing footprint with the expectation that once the Vietnam factory is operating efficiently, we will reduce our manufacturing capacity, most likely, by shutting down an existing facility. We are analyzing various scenarios, each contingent on the success of the new Vietnam factory, and sensor products. In 2017 and 2016, Texas Instruments provided 10.0% and 11.7% of our total inventory purchases. In 2015, no single supplier provided more than 10% of our total inventory purchases.have yet to conclude on a specific plan.
Even though we operate three factories in the PRC, manufacturing and assembly plants in Mexico and Brazil, respectively, and Mexico,plan to open a manufacturing facility in Vietnam in 2023, we continue to evaluate additional contractthird-party manufacturers and sources of supply. During 2017,2022, we utilized multiple contractthird-party manufacturers and maintained duplicate tooling for certain of our products. Where possible, we utilize standard parts and components, which are available from multiple sources.
We are a large consumer of integrated circuits, including low-power, RF chips and modules that are used throughout our product portfolios. We continually seek additional sources to reduce our dependence on our integrated circuit suppliers. To further manage our integrated circuitsystem on a chip supplier dependence, we include flash microcontroller technology which incorporates non-volatile, reprogrammable flash memory in most of our products. Flash memory-based microcontrollers can have shorter lead times than standard microcontrollers using other memory technologies and may be reprogrammed, if necessary.reprogrammed. This allows us flexibility during any unforeseen shipping delays andto use a given component on many different products, has the added benefit of potentially reducing excess and obsolete inventory exposure.exposure and allows us to update our product functionality in the field. This diversification lessens our dependence on any one supplier and allows us to negotiate more favorable terms. Our largest integrated circuit supplier, Qorvo International Pte Ltd., provided 11.5%, 11.8% and 14.2% of our total inventory purchases in 2022, 2021 and 2020, respectively.
Seasonality
Historically,Our manufacturing process consists of plastic injection molding, keypad molding, coating or painting, surface mount technology, assembly, software installation, functional testing, packaging, and quality control. We conduct operations utilizing a formal, documented quality management system to ensure that our products and services satisfy customer needs and expectations. Our manufacturing facilities are certified to the ISO 9001:2015 International Standard for quality management. Testing and quality control are applied to components, parts, sub-assemblies and systems obtained from third-party suppliers. Our manufacturing facilities in Mexico and in Yangzhou, PRC are also certified to the TL 9000 Standard, which is the telecom industry's unique extension to ISO 9001:2015. Our manufacturing facilities are certified to the ISO 14001:2015 International Standard for environmental management systems. In addition, our manufacturing facilities in Yangzhou, PRC have also achieved ISO 45001 International Standard for safety and health management systems. Our facilities located in Yangzhou, PRC and Monterrey, Mexico have successfully completed the Validated Audit Process ("VAP") with the Responsible Business Alliance ("RBA"), the world's largest industry coalition dedicated to responsible business conduct in global supply chains, with both factories achieving Silver Status from the RBA.
We are focused on reducing the environmental impact of our operations. We are evaluating the use of renewable energy and our teams continue to examine practices and processes throughout our facilities to identify opportunities for greater efficiency. Each of our manufacturing facilities has been influenced bystanding policies and targets for the retail sales cycle,monitoring and management of waste generation and energy consumption, and is focused on reducing electricity consumption, water usage and greenhouse gas emissions.
We are in our second year of membership with increased salesthe RBA. We joined as an "affiliate" member in 2021 and were elevated to "regular" membership in 2022. We embrace and support the second halfvision, mission, and goals of the year. We expect this pattern to be repeated during 2018.
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 23" forRBA. This is outlined further details regarding our quarterly results.
Competition
Our principal competitors in the subscription broadcasting market are Remote Solutions, Omni Remotes (formerly Philips Home Control Singapore PTE, Ltd.), SMK, and Ruwido. In the international retail and private label markets for wireless controls we
compete with Logitech and Sony, as well as various manufacturers of wireless controls in Asia. Our primary competitors in the OEM market are the original equipment manufacturers themselves and various wireless control manufacturers in Asia. In home security, safety and automation, we offer universal sub-gigahertz products that are compatible with the top security panel manufacturers, such as Honeywell, GE, Tyco/DSC and 2GIG. In the connected smart home market we compete with the OEMs themselves as well as wireless manufacturers in Asia. We compete in our markets onwebsite: https://www.uei.com/corporate-responsibilities. Through the basis of product quality, features, price, intellectual property, design and development expertise and customer support. We believe thatRBA program, we will needhave access to continue to introduce new and innovative products and software solutions to remain competitive and to recruit and retain competent personnel to successfully accomplish our future objectives.
Engineering, Research and Development
During 2017, our engineering efforts focused on the following:
broadening our product portfolio;
launching new embedded software solutions designed to simplify set-up and control features;
modifying existing products and technologies to improve features and lower costs;
formulating measures to protect our proprietary technology and general know-how;
improving our control solutions software;
updating our library of device codes to include codes for new features and devices introduced worldwide; and
creating innovative products that address consumer challenges in home entertainment control and security sensing.
During 2017, our advanced engineering efforts focused on further developing our existing products, services and technologies. We released software updates to our embedded QuickSet application, and continued development initiatives around emerging RF technologies, such as RF4CE, Bluetooth, and Bluetooth Smart. We introduced a versatile, low power dual-RF chip platform that is deployed across a range of our customRBA training and standard products, allowing for broader flexibility and easier implementation of multiple communication protocols. Additionally, we released several new advanced remote control products that incorporate voice search capabilitiesassessment tools to support continual improvement in our subscription broadcastsocial, environmental and OEM channels.ethical responsibilities of our supply chains. We follow the RBA guidelines for supplier risk assessments process by requiring our suppliers of raw materials and components to complete the full RBA self-assessment questionnaire ("SAQ") and to conduct an on-site VAP audit for 50% of any identified high-risk major suppliers. In addition to observance of quality standards from our suppliers, we maintain and request our suppliers to adhere to our Global Supplier Code of Conduct and Fair Competition Policy ("Supplier Code of Conduct"), which is available on our website and is an essential part of our supply chain management.
Our personnel are involved with various industry organizations and bodies, which are
Further, our Supplier Code of Conduct sets forth our global expectations that we have in the processareas of setting standards for IR, RF, telephonefair dealing, legal compliance, business integrity, labor practices, health and cable communicationssafety, and networkingenvironmental management. In particular, we require our suppliers to respect basic human rights and to not engage in any involuntary or forced labor and to fully comply with all laws and regulations pertaining to the home. Becauseappropriate and dignified treatment of all workers. In addition, we adhere to, and require suppliers to adhere to the natureRBA Code of researchConduct, which among other things prohibits the use of forced labor in any manner. To better enforce a zero-tolerance of forced labor, we provide training to our employees to identify signs of forced labor and development activities, there can be no assurance that any ofother unlawful labor practices and how to report it directly to management or use our researchglobal ethics "whistleblower" line.
Government Regulation and development projects will be successfully completed or ultimately achieve commercial success.
Our expenditures on engineering, research and development were:
|
| | | | | | | | | | | | |
(In millions): | | 2017 | | 2016 | | 2015 |
Research and development | | $ | 21.4 |
| | $ | 19.9 |
| | $ | 18.1 |
|
Engineering (1) | | 11.0 |
| | 10.5 |
| | 9.5 |
|
Total engineering, research and development | | $ | 32.4 |
| | $ | 30.4 |
| | $ | 27.6 |
|
| |
(1)
| Engineering costs are included in selling, general and administrative expenses. |
Environmental Matters
Many of our products are subject to various federal, state, local and international laws governing chemical substances in products, including laws regulating the manufacturing and distribution of chemical substances and laws restricting the presence of certain substances in electronics products. We may incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third-party damages, or personal injury claims, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws. We also face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materialsmaterial composition of our products.
We may also face significant costs and liabilities in connection with product take-back legislation. The European Union's Waste Electrical and Electronic Equipment Directive ("WEEE") Directive makes producers of electrical goods financially responsible for specified collection, recycling, treatment, and disposal of past and future covered products. Our European subsidiaries are WEEE compliant. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, the PRC and Japan.
We believe that we have materially complied with all currently existing international and domestic federal, state and local statutes and regulations regarding environmental standards and occupational safety and health matters to which we are subject. During the years ended December 31, 2017, 20162022, 2021 and 2015,2020, the amountscosts incurred in complying with federal, state, local and localforeign statutes and regulations pertaining to environmental standards and occupational safety and health laws and regulations did not materially affect our earnings, financial condition or competitive position. In addition, during the same period, the costs incurred in complying with other applicable government regulations likewise did not materially affect our earnings, financial condition.condition or competitive position. However, future events, such as changes in existingdue to the heightened awareness of corporate environmental, social and governance ("ESG") matters and evolving laws and regulations or enforcement policies, may give rise to additionalincreases in compliance costs that may have a material adverse effect upon our capital expenditures, earnings or financial condition.
Employees
Our operations, supply chain and products are expected to become increasingly subject to federal, state, local and foreign laws, regulations and international treaties relating to climate change, such as climate disclosure, carbon pricing or product energy efficiency requirements. We strive to continually improve the energy and carbon efficiency of our operations, supply chain and product portfolio and deliver more cost-effective and lower carbon technology solutions to our customers. We believe that technology will be fundamental to finding solutions to achieve compliance with and manage those requirements.
We are committed to reducing and eliminating substances of concern from our products and manufacturing process. Our products distributed in the European Union are compliant with the RoHS (Restriction of Hazardous Substances Directive 2011/65/EU and 2015/863/EU) and REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) directives. In other regions, we also need to comply with our customers' specific requirements relating to the non-use of certain hazardous substances in the products, which are typically equally or more stringent than the RoHS directive. We have a dedicated "Green Team," based in the PRC and comprised of engineers and environmental regulation experts, that analyze our products, processes, and raw materials to help ensure that we comply with environmental and government regulations worldwide, as well as the applicable "Green" requirements imposed by our customers. Additionally, we have in-house testing capability to help ensure product compliance. In response to and to comply with certain National Standards published by the Chinese government, our Green Team has been working proactively for the identification and reduction of volatile organic compounds ("VOCs") within our supply chain. We place great importance on the compliance with local health and safety laws and regulations. At our manufacturing facilities, we are also committed to protecting our workers from exposure to hazardous substances under an established health and safety management system: As an example, we have replaced VOC emitting inks and paints with reduced-VOC paints at our PRC facilities.
We strive to extend the useful life of our products and reduce our products' impact on the environment. We have invested in R&D to improve the energy efficiency of our battery-operated products: For example, we deploy a low energy IR-engine in some of our products, which can extend battery life regardless of the protocols utilized by the product. We have introduced our control platform and related technologies that address the growing demand for sustainable products that reduce energy use and eliminate waste. With this platform, we partnered with technology leaders and invested in bringing ultra-low power connectivity chips with built-in energy harvesting and photovoltaic cells to the market. These chips offer more computing power while consuming substantially less battery power. In addition, to reduce energy consumption even further, we are actively working on solutions powered by low-light solar cells for the entertainment remote control and IoT markets.
We also offer a product refurbishment program to our customers where we reclaim, refurbish and recycle pre-owned remote controls. Under this program, major components in pre-owned remote control units are reused or recycled; for example, the printed circuit board assemblies ("PCBA") are cleaned, tested and reused, or plastics are reground to be reused. We have also employed new master carton packing methods to increase shipping efficiency and reduce cardboard usage. Some of our manufacturing facilities are switching to the use of recycled solder. To further reduce collateral waste, we have introduced an initiative to reduce and/or remove single use plastics ("SUP") from our supply chain and manufacturing process for certain customer programs.
In the nations where we have operations or otherwise conduct business, we are also subject to tariffs, import/export controls, and other trade-related laws and limitations. These limits, regulations, and tariffs, especially those pertaining to or affecting relations between the United States and the PRC, might significantly disrupt our business, affecting our capacity to manufacture, source components and sell goods.
Government regulations are subject to change; therefore, we are unable to predict the impact of complying with potential future requirements or whether doing so will materially affect our operations, financial situation, or business.
Human Capital
As of December 31, 2017,2022, we employed 3,010 employees,4,658 members of which 554 workedstaff across our worldwide facilities. Of this staff, 3,383 are associated with our manufacturing and supply chain organizations in the PRC, Mexico and Brazil. Beyond the manufacturing and supply chain organizations, 844 of staff work in engineering and research and development, 115R&D, 130 in sales, and marketing, 63 in consumer service and support 1,988 in operations and warehousing and 290301 in executive and administrative functions. In addition, our factories
Additionally, in the PRC, as is standard practice, we work with third-party agencies who have recruited and provided us with workers to support our production activities. Since the fourth quarter of 2021, these third-party agencies have been required to adhere to our Supplier Code of Conduct, which among other things, prohibits the use of forced labor and sets forth requirements on fair dealing, legal compliance, business integrity, labor practices, health and safety and environmental management.
We provide and maintain a work environment that is designed to attract, develop and retain top talent through offering our employees an engaging work experience that contributes to their career development. We recognize that our success is based on the collective talents and dedication of those we employ. Talent management is critical to our ability to execute our long-term growth strategy, and we utilize both internal human resource personnel and external recruiting firms to identify and attract such talent. Through our history of technological innovation, we appreciate the importance of retention, growth and development of our employees. We regularly collect feedback from employees to better understand and improve their experiences and identify opportunities to continually strengthen our culture. Due to the nature of our activities, we tend to heavily invest in engineering capital, employing highly skilled and specialized engineers and technicians in the areas of electronics, RF design, software, cloud, mechanical, industrial design, manufacturing and quality disciplines.
Our staff is located around the globe at different office and development locations. Our R&D locations are as follows:
•advanced engineering, architecture and cloud teams are located in Santa Ana, California, and Scottsdale, Arizona;
•cloud architecture, software and service teams are located in Santa Ana and San Mateo, California;
•sensor engineering and R&D teams are located in Carlsbad, California;
•connected thermostat engineering and R&D teams are located in Poway, California;
•hardware engineering teams are located in Panyu and Suzhou in the PRC;
•software, firmware and device database teams are located in Bangalore, India; and
•a software services team focused on support software solutions is located in Plymouth, Minnesota.
Next to these specialized centers of excellence, we employ engineering, sales and marketing and support staff in many of our regional offices in the United States, The Netherlands, Hong Kong, PRC, Brazil, India, Japan, Korea and Mexico.
We are committed to an inclusive culture that values equality, opportunity, and respect. We have an employee Code of Conduct and a Supplier Code of Conduct that our employees and suppliers, respectively, must adhere to, both of which cover diversity, inclusion, anti-discrimination and corporate social responsibility. The respect for human rights is a core tenet both within our organization and when working with our suppliers, and our Asian operations engaged an additional 7,612 staff contracted through agency agreements.employees are encouraged to notify the Company if they notice or suspect any violation of our employee Code of Conduct, Supplier Code of Conduct or the law. We have a confidential ethics hotline to enable our employees to report any suspected violations of applicable laws or policies.
Labor unions represent approximately 14.3%29.0% of our 3,0104,658 employees atas of December 31, 2017.2022. Some of these unionized workers are employed in Monterrey, Mexico, and are represented under contract with the Sindicato Industrial de Trabajadores de Nuevo León adherido a la Federación Nacional de Sindicatos Independientes. Unionized workers, employed in Manaus, Brazil, are represented under contract with the Sindicato dos Trabalhadores nas Industrias Metalugicas, Mecanicas e de Materiais Eletricos de Manaus. Other unionized workers, employed in Monterrey, Mexico, are represented under contract with the Sindicato Industrial de Trabajadores de Nuevo León adherido a la Federación Nacional de Sindicatos Independientes. Our business units are subject to various laws and regulations relating to their relationships with their employees. These laws and regulations are specific to the location of each business unit. We believe that our relationships with employees and their representative organizations are good.
International Operations
Financial information relating toSeasonality
Historically, our international operations forbusiness has been influenced by the years ended December 31, 2017, 2016 and 2015 is incorporated by reference to "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 15".
Executive Officersretail sales cycle, with increased sales in the second half of the Registrant(1)year. We expect this pattern to be repeated during 2023.
Information About Our Executive Officers
The following table sets forth certain information concerning our executive officers on March 12, 2018:8, 2023:
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| | | | | | | | | | | | | |
Name | | Age | | Position |
Paul D. Arling | | 5560 | | Chairman of the Board and Chief Executive Officer |
David Chong | | 56 | | Executive Vice President, Asia |
Louis S. Hughes | | 53 | | Chief Operating Officer |
Richard A. Firehammer, Jr. | | 60 | | Senior Vice President, General Counsel and Secretary |
Bryan M. Hackworth | | 4853 | | Senior Vice President and Chief Financial Officer |
Ramzi S. Ammari | | 57 | | Senior Vice President, Corporate Planning and Strategy |
David Chong | | 61 | | Executive Vice President, Asia |
Richard A. Firehammer, Jr. | | 65 | | Senior Vice President, General Counsel, Head of Global Compliance, and Secretary |
Menno V. Koopmans | | 4247 | | Managing Director, EMEASenior Vice President, Global Sales |
Richard K. Carnifax | | 36 | | Senior Vice President, Global Operations |
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(1)
| Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K. |
Paul D. Arling is our Chairman and Chief Executive Officer. He joined us in May 1996 as Chief Financial Officer and was named to our Board of Directors in August 1996. He was appointed President and Chief Operating Officer in September 1998, was promoted to Chief Executive Officer in October 2000 and appointed as Chairman in July 2001. At the 20172022 Annual Meeting of Stockholders, Mr. Arling was re-elected as our Chairman to serve until the 20182023 Annual Meeting of Stockholders. From 1993 through May 1996, he served in various capacities at LESCO, Inc. (a manufacturer and distributor of professional turf care products). Prior to LESCO, he worked for Imperial Wall coveringsWallcoverings (a manufacturer and distributor of wall covering products) as Director of Planning and The Michael Allen Company (a strategic management consulting company) where he was employed as a management consultant. Mr. Arling received his Bachelor of Science and Master of Business Administration from The Wharton School of the University of Pennsylvania.
Bryan M. Hackworth is our Senior Vice President and Chief Financial Officer. He was promoted to Chief Financial Officer in August 2006. Mr. Hackworth joined us in June 2004 as Corporate Controller and subsequently assumed the role of Chief Accounting Officer in May 2005. Before joining us in 2004, he spent five years at Mars, Inc., a privately held international manufacturer and distributor of consumer products and served in several financial and strategic roles. Prior to joining Mars, Inc., Mr. Hackworth spent six years at Deloitte & Touche LLP as an auditor, specializing in the manufacturing and retail industries. Mr. Hackworth is a certified public accountant (inactive) in the state of California and holds a Bachelor of Arts in Economics from University of California, Irvine.
Ramzi S. Ammari is our Senior Vice President, Corporate Planning and Strategy. He joined us in June 1997 as a Project Manager and has held various positions of increasing responsibility within our organization until being named to his current position in October 2013. He has global responsibility for the Company's technology innovation roadmap; driving new product initiatives; directing and implementing strategic partnerships, joint ventures and acquisitions; and recommending new avenues for business creation. Prior to joining us, Mr. Ammari worked at Mitsubishi Consumer Electronics of America for four years as Business Planning Manager where he was responsible for introducing the first flat-screen plasma display panel television for the North America market. He received his Bachelor of Science, Engineering degree in 1989 and, subsequently, a Master of Business Administration from University of California, Irvine in 1993.
David Chong is our Executive Vice President, Asia. He is responsible for managing sales in our Asian markets. He was previously responsible for the general management of our Asia region and Global Operations.region. Mr. Chong joined us in January 2009 as Senior Vice President of Global OEM.OEM Sales. Prior to joining us, Mr. Chong served as Senior Vice President at Philips Consumer Electronics Division and as the Chief Marketing Officer of the business group Philips Display (Philips TV and computer monitor business). At Philips Display, he led the re-engineering of the Product Creation, Marketing and Sales Organization to compete successfully in the LCD TV space. Prior to this, he also served as Vice President and General Manager of the Audio Video Business in Asia, Vice President and Global Business Line Manager for Audio and
various senior management positions at Philips' CE Division. Mr. Chong started at Philips Research Lab in 1984 as a research scientist working in the area of VLSI design methodologies. He also served as Managing Director for Asia at InVue Security Product before joining us at the present position.us. Mr. Chong had his senior education in The United Kingdom, holding a B.S.Bachelor of Science in Electrical and Electronics Engineering with High Honors from University of Nottingham.
Louis S. Hughes is our Chief Operating Officer. He joined us in 2004 as General Manager
Richard A. Firehammer, Jr., Esq. is our Senior Vice President, General Counsel, Head of Global Compliance, and Secretary. He joined us in October 1993 as General Counsel. He became our Secretary in February 1994. He was our Vice President from May 1997 until August 1998, and served as counsel to us from September 1998 until February 1999, at which time he was promoted to Senior Vice President. In January 2022, in addition to his current position.duties as General Counsel and Secretary, he took on the added responsibilities as Head of Global Compliance. From November 1992 to September 1993, he was associated with the Chicago, Illinois law firm, Shefsky & Froelich, Ltd. From 1987 to 1992, he was with the law firm Vedder, Price, Kaufman & Kammholz in Chicago, Illinois. He received his Bachelor of Science in Accounting from Indiana University and a Juris Doctor degree from Whittier College School of Law. Mr. Firehammer is also a certified public accountant (inactive).
Bryan M. Hackworth
Menno V. Koopmans is our Senior Vice President, and Chief Financial Officer.Global Sales. He served as Managing Director, EMEA from 2018 to August 2019 when he was promoted to Chief Financial Officer in August 2006. Mr. Hackworth joined us in June 2004 as Corporate Controller and subsequently assumed the role of Chief Accounting Officer in May 2006. Before joining us in 2004, he spent five years at Mars, Inc., a privately held international manufacturer and distributor of consumer products and served in several financial and strategic roles (Controller — Ice Cream Division; Strategic Planning Manager for the WHISKAS ® Brand) and various other financial management positions. Prior to joining Mars, Inc., Mr. Hackworth spent six years at Deloitte & Touche LLP as an auditor, specializing in the manufacturing and retail industries.
Menno V. Koopmans is our Managing Director, EMEA.his current position. From 2014 to the end of 2016,2017, he was our Senior Vice President for subscription broadcasting business in Europe and India where he led the customer transition into smart remote controls. From 2005 until 2013, he was the head of our worldwide consumer business and our One For All®All® brand. Prior to joining us, Mr. Koopmans worked at Mars, Sony Europe and Royal Philips Electronics in different product, marketing and sales management roles in both fast-moving consumer goods and durable consumer goods categories. Mr. Koopmans received his MastersMaster in Science of Business Administration from Erasmus University in Rotterdam, The Netherlands.
Richard K. Carnifax is our Senior Vice President, Global Operations. He joined us in May 2020 as Vice President, Global Supply Chain and in July 2022, he was promoted to Vice President, Operations. In February 2023, he was promoted to his current position, Senior Vice President, Global Operations. Prior to joining us, from March 2019 until May 2020, Mr. Carnifax was the Chief Operating Officer at Cast Nylons, a privately held manufacturer and distributor of cast nylon stock shapes and custom cast parts and was Vice President, Operations at Cast Nylons from November 2017 until March 2019. From November 2015 until September 2017, he held various operational roles at Air Enterprises, a privately held manufacturer of specialty air handling equipment. Prior to joining Air Enterprises, Mr. Carnifax spent four years scheduling and planning materials for Howden, a provider of high-quality air and gas handling products and services to the power, oil and gas, mining and petrochemical industries. Mr. Carnifax holds a Bachelor of Arts in Political Science and a Master of Arts in International Relations/Business from the University of Akron.
ITEM 1A. RISK FACTORS
Forward-Looking Statements
We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations, which follow under the headings "Business", "Liquidity and Capital Resources", and other statements throughout this report preceded by, followed by or that include the words "believes", "expects", "anticipates", "intends", "plans", "estimates" or similar expressions.
Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the "SEC").SEC. We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.
Risks and Uncertainties
We are subject to various risks that could have a negative effect on usmaterially and adversely affect our business, results of operations, cash flows, liquidity, or onfinancial condition which make an investment in our financial condition.securities risky. You should understand that these risks could, in circumstances we may or may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results), cash flows, liquidity, and stock price. In addition, these risks could cause results to differ materially from those we express in forward-looking statements contained in this report or in other Company communications.communications, including those we file from time to time with the SEC. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. You should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:
Risks Relating to Economic Conditions and Global Events
General economic factors beyond our control could adversely affect our business and results of operations. These factors include, but are not limited to, supply chain disruptions, labor shortages, wage pressures, geo-political matters and conflicts, rising inflation and potential economic slowdown or recession, as well as increases in costs including fuel and energy costs, foreign currency exchange rate fluctuations, and other matters that influence consumer spending and preferences. Additionally, the invasion of Ukraine by Russia has escalated tensions among the United States, the North Atlantic Treaty Organization ("NATO") and Russia. Such invasion, ongoing military conflict, resulting sanctions and related countermeasures by NATO states, the United States and other countries could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, and supply chain interruptions.
Global markets continued to face threats and uncertain economic and financial market conditions that may also adversely affect the financial condition of our customers, suppliers and other business partners. Any significant decrease in customers' purchases of our products or our inability to collect accounts receivable resulting from an adverse impact of the global markets on customers' financial condition could have a material adverse effect on our business, financial condition and results of operations. Additionally, disruptions in financial markets could reduce our access to debt capital markets, negatively affecting our ability to implement our business strategy.
Risks Relating to the COVID-19 Pandemic
The COVID-19 pandemic and its consequences, including related measures to curtail its spread, have and will continue to impact our business, operations, and financial results. The extent to which the COVID-19 pandemic impacts our business, operations, and financial results, including the duration and magnitude of such effects, will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the COVID-19 pandemic (including the location and extent of resurgences of the virus, particularly in light of new variants, and the availability of effective treatments or vaccines); and the negative impact the COVID-19 pandemic has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending. Because the severity, magnitude and duration of the COVID-19 pandemic, including any new variants, are uncertain, rapidly changing, and difficult to predict, the pandemic's impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain.
We anticipate that the global health crisis caused by the COVID-19 pandemic will continue to negatively impact business activity across the globe, and as such, we expect our sales demand to be negatively impacted into, at least, the first half of 2023 given the global reach and economic impact of the COVID-19 pandemic and the various governmentally imposed lockdowns, quarantine and social distancing measures put in place to contain the spread of the COVID-19 pandemic. A future suspension of our manufacturing operations would impact our ability to meet customer demand and could have a significant adverse effect on our financial condition and results of operations. COVID-19 also continues to impact the global supply chain causing disruptions to service providers, logistics and the flow and availability of supplies and products. Our manufacturing sites, as well as our suppliers and outsourcing partners, and our supply chain have been adversely affected and may continue to be adversely impacted as a result of restrictions and logistics and operational challenges. These disruptions have resulted in and may continue to result in supply shortages and delays impacting market conditions and business operations across all industries worldwide, including our own. As a result, we may experience further disruptions to our manufacturing operations, supply chain and/or distribution channels in the future, and these disruptions may be prolonged.
We remain cautious about how the economy might behave for the next few years and we continue to actively monitor the potential impact on our operations and may take further actions altering our business operations as necessary or as required by international, federal, state, or local authorities.
Risks Relating to Operations
Cybersecurity Issues: Security Breaches, Failure to Maintain the Integrity of and Protect Internal or Customer Data May Result in Faulty Business Decisions, Operational Inefficiencies, Damage to our Reputation and/or Subject Us to Costs, Fines, or Lawsuits
Our business requires collection, processing, and retention of large volumes of internal and sensitive and confidential customer data, including personally identifiable information of our customers in various information systems that we maintain and in those maintained by third parties with whom we contract, including in areas such as customer product servicing, human resources outsourcing, website hosting, and various forms of electronic communications. We and third parties who provide services to us also maintain personally identifiable information about our employees. The integrity and protection of that customer, employee, and company data, including proprietary information, is critical to us. If that data is inaccurate or
incomplete, we may make faulty decisions. Our customers and employees also have a high expectation that we and our service providers will adequately protect their personal information. Despite the security measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third-party suppliers and vendors with which we do business, may be vulnerable to security breaches, cyberattacks, acts of vandalism or misconduct, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer, employee, supplier or Company information, whether caused by us, an unknown third party, or the retailers, dealers, licensees or other third-party suppliers and vendors with which we do business, could result in losses, severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business, results of operations and financial condition. As cybersecurity threats evolve in sophistication and become more prevalent worldwide, we continue to increase our sensitivity and attention to these threats, seek additional investments and resources to address these threats and enhance the security of our facilities and systems and strengthen our controls and procedures to monitor, protect against and mitigate these threats. The domestic and international regulatory environment related to information security, data collection and privacy is increasingly rigorous and complex, with new and constantly changing requirements applicable to our business. Compliance with these requirements, including the European Union's General Data Protection Regulation ("GDPR"), China's newly enacted Personal Information Protection Law ("PIPL") and other domestic and international regulations, could result in additional costs and changes to our business practices.
Moreover, we rely heavily on computer systems to manage and operate our business, record and process transactions, and manage, support and communicate with our employees, customers, suppliers and other vendors. Computer systems are important to production planning, finance, company operations and customer service, among other business-critical processes. Despite our efforts to prevent disruptions to our computer systems, these systems may be affected by damage or interruption from, among other causes, power outages, system failures, computer viruses and other intrusions, including cyberattacks. Computer hardware and storage equipment that is integral to efficient operations, such as email, telephone and other functionality, is concentrated in certain physical locations in the various continents in which we operate. We rely on software applications, enterprise cloud storage systems and cloud computing services provided by third-party vendors, and our business may be adversely affected by service disruptions in or security breaches to such systems. Remote work and remote access to our systems has increased, which also increases the risk of cybersecurity attacks on our systems surface. In addition, there has been a global increase in cyberattack volume, frequency, and sophistication driven by the global enablement of remote workforces. Geopolitical tensions or conflicts, such as Russia’s invasion of Ukraine, may further heighten the risk of cybersecurity attacks. We continue to mitigate these risks in a number of ways, including through additional investment, engagement of third-party experts and consultants, improving the security of our facilities and systems (including through upgrades to our security and information technology systems), providing training for all employees (with more enhanced or frequent training based on role or responsibility), assessing the continued appropriateness of relevant insurance coverage and strengthening our controls and procedures to monitor, mitigate and respond appropriately to these threats. We carry cyber insurance, and while we have not incurred any material losses due to any failure of or disruptions to our systems, or from any breaches of or attacks, we cannot be certain that our coverage will be adequate for liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or that any insurer will not deny coverage as to any future claim.
Proprietary Technologies
We produce highly complex products that incorporate leading-edge technology, including hardware, firmware, and software. Firmware and software may contain bugs that may unexpectedly interfere with product operation. There can be no assurance that our testing programs will detect all defects in individual products or defects that may affect numerous shipments. The presence of defects may harm customer satisfaction, reduce sales opportunities, or increase warranty claims and/or returns. An inability to cure or repair such a defect may result in the failure of a product line, temporary or permanent withdrawal of a product or market, damage to our reputation, increased inventory costs, or product re-engineering expenses, any of which may have a material impact on our operating results, financial condition and cash flows.
Technology Changes in Control and Sensing
We currently derive substantial revenue from the sale of remote controls, sensors and home automation products based on IR and RF and other technologies. Other control technologies exist or may be developed that may compete with our technology. In addition, we develop and maintain our own database of IR and RF codes. There are other IR and RF libraries offered by companies that we compete with in the marketplace. In addition, if competing control and sensing technology and products gain acceptance and start to be integrated into home electronics devices and home security and automation products, demand for our products may decrease, resulting in decreased operating results, financial condition and cash flows.
Our Technology Development Activities May Experience Delays
We may experience technical, financial, resource or other difficulties or delays related to the further development of our technologies. Delays may have adverse financial effects and may allow competitors to gain an advantage over us in the
marketplace or in the standards setting arena. There can be no assurance that we will continue to have adequate staffing or that our development efforts will ultimately be successful. Moreover, certain of our technologies have not been fully tested in commercial use, and it is possible that they may not perform as expected. In such cases, our business, financial condition and operating results may be adversely affected, and our ability to secure new licensees and other business opportunities may be diminished.
Dependence upon New Product Introduction
Our ability to remain competitive in the video services, consumer electronics, security, home automation, climate control and home appliance markets will depend considerably upon our ability to successfully identify new product opportunities, as well as develop and introduce these products and enhancements on a timely and cost effective basis. There can be no assurance that we will be successful at developing and marketing new products or enhancing our existing products, or that these new or enhanced products will achieve consumer acceptance and, if achieved, will sustain that acceptance. In addition, there can be no assurance that products developed by others will not render our products non-competitive or obsolete or that we will be able to obtain or maintain the rights to use proprietary technologies developed by others which are incorporated in our products. Any failure to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, may have a material adverse effect on our operating results, financial condition and cash flows. Moreover, the introduction of new products may require significant expenditures for R&D, tooling, manufacturing processes, inventory and marketing. In order to achieve high-volume production of any new product, we may have to make substantial investments in inventory and expand our production capabilities. We cannot be certain that we will recover the costs we incurred in developing new products, investing in inventory, expanding our production capabilities, or that those new products will be successful.
Dependence on Consumer Preference
We are susceptible to fluctuations in our business based upon consumer demand for our products. We cannot guarantee that increases in demand for our products associated with increases in the deployment of new technology will continue. We believe that our success depends on our ability to anticipate, gauge and respond to fluctuations in consumer preferences. However, it is impossible to predict with complete accuracy the occurrence and effect of fluctuations in consumer demand over a product's life cycle. Moreover, any growth in revenues that we achieve may be transitory and should not be relied upon as an indication of future performance.
Dependence on Major Customers
The economic strength and weakness of our worldwide customers affect our performance. We sell our products, accessory products, and proprietary technologies to video service providers, OEMs, retailers and private label customers. We also supply our products, accessory products, and technologies to our wholly owned, non-U.S. subsidiaries and to independent foreign distributors, who in turn distribute our products worldwide. While we generally have a broad and varied customer base, during the years ended December 31, 2022, 2021 and 2020, Comcast Corporation accounted for sales totaling more than 10% of our net sales. During the years ended December 31, 2022 and 2021, Daikin Industries Ltd. also accounted for sales totaling more than 10% of our net sales. In addition to these customers, we have some customers that, individually or through their subsidiaries or affiliated partners, purchase a large amount of products from us. Although our broad distribution channels help to minimize the impact of the loss of any one customer, the loss of any of these large individual customers, or our inability to maintain order volume with these customers, may have an adverse effect on our sales, operating results, financial condition and cash flows.
Demand for Consumer Service and Support
We provide consumer service and support to our retail customers to add overall value and to help differentiate us from our competitors. Certain of our products have more features than others and therefore require more end-user technical support, which may increase our support costs and have an adverse effect on our business, operating results, financial condition and cash flows. We continually review our service and support group and are marketing our expertise in this area to other potential retail customers.
Manufacturing Risks
We operate factories in the PRC, Brazil and Mexico and expect to commence manufacturing operations in a new factory in Vietnam in the first half of 2023. We are currently evaluating our manufacturing footprint with the expectation that once the Vietnam factory is operating efficiently, we will reduce our manufacturing capacity, most likely, by shutting down an existing facility. If this were to occur, we would record an impairment charge and severance expense in amounts that are not presently calculable, yet could be material. In addition, we utilize third-party manufacturers located in Asia to manufacture a portion of our products. We believe that the loss of any one or more of these third-party manufacturers would not have a long-term material adverse effect on our business, results of operations and cash flows, because numerous other manufacturers are
available to fulfill our requirements; however, the loss of any of our major third-party manufacturers may adversely affect our business, operating results, financial condition and cash flows until alternative manufacturing arrangements are secured.
Use of Third-Party Employment Agencies
We utilize the services of third-party employment or labor agencies to provide us with staff to support our production activities. While we require these agencies to adhere to our Supplier Code of Conduct, which among other things prohibits forced labor in any manner and requires them to treat all employees with respect and dignity, use of these third-party agencies has come under worldwide scrutiny. In October 2021, Reuters published an article indicating that individuals from China's Uyghur minority, originally resident in the Xinjiang Uyghur Autonomous Region of China ("XUAR"), were working in a factory operated by our Chinese subsidiary, Gemstar Technology (Qinzhou) Co. Ltd. ("Gemstar"). The article alleged that the presence of these workers in our factory was indicative of "a transfer program described by some rights groups as forced labor." These workers were employed, managed by and provided to Gemstar by a third-party employment agency. As a result of this article, we commissioned two separate audits. Both audits confirmed that there were no indicia of forced labor or any other violations of human rights and that Gemstar compensated these individuals for their work at the same rates as workers of other ethnicities who had comparable skills and roles and at a level that was above the local minimum wage. Although our review did not identify any instances in which individuals were obliged or in any other way forced to work at the Gemstar factory or were paid less than their promised wage, Gemstar terminated its relationship with that agency, ended its arrangement with these workers, and paid all outstanding wages and severance directly and individually to each of the workers in question.
Shortly after publication of the Reuters article, three U.S. Senators heading the U.S. Senate Foreign Affairs Committee (the "Committee") jointly wrote to us seeking information regarding these workers and the terms of their work at our Gemstar factory. We cooperated fully with the Committee's inquiry and provided the Committee with timely and complete responses to all of its questions.
Nonetheless, the perception that we or an entity affiliated with us might have had associations with a program described by some as involving forced labor could result in reputational damage as well as lost revenue. To date, as a result of this perception, one customer has put further business with us on hold. Should additional customers cease doing business with us, the loss of revenue could become material, which would have an adverse effect on our business, results of operations and financial condition.
Legislation Pertaining to Forced Labor
On December 23, 2021, President Biden signed the Uyghur Forced Labor Prevention Act (the "UFLPA") which took effect on June 21, 2022. The UFLPA creates a rebuttable presumption that all goods produced or manufactured, even partially, in XUAR, were made with forced labor and, therefore, would not be allowed entry at U.S. ports. Importers will be required to present clear and convincing evidence that goods from the XUAR are not made with forced labor. Under the law, U.S. Customs and Border Protection is tasked with developing targeting and enforcement strategies, the details of which are yet to be finalized. The UFLPA also builds on prior legislation, such as 2020's Uyghur Human Rights Policy Act (the "UHRPA") by expanding the UHRPA's authorization of sanctions to cover foreign individuals responsible for human rights abuses related to forced labor. While we do not source product from the XUAR and have increased actions to ensure our entire supply chain is free of any products made with forced labor, there is nonetheless a risk, particularly in light of prior media allegations about Gemstar, that our business, results of operations and financial condition could be adversely affected by the UFLPA, the UHRPA and related regulatory requirements and enforcement activity.
The U.S. government has also recently expanded regulatory and enforcement activity related to a long-existing ban on U.S. importation of products produced with forced labor. Section 307 of the U.S. Tariff Act of 1930, as amended ("Section 307") prohibits U.S. importation of goods that are produced or manufactured, wholly or in part, in any non-U.S. country by forced or indentured labor. While we do not believe we or any of our affiliates have used forced labor, and Gemstar has terminated its relationship with the third-party labor agency, ended its arrangement with these workers in question, and paid all outstanding wages and severance directly and individually to each of these workers, we cannot guarantee that the relevant U.S. authorities will not decide that forced labor exists or existed in the manufacturing of our products or in our supply chain and, pursuant to Section 307, prohibit or otherwise penalize U.S. imports of certain of our products, which would have an adverse effect on our business, results of operations and financial condition. In addition, if any new legislation or regulatory action that imposes additional restrictions or requirements on importation with respect to alleged use of forced labor were to be enacted in the United States or in other regions where we do business, our business, results of operations and financial condition could be adversely affected.
Dependence upon Key Suppliers
We continue to operate in a supply-constrained environment, and we are heavily dependent on third-party suppliers and their ability to deliver sufficient quantities of key components and products at reasonable prices and in time for us to meet schedules
for the delivery of our products and services. Most of the components used in our products are available from multiple sources. However, we purchase integrated circuits ("ICs") used in products, from a small number of key suppliers. To reduce our dependence on our IC suppliers we continually seek additional sources. We maintain inventories of our ICs, which may be used in part to mitigate, but not eliminate, delays resulting from supply interruptions. Further, we have identified alternative sources of supply for our ICs, component parts, and finished goods; however, there can be no assurance that we will be able to continue to obtain these inventory purchases on a timely basis or in the quantities we need. Any extended interruption, shortage or termination in the supply of any of the components used in our products, or a reduction in their quality or reliability, or a significant increase in prices of components, would have an adverse effect on our operating results, financial position and cash flows.
From time to time, we may obtain components from a single source due to technology, availability, price, quality or other considerations. New products that we introduce may utilize custom components obtained initially from only one source until we have determined whether there is a need for additional suppliers. Replacing a single-source supplier could delay production of some products as replacement suppliers may be subject to capacity constraints or other output limitations. For some components, alternative sources may not exist or may be unable to produce the quantities necessary to satisfy our requirements. The loss of, deterioration of our relationship with, or limits in allocation by, a single-source supplier, could adversely affect our business and financial performance.
Difficulty in Ordering Integrated Circuits and Increases in Commodities and Freight Costs Have Adversely Affected and Will Continue to Adversely Affect Our Business.
We continue experiencing difficulty in ordering ICs for future use and that difficulty is expected to continue. While we have identified other sources of ICs and are taking other production and inventory control steps in order to mitigate the effects caused by this shortage, we cannot guarantee that the alternative sources will meet our short- and longer-term IC needs and/or without experiencing increases in the prices we pay for these components. If we are not able to purchase sufficient quantities of ICs from our current and alternative suppliers, we may not be able to produce sufficient quantities of products to meet our customers' demands. This, in turn, may affect our ability to meet our quarterly revenue targets and otherwise adversely affect our business. In addition, many of our products are paired with certain of our customers' products, like set-top boxes and televisions. If those customers are not able to obtain sufficient quantities of ICs for their products, their demand for our products may decrease. Also, we are continuing to experience increases in commodities and freight costs which have and may continue to adversely affect our margins. At the same time, in order to secure components for our products or services, we have and may continue to make advance payments to suppliers and/or enter into non-cancelable commitments with suppliers. We have and may continue to strategically purchase ICs and other key components in advance of demand to take advantage of favorable pricing or to address concerns about future availability. If we fail to anticipate customer demand properly or if customer changes its demand significantly, a temporary "oversupply" could result in excess or obsolete components.
Transportation Costs and Impact of Oil Prices
We ship products from our factories and foreign manufacturers via ocean and air transport. It is sometimes difficult to forecast swings in demand or delays in production and, as a result, products may be shipped via air which is more costly than ocean shipments. We typically cannot recover the increased cost of air freight from our customers. Additionally, tariffs and other export fees may be incurred to ship products from foreign manufacturers to the customer. These increases in costs and tariffs may have a material adverse effect on our product margins. We also have an exposure to oil prices in two forms. The first is in the prices of oil-based materials in our products, which are primarily the plastics and other components that we include in our finished products. The second is in the cost of delivery and freight, which would be passed on by the carriers that we use in the form of higher rates. Rising oil prices may have an adverse effect on cost of sales and operating expenses, and Russia's invasion of Ukraine may continue to create uncertainty in oil prices.
Disruptions Caused by Labor Disputes or Organized Labor Activities Could Materially Harm our Business and Reputation
Currently, approximately 1,400 of our Brazil and Mexico employees are represented by labor unions. Disputes with the current labor unions or new union organizing activities could lead to production slowdowns or stoppages and make it difficult for us to meet scheduled delivery times for product shipments to some of our customers, which could result in a loss of business and material damage to our reputation. In addition, union activity and compliance with international labor standards could result in higher labor costs, which could have a material adverse effect on our financial position and results of operations.
Leased Property
We lease all of the properties used in our business. We can give no assurance that we will enter into new or renewal leases, or that, if entered into, the new lease terms will be similar to the existing terms or that the terms of any such new or renewal leases will not have a significant and material adverse effect on our operating results, financial condition and cash flows.
Competition
Competition within the industries we serve is based primarily on product availability, price, speed of delivery, ability to tailor specific solutions to customer needs, quality, and depth of product lines. Our competition is fragmented across our products, and, accordingly, we do not compete with any one company across all product lines. We compete with a variety of entities, some of which have greater financial resources. Other competitors are smaller and may be able to offer more specialized products. Our ability to remain competitive in this industry depends in part on our ability to successfully identify new product opportunities, develop and introduce new products and enhancements on a timely and cost-effective basis, as well as our ability to successfully identify and enter into strategic alliances with entities doing business within the industries we serve. Competition in any of these areas may reduce our sales and adversely affect our earnings or cash flow resulting from decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products. There can be no assurance that our product offerings will be, and/or will remain, competitive or that strategic alliances, if any, will achieve the type, extent, and amount of success or business that we expect them to achieve. The sales of our products and technology may not occur or grow in the manner we expect, and thus we may not recoup costs incurred in the R&D as quickly as we expect, if at all. Some customers may elect to engage a second source to manufacture the same product, and there is no guarantee that these customers will maintain the volume that was initially allocated to us throughout the product life cycle.
The home security and automation industry is highly fragmented and subject to significant competition and pricing pressures. In particular, the monitored security industry providers have highly recognized brands which may drive increased awareness of their security/automation offerings rather than ours, have access to greater capital and resources than us, and may spend significantly more on advertising, marketing and promotional activities which could have a material adverse effect on our ability to drive awareness and demand for our products and services. In addition, video service providers have expanded into the monitored security industry and are bundling their existing offerings with monitored security services. We also face competition from DIY companies that are increasingly providing products which enable customers to self-monitor and control their environments without third-party involvement. Further, DIY providers may also offer professional monitoring with the purchase of their systems and equipment or new IoT devices and services with automated features and capabilities that may be appealing to customers. Continued pricing pressure, improvements in technology and shifts in customer preferences towards self-monitoring or DIY could adversely impact our customer base and/or pricing structure and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Change in Competition and Pricing
Even with having our own factories, we will continue to rely on third-party manufacturers to build a portion of our products. Price is always an issue in winning and retaining business. If customers become increasingly price sensitive, new competition may arise from manufacturers who decide to go into direct competition with us or from current competitors who perform their own manufacturing. If such a trend develops, we may experience downward pressure on our pricing or lose sales, which may have a material adverse effect on our operating results, financial condition and cash flows.
Strategic Business Transactions
We have historically made strategic acquisitions of businesses in industries adjacent to our core business and will likely acquire additional businesses in the future as part of our long-term growth strategy. The success of future acquisitions depends in large part on our ability to integrate the operations and personnel of the acquired companies and manage challenges that may arise as a result of the acquisitions, particularly when the acquired businesses operate in new or foreign markets. In the event we do not successfully integrate such future acquisitions into our existing operations so as to realize the expected return on our investment, our results of operations, cash flow or financial condition could be adversely affected.
Recruitment and Retention of Talent and Key Employees
In order to be successful, we must attract, hire, retain, train, motivate, and develop qualified executives, engineers, technical staff and other key employees. Identifying, developing internally or hiring externally, training and retaining qualified executives, engineers and qualified sales representatives are critical to our future, and competition for experienced employees in the technology industry can be intense as employees' expectations of compensation, benefits and work flexibility continue to increase. Equity-based compensation can be important to attracting and retaining qualified employees and lack of positive performance in our stock price may adversely affect our ability to attract or retain key employees. In addition, workforce dynamics are constantly evolving in all regions, and we may not be able to manage changing workforce dynamics successfully.
Risks Related to Doing Business in the PRC
We
Presently, we manufacture a majority of our products in our factories in the PRC. Additionally, many of our contract manufacturers are located in the PRC. DoingIn addition to the other risks identified herein, doing business in the PRC carries a number of risks including the following:
The Fluctuation of the Chinese Yuan Renminbi May Adversely Impact Our Manufacturing Costs.
Under Chinese monetary policy, the Chinese Yuan Renminbi is permitted to fluctuate within a managed band against a basket of certain foreign currencies and has resulted in increased volatility in the exchange rate of the Chinese Yuan Renminbi against the U.S. Dollar. Any significant appreciation of the Chinese Yuan Renminbi against the U.S. Dollar could lead to higher manufacturing costs for our products.
Availability of Adequate Workforce Levels
Presently, a portion of workers at our PRC factories are obtained from third-party employment agencies. As the labor laws, social insurance and wage levels continue to grow and the workers become more sophisticated, our costs to employ these and other workers in the PRC may grow beyond that anticipated by management. Some of our key customers have demanded that we reduce the percentage of workers sourced from third-party employment agencies, which may also lead to increased costs in recruitment, retention and compliance. While we have already experienced increases in labor rates in the PRC, as the PRC market continues to open up and grow, we may experience an increase in competition for the same workers, resulting in either an inability to attract and retain an adequate number of qualified workers or an increase in our employment costs to obtain and retain these workers.
Changes in the policiesPolicies of the PRC government may haveGovernment May Have a significant impact uponSignificant Impact Upon the business we may be able to conductBusiness We Conduct in the PRC and the profitabilityProfitability of such business.Such Business.
Our business operations may be adversely affected by the current and future political environment in the PRC. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy, through regulation and state ownership. Our ability to operate in the PRC may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, labor and social insurance, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters.
The PRC lawsLaws and regulations governing our current business operationsRegulations Governing Our Current Business Operations are sometimes vagueSometimes Vague and uncertain. Any changes in such PRC laws and regulations may harm our business.Uncertain.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings.customers. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business. If the relevant authorities find that we are in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
levying fines;
revoking our business and other licenses;
requiring that we restructure our ownership or operations; and
requiring that we discontinue any portion or all of our business.
The fluctuation of the Chinese Yuan Renminbi may harm your investment.
Under Chinese monetary policy, the Chinese Yuan Renminbi is permitted to fluctuate within a managed band against a basket of certain foreign currencies and has resulted in a 23.5% appreciation of the Chinese Yuan Renminbi against the U.S. Dollar during the period from July 21, 2005 to December 31, 2017. While the international reaction to the Chinese Yuan Renminbi revaluation has been positive, there remains international pressure on the PRC government to adopt an even more flexible currency policy, which may result in a further and more significant appreciation of the Chinese Yuan Renminbi against the U.S. Dollar, which could lead to higher manufacturing costs for our products.
The PRC's legalLegal and judicial system may not adequately protect our businessJudicial System May Not Adequately Protect Our Business and operationsOperations and the rightsRights of foreign investors.Foreign Investors.
The PRC legal and judicial system may negatively impact foreign investors, with inconsistent enforcement of existing laws inconsistent.laws. In addition, the promulgation of new laws, changes to existing laws and the pre-emptionpreemption of local regulations by national laws may adversely affect foreign investors.
Availability
Risks Relating to Regulation and Legal
Certain Regulatory and Financial Risks Related to Climate Change
Growing concerns about climate change may result in the imposition of adequate workforce levels
Presently,additional regulations or restrictions to which we may become subject. A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to climate change, including regulating greenhouse gas emissions. The outcome of new legislation or regulation in the vast majority of workers at our PRC factories are obtained from third-party employment agencies. As the labor laws, social insuranceU.S. and wage levels continueother jurisdictions in which we operate may result in new or additional requirements, additional charges to maturefund energy efficiency activities, and grow and the workers become more sophisticated, ourfees or restrictions on certain activities. Compliance with these climate change initiatives may also result in additional costs to employ theseus. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Even without such regulation, increased public awareness and other workersadverse publicity about potential impacts on climate change emanating from us or our industry could harm us. We may not be able to recover the cost of compliance with new or more stringent laws and regulations, which could adversely affect our results of operations, financial position or cash flows. Ultimately, the impacts of climate change, whether involving physical risks or transition risks are expected to be widespread and unpredictable and may materially adversely affect our business and financial results.
Significant Developments From Potential Changes in U.S. Trade Policies Could Have a Material Adverse Effect On Us
The U.S. government implemented additional tariffs on certain goods imported from the PRC. We manufacture a substantial amount of our products in the PRC and are presently subject to these additional tariffs and will remain so until the tariff lists are altered. These tariffs, and other governmental action relating to international trade agreements or policies, may grow beyond that anticipated by management. Whileadversely impact
demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, as a result, adversely impact our business. These additional tariffs may cause us to increase prices to our customers which may reduce demand, or, if we have already experienced increasesare unable to increase prices, result in labor rates inlowering our margin on products sold. It remains unclear what the PRC, asU.S. or foreign governments will or will not do with respect to tariffs, international trade agreements and policies on a short-term or long-term basis. We cannot predict future trade policy or the PRC market continues to open upterms of any renegotiated trade agreements and grow, we may experience an increase in competition for the same workers, resulting in either an inability to attract and retain an adequate number of qualified workers or an increase in our employment costs to obtain and retain these workers.
Expansion in the PRC
As our global business grows, we may decide to expand in China to meet demand. This would be dependenttheir impacts on our ability to locate suitable facilities to support thisbusiness. The adoption and expansion to obtainof trade restrictions, the necessary permits and funding, to attract and retain adequate levels of qualified workers, and to enter into a long-term land lease that is common in the PRC.
Sale of Guangzhou factory
On September 26, 2016, we entered into an agreement to sell our Guangzhou manufacturing facility. While the buyer has completed its due diligence review, the parties are discussing a small number of open items. Management continues to expect this sale to close in the first half of 2018. In anticipationoccurrence of a successful closingtrade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could adversely impact our business, financial condition and results of the sale, we completed the shutdown of all operations at our Guangzhou facility in 2017 and have largely completed the transition of manufacturing activities from this factory to our other
China factories.operations. As a result of this transition, we experienced numerous factory inefficiencies related to hiring, trainingthese tariffs and other transition activitiesgovernmental action, we moved production of many of our products destined for the U.S. to allow us to manufacture allMexico and a third-party manufacturing partner outside of the PRC.
Policy Changes Affecting International Trade Could Adversely Impact the Demand for Our Products and Our Competitive Position
Due to the international scope of our operations, changes in government policies on foreign trade and investment may affect the demand for our products previously manufacturedand services, impact the competitive position of our products or prevent us from being able to sell products in Guangzhou at our other China factories. If we are unsuccessful at completing this transition, thiscertain countries. Our business may benefit from free trade agreements. Efforts to withdraw from or substantially modify such agreements or the implementation of more restrictive trade policies such as more detailed inspections, higher tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could continue to have a material adverse effect on our results of operations, financial condition or cash flow and financial condition. Additionally, if the sale does not close, we may incur unexpected costs associated with an unutilized factory, we may incur additional costs to sell the factory to another buyer,that of our customers, vendors and we may be forced to sell the factory at a less favorable price.suppliers.
Risks and Uncertainties Associated with Our Expansion Into and Our Operations Outside of the United States May Adversely Affect Our Results of Operations, Cash Flow, Liquidity or Financial Condition
Net external sales of our consolidated foreign subsidiaries totaled approximately 44.3%, 41.0% and 43.5% of our total consolidated net sales in 2017, 2016 and 2015, respectively. We expect that theOur international share of our total revenues willoperations continue to makegrow, making up a significant part of our current business and future strategic plans. Additionally, weWe presently operate factories in the PRC, Brazil and Mexico, as well as an engineering centercenters in India. As a result,India, Korea and Japan and rely on third-party manufacturers located in Asia. In addition, we expect to commence manufacturing operations in Vietnam in the first half of 2023. We are increasingly exposed to the challenges and risks of doing business outside the United States, which could reduce our revenues or profits, increase our costs, result in significant liabilities or sanctions, or otherwise disrupt our business. These challenges include: (1) compliance with complex and changing laws, regulations and policies of governments that may impact our operations, such as foreign ownership restrictions, import and export controls, tariffs, and trade restrictions; (2) compliance with U.S. and foreign laws that affect the activities of companies abroad, such as anti-corruption laws, competition laws, currency regulations, and laws affecting dealings with certain nations; (3) limitations on our ability to repatriate non-U.S. earnings in a tax effective manner; (4) the difficulties involved in managing an organization doing business in many different countries; (5) uncertainties as to the enforceability of contract and intellectual property rights under local laws; (6) rapid changes in government policy, political or civil unrest, in the Middle East and elsewhere, acts of terrorism, or the threat of international boycotts or U.S. anti-boycott legislation; and (7) currency exchange rate fluctuations.
We are also exposed to risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions, particularly in light of the current U.S. presidential administration. For example, the passage of the Tax Cuts and Jobs Act on December 22, 2017, significantly changed U.S. income tax law. Whileas such we are still assessing the long-term impact these changes will have on our overall income tax liability under our existing business structure, these recent changessubject to a variety of taxes in the U.S. (federal, state, and local) and numerous foreign jurisdictions. We may recognize additional tax expense and be subject to additional tax liabilities due to changes in laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. Such changes could increasecome about as a result of economic, political, and other conditions. Our tax expense and liabilities are also affected by other factors, such as changes in our U.S. incomebusiness operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax liabilitybenefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, and adversely affectchanges in our consolidated after-tax profitability.deferred tax assets and liabilities and their valuation. Significant judgment is required in evaluating and estimating our tax expense and liabilities. In addition, the current U.S. presidential administration has introduced greater uncertainty with respectordinary course of our business, there are many transactions and calculations which make the ultimate tax determination uncertain.
We are also currently subject to future trade regulationstax controversies in various jurisdictions, and trade agreements. Changesthese jurisdictions may assess additional tax liabilities against us. Developments in an audit, investigation, or other tax policy, trade regulations or trade agreementscontroversy could have a material adverse effect on our businessoperating results or cash flows in the period or periods for which that development occurs, as well as for prior and resultssubsequent periods. We regularly assess the likelihood of operations.an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical tax accruals.
Failure by Our International Operations to Comply With Anti-Corruption Laws or Trade Sanctions Could Increase Our Costs, Reduce Our Profits, Limit Our Growth, Harm Our Reputation, or Subject usUs to Broader Liability
We are subject to restrictions imposed by the U.S. Foreign Corrupt Practices Act and anti-corruption laws and regulations of other countries applicable to our operations. Anti-corruptionoperations, such as the U.K. Bribery Act. These laws require us to maintain adequate internal controls and regulations generally prohibit companiesaccurate books and their intermediaries from making improper payments to government officials or other personsrecords. We have properties and do business in order to receive or retain business.many parts of the world where corruption is common, and our compliance with anti-corruption laws may potentially conflict with local customs and practices. The compliance programs, internal controls and policies we maintain and enforce to promote compliance with applicable anti-bribery and anti-corruptionthese laws may not prevent our associates,employees, contractors or agents from acting in ways prohibited by these laws and regulations. We are also subject to trade sanctions administered by the U.S. Office of Foreign Assets Control and the U.S. Department of Commerce.Commerce, and other U.S. government agencies, and authorities in other countries where we do business. Our Global Compliance Department, compliance programs, and internal controls alsocontrol policies and procedures may not prevent conduct that is prohibited under these rules. The United States or other countries may impose additional sanctions at any time against any country in which or with whom we do business. Depending on the nature of the sanctions imposed, our operations in the relevant country could be restricted or otherwise adversely affected. Any violations of anti-corruption laws and regulations or trade sanctions could result in significant civil and criminal penalties, reduce our profits, disrupt or have a material adverse effect on our business or damage our reputation.reputation or result in lawsuits or regulatory actions being brought against us or our officers or directors. In addition, the operation of these laws and regulations or an imposition of further restrictions in these areas could increase our cost of operations, reduce our profits or cause us to forgo development opportunities or limit certain business operations that would otherwise support growth.
Fluctuations
We are Subject to a Wide Variety of Complex Domestic and Foreign Laws and Regulations
We are subject to a wide variety of complex domestic and foreign laws and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, laws governing improper business practices, and health, safety and environmental laws and regulations. These laws and regulations not only govern our current operations and products, but could also impose liability on us for our past operations. From time to time, our Company, our operations and the industries in Foreign Currency Exchange Rates May Adversely Affectwhich we operate are being reviewed or investigated by regulators, which may lead to enforcement actions or the assertion of private litigation claims and damages. Our Results of Operations, Cash Flow, Liquiditycosts to respond to any investigation or Financial Condition.
Because of our international operations, we are exposed to risk associatedcomply with interest ratesthese laws and value changesregulations may increase as these requirements become more stringent in foreign currencies, whichthe future, and these increased costs may adversely affect our business. Historically, our reported net sales, earnings, cash flow and financial condition have been subjected to fluctuations in foreign exchange rates. Our exchange rate exposure is in the Argentinian Peso, Brazilian Real, British Pound, Chinese Yuan Renminbi, Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen, Korean Won and Mexican Peso. While we actively manage the exposure of our foreign currency risk as part of our overall financial risk management policy, we believe we may experience losses from foreign currency exchange rate fluctuations, and such losses may adversely affect our sales, earnings, cash flow, liquidity or financial condition.
Risks Relating to Natural or Man-made Disasters, Contagious Disease, Terrorist Activity, and War May Adversely Affect Our Business, Financial Condition and Results of Operations
Our ability, including manufacturing or distribution capabilities, and that of our suppliers, business partners and contract manufacturers, to make, move and sell products is critical to our success. So called “Acts of God,” such as hurricanes, earthquakes, tsunamis, and other natural disasters, as well as the potential spread of contagious diseases in locations where we or they own or operate significant operations could cause a disruption in our or our third party’s production and distribution capabilities or a decline in demand for our products and services. In addition, actual or threatened war, terrorist activity, political unrest, or civil strife, such as recent events in Ukraine and Russia, the Middle East, North Korea and other geopolitical uncertainty could have a similar effect. Any one or more of these events may reduce our ability to produce or sell our products which may adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain.
Dependence on Foreign Manufacturing
cash flow or financial condition. Although we ownbelieve that we have adopted appropriate risk management and operate factories incompliance programs to mitigate these risks, the PRC, Brazilglobal and Mexico, third-party manufacturers located in Asiadiverse nature of our operations means that compliance risks will continue to manufacture a portion of our products. Our arrangements with these foreign manufacturers are subject to the risks of doing business abroad, such as tariffs, environmental and trade restrictions, intellectual property protection and enforcement, export license requirements, work stoppages, political and social instability, economic and labor conditions, foreign currency exchange rate fluctuations, changes in laws and policies (including fiscal policies),exist. Investigations, examinations and other factors,proceedings, the nature and outcome of which cannot be predicted, will likely arise from time to time. These investigations, examinations and other proceedings may subject us to significant liability and require us to pay significant settlements, fines and penalties, which may have a material adverse effect on our business, results of operations, and cash flows. We believe that the loss of any one or more of our manufacturers would not have a long-term material adverse effect on our business, results of operations and cash flows because numerous other manufacturers are available to fulfill our requirements; however, the loss of any of our major third-party manufacturers may adversely affect our business, operating results,or financial condition and cash flows until alternative manufacturing arrangements are secured.condition.
Dependence upon Key Suppliers
Most of the components used in our products are available from multiple sources. However, we purchase integrated circuits, used principally in our wireless control products, from a small number of key suppliers. To reduce our dependence on our integrated circuit suppliers we continually seek additional sources. We maintain inventories of our integrated circuits, which may be used in part to mitigate, but not eliminate, delays resulting from supply interruptions.
We have identified alternative sources of supply for our integrated circuit, component parts, and finished goods needs; however, there can be no assurance that we will be able to continue to obtain these inventory purchases on a timely basis. Any extended interruption, shortage or termination in the supply of any of the components used in our products, or a reduction in their quality or reliability, or a significant increase in prices of components, would have an adverse effect on our operating results, financial position and cash flows.
Patents, Trademarks, and Copyrights
TheWe have numerous patents, trade secrets, trademarks, trade names, and know-how that are valuable to our business. However, the procedures by which we identify, document, and file for patent, trademark, and copyright protection are based solely on engineering and management judgment, with no assurance that a specific filing will be issued, or if issued, will deliver any lasting value to us. Because of the rapid innovation of products and technologies that is characteristic of our industry, there can be no assurance that rights granted under any patent will provide competitive advantages to us or will be adequate to safeguard and maintain our proprietary rights. Moreover, the laws of certain countries in which our products are or may be manufactured or sold may not offer protection on such products and associated intellectual property to the same extent that the United States legal system may offer.
In our opinion, our intellectual property holdings as well as our engineering, production, and marketing skills and the experience of our personnel are of equal importance to our market position. We further believe that while our business is not materially dependent upon any single patent, trade secret, trademark, trade name, copyright, or know-how, we do have "families" of patents that are interrelated, which if determined to be invalid or unenforceable, could have a detrimental effect on our business. Despite our efforts to protect such intellectual property and other proprietary information from unauthorized use or disclosure, third parties may attempt to disclose, obtain or use our intellectual property and information without our authorization. Although we rely on the patent, trademark, trade secret and copyright laws of the United States and other countries to protect our intellectual property rights, the laws of some countries may not protect such rights to the same extent as the laws of the United States. Unauthorized use of our intellectual property by third parties, the failure of foreign countries to have laws to protect our intellectual property rights, or trade secret.an inability to effectively enforce such rights in foreign countries could have an adverse effect on our business.
Some
In addition, as is typical in our business, third parties (including non-practicing entities ("NPEs")) may challenge the validity of our patents. In the event that such challenges prove successful, the value of our patents may decline which, in turn, could have an adverse effect on our business. Further, some of our products include or use technology and/or components of third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of such products, we believe that, based upon past experience and industry practice, such licenses may be obtained on commercially reasonable terms; however, there can be no guarantee that such licenses may be obtained on such terms or at all. Because of technological changes in the
wireless and home control industry, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of our products and business methods may unknowingly infringe upon the patents of others.
Potential for Litigation
As is typical in our industry and for 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 they 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.
Technology Changes in Wireless Control If a customer or third party believes that he or she has suffered harm to person or property due to an actual or alleged security system failure, he or she (or their insurers) may pursue legal action against us, and Sensing
We currently derive substantial revenue from the salecost of wireless remote controls, sensorsdefending the legal action and home automationof any judgment against us could be substantial. In particular, because some of our products based on IR and RFservices are intended to help protect lives and other technologies. Other control technologies exist or may be developed that may compete with this technology. In addition, we developreal and maintain our own database of IR and RF codes. There are other IR and RF libraries offered by companies that we compete with in the marketplace. The advantage thatpersonal property, we may have comparedgreater exposure to litigation risks than businesses that provide other consumer and small business products and services. While our competitorscustomer contracts contain a series of risk-mitigation provisions that are aimed at limiting our liability and/or limiting a claimant's ability to pursue legal action against us, in the event of litigation with respect to such matters it is difficultpossible that these risk-mitigation provisions may be deemed not applicable or unenforceable and, regardless of the ultimate outcome, we may incur significant costs of defense that could materially and adversely affect our business, financial condition, results of operations and cash flows.
Environmental Matters
Many of our products are subject to measure.various federal, state, local and international laws governing chemical substances in products, including laws regulating the manufacture and distribution of chemical substances and restricting the presence of certain substances in electronics products. In addition, if competing wireless controlmany of these laws and sensing technologyregulations make producers of electrical goods responsible for collection, recycling, treatment and products gain acceptancedisposal of recovered products. As a result, we may face significant costs and start to be integrated into home electronics devicesliabilities in complying with these laws and home securityany future laws and automation productsregulations or enforcement policies that are currently utilizingmay have a material adverse effect upon our remote controllers and sensors, demand for our products may decrease, resulting in decreased operating results, financial condition, and cash flows.
Our Technology Development Activities May Experience Delays.
We may experience technical, financial, resource In addition, our operations, supply chain and our products are expected to become increasingly subject to federal, state, local and foreign laws, regulations, and international treaties relating to climate change, such as climate disclosure, carbon pricing or product energy efficiency requirements, requiring us to comply or potentially face market-access limitations or other difficulties or delays relatedsanctions including fines. We strive to continually improve the energy and carbon efficiency of our operations, supply chain and product portfolio and deliver more cost-effective and lower carbon technology solutions to our customers.
Regulations Related to the further developmentUse of Conflict-Free Minerals May Increase Our Costs and Expenses, and an Inability to Certify that Our Products are Conflict-Free May Adversely Affect Customer Relationships
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve the transparency and accountability of the use by public companies in their products of minerals mined in certain countries and to prevent the sourcing of such "conflict" minerals. As a result, the SEC enacted annual disclosure and reporting requirements for public companies to conduct due diligence to determine the source of any conflict minerals used in our products and to make annual disclosures in filings with the SEC. Because our supply chain is broad-based and complex, we may not be able to easily verify the origins for all minerals used in our products. In addition, the new rules may reduce the number of suppliers who provide components and products containing conflict-free minerals and thus may increase the cost of the components used in manufacturing our products and the costs of our technologies. Delaysproducts to us. Any increased costs and expenses may have a material adverse financial effects and may allow competitors with comparable technology offerings to gain an advantage over us in the marketplace or in the standards setting arena. There can be no assurance that we will continue to have adequate staffing or thatimpact on our development efforts will ultimately be successful. Moreover, certain of our technologies have not been fully tested in commercial use, and it is possible that they may not perform as expected. In such cases, our business, financial condition and operatingresults of operations. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which may place us at a competitive disadvantage, and our reputation may be harmed.
The Prominence and Evolution on Disclosures related to ESG Matters May Expose Us to Certain Performance and Reputational Risks
We have established certain ESG goals and reporting of ESG data. Our failure to adequately update, accomplish or accurately track and report on these goals on a timely basis, or at all, could adversely affect our reputation, financial performance, and growth, and expose us to increased scrutiny from the investment community, special interest groups and enforcement authorities. Standards for tracking and reporting ESG matters continue to evolve. Methodologies for reporting ESG data may be updated and previously reported ESG data may be adjusted to reflect improvement in availability and quality of third-party data, changing assumptions, changes in the nature and scope of our operations and other changes in circumstances. Our processes and controls for reporting ESG matters relating to our operations and supply chain are evolving along with various standards for identifying, measuring, and reporting ESG metrics, including ESG-related disclosures that may be required by the SEC, European and other regulators, and such standards may change over time. If our ESG practices do not meet evolving investor or other stakeholder expectations and standards, then our reputation or our attractiveness as an investment, business partner, service provider or employer could be negatively impacted.
Risks Relating to Finance
Growth Projections
Management has made projections required for the preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") regarding future events and the financial performance of the Company, including those involving:
•the benefits the Company expects as a result of the development and success of products and technologies, including new products and technologies;
•the benefits expected by conducting business in Asian and Latin American markets, without which, we may not be able to recover the costs we incur to enter into such markets;
•new contracts with new and existing customers and new market penetrations;
•the expected continued adoption of the Company's technologies in gaming consoles, mobile devices, and other home entertainment and control devices;
•the expected continued growth in digital TVs, DVRs, PVRs and overall growth in the Company's industry;
•the impact competitors and OTT providers may have on our business; and
•the effects we may experience due to current global and regional economic conditions.
Actual events or results may be adversely affected, and our abilityunfavorable to secure new licensees and other business opportunities may be diminished.
Change in Competition and Pricing
Even with having our own factories, we will continue to rely on third-party manufacturers to build a portion of our universal wireless control products. Price is always an issue in winning and retaining business. If customers become increasingly price sensitive, new competition may arise from manufacturers who decide to go into direct competition with us or from current competitors who perform their own manufacturing. If such a trend develops, we may experience downward pressure on our pricing or lose sales,management's projections, which may have a material adverse effect on our projected operating results, financial condition and cash flows.
Risks Related to Adverse Changes in General Business
Additionally, we have long-lived and Economic Conditions
Adverseintangible assets, including goodwill, recorded on our consolidated balance sheet. We assess these assets for impairment whenever events or changes in generalcircumstances indicate that the fair value may be below its carrying value. Factors considered important that may trigger said assessment include, among others, a significant adverse change in legal factors or in business and economicclimate, a decline in macroeconomic conditions, a significant decline in our financial performance or a significant decline in the United States and worldwide may reduce the demand for someprice of our productscommon stock for a sustained period of time. Impairment assessment involves judgment as to assumptions regarding future sales and cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions and may result in changes in our estimates of future sales and cash flows that may result in us incurring substantial impairment charges, which would adversely affect our results of operations cash flow, liquidity or financial condition. Higher inflation rates, interest rates, tax rates
Market Projections and unemployment rates, higher laborData are Forward-looking in Nature.
Our strategy is based on our own projections and health care costs, recessions, changing governmental policies, lawson analyst, industry observer and regulations, increased tariffs,expert projections, which are forward-looking in nature and otherare inherently subject to risks and uncertainties. The validity of their and our assumptions, the timing and scope of the markets within which we compete, economic factorsconditions, customer buying patterns, the timeliness of equipment development, pricing of products, and availability of capital for infrastructure improvements may affect these predictions. In addition, market data upon which we rely is based on third-party reports that may be inaccurate. The inaccuracy of any of these projections and/or market data may adversely affect our operating results of operations, cash flow, liquidity or financial condition. Any such changes may impact our business in a number of ways, including:
Potential deferment of purchases and orders by customers and cyclical nature of portions of our business
Uncertainty about current and future global economic conditions may cause consumers, businesses and governments to defer purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our products may differ materially from our current expectations.
In addition, portions of our business involve the sale of products to sectors of the economy that are cyclical in nature, particularly the retail sector. Our sales to these sectors are affected by the levels of discretionary consumer and business spending. During economic downturns, the levels of consumer and business discretionary spending in these sectors may decrease, and the recovery of these sectors may lag behind the recovery of the overall economy. This decrease in spending will likely reduce the demand for some of our products and may adversely affect our sales, earnings, cash flow or financial condition. Although many of our end markets have shown signs of stabilization and modest improvement from the recent global economic downturn, the recovery has been erratic. A worsening in these sectors may cause a reduction in the demand for some of our products and may adversely impact sales, earnings, cash flow and financial condition.
Customers' inability to obtain financing to make purchases from us and/or maintain their business
Some of our customers require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products may adversely impact our financial results. In addition, an economic downturn could result in insolvencies for our customers, which may adversely impact our financial results.
Potential impact on trade receivables
Credit market conditions may slow our collection efforts as customers experience increased difficulty in obtaining requisite financing, leading to higher than normal accounts receivable balances and longer days sales outstanding. Continuation of these conditions may limit our ability to collect our accounts receivable, which may result in greater expense associated with collection efforts and increased bad debt expense.
Negative impact from increased financial pressures on third-party dealers, distributors and retailers
We make sales in certain regions of the world through third-party dealers, distributors and retailers. Although many of these third parties have significant operations and maintain access to available credit, others are smaller and more likely to be impacted by a significant decrease in available credit. If credit pressures or other financial difficulties result in insolvency for these third parties and we are unable to successfully transition our end customers to purchase products from other third parties or from us directly, it may adversely impact our financial results.
Negative impact from increased financial pressures on key suppliers
Our ability to meet customers' demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent as a result of an economic downturn, it may result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact our financial results. In addition, credit constraints at key suppliers may result in accelerated payment of accounts payable by us, impacting our cash flow.
Potential Fluctuations in Quarterly Results
We may from time to time increase our operating expenses to fund greater levels of research and development,R&D, sales and marketing activities, development of new distribution channels, improvements in our operational and financial systems, moving manufacturing capabilities to other countries, and development of our customer support capabilities, andIn addition, legal expenses could increase from time to time as we enhance or increase our litigation efforts and/or to support our efforts to comply with or respond to various government regulations.regulations and investigations. To the extent such expenses precede or are not subsequently followed by increased revenues, our business, operating results, financial condition and cash flows will be adversely affected.
In addition, we may experience significant fluctuations in future quarterly operating results that may be caused by many other factors, including demand for our products, introduction or enhancement of products by us and our competitors, the loss or acquisition of any significant customers, market acceptance of new products, price reductions by us or our competitors, mix of distribution channels through which our products are sold, product or supply constraints, level of product returns, mix of customers and products sold, component pricing, mix of international and domestic revenues, foreign currency exchange rate fluctuations and general economic conditions. In addition, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing or marketing decisions or acquisitions that may have a material adverse effect on our business, results of operations or financial condition. As a result, we believe period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance.
Due to all of the foregoing factors, it is possible that in some future quarters our operating results will be below the expectations of public market analysts and investors. If this happens the price of our common stock may be materially adversely affected.
Fluctuations in Foreign Currency Exchange Rates or Interest Rates May Adversely Affect Our Results of Operations, Cash Flow, Liquidity or Financial Condition
Because of our international operations, we are exposed to risk associated with interest rates and value changes in foreign currencies, which may adversely affect our business. We earn revenues and incur expenses in foreign currencies as part of our operations outside of the U.S. Accordingly, fluctuations in currency exchange rates may significantly increase the amount of U.S. dollars required for foreign currency expenses or significantly decrease the U.S. dollars we receive from foreign currency revenues. We are also exposed to currency translation risk because the results of our non-U.S. business are generally reported in local currency, which we then translate to U.S. dollars for inclusion in our financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. We expect that our exposure to foreign currency exchange rate fluctuations will grow as the relative contribution of our non-U.S. operations increases. We actively manage the exposure of our foreign currency risk as part of our overall financial risk management policy, by entering into foreign exchange hedging agreements with financial institutions to reduce exposures to some of the principal currencies, but these efforts may not be successful. These hedging agreements also do not cover all currencies in which we do business, do not eliminate foreign currency risk entirely for the currencies that they do cover, and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.
In addition, under the Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank"), we may elect to pay interest on the revolving line of credit ("Credit Line") based on LIBOR or a base rate as specified in the Second Amended Credit Agreement. LIBOR is subject to recent national, international and other regulatory guidance and proposals for reform. These reforms have resulted in plans to phase out and eventually replace LIBOR. The Financial Conduct Authority, which regulates LIBOR, announced it would cease publications of the remaining tenors of LIBOR immediately after June 30, 2023. On January 7, 2021, we executed an amendment to our Second Amended Credit Agreement which defines the Secured Overnight Financing Rate ("SOFR") as the replacement benchmark for LIBOR upon its phase out. The calculation of interest rates under the SOFR replacement benchmarks could negatively impact our business and financial results. To the extent these interest rates increase, our interest expense will increase, which could adversely affect our financial condition, operating results and cash flows.
Our Ability to Generate Cash Depends on Many Factors Beyond Our Control. We Also Depend on the Business of Our Subsidiaries to Satisfy Our Cash Needs.
Our historical financial results have been, and we anticipate that our future financial results will be, subject to fluctuations. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from our operations or that future borrowings will be available to us in an amount sufficient to enable us to make payments of our debt, fund our other liquidity needs and make planned capital expenditures.
The degree to which we are currently leveraged could have important consequences for stockholders. For example, it could:
•require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;
•increase our vulnerability to adverse economic or industry conditions;
•limit our ability to obtain additional financing in the future to enable us to react to changes in our business; or
•place us at a competitive disadvantage compared to businesses in our industry that have less debt.
A significant portion of our operations areis conducted through our subsidiaries. As a result, our ability to generate sufficient cash flow for our needs is dependent on the earnings of our subsidiaries and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Our subsidiaries are separate and distinct legal entities. Our subsidiariesentities and have no obligation to pay any amounts due on our debt or to provide us with funds to meet our cash flow needs,
whether in the form of dividends, distributions, loans or other payments.needs. In addition, any payment of dividends, loans or advances by our subsidiaries may be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries' earnings and business considerations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of that subsidiary's creditors, including trade creditors. In addition, even if we are a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us. Further, changes in the laws of foreign jurisdictions in which we operate may adversely affect the ability of some of our foreign subsidiaries to repatriate funds to us.
In addition, we
We may also fund a portion of our seasonal working capital needs and obtain funding for other general corporate purposes through short-term borrowings backed by our revolving credit facility and other financing facilities.facility. If any of the banks in these credit and financing facilities are unable to perform on their commitments, which may adversely affect our ability to fund seasonal working capital needs and obtain funding for other general corporate purposes, our cash flow, liquidity or financial condition may be adversely impacted.
Although we currently have available credit facilities to fund our current operating needs, we cannot be certain that we will be able to replace our existing credit facilities or refinance our existing or future debt when necessary. Our cost of borrowing and ability to access the capital markets are affected not only by market conditions, but also by our debt and credit ratings assigned by the major credit rating agencies. Downgrades in these ratings will increase our cost of borrowing and may have an adverse effect on our access to the capital markets, including our access to the commercial paper market. An inability to access the capital markets may have a material adverse effect on our results of operations, cash flow, liquidity or financial condition. Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default which, if not cured or waived, would have a material adverse effect on us.
Risks Relating to Our Stock
The Price of Our Common Stock is Volatile and May Decline Regardless of Our Operating Performance.Performance
Historically, we have had large fluctuations in the price of our common stock, and such fluctuations may continue.continue, including a significant decline in our stock price. The trading market price for our common stock has historically been at low volumes and our market price is volatile and may fluctuate significantly in response to a number of factors, most of which we cannot control, including:
including the public's response to press releases or other public announcements by us or third parties, including our filings with the SEC and announcements relating to product and technology development, relationships with new and existing customers, litigation and other legal proceedings in which we are involved and intellectual property impacting us or our business;
announcements concerning strategic transactions, such as spin-offs, joint ventures and acquisitions or divestitures;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;
the inclusion or removal of our common stock from any indices; investor perceptions as to the likelihood of achievement of near-term goals;
changes in market share of significant customers;
changes in operating performance and stock market valuations of other technology or content providing companies generally; and
market conditions or trends in our industry or the economy as a whole.
In the past, stockholders Stockholders of other companies have instituted securities class action litigation followingagainst such companies after periods of market volatility.price volatility in such companies' stock. If we were to become involved in such securities litigation, we may incur substantial costs and our resources and the attention of management may be diverted from our business.
In addition, our officers and directors periodically sell shares of our common stock which they own, many times pursuant to trading plans established under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended or the Exchange Act.(the "Exchange Act"). Sales of shares by our officers and directors may not be indicative of their respective opinions of our performance at the time of sale or of our potential future performance. Nonetheless, the market price of our stock may be affected by such sales of shares by our officers and directors.
If Securities or Industry Analysts Fail to Continue Publishing Research About Our Business, Our Stock Price and Trading Volume May Decline.
The trading market for our common stock has historically been at low volumes and is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we may lose visibility in the financial markets, which in turn may cause our stock price or trading volume to decline.
Future Sales of Our EquityShares By Our Largest Stockholders May Depress the Market Price of Our Common Stock.Stock
We have several institutional stockholders that own significant blocks of our common stock. If one or more of these stockholders were to sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our common stock may be negatively affected. Further, due to our historically low trading volumes, such large stockholders may not be able to sell the number of shares they wish to sell and/or in the time frame in which they wish to sell. Moreover, while such large stockholders are attempting to sell their shares, other stockholders may not be able to sell their shares at the price and time that such other stockholders desire due to the low trading volumes of our stock. Additionally, in March 2016, we issued common stock purchase warrants to Comcast Corporation ("Comcast") to purchase up to 725,000 shares of our common stock at a price of $54.55 per share. The right to exercise the warrants is subject to vesting over three successive two-year periods (the first two-year period commenced on January 1, 2016 and ended on December 31, 2017) based on the level of purchases of goods and services from us by Comcast and its affiliates, as defined in the warrants. To the extent that the warrants vest and Comcast exercises the warrants and sells any of the shares of common stock issuable upon exercise, or the perception that such sales may occur, could adversely affect the market price and/or trading volume of our common stock. Based upon the volume of goods and services purchased by Comcast during the first two-year period which ended on December 31, 2017, Comcast vested in 175,000 of the warrants.
Approved Stock Repurchase Programs May Not Result in a Positive Return of Capital to Stockholders.Stockholders
Periodically, our Board approves programs to repurchase our common stock based upon an assessment of the then current value as compared to the then trading ranges and investor analyst reports. Also considered in this decision is the effect any such repurchases may have on our cash balances and needs, cash flow, and short- and long-term borrowing. Our stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, we, the technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to our and these companies’companies' operating performance. Price volatility over a given period may cause the average price at which we repurchase our own stock to exceed the stock’sstock's price at a given point in time. While we believe our stock price should reflect expectations of future growth and profitability, we also believe our stock price should reflect expectations that our share repurchase program will be fully consummated even though our share repurchase program does not obligate us to acquire any specific number of shares. If we fail to meet expectations related to future growth, profitability, share repurchases or other market expectations, our stock price may decline significantly, which could have a material adverse impact on investor confidence.
Dependence on Consumer Preference
We are susceptible to fluctuations in our business based upon consumer demand for our products. In addition, we cannot guarantee that increases in demand for our products associated with increases in the deployment of new technology will continue. We believe that our success depends on our ability to anticipate, gauge and respond to fluctuations in consumer preferences. However, it is impossible to predict with complete accuracy the occurrence and effect of fluctuations in consumer demand over a product's life cycle. Moreover, any growth in revenues that we achieve may be transitory and should not be relied upon as an indication of future performance.
Demand for Consumer Service and Support
We have continually provided domestic and international consumer service and support to our customers to add overall value and to help differentiate us from our competitors. We continually review our service and support group and are marketing our expertise in this area to other potential customers. There can be no assurance that we will be able to attract new customers in the future.
In addition, certain of our products have more features and are more complex than others and therefore require more end-user technical support. In some instances, we rely on distributors or dealers to provide the initial level of technical support to the end-users. We provide the second level of technical support for bug fixes and other issues at no additional charge. Therefore, as the mix of our products includes more of these complex product lines, support costs may increase, which may have an adverse effect on our business, operating results, financial condition and cash flows.
Dependence upon New Product Introduction
Our ability to remain competitive in the wireless control, AV accessory, home security and home automation markets will depend considerably upon our ability to successfully identify new product opportunities, as well as develop and introduce these products and enhancements on a timely and cost effective basis. There can be no assurance that we will be successful at developing and marketing new products or enhancing our existing products, or that these new or enhanced products will achieve consumer acceptance and, if achieved, will sustain that acceptance. In addition, there can be no assurance that products developed by others will not render our products non-competitive or obsolete or that we will be able to obtain or maintain the rights to use proprietary technologies developed by others which are incorporated in our products. Any failure to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, may have a material adverse effect on our operating results, financial condition and cash flows.
In addition, the introduction of new products may require significant expenditures for research and development, tooling, manufacturing processes, inventory and marketing. In order to achieve high volume production of any new product, we may have to make substantial investments in inventory and expand our production capabilities.
Dependence on Major Customers
The economic strength and weakness of our worldwide customers affect our performance. We sell our wireless control products, AV accessory products, and proprietary technologies to subscription broadcasters, original equipment manufacturers, retailers and private label customers. We also supply our products to our wholly owned, non-U.S. subsidiaries and to independent foreign distributors, who in turn distribute our products worldwide, with Europe, Asia and Latin America currently representing our principal foreign markets.
During the years ended December 31, 2017, 2016 and 2015, we had sales in excess of 10% of our net sales to Comcast and to AT&T. The loss of any of these customers or of any other key customer, either in the United States or abroad or our inability to maintain order volume with these customers, may have an adverse effect on our operating results, financial condition and cash flows.
Outsourced Labor
We continue to use outside resources to assist us in the development of some of our products and technologies. While we believe that such outside services will continue to be available to us, if they cease to be available, the development of these products and technologies may be substantially delayed, which may have a material adverse effect on our operating results, financial condition and cash flows.
Disruptions Caused by Labor Disputes or Organized Labor Activities Could Materially Harm our Business and Reputation
Currently, approximately 400 of our Brazil and Mexico employees are represented by labor unions. Disputes with the current labor unions or new union organizing activities could lead to production slowdowns or stoppages and make it difficult or impossible for us to meet scheduled delivery times for product shipments to some of our customers, which could result in a loss of business and material damage to our reputation. In addition, union activity and compliance with international labor standards could result in higher labor costs, which could have a material adverse effect on our financial position and results of operations.
Competition
Competition within the wireless control industry is based primarily on product availability, price, speed of delivery, ability to tailor specific solutions to customer needs, quality, and depth of product lines. Our competition is fragmented across our products, and, accordingly, we do not compete with any one company across all product lines. We compete with a variety of entities, some of which have greater financial resources. Other competitors are smaller and may be able to offer more specialized products. Our ability to remain competitive in this industry depends in part on our ability to successfully identify new product opportunities, develop and introduce new products and enhancements on a timely and cost effective basis, as well as our ability to successfully identify and enter into strategic alliances with entities doing business within the industries we serve. Competition in any of these areas may reduce our sales and adversely affect our earnings or cash flow by resulting in decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products. There can be no assurance that our product offerings will be, and/or will remain, competitive or that strategic alliances, if any, will achieve the type, extent, and amount of success or business that we expect them to achieve. The sales of our products and technology may not occur or grow in the manner we expect, and thus we may not recoup costs incurred in the research and development of these products as quickly as we expect, if at all.
The home security and automation industry is highly fragmented and subject to significant competition and pricing pressures. In particular, the monitored security industry providers have highly recognized brands which may drive increased awareness of their
security/automation offerings rather than ours, have access to greater capital and resources than us, and may spend significantly more on advertising, marketing and promotional resources which could have a material adverse effect on our ability to drive awareness and demand for our products and services. In addition, cable and telecommunications companies have expanded into the monitored security industry and are bundling their existing offerings with monitored security services. We also face competition from Do-It-Yourself ("DIY") companies that are increasingly providing products which enable customers to self-monitor and control their environments without third-party involvement. Further, DIY providers may also offer professional monitoring with the purchase of their systems and equipment or new IoT devices and services with automated features and capabilities that may be appealing to customers. Continued pricing pressure, improvements in technology and shifts in customer preferences towards self-monitoring or DIY could adversely impact our customer base and/or pricing structure and have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are Exposed to Greater Risks of Liability for Omissions or System Failures
If a customer or third party believes that he or she has suffered harm to person or property due to an actual or alleged security system failure, he or she (or their insurers) may pursue legal action against us, and the cost of defending the legal action and of any judgment against us could be substantial. In particular, because some of our products and services are intended to help protect lives and real and personal property, we may have greater exposure to litigation risks than businesses that provide other consumer and small business products and services. While our customer contracts contain a series of risk-mitigation provisions that are aimed at limiting our liability and/or limiting a claimant’s ability to pursue legal action against us, in the event of litigation with respect to such matters it is possible that these risk-mitigation provisions may be deemed not applicable or unenforceable and, regardless of the ultimate outcome, we may incur significant costs of defense that could materially and adversely affect our business, financial condition, results of operations and cash flows.
Our Brand Quality and Reputation
Our business depends on the quality and reputation of our brands, and any deterioration in the quality or reputation of these brands may have an adverse impact on our market share, reputation, business, financial condition or results of operations. Events that may be beyond our control may affect the reputation of one or more of our products or more generally impact the reputation of our brands. If the reputation or perceived quality of our brands declines, our market share, reputation, business, financial condition or results of operations may be affected.
Unanticipated Changes in Tax and Other Laws and Regulations
Our business is subject to regulation under a wide variety of laws, regulations and policies in jurisdictions around the world. In response to continued economic challenges, we anticipate that many of the jurisdictions in which we do business will continue to review tax and other revenue raising laws, regulations and policies, and any resulting changes may impose new restrictions, costs or prohibitions on our current practices and reduce our profits. In particular, governments may revise tax laws, regulations or official interpretations in ways that may have a significant impact on us, including modifications that may reduce the profits that we can effectively realize from our non-U.S. operations, or that may require costly changes to those operations, or the way in which they are structured. If changes in tax laws, regulations or interpretations significantly increase the tax rates on non-U.S. income, our effective tax rate may increase and our profits may be reduced. If such increases resulted from our status as a U.S. company, those changes may place us at a disadvantage to our non-U.S. competitors if those competitors remain subject to lower local tax rates. Further, the recent passage of the Tax Cuts and Jobs Act in the U.S. significantly changes U.S. income tax law and could increase the tax rate on our non-U.S. income, which may increase our overall effective tax rate.
In addition, from time to time, we are subject to tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges or other matters and assess additional taxes. We assess the likely outcomes of these audits in order to determine the appropriateness of the tax provision. However, there can be no assurance that we will accurately predict or calculate the outcomes of these audits, and the actual outcomes of these audits may have a material impact on our financial condition, results of operations and cash flows. In addition, our effective tax rate in the future may be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. Furthermore, our tax provisions may be adversely affected as a result of any new interpretative accounting guidance related to accounting for uncertain tax positions.
Environmental Matters
Many of our products are subject to various federal, state, local and international laws governing chemical substances in products, including laws regulating the manufacture and distribution of chemical substances and restricting the presence of certain substances in electronics products. In addition, many of these laws and regulations make producers of electrical goods responsible for collection, recycling, treatment and disposal of recovered products. As a result, we may face significant costs and liabilities in complying with these laws and any future laws and regulations or enforcement policies that may have a material adverse effect upon our operating results, financial condition, and cash flows.
Leased Property
We lease all of the properties used in our business. We can give no assurance that we will enter into new or renewal leases, or that, if entered into, the new lease terms will be similar to the existing terms or that the terms of any such new or renewal leases will not have a significant and material adverse effect on our operating results, financial condition and cash flows.
Failure to Recruit, Hire, and Retain Key Personnel
Our ability to achieve growth in the future will depend, in part, on our success at recruiting, hiring, training, developing and retaining highly skilled engineering, managerial, operational, sales and marketing personnel. If our salary and benefits fail to stay competitive it may negatively impact our ability to hire and retain key personnel and we may experience low morale, inefficiency or internal control failures. The inability to recruit, hire, train, develop and retain qualified personnel, or the loss of any key personnel, may make it difficult to meet key objectives, such as timely and effective product introductions, and also limit our ability to grow and expand our business.
Transportation Costs, Tariffs, and Impact of Oil Prices
We ship products from our factories and foreign manufacturers via ocean and air transport. It is sometimes difficult to forecast swings in demand or delays in production and, as a result, products may be shipped via air which is more costly than ocean shipments. We typically cannot recover the increased cost of air freight from our customers. Additionally, tariffs and other export fees may be incurred to ship products from foreign manufacturers to the customer. The inability to predict swings in demand or delays in production may increase the cost of freight which may have a material adverse effect on our product margins.
In addition, we have an exposure to oil prices in two forms. The first is in the prices of oil-based materials in our products, which are primarily the plastics and other components that we include in our finished products. The second is in the cost of delivery and freight, which would be passed on by the carriers that we use in the form of higher rates. We record freight-in as a cost of sales and freight-out in operating expenses. Rising oil prices may have an adverse effect on cost of sales and operating expenses.
Proprietary Technologies
We produce highly complex products that incorporate leading-edge technology, including hardware, firmware, and software. Firmware and software may contain bugs that may unexpectedly interfere with product operation. There can be no assurance that our testing programs will detect all defects in individual products or defects that may affect numerous shipments. The presence of defects may harm customer satisfaction, reduce sales opportunities, or increase warranty claims and/or returns. An inability to cure or repair such a defect may result in the failure of a product line, temporary or permanent withdrawal of a product or market, damage to our reputation, increased inventory costs, or product re-engineering expenses, any of which may have a material impact on our operating results, financial condition and cash flows.
Strategic Business Transactions
We may, from time to time, pursue strategic alliances, joint ventures, business acquisitions, products or technologies ("strategic business transactions") that complement or expand our existing operations, including those that may be material in size and scope. Strategic business transactions involve many risks, including the diversion of management's attention away from day-to-day operations. There is also the risk that we will not be able to successfully integrate the strategic business transaction with our operations, personnel, customer base, products or technologies. Such strategic business transactions may also have adverse short-term effects on our operating results, and may result in dilutive issuances of equity securities, the incurrence of debt, and the loss of key employees. In addition, these strategic business transactions are subject to specific accounting guidelines that may adversely affect our financial condition, results of operations and cash flow.
Growth Projections
Management has made projections required for the preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") regarding future events and the financial performance of the Company, including those involving:
the benefits the Company expects as a result of the development and success of products and technologies, including new products and technologies;
the benefits expected by conducting business in Asian and Latin American markets, without which, we may not be able to recover the costs we incur to enter into such markets;
new contracts with new and existing customers and new market penetrations;
the expected continued adoption of the Company's technologies in gaming consoles, mobile devices, and other home entertainment and control devices;
the expected continued growth in digital TVs, DVRs, PVRs and overall growth in the Company's industry;
the impact competitors and OTT providers may have on our business; and
the effects we may experience due to current global and regional economic conditions.
Actual events or results may be unfavorable to management's projections, which may have a material adverse effect on our projected operating results, financial condition and cash flows.
Additionally, we have goodwill and intangible assets recorded on our balance sheet. We periodically evaluate the recoverability of the carrying value of our goodwill and intangible assets whenever events or changes in circumstances indicate that such value may not be recoverable. Impairment assessment involves judgment as to assumptions regarding future sales and cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions and may result in changes in our estimates of future sales and cash flows that may result in us incurring substantial impairment charges, which would adversely affect our results of operations or financial condition.
Market Projections and Data are Forward-looking in Nature.
Our strategy is based on our own projections and on analyst, industry observer and expert projections, which are forward-looking in nature and are inherently subject to risks and uncertainties. The validity of their and our assumptions, the timing and scope of the markets within which we compete, economic conditions, customer buying patterns, the timeliness of equipment development, pricing of products, and availability of capital for infrastructure improvements may affect these predictions. In addition, market data upon which we rely is based on third party reports that may be inaccurate. The inaccuracy of any of these projections and/or market data may adversely affect our operating results and financial condition.
Cybersecurity Issues: Failure to Maintain the Integrity of and Protect Internal or Customer Data May Result in Faulty Business Decisions, Operational Inefficiencies, Damage to our Reputation and/or Subject Us to Costs, Fines, or Lawsuits
Our business requires collection and retention of large volumes of internal and customer data, including personally identifiable information of our customers in various information systems that we maintain and in those maintained by third parties with whom we contract to provide services, including in areas such as customer product servicing, human resources outsourcing, website hosting, and various forms of electronic communications. We and third parties who provide services to us also maintain personally identifiable information about our employees. The integrity and protection of that customer, employee, and company data, including proprietary information, is critical to us. If that data is inaccurate or incomplete, we may make faulty decisions. Our customers and employees also have a high expectation that we and our service providers will adequately protect their personal information. The information, security and privacy requirements imposed by governmental regulation is also increasingly demanding, in both the United States and other jurisdictions where we operate. For example, the European Union’s General Data Protection Regulation is considered to be one of the most stringent data privacy regulations and becomes enforceable on May 25, 2018. Our systems and those of our service providers may be unable to satisfy these changing requirements and employee and customer expectations, or may require significant additional investments or time in order to do so.
Further, proprietary information key to the development of our products is susceptible to the vulnerability of cybersecurity. Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error, or inadvertent releases of data may materially impact our and our service providers' information systems and records and could disrupt our business. Our reliance on computer, Internet-based and mobile systems and communications and the frequency and sophistication of efforts by hackers to gain unauthorized access to such systems have increased significantly in recent years. A significant theft, loss, or fraudulent use of customer, employee, or company data maintained by us or by a service provider could adversely impact our reputation, cause harm to our business generally, and could result in remedial and other expenses, fines, or litigation. Breaches in the security of our information systems or those of our service providers or
other disruptions in data services could lead to an interruption in the operation of our systems, resulting in a loss of data, operational inefficiencies and a loss of profits.
Effectiveness of Our Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include our assessment of the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. Furthermore, our independent registered public accounting firm is required to audit our internal control over financial reporting and separately report on whether it believes we maintain, in all material respects, effective internal control over financial reporting. Although we believe that we currently have adequate internal control procedures in place, we cannot be certain that future material changes to our internal control over financial reporting will be effective. Additionally, in 2016 we began implementing a new global ERP system which has impacted our internal controls in 2017, primarily in the U.S., where the ERP system went live in February 2017. We continue to implement the ERP system globally and expect it to impact our control environment in Asia when the system goes live there in 2018. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action may adversely affect our financial results and the market price of our common stock.
Our Governing Corporate Documents Contain, and Our Board of Directors May Implement, Antitakeover Provisions that May Deter Takeover Attempts
Our governing corporate documents, among other things, require super-majority votes in connection with certain mergers and similar transactions. In addition, our Board of Directors may, without stockholder approval, implement other anti-takeover defenses, such as a stockholder's rights plan.
Regulations Related to the Use of Conflict-Free Minerals May Increase Our CostsGeneral Risks
Economic Downturns and Expenses,Other Global, National, and an Inability to Certify that Our Products are Conflict-FreeRegional Conditions May Adversely Affect Customer RelationshipsOur Results of Operations, Cash Flow, Liquidity or Financial Condition
The Dodd-Frank Wall Street ReformBecause we conduct our business on a global platform, our business is sensitive to global and Consumer Protection Act contains provisionsregional business and economic conditions. Adverse changes in global, national, regional economies, governmental policies (including in areas such as trade, travel, immigration, healthcare, and related issues), and geopolitical conditions (such as the Russian invasion of Ukraine, tension across the Taiwan Strait and tension between the United States and the PRC, and the ramifications of those and other events) impact our activities. Such conditions in the United States and worldwide may impact our business due to improveweak economic conditions, changes in energy prices and currency values, political instability, heightened travel security measures, advisories, or disruptions, and concerns over disease, violence, war, or terrorism may reduce the transparency and accountabilitydemand for some of the use by public companies in their products of minerals mined in certain countries and to prevent the sourcing of such "conflict" minerals. As a result, the SEC enacted new annual disclosure and reporting requirements for public companies that use these minerals in their products, which apply to us. Under the final rules, we are required to conduct due diligence to determine the source of any conflict minerals used in our products and impair the ability of those with whom we do business to make annual disclosures in filings with the SEC. Because our supply chain is broad-based and complex, we may not be ablesatisfy their obligations to easily verify the origins for all minerals used in our products. In addition, the new rules may reduce the number of suppliers who provide components and products containing conflict-free minerals and thus may increase the cost of the components used in manufacturing our products and the costs of our products to us. Any increased costs and expenses may have a material adverse impact on our financial condition and results of operations. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which may place us, at a competitive disadvantage, and our reputation may be harmed.
We are Subject to a Wide Variety of Complex Domestic and Foreign Laws and Regulations.
We are subject to a wide variety of complex domestic and foreign laws and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, and laws governing improper business practices. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators. From time to time, our Company, our operations and the industries in which we operate are being reviewed or investigated by regulators, which may lead to enforcement actions or the assertion of private litigation claims and damages.
Although we believe that we have adopted appropriate risk management and compliance programs to mitigate these risks, the global and diverse nature of our operations means that compliance risks will continue to exist. Investigations, examinations and other proceedings, the nature and outcomeeach of which cannot be predicted, will likely arise from time to time. These investigations, examinations and other proceedings may subject us to significant liability and require us to make significant accruals or pay significant settlements, fines and penalties, which may have a material adverse effect on our results of operations, cash flow or financial condition.
We are Required to Comply with Numerous Complex and Increasingly Stringent Domestic and Foreign Health, Safety and Environmental Laws and Regulations, the Cost of Which is Likely to Increase.
Our operations are subject to various domestic and foreign health, safety and environmental laws and regulations. These laws and regulations not only govern our current operations and products, but also impose potential liability on us for our past operations. We expect health, safety and environmental laws and regulations to impose increasingly stringent requirements upon our industry and us in the future. Our costs to comply with these laws and regulations may increase as these requirements become more stringent in the future, and these increased costs maycould adversely affect our results of operations, cash flow, liquidity or financial condition. Higher inflation rates, interest rates, tax rates and unemployment rates, higher labor and healthcare costs, recessions, changing governmental policies, laws and regulations, and other economic factors could also adversely affect demand for some of our products and our results of operations, cash flow, liquidity or financial condition and that of our customers, vendors and suppliers.
Global economic uncertainty continues to exist. The continuation or worsening of the global economic downturn may adversely impact our net sales, the collection of accounts receivable, funding for working capital needs, expected cash flow generation from current and acquired businesses, and our investments, which may adversely impact our results of operations, cash flow, liquidity or financial condition. We finance a portion of our sales through trade credit. Credit markets remain tight, and some customers who require financing for their businesses have not been able to obtain necessary financing. A continuation or worsening of these conditions could limit our ability to collect our accounts receivable, which could adversely affect our results of operations, cash flow, liquidity or financial condition.
Our ability to meet customers' demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent as a result of an economic downturn, it may result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact our financial results. In addition, credit constraints at key suppliers may result in accelerated payment of accounts payable by us, impacting our cash flow.
Risks Relating to Natural or Man-Made Disasters, Contagious Disease, Climate Change, Violence, or War May Cause Increases in the Cost of Raw Materials, Production, and Energy which May Adversely Affect Our Earnings or Cash Flow
Our ability, including manufacturing or distribution capabilities, and that of our suppliers, business partners and contract manufacturers, to make, move and sell products is critical to our success. We purchase raw materials and energy for use in the manufacturing, distribution and sale of our products. So called "Acts of God," such as hurricanes, earthquakes, tsunamis, floods, volcanic activity, wildfires, and other natural disasters, as well as man-made disasters and the spread of contagious diseases in locations where we lease and/or own properties and equipment or manage our business, and these circumstances could continue or worsen in the future to an extent and for durations that we are not able to predict. Actual or threatened war, terrorist activity, political unrest, civil or geopolitical strife, and other acts of violence could have a similar effect. As with the effects we have already experienced from the COVID-19 pandemic, any one or more of these events, including the actions taken by Russia against Ukraine, could disrupt sales volumes, raw material and fuel supplies and increase our costs, reduce our ability to manufacture and supply our products, and/or increase our operating costs, all of which could adversely affect our earnings or cash flows and profits. There are also inherent climate-related risks wherever our business is conducted. Changes in Financial Accounting Standards or Policies May Affect Our Reported Financial Condition or Results of Operations.
From time to time the Financial Accounting Standards Board (the "FASB")market dynamics, stakeholder expectations, local, national and international climate change policies, and the SEC change their guidance governingfrequency and intensity of extreme weather events on critical infrastructure globally, all have the formpotential to disrupt our business and contentoperations. Such events could result in increases in our costs and expenses and harm our future revenue, cash flows and financial positions.
Although raw materials and energy supplies (including oil and natural gas) are generally available from various sources in sufficient quantities, unexpected shortages and increases in the cost of raw materials and energy, or any deterioration in our
relationships with or the financial viability of our external financial statements. In addition, accounting standard setters and those who interpret GAAP, such as the FASB and the SECsuppliers, may change or even reverse their previous interpretations or positions with regard to how these standards should be applied. A change in accounting principles or their interpretation can have a significantan adverse effect on our reported results. In certain cases,earnings or cash flow in the company may be requiredevent we are unable to apply new or revised guidance retroactively or apply existing guidance differently. For example, in May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which will impact the timing of revenue recognition for certain new and existing contracts with customers beginning January 1, 2018. Additionally, in February 2016, the FASB issued ASU 2016-02, “Leases,” which changes the accounting for leases. These and other potential changes in reporting standards may substantially change our reporting practicesoffset higher costs in a numbertimely manner by sufficiently decreasing our operating costs or raising the prices of areas, including revenue recognitionour products. In recent years, some raw material and recordingenergy prices have increased, particularly silicon and plastic packaging. The cost of assetsraw materials and liabilities,energy has in the past experienced, and affect our reported financial condition or resultslikely will in the future continue to experience, periods of operations.volatility.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our global headquarters is located in Santa Ana, California.Scottsdale, Arizona. We utilize the following facilities:
|
| | | | | | | | | | | | | | | | | | | |
Location | | Purpose or Use | | Square Feet
| | Status |
Santa Ana, CaliforniaScottsdale, Arizona | | Corporate headquarters, engineering, research and development | | 36,18425,106 |
| | Leased, expires October 31, 2022February 27, 2027 |
Euclid, Ohio | | Call center | | 12,728 |
| | Leased, expires June 30, 2025 |
Carlsbad, California | | Engineering, research and development | | 27,14130,758 |
| | Leased, expires December 31, 2027 |
Plymouth, Minnesota | | Engineering, research and development | | 5,275 | | | Leased, expires March 31, 2025 |
Poway, California | | Engineering, research and development | | 7,891 | | | Leased, expires December 31, 2024 |
Santa Ana, California | | Engineering, research and development | | 18,420 | | | Leased, expires November 30, 20192027 |
San Mateo, CaliforniaBangalore, India | | Engineering, research and development | | 5,82621,326 |
| | Leased, expires JanuaryAugust 31, 2023 |
Poway, CaliforniaSuzhou, PRC | | Engineering research and development | | 7,8915,705 |
| | Leased, expires November 30, 2018December 31, 2023 |
Hong Kong, PRC | | Asian headquarters | | 6,550 | | | Leased, expires July 31, 2025 |
Enschede, Netherlands | | European headquarters and call center | | 19,13719,407 |
| | Leased, expires February 28, 2024 |
Bangalore, IndiaGuangzhou, PRC | | Engineering, research and developmentService center | | 21,32626,850 |
| | Leased, expires February 28, 2018April 14, 2023 |
Hong Kong, PRCHai Duong, Vietnam | | Asian headquartersManufacturing facility | | 12,000124,776 |
| | Leased, expires June 30, 2019 |
Suzhou, PRC | | Engineering, research and development | | 4,908 |
| | Leased, expires December 31, 20181, 2034 |
Suzhou, PRCManaus, Brazil | | Engineering, research and developmentManufacturing facility | | 5,70556,120 |
| | Leased, expires DecemberAugust 19, 2025 |
Monterrey, Mexico | | Manufacturing facility | | 101,571 | | | Leased, expires September 30, 2023 |
Monterrey, Mexico | | Storage facility | | 145,185 | | | Leased, expires July 29, 2025 |
Qinzhou, PRC | | Manufacturing facility | | 20,452 | | | Leased, expires May 31, 20202023 |
Qinzhou, PRC | | Manufacturing facility | | 398,269 | | | Leased, expires October 31, 2025 |
Qinzhou, PRC | | Manufacturing facility | | 248,448 | | | Leased, expires October 31, 2025 |
Yangzhou, PRC (1) | | Manufacturing facility | | 1,204,697 |
| | Land leased, expires July 31, 2055 |
Yangzhou, PRC | | Manufacturing facility | | 77,888 |
| | Leased, expires October 31, 2025 |
Yangzhou, PRC | | Manufacturing facility | | 90,201 |
| | Leased, expires September 30, 2022 |
Guangzhou, PRC (1) (2)
| | Manufacturing facility | | 710,203 |
| | Land leased, expires June 30, 2044 |
Guangzhou, PRC | | Service Center | | 26,850 |
| | Leased, expires April 14, 2020 |
Qinzhou, PRC | | Manufacturing facility | | 321,313 |
| | Leased, expires May 31, 2018 |
Qinzhou, PRC | | Manufacturing facility | | 345,662 |
| | Leased, expires February 28, 2022 |
Manaus, Brazil | | Manufacturing facility | | 56,120 |
| | Leased, expires August 19, 2022 |
Monterrey, Mexico | | Manufacturing facility | | 50,000 |
| | Leased, expires March 31, 2019 |
| |
(1)(1)Private ownership of land in mainland PRC is not allowed. All land in the PRC is owned by the government and cannot be sold to any individual or entity. These facilities were developed on land which we lease from the PRC government.
| Private ownership of land in mainland PRC is not allowed. All land in the PRC is owned by the government and cannot be sold to any individual or entity. These facilities were developed on land which we lease from the PRC government. |
| |
(2)
| As discussed in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 13", this facility is subject to a pending sale that is expected to close in 2018. |
In addition to the facilities listed above, we lease space in various international locations, primarily for use as sales offices.
Upon expiration of our facilities leases, we believe we will obtain lease agreements under similar terms; however, there can be no assurance that we will receive similar terms or that any offer to renew will be accepted.
We currently believe that our manufacturing, engineering, and research and development facilities are suitable and adequate for our continued needs. We will continue to assess the suitability and adequacy of these facilities to meet both our current needs, as well as our expected future requirements.
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 12"8" for additional information regarding our obligations under leases.
ITEM 3. LEGAL PROCEEDINGS
We are subject to lawsuits arising out of the conduct of our business. The discussion of our litigation matters in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 13"13 — Commitments and Contingencies — Litigation" is incorporated by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Select Market under the symbol UEIC. The closing price of our common stock as reported by NASDAQ on March 8, 2018 was $53.50. Our stockholders of record on March 8, 20183, 2023 numbered 120.166. We have never paid cash dividends on our common stock, nor do we currently intend to pay any cash dividends on our common stock in the foreseeable future.stock. We intend to retain our earnings, if any, to reinvest in the business for the future operationoperations and expansion of our business.and, as such, we do not anticipate paying any cash dividends in the foreseeable future.
The following table sets forth, for the periods indicated, the high and low sale prices for our common stock, as reported by NASDAQ:
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| High | | Low | | High | | Low |
First Quarter | $ | 74.85 |
| | $ | 57.50 |
| | $ | 65.81 |
| | $ | 45.20 |
|
Second Quarter | 72.00 |
| | 57.10 |
| | 72.31 |
| | 58.97 |
|
Third Quarter | 72.50 |
| | 55.75 |
| | 80.42 |
| | 70.02 |
|
Fourth Quarter | 67.44 |
| | 46.05 |
| | 75.20 |
| | 52.90 |
|
Purchases of Equity Securities
The following table sets forth, for the fourth quarter, our total stock repurchases, average price paid per share and the maximum number of shares that may yet be purchased on the open market under our plans or programs:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Weighted Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
October 1, 2022 - October 31, 2022 | | — | | | $ | — | | | — | | | — | |
November 1, 2022 - November 30, 2022 | | 3,057 | | | 21.90 | | | — | | | — | |
December 1, 2022- December 31, 2022 | | 73,015 | | | 22.90 | | | — | | | — | |
Total | | 76,072 | | | $ | 22.86 | | | — | | | |
|
| | | | | | | | | | | | | |
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) |
October 1, 2017 - October 31, 2017 | | 32,190 |
| | $ | 64.76 |
| | 30,837 |
| | 383,434 |
|
November 1, 2017 - November 30, 2017 | | 301,076 |
| | 53.03 |
| | 300,000 |
| | — |
|
December 1, 2017 - December 31, 2017 | | 17,057 |
| | 47.83 |
| | — |
| | — |
|
Total | | 350,323 |
| | $ | 53.86 |
| | 330,837 |
| | — |
|
| |
(1)
| Of the repurchases in October, November and December, 1,353, 1,076 and 17,057(1)Of the repurchases in November and December, 3,057 and 73,015 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)
| On November 7, 2017, the Company announced that it may purchase up to 300,000 shares from time to time in open market purchases or privately negotiated transactions. The 83,434 remaining shares available for repurchase under the third quarter Rule 10b5-1 plan expired on November 2, 2017. |
During the year ended December 31, 2017, we repurchased 680,287 shares of our issuedthe Company that were owned and outstanding commontendered by employees to satisfy option cost and tax withholding obligations in connection with stock for $39.1 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 cashoption exercises and the price to be paid is at or below a threshold approved by our Board from time to time based upon an assessmentvesting of then current value as compared to then trading ranges and investor analyst reports. Also considered in this decision is the effect any such repurchase may have on our cash balances and needs, cash flow, and short- and long-term borrowing. On December 31, 2017, we had no shares available for repurchase under the Board's authorizations. Throughout 2018, our Board will continue to assess the efficacy of a corporate stock repurchase program utilizing the same criteria as it had in the past; namely, comparing the then current value as compared to then trading ranges and investor analyst reports, as well as the effect any such repurchase may have on our cash balances and needs, cash flow, and short- and long-term borrowing. Any such approved repurchase program will not obligate us to acquire any specific number of shares and under any such program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).restricted shares.
Equity Compensation Plans
Information regarding our equity compensation plans, including both stockholder approved plans and plans not approved by stockholders, is incorporated by reference to "ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS" under the caption "Equity Compensation Plan Information" and "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 16".
Performance Chart
The following graph and table compares the cumulative total stockholder return with respect to our common stock versus the cumulative total return of the Standard & Poor's Small Cap 600 (the "S&P Small Cap 600"), the NASDAQ Composite Index, and the Peer Group IndexIndices for the five-year period ended December 31, 2017.2022. We amended our peer group during 2022 to more accurately reflect the current overall business of the Company. The comparison assumes that $100 was invested on December 31, 20122017 in each of our common stock, S&P Small Cap 600, the NASDAQ Composite Index, and the Peer Group IndexIndices and that all dividends were reinvested. We have not paid any dividends and, therefore, our cumulative total return calculation is based solely upon stock price appreciation and not upon reinvestment of dividends. The graph and table depicts year-end values based on actual market value increases and decreases relative to the initial investment of $100, based on information provided for each calendar year by the NASDAQ Stock Market, and the New York Stock Exchange, the Hong Kong Stock Exchange and the Korea Exchange.
The comparisons in the graph and table below are based on historical data and are not intended to forecast the possible future performance of our common stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 |
Universal Electronics Inc. | $ | 100 | | | $ | 54 | | | $ | 111 | | | $ | 111 | | | $ | 86 | | | $ | 44 | |
S&P Small Cap 600 | $ | 100 | | | $ | 90 | | | $ | 109 | | | $ | 120 | | | $ | 150 | | | $ | 124 | |
NASDAQ Composite Index | $ | 100 | | | $ | 96 | | | $ | 130 | | | $ | 187 | | | $ | 227 | | | $ | 152 | |
Peer Group - Legacy Index (1) | $ | 100 | | | $ | 96 | | | $ | 117 | | | $ | 195 | | | $ | 181 | | | $ | 134 | |
Peer Group - Updated Index (2)(3) | $ | 100 | | | $ | 82 | | | $ | 120 | | | $ | 173 | | | $ | 171 | | | $ | 112 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 |
Universal Electronics Inc. | $ | 100 |
| | $ | 197 |
| | $ | 336 |
| | $ | 265 |
| | $ | 334 |
| | $ | 244 |
|
S&P Small Cap 600 | $ | 100 |
| | $ | 140 |
| | $ | 146 |
| | $ | 141 |
| | $ | 176 |
| | $ | 196 |
|
NASDAQ Composite Index | $ | 100 |
| | $ | 138 |
| | $ | 157 |
| | $ | 166 |
| | $ | 178 |
| | $ | 229 |
|
Peer Group Index (1) | $ | 100 |
| | $ | 135 |
| | $ | 149 |
| | $ | 121 |
| | $ | 166 |
| | $ | 207 |
|
(1) Companies in the legacy Peer Group Index are as follows: TiVoDolby Laboratories, Inc.; Logitech International S.A.; VOXX International Corp.; and Xperi Corporation (formerly RoviTiVo Corporation).
(2) Companies in the updated Peer Group Index are as follows: Arlo Technologies, Inc.; Charter Communications, Inc.; Comcast Corporation; CommScope Holding Company, Inc.; Computime Group Limited; Dish Network Corporation; Home Control International Limited; LG Display Co., Ltd.; Liberty Global PLC; Logitech International Dolby Laboratories,S.A.; Samsung Electronics Co. Ltd.; Sony Group Corporation; and Turtle Beach Corporation.
(3) Cumulative stockholder return data for Arlo Technologies, Inc., and VOXX International Corp. Harman International Industries, Inc.Home Control Limited was previouslynot included in the updated Peer Group Index but has been removed due to its acquisition in Marchcalculations, as these companies were not public until after the December 31, 2017 by Samsung Electronics.base period.
The information presented above is as of December 31, 20122017 through December 31, 2017.2022. This information should not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to the liabilities of Section 18 of the Exchange Act nor should this information be incorporated by reference into any prior or future filings under the Securities Act of 1933 or the Exchange Act, except to the extent that we specifically incorporate it by reference into a filing.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA[RESERVED]
The information below is not necessarily indicative of the results of future operations and should be read in conjunction with "ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", and the Consolidated Financial Statements and notes thereto included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA", of this Form 10-K, which are incorporated herein by reference, in order to further understand the factors that may affect the comparability of the financial data presented below.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands, except per share data) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Net sales | $ | 695,790 |
| | $ | 651,371 |
| | $ | 602,833 |
| | $ | 562,329 |
| | $ | 529,354 |
|
Operating income | $ | 10,670 |
| | $ | 25,397 |
| | $ | 35,919 |
| | $ | 41,280 |
| | $ | 32,154 |
|
Net income (loss) attributable to Universal Electronics Inc. | $ | (10,323 | ) | | $ | 20,354 |
| | $ | 29,174 |
| | $ | 32,534 |
| | $ | 22,963 |
|
Earnings (loss) per share attributable to Universal Electronics Inc.: | | | | | | | | | |
Basic | $ | (0.72 | ) | | $ | 1.41 |
| | $ | 1.91 |
| | $ | 2.06 |
| | $ | 1.51 |
|
Diluted | $ | (0.72 | ) | | $ | 1.38 |
| | $ | 1.88 |
| | $ | 2.01 |
| | $ | 1.47 |
|
Shares used in computing earnings (loss) per share: | | | | | | | | | |
Basic | 14,351 |
| | 14,465 |
| | 15,248 |
| | 15,781 |
| | 15,248 |
|
Diluted | 14,351 |
| | 14,764 |
| | 15,542 |
| | 16,152 |
| | 15,601 |
|
Cash dividends declared per common share | — |
| | — |
| | — |
| | — |
| | — |
|
Gross margin | 23.8 | % | | 25.2 | % | | 27.7 | % | | 29.7 | % | | 28.6 | % |
Operating expenses as a % of net sales | 22.3 | % | | 21.3 | % | | 21.8 | % | | 22.4 | % | | 22.5 | % |
Operating margin | 1.5 | % | | 3.9 | % | | 5.9 | % | | 7.3 | % | | 6.1 | % |
Net income (loss) as a % of net sales | (1.5 | )% | | 3.1 | % | | 4.8 | % | | 5.8 | % | | 4.3 | % |
Return on average assets | (1.8 | )% | | 4.0 | % | | 6.1 | % | | 7.3 | % | | 5.7 | % |
| | | | | | | | | |
| December 31, |
(In thousands, except per share data) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Working capital | $ | 74,362 |
| | $ | 108,291 |
| | $ | 100,200 |
| | $ | 183,600 |
| | $ | 158,548 |
|
Ratio of current assets to current liabilities | 1.2 |
| | 1.5 |
| | 1.5 |
| | 2.3 |
| | 2.3 |
|
Total assets | $ | 608,430 |
| | $ | 521,036 |
| | $ | 495,220 |
| | $ | 463,070 |
| | $ | 423,733 |
|
Cash and cash equivalents | $ | 62,438 |
| | $ | 50,611 |
| | $ | 52,966 |
| | $ | 112,521 |
| | $ | 76,174 |
|
Line of credit | $ | 138,000 |
| | $ | 49,987 |
| | $ | 50,000 |
| | $ | — |
| | $ | — |
|
Stockholders’ equity | $ | 253,549 |
| | $ | 280,510 |
| | $ | 257,908 |
| | $ | 315,621 |
| | $ | 291,270 |
|
Book value per share (1) | $ | 18.04 |
| | $ | 19.28 |
| | $ | 17.97 |
| | $ | 19.85 |
| | $ | 18.55 |
|
Ratio of liabilities to liabilities and stockholders’ equity | 58.3 | % | | 46.2 | % | | 47.9 | % | | 31.8 | % | | 31.3 | % |
| |
(1)
| Book value per share is defined as stockholders’ equity divided by common shares issued less treasury stock. |
The comparability of information for 2017, 2016 and 2015 compared to previous years is affected by the acquisitions of the net assets of Ecolink during the third quarter of 2015 and RCS during the second quarter of 2017. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 22" for further information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We generally discuss 2022 and 2021 items and year-to-year comparisons between 2022 and 2021 in the section that follows. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 4, 2022.
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
Overview
We design, develop, manufacture, ship and manufacturesupport control and sensor technology solutions and a broad line of pre-programmeduniversal control systems, audio-video ("AV") accessories, wireless security and smart home products that are used by the world's leading brands in the video services, consumer electronics, security, home automation, climate control, and home appliance markets. Our product and technology offerings include:
•easy-to-use, voice-enabled, automatically-programmed universal remote control products, AV accessories, softwarecontrols with two-way radio frequency ("RF") as well as infrared ("IR") remote controls, sold primarily to video service providers (cable, satellite, Internet Protocol television ("IPTV") and intelligent wireless security, sensingOver the Top ("OTT") services), original equipment manufacturers ("OEMs"), retailers, and 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 customers;
•integrated circuits ("ICs"), on which our software and universal device control database is embedded, sold primarily to OEMs, video service providers, and private label customers;
•software, firmware and technology solutions that can enable devices such as TVs, set-top boxes, audio systems, smart speakers, game consoles and other consumer electronic and smart home devices to wirelessly connect and interact with home networks and interactive services to control and deliver home entertainment, smart home services and device or system information;
•cloud-services that support our embedded software and hardware solutions (directly or indirectly) enabling real-time device identification and system control;
•intellectual property that we license primarily to OEMs and video service providers;
•proprietary and standards-based RF sensors designed for residential security, safety and home automation applications;
•embedded and cloud-enabled software for reliable firmware update and digital rights management validation services to major consumer electronics brands;
•wall-mount and handheld thermostat controllers and connected accessories for smart energy management systems, primarily to OEM customers, as well as hotels and hospitality system integrators; and
•AV accessories sold, directly and indirectly, to consumers including universal remote controls, television wall mounts and stands and digital television antennas.
A key factor in creating products and software for control of entertainment devices is our proprietary device knowledge. Each year our device control databaselibrary continues to OEMs that manufacture televisions, digital audiogrow across AV 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 database that covers over one million individual device functions and approximately 8,100 unique consumer electronic brands. QuickSet®smart home platforms, supporting many common smart home protocols, including IR, HDMI-CEC, Zigbee (Rf4CE), 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,Z-Wave, IP, as well as mostHome Network and Cloud Control.
Our technology also includes other remote controlled home entertainment devices and home automation control modules, worldwide.as well as wired Consumer Electronics Control ("CEC") and wireless IP control protocols commonly found on many of the latest HDMI and internet connected devices. Our proprietary software automatically detects, identifies and enables the appropriate control commands for many home entertainment and automation devices in the home. Our libraries are continuously updated with device control codes used in newly introduced AV and Internet of Things ("IoT") devices. These control codes are captured directly from original control devices or from the manufacturer's written specifications to ensure the accuracy and integrity of the library.
With the wider adoption of more advanced control technologies, emerging 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 operate as one business segment. We have 24one domestic subsidiary and 25 international subsidiaries located in Argentina, Brazil, British Virgin Islands, Cayman Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Korea, Mexico (2), the Netherlands, People's Republic of China (6)(the "PRC") (7), Singapore, Spain, United Kingdom and the United Kingdom.Vietnam.
To recap our results for 2017:2022:
•Net sales increased6.8%decreased 9.8% to $695.8$542.8 million in 20172022 from $651.4$601.6 million in 2016.
2021.•Our gross marginprofit percentage decreased to 28.1% in 2022 from 25.2%28.8% in 2016 to 23.8% in 2017.
2021.•Operating expenses, as a percent of sales, increased to 25.4% in 2022 from 21.3%24.9% in 2016 to 22.3% in 2017
2021.•Operating income decreased 58.0% to $10.7$14.5 million in 20172022 from $25.4$23.3 million in 2016,2021, and our operating margin percentage decreased to 1.5%2.7% in 2017,2022, compared to 3.9% in 2016.2021.
•Our effective tax rate increased to 241.6%96.4% in 20172022 from 19.1%67.0% in 2016.2021.
Our strategic business objectives for 20182023 include the following:
continue
•increase new product development efforts in high-growth HVAC OEM channel to developgrow our market penetration with existing customers and acquire new customers with the goal of achieving market the advanced remoteshare leadership in climate control products and technologies our customer base is adopting;channel within 2 years;
continue to •broaden our home control and home automation product offerings;solutions with the aim of acquiring new customers that represent market share leaders in their respective channels and regions;
further penetrate international•expand our software and service platform, QuickSet, to deliver a complete smart entertainment and smart home managed service platform;
•invest in creating sustainable technology solutions that offer product differentiation across our global product portfolio;
•explore and expand product offerings in our core subscription broadcasting markets;channel beyond traditional entertainment remote controls;
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.business; and
•expedite our long-term factory planning strategy to optimize our manufacturing footprint and reduce our manufacturing concentration in the PRC.
We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.
COVID-19 Pandemic and Supply Chain Impact
The COVID-19 pandemic, including related measures to curtail its spread, continues to be a complex and evolving situation and has and will continue to impact our business, operations, and financial results. We anticipate that the global health crisis caused by the COVID-19 pandemic will continue to negatively impact business activity across the globe, including our business. We expect our sales demand to be negatively impacted into, at least, the first half of 2023 given the global reach and economic impact of the COVID-19 pandemic and the various governmentally imposed lockdowns, quarantine and social distancing measures put in place to contain the spread of the COVID-19 pandemic. A future suspension of our manufacturing operations would impact our ability to meet customer demand and could have a significant adverse effect on our financial conditions and results of operations. COVID-19 also continues to impact the global supply chain causing disruptions to service providers, logistics and the flow and availability of supplies and products. Our manufacturing sites, as well as our suppliers and outsourcing partners, and our supply chain have been adversely and may continue to be adversely impacted as a result of restrictions and logistics and operational challenges related to COVID-19. These disruptions have resulted and may continue to result in supply shortages and delays impacting sales worldwide. We may experience further disruptions to our manufacturing operations, supply chain and/or distribution channels in the future, and these disruptions may be prolonged.
We have also been negatively impacted by supply chain difficulties including obtaining ICs and other long-lead time components and we expect this to continue into 2023. While we are taking production and inventory control steps to mitigate the effects caused by these shortages including advanced purchasing of long-lead time components, we cannot guarantee that these steps will allow us to meet our short-term IC and other component parts needs. As such, these supply constraints continue to cause difficulty and delays in our ability to fulfill customer orders and have at times resulted in increased logistics costs. In addition, many of our products are paired with certain of our customers' products, like set-top boxes or televisions. If those customers are not able to obtain sufficient quantities of ICs for their products, their demand for our products may decrease.
Macroeconomic Conditions
We have been negatively impacted and we expect to continue to be negatively impacted by adverse macroeconomic conditions, in particular reduced consumer spending. Inflation has increased our component and logistics costs. While we have been able to increase sales prices on certain products, there may be a delay in our ability to increase prices and we may not be able to fully offset the impact of increased material costs which would negatively impact our gross profit. Our cost of labor, materials and borrowing may continue to increase which would negatively impact our business and financial results. In addition, we expect recessionary fears in the global economy will ultimately negatively impact our sales demand.
Qinzhou, China Facility
In October 2021, Reuters published an article indicating that individuals from China's Uyghur minority, originally resident in the PRC region of Xinjiang, were working in a facility in Qinzhou, Guangxi operated by our Chinese subsidiary, Gemstar Technology (Qinzhou) Co. Ltd. ("Gemstar"). The article alleged that the presence of these workers in Guangxi was indicative of "a transfer program described by some rights groups as forced labor."
We have reviewed and confirmed that Gemstar compensated these individuals for their work at the same rates as workers of other ethnicities who had comparable skills and roles, and at a level that was above the local minimum wage. Although our review did not identify any instances in which individuals were obliged or in any other way forced to work at the Qinzhou facility or were paid less than their promised wage, Gemstar, which engaged these workers through a third-party labor agency, terminated its relationship with that agency, ended its arrangement with these workers, and paid all outstanding wages and severance directly and individually to each of the workers in question. Nonetheless, the perception that we or an entity affiliated with us might have had associations with a program described by some as involving forced labor could result in reputational damage as well as lost revenue. To date, as a result of this perception, one customer has put further business with us on hold. Should additional customers cease doing business with us, the loss of revenue could become material, which would have an adverse effect on our business, results of operations and financial condition. We take all allegations regarding working conditions seriously, and took a cooperative approach to responding to the Committee's letter, cooperated fully with the Committee's inquiry and provided the Committee with timely and complete responses to all of its questions.
Manufacturing Footprint
We expect to commence manufacturing operations in a new factory in Vietnam in the first half of 2023, which may result in manufacturing inefficiencies. We are currently evaluating our manufacturing footprint with the expectation that once the Vietnam factory is operating efficiently, we will reduce our manufacturing capacity, most likely, by shutting down an existing facility. If this were to occur, we would record an impairment charge and severance expense in amounts that are not presently calculable, however could be material. We are analyzing various scenarios, each contingent on the success of the new Vietnam factory, and have yet to conclude on a specific plan.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAPaccounting principles generally accepted in the United States ("U.S. GAAP") requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-goingongoing 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,and income taxes, stock-based compensation expense and performance-based common stock warrants.taxes. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations.statements.
An accounting policyestimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. Management believes the following critical accounting policiesestimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. In addition to the accounting policies mentioned below, see "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 2" for other significant accounting policies.
Revenue recognition
We recognize revenue on
Revenue is recognized when control of a good or service is transferred to a customer. Control is considered to be transferred when the salecustomer has the ability to direct the use of products when titleand obtain substantially all of the goods has transferred,remaining benefits of that good or service. Revenues are generated from manufacturing and delivering universal control, sensing and automation products and AV accessories, which are sold through multiple channels, and licensing intellectual property that is embedded in these products or licensed to others for use in their products. We also generate revenues from a cloud-based software solution enabling software updates, digital rights management provisioning and remote technical support to consumer electronics customers.
Timing of Revenue Recognition – When determining the classification of over time verses point in time revenue recognition, there is persuasive evidencesignificant judgment exercised by management in identifying and evaluating whether new contracts and/or products meet the criteria for over time or point in time revenue recognition. Significant judgments include the evaluation of legal terms and rights within each jurisdiction that we operate, specifically as it relates to our entitlement to gross margin at termination, and the evaluation of whether it is possible, contractually or economically, to repurpose or redirect products.
Royalty Revenue – We license our symbolic intellectual property which includes our patented technologies and database of control codes. Royalty revenue is recognized for these licensing arrangements on an arrangement (such asover time basis. We record license revenue for per-unit based licenses when our customers manufacture or ship a purchase orderproduct incorporating our intellectual property and we have a present right to payment. The number of shipped units is estimated based on historical royalty revenue and other known factors. If actual shipped units differ from our estimates we will record a reduction or increase to net sales in the customer),period the sales price is fixed or determinableactuals are reported by the licensee, typically in the following quarter.
Sales Returns and collectability is reasonably assured.
Allowances – A provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net revenuessales in the period in which we make such a determination.
Sales Discounts and Rebates –A provision is recorded for estimated sales discounts and rebates and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. We accrue for discounts and rebates based on historical experience and our expectations regarding future sales to our customers. These accruals are recorded as a reduction to sales in the same period as the related revenues. Changes in such accruals may be required if futureactual discounts and rebates and incentives differ from our estimates.
Revenue for the sale of tooling is recognized when the related tooling has been provided, customer acceptance documentation has been obtained, the sales price is fixed or determinable and collectability is reasonably assured.
We generate service revenue, which is paid monthly, as a result of providing consumer support programs to some of our customers through our call centers. These service revenues are recognized when services are performed, persuasive evidence of an arrangement exists (such as when a signed agreement is received from the customer), the sales price is fixed or determinable, and collectability is reasonably assured.
We license our intellectual property including our patented technologies, trademarks, and database of control codes. When our license fees are paid on a per unit basis we record license revenue when our customers ship a product incorporating our intellectual property, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectability is reasonably assured. When a fixed upfront license fee is received in exchange for the delivery of a particular database of infrared codes that represents the culmination of the earnings process, we record revenues when delivery has occurred, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectability is reasonably assured. Revenue for term license fees is recognized on a straight-line basis over the effective term of the license when we cannot reliably predict in which periods, within the term of the license, the licensee will benefit from the use of our patented inventions.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for products sold or services rendered. The allowance for doubtful accounts is estimated based on a variety of factors, including credit reviews, historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior. We also record specific provisions for individual accounts when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. Our historical reserves have been sufficient to cover losses from uncollectible accounts. However, because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates and may have a material effect on our consolidated financial position, results of operations and cash flows.
Inventories
Our finished good, component part, and raw material inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. We write-downwrite down our inventory for the estimated difference between cost and estimated net realizable value based upon our best estimates of future demand and market conditions. We carry inventory in amounts necessary to satisfy our customers' inventory requirements on a timely basis. We continually monitor our inventory status to control inventory levels and write-downwrite down any excess or obsolete inventories on hand. If actual market conditions arebecome less favorable than those projected by management, additional inventory write-downs may be required, which may have a material impact on our financial statements. Such circumstances may include, but are not limited to, the development of new competing technology that impedes the marketability of our products or the occurrence of significant price decreases in our raw material or component parts, such as integrated circuits. Each percentage point change in the ratio of excess and obsolete inventory reserve to inventory would impact cost of sales by approximately $1.7$1.5 million.
Valuation of Long-Lived Assets and Intangible Assets
We assess long-lived and intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors considered important which may trigger an impairment review, if significant, include the following:
•underperformance relative to historical or projected future operating results;
•changes in the manner of use of the assets;
•changes in the strategy of our overall business;
•negative industry or economic trends;
•a decline in our stock price for a sustained period; and
•a variance between our market capitalization relative to net book value.
If the carrying value of the asset is larger than its projected undiscounted future cash flows, the asset is impaired. The impairment is measured as the difference between the net book value of the asset and the asset's estimated fair value. Fair value is estimated utilizing the asset's projected discounted future cash flows. In assessing fair value, we must make assumptions regarding estimated future cash flows, the discount rate and other factors. If the actual performance of the assets becomes less favorable than those projected by management, adjustments to the carrying values of these assets may have a material effect on the consolidated financial statements.
Goodwill
We evaluate the carrying value of goodwill on December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances may include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competitiona decline in macroeconomic conditions, (3) a significant decline in our financial performance or (3) an adverse action or(4) a significant decline in the price of our common stock for a sustained period of time.
We perform our annual impairment test using a qualitative assessment by a regulator.
To evaluate whether goodwillweighing the relative impact of factors that are specific to our single reporting unit as well as industry and macroeconomic factors. Based on the qualitative assessment performed, considering the aggregation of the relevant factors, we concluded that it is impaired, we conduct a two-step quantitative goodwill impairment test. Innot more likely than not that the first step we compare the estimated fair value of our single reporting unit to the reporting unit's carrying amount, including goodwill. We estimate the fair value of our reporting unit based on income and market approaches. Under the income approach, we calculate the fair value based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of enterprise value to EBITDA for comparable companies. Ifis less than the carrying valuevalue. Therefore, performing a quantitative impairment test was unnecessary.
Certain future events and circumstances, including adverse changes in general business and economic conditions in the United States and worldwide and changes in consumer behavior could result in changes to our assumptions and judgments used in the goodwill impairment tests. A downward revision of the net assets assigned to the reporting unit exceedsthese assumptions could cause the fair value of the reporting unit then we perform the second step of theto fall below its respective carrying values and a noncash impairment test in order to determine the implied fair value of the reporting unit's goodwill. To calculate the implied fair value of the reporting unit's goodwill, the fair value of the reporting unit is first allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the reporting unit's fair value over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment losscharge would be recognized equal to the amount by which the carrying value of goodwill exceeds its implied fair value.
Determining the fair value ofrequired. Such a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and the determination of appropriate market comparables. In addition, we make certain judgments and assumptions in determining our reporting units. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future resultscharge may differ from those estimates.
Business Combinations
We allocate the purchase price of acquired businesses to the tangible and intangible assets and the liabilities assumed based on their estimated fair valueshave a material effect on the acquisition date. The excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assetsconsolidated financial statements.
acquired and liabilities assumed. Such valuations require management to make significant fair value estimates and assumptions, especially with respect to intangible assets and contingent consideration. Management estimates the fair value of certain intangible assets and contingent consideration by utilizing the following (but not limited to):
future cash flow from customer contracts, customer lists, distribution agreements, acquired developed technologies, trademarks, trade names and patents;
expected costs to complete development of in-process technology into commercially viable products and cash flows from the products once they are completed;
brand awareness and market position as well as assumptions regarding the period of time the brand will continue to be used in our product portfolio; and
discount rates utilized in discounted cash flow models.
In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability at each reporting period and record changes in the fair value within operating expenses. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of earnings estimates or in the timing or likelihood of achieving earnings-based milestones.
Our estimates are based upon assumptions believed to be reasonable; however, unanticipated events or circumstances may occur which may affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Results of operations and cash flows of acquired businesses are included in our operating results from the date of acquisition.
Income Taxes
We calculate our current and deferred tax provisions based on estimates and assumptions that may differ from the actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed returns when we have identified and finalized them, which is generally in the third and fourth quarters of the subsequent year.
We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that we are more likely than not to realize. We have considered future market growth, forecasted earnings and tax rates, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period in which we make such determination. Likewise, if we later determine that we are more likely than not to realize the net deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. In order for us to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.
Our effective Any changes to the realizability of our deferred tax rate includes theassets or liabilities may have a material impact of certain undistributed foreign earnings for which we have not provided state income taxes or foreign withholding taxes because we plan to reinvest such earnings indefinitely outside the United States. The decision to reinvest our foreign earnings indefinitely outside the United States is based on our projected cash flow needs as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business may impact our effective tax rate.financial statements.
We are subject to income taxes in the United States and foreign countries, and we are subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities are likely
to challenge certain positions, which may not be fully sustained. However, ourOur income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges in accordance with the accounting for uncertainty in income taxes prescribed by U.S. GAAP. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates.
We maintain reserves for uncertain tax positions, including related interest and penalties. We review our reserves quarterly, and we may adjust such reserves due to proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, execution of advanced pricing agreements, resolution with respect to individual audit issues, the resolution of entire audits, or the expiration of statutes of limitations. The amounts ultimately paid upon resolution of audits may be materially different from the amounts previously included in our income tax expense and, therefore, may have a material impact on our operating results, financial position and cash flows.statements.
Stock-Based Compensation
We recognize the grant date fair value of stock-based compensation awards as expense, net of forfeitures, in proportion to vesting during the requisite service period, which ranges from one to four years. Forfeitures are deducted as they occur.
We determine the fair value of restricted stock awards utilizing the average of the high and low trade prices of our Company's shares on the date they were granted.
The fair value of stock options granted to employees and directors 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 term is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the stock option. Expected life is computed utilizing historical exercise patterns and post-vesting behavior. The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.
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. If we do not have a reliable forecast of future purchases to be made by the customer by which to estimate the number of warrants that will vest, then the maximum number of potential warrants is assumed until such time that a reliable forecast of future purchases is available. To the extent that our projections change in the future as to the number of warrants that will vest, a cumulative catch-up adjustment will be recorded in the period in which our estimates change.
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 price of our common stock, the risk-free interest rate, expected volatility, and expected life in years. The price of our common stock is equal to the average of the high and low trade prices of our common stock on the measurement date. 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.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Net sales | 100.0 | % | | 100.0 | % |
Cost of sales | 71.9 | | | 71.2 | |
Gross profit | 28.1 | | | 28.8 | |
Research and development expenses | 6.0 | | | 5.1 | |
Selling, general and administrative expenses | 19.4 | | | 19.8 | |
Operating income | 2.7 | | | 3.9 | |
Interest income (expense), net | (0.4) | | | (0.1) | |
Loss on sale of Argentina subsidiary | 0.0 | | | (1.0) | |
| | | |
Other income (expense), net | (0.2) | | | (0.1) | |
Income before provision for income taxes | 2.1 | | | 2.7 | |
Provision for income taxes | 2.0 | | | 1.8 | |
Net income | 0.1 | % | | 0.9 | % |
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | 2015 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 76.2 |
| | 74.8 |
| | 72.3 |
|
Gross profit | 23.8 |
| | 25.2 |
| | 27.7 |
|
Research and development expenses | 3.1 |
| | 3.0 |
| | 3.1 |
|
Factory transition restructuring charges | 0.9 |
| | 0.7 |
| | — |
|
Selling, general and administrative expenses | 18.3 |
| | 17.6 |
| | 18.7 |
|
Operating income | 1.5 |
| | 3.9 |
| | 5.9 |
|
Interest income (expense), net | (0.4 | ) | | (0.2 | ) | | 0.0 |
|
Other income (expense), net | (0.1 | ) | | 0.1 |
| | (0.0 | ) |
Income before provision for income taxes | 1.0 |
| | 3.8 |
| | 5.9 |
|
Provision for income taxes | 2.5 |
| | 0.7 |
| | 1.1 |
|
Net income (loss) | (1.5 | ) |
| 3.1 |
|
| 4.8 |
|
Net income (loss) attributable to noncontrolling interest | — |
| | 0.0 |
| | (0.0 | ) |
Net income (loss) attributable to Universal Electronics Inc. | (1.5 | )% |
| 3.1 | % |
| 4.8 | % |
Year Ended December 31, 20172022 ("2017"2022") Compared to Year Ended December 31, 20162021 ("2016"2021")
Net sales. Net sales for 20172022 were $695.8$542.8 million, an increasea decrease of 6.8%9.8% compared to $651.4$601.6 million in 2016. Net sales by our business and consumer lines were as follows:
|
| | | | | | | | | | | | | |
| 2017 | | 2016 |
| $ (millions) | | % of total | | $ (millions) | | % of total |
Business | $ | 642.2 |
| | 92.3 | % | | $ | 601.7 |
| | 92.4 | % |
Consumer | 53.6 |
| | 7.7 | % | | 49.7 |
| | 7.6 | % |
Total net sales | $ | 695.8 |
| | 100.0 | % | | $ | 651.4 |
| | 100.0 | % |
Net sales2021. Sales in our Business lines (subscription broadcasting, OEM,subscription broadcast channel were lower than in the prior year due primarily to lower customer demand and computing companies) were 92.3% of net sales in 2017 compared to 92.4% in 2016. Net salescomponent shortages. Sales in our Business linesretail channel were also lower than the prior year due to macroeconomic headwinds and the loss of a customer in 2017 increased by 6.7% to $642.2 million from $601.7 million in 2016 driven primarily by the rollout of higher end platforms in Europe, increased sales of home security products and increased sales to consumer electronics companies in Asia. These increases were partially offset by a decrease in sales to North American satellite broadcasting customers as certain customers were depleting existing prior generation inventory in preparation for the launch of their new advanced platforms.America.
Net sales in our Consumer lines (One For All® retail and private label) were 7.7% of net sales in 2017 compared to 7.6% in 2016. Net sales in our Consumer lines in 2017 increased by 7.8% to $53.6 million from $49.7 million in 2016 driven primarily by growth in markets outside of Europe.
Gross profit. Gross profit in 20172022 was $165.7$152.3 million compared to $164.1$173.0 million in 2016.2021. Gross profit as a percent of sales decreased to 23.8%28.1% in 2017 from 25.2%2022 compared to 28.8% in 2016. The gross margin percentage2021. Gross profit as a percent of sales was unfavorably impacted by price reductions granted to certain large volume customers, impairment write-downs of underutilized factory equipmentinflationary pressures associated with raw materials and manufacturing inefficiencies experienced due to our factory transition activities in China, which were completed in the fourth quarter of 2017. Thesecomponents, freight costs and wages. Partially offsetting these unfavorable impacts were partially offset bysales price increases on certain products, which were implemented throughout the weakeningfirst two quarters of the Chinese Yuan Renminbi relative to the U.S. Dollar.2022.
Research and development ("R&D") expenses. R&D expenses increased 7.9%5.0% to $21.4$32.5 million in 20172022 from $19.9$30.9 million in 2016 primarily driven by2021. The increase in R&D efforts dedicatedexpenses is due to developing newan increase in product offerings for newdevelopment activities as we continue to expand our portfolio of products and existing product categories.focus on growth channels including HVAC, home security and home automation.
Factory transition restructuring charges. In the first quarter of 2016, we implemented a plan to reduce the impact of rising labor rates in China by transitioning 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 rising at a slower rate. As a result, we incurred severance costs of $6.1 million and $4.5 million in 2017 and 2016, respectively. We ceased manufacturing operations in our Guangzhou factory during the third quarter of 2017 and as a result, we do not expect to incur additional severance costs associated with the transition of manufacturing activities from this location.
Selling, general and administrative ("SG&A") expenses. SG&A expenses increaseddecreased 11.4% to $127.5$105.3 million in 20172022 from $114.4$118.8 million in 2016. This increase was driven2021, primarily by incrementaldue to a decrease in outside legal expenses related to a specific legal matter.
Interest income (expense), net. Net interest expense recordedincreased to reflect an increase$2.2 million in the value of contingent consideration to be paid2022 from $0.6 million in connection with our acquisition of the net assets of Ecolink Intelligent Technology, Inc. ("Ecolink"); increased stock-based compensation expense; increased headcount and other direct costs associated with product development efforts2021 as a result of an increasea higher average loan balance and a higher average interest rate.
Loss on sale of Argentina subsidiary. During 2021, we completed the sale of our subsidiary, One For All Argentina S.R.L, recording a loss on sale of $6.1 million. The loss was primarily attributable to the weakening of the Argentinian Peso versus the U.S. Dollar resulting in a loss in equity value in our Argentina subsidiary and ultimately sales proceeds that were significantly less than the numberinvested capital.
Other income (expense), net. Other expense, net was $1.0 million in 2022, compared to other expense, net of higher end customer products; additional expense to support our implementation of a new ERP system; and additional expense$0.6 million in 2021, both as a result of the acquisition of the net assets of Residential Control Systems, Inc. ("RCS") in April 2017. Partially offsetting these increases was a decrease in legal expense as a result of higher legal fees, including the recording of a $2.0 million legal settlement, in the prior year period related to patent litigation matters.
Interest income (expense), net. Net interest expense was $2.5 million in 2017 compared to net interest expense of $1.0 million in 2016. This increase was primarily attributable to an increased level of borrowings on our line of credit.
Other income (expense), net. Net other expense was $0.8 million in 2017 compared to net other income of $0.8 million in 2016. This change was driven primarily by a decrease in foreign currency gains associated with fluctuations in the Chinese Yuan Renminbi exchange rate versus the U.S. Dollar.losses offset partially by miscellaneous non-operating gains.
Income tax expense. Income tax expense was $17.6$11.0 million in 20172022 compared to $4.8$10.8 million in 2016.2021. Our effective tax rate was 241.6% in 2017 compared to 19.1% in 2016. The increase in our effective tax rate was driven by the recording of $16.6 million of income tax expense in 2017 representing the estimated tax impact of the U.S. Tax Cuts and Jobs Act that was enacted in December 2017.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 ("2015")
Net sales. Net sales for 2016 were $651.4 million, an increase of 8.1% compared to $602.8 million in 2015. Net sales by our business and consumer lines were as follows:
|
| | | | | | | | | | | | | |
| 2016 | | 2015 |
| $ (millions) | | % of total | | $ (millions) | | % of total |
Business | $ | 601.7 |
| | 92.4 | % | | $ | 551.0 |
| | 91.4 | % |
Consumer | 49.7 |
| | 7.6 | % | | 51.8 |
| | 8.6 | % |
Total net sales | $ | 651.4 |
| | 100.0 | % | | $ | 602.8 |
| | 100.0 | % |
Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were 92.4% of net sales in 2016 compared to 91.4% in 2015. Net sales in our Business lines in 2016 increased by 9.2% to $601.7 million from $551.0 million in 2015 driven by an increased demandelevated in both the subscription broadcasting2022 and OEM markets for our advanced products which include features such as voice control2021 at 96.4% and two-way RF technologies.
Net sales in our Consumer lines (One For All® retail and private label) were 7.6% of net sales in 2016 compared to 8.6% in 2015. Net sales in our Consumer lines in 2016 decreased by 4.1% to $49.7 million from $51.8 million in 2015. This decrease was driven primarily by the weakening of the British Pound compared to the U.S. Dollar, which negatively impacted sales in 2016 by $2.4 million.
Gross profit. Gross profit in 2016 was $164.1 million compared to $166.7 million in 2015. Gross profit as a percent of sales decreased to 25.2% in 2016 from 27.7% in 2015. The gross margin percentage was unfavorably impacted in 2016 by an increase in sales to certain large customers that yield a lower gross margin rate than our company average. In addition, manufacturing inefficiencies were incurred resulting from the transition of production activities from our southern-most China factory to our other China factories. 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 expenses. R&D expenses increased 9.4% to $19.9 million in 2016 from $18.1 million in 201567.0%, respectively, as a result of our research and development efforts in existing categoriesmix of pre-tax income/loss by jurisdiction, as well as new categories including home security.
Factory transition restructuring charges. In the first quarter of 2016, we implemented a plan to reduce the impact of rising labor rates in China by transitioning manufacturing activities from our southern-most China factory, locatedlosses incurred in the city of Guangzhou in the Guangdong province,U.S. which are not benefited due to our other China factories where labor rates are rising at a slower rate. As a result, we incurred severance costs of $4.5 million in 2016.valuation allowance.
Selling, general and administrative expenses. SG&A expenses increased 1.5% to $114.4 million in 2016 from $112.7 million in 2015. This increase was driven primarily by increased operating costs associated with our August 2015 acquisition of Ecolink and increased payroll costs associated with additional headcount required to support product development efforts. These increases were partially offset by a lower level of patent litigation related costs as well as the weakening of the Chinese Yuan Renminbi versus the U.S. Dollar.
Interest income (expense), net. Net interest expense was $1.0 million in 2016 compared to net interest income of $63 thousand in 2015. This increase was primarily attributable to an increased level of borrowings on our line of credit.
Other income (expense), net. Net other income was $0.8 million in 2016 compared to net other expense of $7 thousand in 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.
Income tax expense. Income tax expense was $4.8 million in 2016 compared to $6.8 million in 2015, and our effective tax rate was 19.1% in 2016 compared to 18.9% in 2015.
Liquidity and Capital Resources
Sources and Uses of Cash
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | Year Ended December 31, 2017 | | Increase (Decrease) | | Year Ended December 31, 2016 | | Increase (Decrease) | | Year Ended December 31, 2015 |
Cash provided by operating activities | $ | 13,788 |
| | $ | (35,755 | ) | | $ | 49,543 |
| | $ | 23,449 |
| | $ | 26,094 |
|
Cash used for investing activities | (51,227 | ) | | (8,712 | ) | | (42,515 | ) | | 5,134 |
| | (47,649 | ) |
Cash provided by (used for) financing activities | 50,370 |
| | 54,816 |
| | (4,446 | ) | | 30,696 |
| | (35,142 | ) |
Effect of exchange rate changes on cash | (1,104 | ) | | 3,833 |
| | (4,937 | ) | | (2,079 | ) | | (2,858 | ) |
Net increase (decrease) in cash and cash equivalents | $ | 11,827 |
| | $ | 14,182 |
| | $ | (2,355 | ) | | $ | 57,200 |
| | $ | (59,555 | ) |
|
| | | | | | | | | | | |
| December 31, 2017 | | Increase (Decrease) | | December 31, 2016 |
Cash and cash equivalents | $ | 62,438 |
| | $ | 11,827 |
| | $ | 50,611 |
|
Working capital | 74,362 |
| | (33,929 | ) | | 108,291 |
|
Net cash provided by operating activities decreased $35.8 million in 2017 when compared to 2016, primarily due to the net loss reported in 2017 and the net impact of changes in working capital needs associated with accounts receivable and inventories, partially offset by changes in the balances of income tax related assets and liabilities. With respect to accounts receivable, although net sales increased by 6.8% in 2017 compared to 2016, accounts receivable increased by 21.7% due to both collection timing and the timing of sales in 2017. At December 31, 2017, days sales outstanding was 75 days compared to 70 days at December 31, 2016. Cash outflows associated with inventories were greater in 2017 compared to 2016 primarily due to some buildup of inventory related to the anticipated rollout of higher end platforms to certain customers as well as strategic purchases of certain raw materials to take advantage of better pricing. Our inventory turns decreased from 3.8 turns at December 31, 2016 to 3.6 turns at December 31, 2017. These cash flow impacts were partially offset by favorable cash flows associated with income taxes, which were driven by the timing of income tax payments as well as the usage of a significant portion of our deferred income tax assets in 2017 as a result of the enactment of the U.S. Tax Cuts and Jobs Act in December 2017.
Net cash provided by operating activities increased $23.4 million in 2016 when compared to 2015, primarily due to the net impact of changes in working capital needs associated with inventories, accounts receivable and accounts payable. With respect to accounts receivable, although net sales increased by 8.1% in 2016 compared to 2015, accounts receivable only increased by 2.3% due to the timing of sales in 2016. Additionally, we experienced a greater growth in accounts receivable in 2015 as a result of us extending longer payment terms to certain significant customers. At December 31, 2016, days sales outstanding was 70 days
compared to 68 days at December 31, 2015. Cash outflows associated with inventories were greater in 2015 compared to 2016 primarily due to preparation in 2015 for the manufacturing transition of certain products from our southern China factory to our other China factories. The decrease in cash inflows associated with accounts payable were largely driven by the decrease in cash outflows associated with inventories.
Net cash used for investing activities during 2017 was $51.2 million compared to $42.5 million and $47.6 million of net cash used during 2016 and 2015, respectively. Our 2017, 2016 and 2015 cash used for investing activities primarily included our investments in property, plant and equipment as well as internally developed patents. In 2017, cash used for investing activities also included our acquisition of the net assets of RCS for $8.9 million, and in 2015, cash used for investing activities included our acquisition of the net assets of Ecolink for $12.3 million, net of cash acquired.
Net cash provided by financing activities was $50.4 million during 2017 compared to net cash used for financing activities of $4.4 million during 2016 and net cash used for financing activities of $35.1 million during 2015. The primary drivers of our cash flows from financing activities in 2017, 2016 and 2015 were net borrowings on our line of credit and repurchases of shares of our common stock. Net borrowings on our line of credit were $88.0 million and $50.0 million in 2017 and 2015, respectively. We had no net borrowings or repayments on our line of credit in 2016. During 2017, we purchased 680,287 shares of our common stock at a cost of $39.1 million, compared to 197,819 and 1,816,293 shares at a cost of $12.6 million and $89.4 million during 2016 and 2015, respectively.
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 from time to time based upon an assessment of then current value as compared to then trading ranges and investor analyst reports. Also considered in this decision is the effect any such repurchases may have on our cash balances and needs, cash flow, and short- and long-term borrowing. As of December 31, 2017, no shares were available for repurchase under the Board's authorizations. Throughout 2018, our Board will continue to assess the efficacy of a corporate stock repurchase program utilizing the same criteria as it had in the past; namely, comparing the then current value as compared to then trading ranges and investor analyst reports, as well as the effect any such repurchase may have on our cash balances and needs, cash flow, and short- and long-term borrowing. Any such approved repurchase program will not obligate us to acquire any specific number of shares and under any such program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
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 | $ | 14,387 |
| | $ | 4,411 |
| | $ | 5,680 |
| | $ | 3,853 |
| | $ | 443 |
|
Purchase obligations(1) | 5,719 |
| | 5,719 |
| | — |
| | — |
| | — |
|
Contingent consideration (2) | 17,200 |
| | 3,800 |
| | 12,530 |
| | 870 |
| | — |
|
Total contractual obligations | $ | 37,306 |
| | $ | 13,930 |
| | $ | 18,210 |
| | $ | 4,723 |
| | $ | 443 |
|
| |
(1)
| Purchase obligations consist of contractual payments to purchase property, plant and equipment. |
| |
(2)
| Contingent consideration consists of contingent payments related to our purchases of the net assets of Ecolink and RCS. |
Liquidity
Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have been sufficient to support our business operations, capital expenditures and discretionary share repurchases. More recentlyIn addition, 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 and RCS.past acquisitions. 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, andexpenses associated with our long-term factory planning strategy, future discretionary share repurchases. Our working capital needs have typically been greatest during the thirdrepurchases and fourth quarters when accounts receivable and inventories increase in connection with the fourth quarter holiday selling season. In addition, inventory levels typically increase in anticipation of factory closures
in observance of Chinese New Year.potential future acquisitions. We believe our current cash balances, anticipated cash flow to be generated from operations and available borrowing resources will be sufficient to cover expected cash outlays duringfor at least the next twelve months;months and for the foreseeable future thereafter; however, because our cash is located in various jurisdictions throughout the world, we may at times need to increase borrowing from our revolving 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 market risks identified in "ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK".
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Cash and cash equivalents | $ | 66,740 | | | $ | 60,813 | |
Available borrowing resources | 37,000 | | | 66,300 | |
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Cash and cash equivalents | $ | 62,438 |
| | $ | 50,611 |
| | $ | 52,966 |
|
Available borrowing resources | 32,000 |
| | 35,000 |
| | 34,987 |
|
Cash and cash equivalents – At December 31, 2022, we had $6.8 million, $15.6 million, $18.9 million, $13.0 million and $12.4 million of cash and cash equivalents in North America, the PRC, Asia (excluding the PRC), Europe, and South America, respectively. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash and cash equivalents with financial institutions we believe are high quality.
Our cash balances are held in numerous locations throughout the world. The majority of our cash is held outside of the United States and may be repatriated to the United States but, under current law, may be subject to federal and state income taxes and foreign withholding taxes. Additionally, repatriation of some foreign balances is restricted by local laws. We have not provided for the state income tax liability or foreign withholding tax on these amounts for financial statement purposes as this cash is considered indefinitely reinvested outside of the United States.
Available Borrowing Resources – Our intent is to meet our domestic liquidity needs through ongoing cash flows, external borrowings, or both.
On December 31, 2017, we had $10.5 million, $23.3 million, $1.4 million, $18.1 million and $9.2 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 27, 2017, we entered into a Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") and Wells Fargo Bank, National Association. Under the Second Amended Credit Agreement, the existingprovides for a $125.0 million revolving line of credit ("Credit Line") was increased from $125.0 million to $170.0 million and the expiration date remainedthat expires on November 1, 2019.2023. We expect to renew our credit agreement with U.S. Bank, for an additional two years, prior to its expiration. The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit. Therecredit, of which there were no outstanding letters of creditnone at December 31, 2017.
All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary which controls our manufacturing factories in the PRC.
Under the Second Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Second Amended Credit Agreement) plus an applicable margin (varying from 0.00% to 0.50% ). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Second Amended Credit Agreement. The interest rate in effect at December 31, 2017 was 3.04%. There are no commitment fees or unused line fees under the Second Amended Credit Agreement.
The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. As of December 31, 2017, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.
2022. At December 31, 2017,2022, we had an outstanding balance of $138.0$88.0 million on our Credit Line and $32.0$37.0 million of availability.
Off-Balance Sheet Arrangements
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 9" for further information regarding our Credit Line.
Uses of Cash
Our cash flows were as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Year Ended December 31, 2022 | | Increase (Decrease) | | Year Ended December 31, 2021 |
Cash provided by (used for) operating activities | $ | 10,926 | | | $ | (29,357) | | | $ | 40,283 | |
Cash provided by (used for) investing activities | (21,208) | | | (4,167) | | | (17,041) | |
Cash provided by (used for) financing activities | 20,501 | | | 42,527 | | | (22,026) | |
Effect of foreign currency exchange rate changes on cash and cash equivalents | (4,292) | | | (6,736) | | | 2,444 | |
Net increase (decrease) in cash and cash equivalents | $ | 5,927 | | | $ | 2,267 | | | $ | 3,660 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Increase (Decrease) | | December 31, 2021 |
Cash and cash equivalents | $ | 66,740 | | | $ | 5,927 | | | $ | 60,813 | |
Working capital | 121,567 | | | 1,208 | | | 120,359 | |
Net cash provided by operating activities was $10.9 million during 2022 compared to $40.3 million during 2021. Net income was $0.4 million in 2022 compared to $5.3 million in 2021. Accounts receivables decreased by $12.8 million during the year ended December 31, 2022 compared to a decrease of $2.0 million during the year ended December 31, 2021 largely due to a reduction in sales during 2022. Inventories increased by $9.9 million during the year ended December 31, 2022 compared to an increase of $15.0 million during the year ended December 31, 2021. We still remain in a unique environment where certain components, prominently ICs, are in short supply. Although this issue is abating, the lead times associated with certain component vendors remain elevated; consequently, when an opportunity arises to procure more than what is needed at a given period of time, we are proceeding with the purchase. Furthermore, certain customers ordered fewer units than originally forecasted, causing our finished goods inventory to be temporarily elevated. Our inventory turns decreased to 2.2 turns at December 31, 2022 compared to 2.9 turns at December 31, 2021. Changes in accounts payable and accrued liabilities resulted in cash outflows of $28.7 million during the year ended December 31, 2022 compared to cash inflows of $0.9 million during the year ended December 31, 2021, largely as a result of lower sales volume resulting in fewer purchases of raw materials and components, excluding, in certain situations, components in short supply. Changes in accrued income taxes resulted in cash outflows of $2.1 million during the year ended December 31, 2022 compared to cash inflows of $2.9 million during the year ended December 31, 2021.
Net cash used for investing activities during 2022 was $21.2 million, of which $7.5 million, $0.9 million, $14.0 million and $6.6 million was used for the purchase of our term deposit investment, acquisition of Qterics Inc., capital expenditures, and the development of patents, respectively. Offsetting these amounts was $7.8 million received upon the redemption of our term deposit investment. Net cash used for investing activities during 2021 was $17.0 million, of which $12.6 million and $4.4 million was used for capital expenditures and development of patents, respectively.
Future cash flows used for investing activities are largely dependent on the timing and amount of capital expenditures. We estimate that we will incur between $12.0 million and $15.0 million in 2023 which includes amounts associated with our factory in Vietnam which we anticipate commencing operations in the first half of 2023.
Net cash provided by financing activities was $20.5 million during 2022 compared to net cash used for financing activities of $22.0 million during 2021. The primary financing activities in 2022 and 2021 were borrowings and repayments on our line of credit and repurchases of shares of our common stock. Net borrowings on our line of credit were $32.0 million in 2022 and $36.0 million in 2021. During 2022, we purchased 434,107 shares of our common stock at a cost of $13.0 million compared to 1,243,196 shares at a cost of $59.7 million during 2021.
Future cash flows used for financing activities are affected by our financing needs which are largely dependent on the level of cash provided by or used in operations and the level of cash used in investing activities. Additionally, potential future repurchases of shares of our common stock will impact our cash flows used for financing activities. Given the recent decrease in the price of our common stock, we may opportunistically purchase shares of our common stock. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 14" for further information regarding our share repurchase programs.
Material Cash Commitments – The following table summarizes our material cash commitments and the effect these commitments are expected to have on our cash flows in future periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
(In thousands) | Total | | Less than 1 year | | 1 - 3 years | | 4 - 5 years | | After 5 years |
Credit line (1) | $ | 88,000 | | | $ | 88,000 | | | $ | — | | | $ | — | | | $ | — | |
Inventory purchases | 13,708 | | | 13,708 | | | — | | | — | | | — | |
Operating lease obligations | 23,798 | | | 6,841 | | | 9,542 | | | 4,555 | | | 2,860 | |
Property, plant, and equipment purchases | 1,742 | | | 1,742 | | | — | | | — | | | — | |
Software license | 3,468 | | | 53 | | | 578 | | | 946 | | | 1,891 | |
| | | | | | | | | |
Total material cash commitments | $ | 130,716 | | | $ | 110,344 | | | $ | 10,120 | | | $ | 5,501 | | | $ | 4,751 | |
(1) We expect to renew our credit agreement with U.S. Bank, for an additional two years, prior to its expiration.
We do not participate in any off-balance sheet arrangements.anticipate meeting our material cash commitments with our cash generated from operations and available borrowing resources, including our Credit Line.
Recent Accounting Pronouncements
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 2" for a discussion of recent accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, procedures and internal processes governing our management of these risks and the use of financial instruments to mitigate our risk exposure.
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 Second Amended Credit Agreement, we may elect to pay interest on outstanding borrowings on our Credit Line based on LIBOR or a base rate (based on the prime rate of U.S. Bank) plus an applicable margin as defined in the Second Amended Credit Agreement. Accordingly, changes in interest rates would impact our results of operations in future periods. A 100 basis point increase in interest rates would have an approximately $1.0$0.7 million annual impact on net income based on our outstanding Credit Line balance at December 31, 2017.2022.
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 December 31, 2017,2022, we had wholly-owned subsidiaries in Argentina, Brazil, the British Virgin Islands, Cayman Islands, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, the PRC, Singapore, Spain, United Kingdom and the United Kingdom.Vietnam. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases, operating expenses, assets and liabilities denominated in currencies other than the U.S. Dollar. The most significant foreign currencies to our operations are the Chinese Yuan Renminbi, Euro, British Pound, Argentinian Peso, Mexican Peso, Indian Rupee, Hong Kong Dollar, Brazilian Real, Indian RupeeJapanese Yen, Korean Won and Japanese Yen.Vietnamese Dong. 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, andHong Kong Dollar, Japanese Yen, Korean Won and Vietnamese Dong and therefore benefit from a stronger U.S. Dollar and are adversely affected by a weaker U.S. Dollar relative to the foreign currency. For the Euro, British Pound 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.
The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an approximate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currency with all other variables held constant. The analysis includes all of our foreign currency contracts offset by the underlying exposures. Based on our overall foreign currency rate exposure at December 31, 2017,2022, 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, Indian Rupee, Hong Kong Dollar, Brazilian Real, Indian RupeeJapanese Yen, Korean Won and Japanese YenVietnamese Dong relative to the U.S. Dollar fluctuate 10% from December 31, 2017,2022, net income in the first quarter of 20172023 would fluctuate by approximately $9.2$7.4 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Universal Electronics Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Universal Electronics Inc. (a Delaware corporation) and subsidiaries (the “Company”"Company") as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations, comprehensive income (loss), shareholders’stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedules included under Item 15 (collectively referred to as the “financial statements”"financial statements"). In our opinion, thefinancial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)("COSO"), and our report dated March 12, 20188, 2023, expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition - Identifying and evaluating terms and conditions in contracts for the timing of revenue recognition
As described further in Note 2 and Note 4 to the consolidated financial statements, product revenue is generated through manufacturing and delivering universal control, sensing, and automation products, and AV accessories. The Company recognizes revenue over time for custom products with no alternative use when the Company has an enforceable right to payment for performance completed to date, including a reasonable margin, through a contractual commitment from the customer. Revenue is recognized at a point in time if the criteria for recognizing revenue over time are not met. For each new contract and/or product, management performs an analysis to determine whether the asset created is a custom asset with no alternative use and whether the terms and conditions of the contract indicate the Company has an enforceable right to payment for performance completed prior to the transfer of the underlying asset. We identified the determination of overtime versus point in time revenue recognition as a critical audit matter.
The principal considerations for our determination that overtime versus point in time revenue recognition is a critical audit matter is the significant judgment exercised by management in identifying and evaluating whether new contracts and/or products meet the criteria for over time or point in time revenue recognition. Significant judgments include the evaluation of contractual legal terms and rights within each jurisdiction in which the Company operates and evaluation of whether it is possible, contractually or economically, to repurpose or redirect products for an alternative use.
Our audit procedures related to the overtime versus point in time revenue recognition included the following, among others:
•We tested the design and operating effectiveness of key controls over the Company's new and amended contract review process, specifically those related to the identification and evaluation of terms and conditions associated with an enforceable right to payment.
•We tested design and operating effectiveness of key controls associated with the Company's classification of new products, including those associated with determination and classification of a product as having no alternative use.
•For a selection of parts from the Company's active products listing, we performed testing to determine whether products marked as custom with no alternative use are restricted contractually or economically to be repurposed or redirected. This includes evaluating management assumptions regarding the economic feasibility of repurposing a finished product and evidence to support that the final product has no alternative use.
•For a selection of contracts, obtained the contract and management's analysis over the enforceable right to payment and validated that the payment terms within the contract were properly evaluated and the contract was properly included or excluded from the overtime revenue recognition.
•For a selection of revenue transactions, we traced the products sold into the Company's listing of active products and determined whether that product was appropriately classified as custom or non-custom by applying the same testing approach noted above. For transactions selected with custom products, we also obtained and read the contract and contract amendments to determine whether the payment terms within the contract specifically identified an enforceable right to payment, including a reasonable margin, upon cancellation. The two parts to this test serve to determine whether the transaction was appropriately recorded over time or at a point in time.
/s/ GRANT THORNTON LLP
We have served as the Company’sCompany's auditor since 2005.
Los Angeles,
Newport Beach, California
March 12, 20188, 2023
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data) |
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 62,438 |
| | $ | 50,611 |
|
Restricted cash | 4,901 |
| | 4,623 |
|
Accounts receivable, net | 151,578 |
| | 124,592 |
|
Inventories, net | 162,589 |
| | 129,879 |
|
Prepaid expenses and other current assets | 11,687 |
| | 7,439 |
|
Assets held for sale | 12,517 |
| | — |
|
Income tax receivable | 1,587 |
| | 1,054 |
|
Deferred income taxes | — |
| | 5,960 |
|
Total current assets | 407,297 |
| | 324,158 |
|
Property, plant, and equipment, net | 110,962 |
| | 105,351 |
|
Goodwill | 48,651 |
| | 43,052 |
|
Intangible assets, net | 29,041 |
| | 28,549 |
|
Deferred income taxes | 7,913 |
| | 10,430 |
|
Long-term restricted cash | — |
| | 4,600 |
|
Other assets | 4,566 |
| | 4,896 |
|
Total assets | $ | 608,430 |
| | $ | 521,036 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 119,165 |
| | $ | 97,157 |
|
Line of credit | 138,000 |
| | 49,987 |
|
Accrued compensation | 34,499 |
| | 35,580 |
|
Accrued sales discounts, rebates and royalties | 8,882 |
| | 8,358 |
|
Accrued income taxes | 3,670 |
| | 375 |
|
Other accrued liabilities | 28,719 |
| | 24,410 |
|
Total current liabilities | 332,935 |
| | 215,867 |
|
Long-term liabilities: | | | |
Long-term contingent consideration | 13,400 |
| | 10,500 |
|
Deferred income taxes | 4,423 |
| | 7,060 |
|
Income tax payable | 2,520 |
| | 791 |
|
Other long-term liabilities | 1,603 |
| | 6,308 |
|
Total liabilities | 354,881 |
| | 240,526 |
|
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; 23,760,434 and 23,575,340 shares issued on December 31, 2017 and 2016, respectively | 238 |
| | 236 |
|
Paid-in capital | 265,195 |
| | 250,481 |
|
Treasury stock, at cost, 9,702,874 and 9,022,587 shares on December 31, 2017 and 2016, respectively | (262,065 | ) | | (222,980 | ) |
Accumulated other comprehensive income (loss) | (16,599 | ) | | (22,821 | ) |
Retained earnings | 266,780 |
| | 275,594 |
|
Total stockholders' equity | 253,549 |
| | 280,510 |
|
Total liabilities and stockholders' equity | $ | 608,430 |
| | $ | 521,036 |
|
See Notes 5 and 11 for further information concerning our purchases from related party vendors. | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 66,740 | | | $ | 60,813 | |
Accounts receivable, net | 112,346 | | | 129,215 | |
Contract assets | 7,996 | | | 5,012 | |
Inventories | 140,181 | | | 134,469 | |
Prepaid expenses and other current assets | 6,647 | | | 7,289 | |
Income tax receivable | 4,130 | | | 348 | |
Total current assets | 338,040 | | | 337,146 | |
Property, plant and equipment, net | 62,791 | | | 74,647 | |
Goodwill | 49,085 | | | 48,463 | |
Intangible assets, net | 24,470 | | | 20,169 | |
Operating lease right-of-use assets | 21,599 | | | 19,847 | |
Deferred income taxes | 6,242 | | | 7,729 | |
Other assets | 1,936 | | | 2,347 | |
Total assets | $ | 504,163 | | | $ | 510,348 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 71,373 | | | $ | 92,707 | |
Line of credit | 88,000 | | | 56,000 | |
Accrued compensation | 20,904 | | | 24,217 | |
Accrued sales discounts, rebates and royalties | 6,477 | | | 9,286 | |
Accrued income taxes | 5,585 | | | 3,737 | |
Other accrued liabilities | 24,134 | | | 30,840 | |
Total current liabilities | 216,473 | | | 216,787 | |
Long-term liabilities: | | | |
Operating lease obligations | 15,027 | | | 14,266 | |
| | | |
Deferred income taxes | 2,724 | | | 2,394 | |
Income tax payable | 723 | | | 939 | |
Other long-term liabilities | 810 | | | 13 | |
Total liabilities | 235,757 | | | 234,399 | |
Commitments and contingencies | | | |
Stockholders' equity: | | | |
Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding | — | | | — | |
Common stock, $0.01 par value, 50,000,000 shares authorized; 24,999,951 and 24,678,942 shares issued on December 31, 2022 and 2021, respectively | 250 | | | 247 | |
Paid-in capital | 326,839 | | | 314,094 | |
Treasury stock, at cost, 12,295,305 and 11,861,198 shares on December 31, 2022 and 2021, respectively | (368,194) | | | (355,159) | |
Accumulated other comprehensive income (loss) | (21,187) | | | (13,524) | |
Retained earnings | 330,698 | | | 330,291 | |
Total stockholders' equity | 268,406 | | | 275,949 | |
Total liabilities and stockholders' equity | $ | 504,163 | | | $ | 510,348 | |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net sales | $ | 542,751 | | | $ | 601,602 | | | $ | 614,680 | |
Cost of sales | 390,459 | | | 428,586 | | | 438,424 | |
Gross profit | 152,292 | | | 173,016 | | | 176,256 | |
Research and development expenses | 32,452 | | | 30,917 | | | 31,450 | |
Selling, general and administrative expenses | 105,292 | | | 118,846 | | | 107,539 | |
Operating income | 14,548 | | | 23,253 | | | 37,267 | |
Interest income (expense), net | (2,200) | | | (566) | | | (1,422) | |
Loss on sale of Argentina subsidiary | — | | | (6,050) | | | — | |
Accrued social insurance adjustment | — | | | — | | | 9,464 | |
Other income (expense), net | (955) | | | (557) | | | (1,404) | |
Income before provision for income taxes | 11,393 | | | 16,080 | | | 43,905 | |
Provision for income taxes | 10,986 | | | 10,779 | | | 5,333 | |
Net income | $ | 407 | | | $ | 5,301 | | | $ | 38,572 | |
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 0.03 | | | $ | 0.39 | | | $ | 2.78 | |
Diluted | $ | 0.03 | | | $ | 0.39 | | | $ | 2.72 | |
Shares used in computing earnings per share: | | | | | |
Basic | 12,703 | | | 13,465 | | | 13,893 | |
Diluted | 12,779 | | | 13,742 | | | 14,166 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Net sales | $ | 695,790 |
| | $ | 651,371 |
| | $ | 602,833 |
|
Cost of sales | 530,083 |
| | 487,247 |
| | 436,084 |
|
Gross profit | 165,707 |
| | 164,124 |
| | 166,749 |
|
Research and development expenses | 21,416 |
| | 19,850 |
| | 18,141 |
|
Factory transition restructuring charges | 6,145 |
| | 4,493 |
| | — |
|
Selling, general and administrative expenses | 127,476 |
| | 114,384 |
| | 112,689 |
|
Operating income | 10,670 |
| | 25,397 |
| | 35,919 |
|
Interest income (expense), net | (2,534 | ) | | (1,049 | ) | | 63 |
|
Other income (expense), net | (848 | ) | | 840 |
| | (7 | ) |
Income before provision for income taxes | 7,288 |
| | 25,188 |
| | 35,975 |
|
Provision for income taxes | 17,611 |
| | 4,804 |
| | 6,802 |
|
Net income (loss) | (10,323 | ) | | 20,384 |
| | 29,173 |
|
Net income (loss) attributable to noncontrolling interest | — |
| | 30 |
| | (1 | ) |
Net income (loss) attributable to Universal Electronics Inc. | $ | (10,323 | ) | | $ | 20,354 |
| | $ | 29,174 |
|
| | | | | |
Earnings (loss) per share attributable to Universal Electronics Inc.: | | | | | |
Basic | $ | (0.72 | ) | | $ | 1.41 |
| | $ | 1.91 |
|
Diluted | $ | (0.72 | ) | | $ | 1.38 |
| | $ | 1.88 |
|
Shares used in computing earnings (loss) per share: | | | | | |
Basic | 14,351 |
| | 14,465 |
| | 15,248 |
|
Diluted | 14,351 |
| | 14,764 |
| | 15,542 |
|
See Notes 5 and 11 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED COMPREHENSIVE INCOME (LOSS) STATEMENTS
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income | $ | 407 | | | $ | 5,301 | | | $ | 38,572 | |
Other comprehensive income (loss): | | | | | |
Change in foreign currency translation adjustment | (7,663) | | | (427) | | | 4,259 | |
Change in foreign currency translation due to sale of Argentina subsidiary | — | | | 5,425 | | | — | |
Comprehensive income (loss) | $ | (7,256) | | | $ | 10,299 | | | $ | 42,831 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Net income (loss) | $ | (10,323 | ) | | $ | 20,384 |
| | $ | 29,173 |
|
Other comprehensive income (loss): | | | | | |
Change in foreign currency translation adjustment | 6,222 |
| | (7,022 | ) | | (11,353 | ) |
Total comprehensive income (loss) | (4,101 | ) | | 13,362 |
| | 17,820 |
|
Comprehensive income (loss) attributable to noncontrolling interest | — |
| | 30 |
| | (1 | ) |
Comprehensive income (loss) attributable to Universal Electronics Inc. | $ | (4,101 | ) | | $ | 13,332 |
| | $ | 17,821 |
|
See Notes 5 and 11 for further information concerning our purchases from related party vendors.
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | Common Stock Issued | | Common Stock in Treasury | | Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Totals | |
| Common Stock Issued | | Common Stock in Treasury | | Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Noncontrolling Interest | | Totals | | Shares | | Amount | | Shares | | Amount | | |
| Shares | | Amount | | Shares | | Amount | | |
Balance at December 31, 2014 | 22,910 |
| | $ | 229 |
| | (7,008 | ) | | $ | (120,938 | ) | | $ | 214,710 |
| | $ | (4,446 | ) | | $ | 226,066 |
| | $ | — |
| | $ | 315,621 |
| |
Net income (loss) | | | | | | | | | | | | | 29,174 |
| | (1 | ) | | 29,173 |
| |
Currency translation adjustment | | | | | | | | | | | (11,353 | ) | | | | | | (11,353 | ) | |
Shares issued for employee benefit plan and compensation | 165 |
| | 2 |
| | | | | | 866 |
| | | | | | | | 868 |
| |
Purchase of treasury shares | | | | | (1,817 | ) | | (89,395 | ) | | | | | | | | | | (89,395 | ) | |
Stock options exercised | 71 |
| | 1 |
| | | | | | 1,711 |
| | | | | | | | 1,712 |
| |
Shares issued to directors | 30 |
| | — |
| |
|
| |
|
| | — |
| | | | | | | | — |
| |
Employee and director stock-based compensation | | | | | | | | | 7,913 |
| | | | | | | | 7,913 |
| |
Tax benefit from exercise of non-qualified stock options and vested restricted stock | | | | | | | | | 3,069 |
| | | | | | | | 3,069 |
| |
Business combination | | | | | | | | | | | | | | | 378 |
| | 378 |
| |
Distribution to noncontrolling interest | | | | | | | | | | | | | | | (78 | ) | | (78 | ) | |
Balance at December 31, 2015 | 23,176 |
| | 232 |
| | (8,825 | ) | | (210,333 | ) | | 228,269 |
| | (15,799 | ) | | 255,240 |
| | 299 |
| | 257,908 |
| |
Balance at January 1, 2020 | | Balance at January 1, 2020 | 24,118 | | | $ | 241 | | | (10,174) | | | $ | (277,817) | | | $ | 288,338 | | | $ | (22,781) | | | $ | 286,418 | | | $ | 274,399 | | |
Net income | | | | | | | | | | | | | 20,354 |
| | 30 |
| | 20,384 |
| Net income | | 38,572 | | | 38,572 | | |
Currency translation adjustment | | | | | | | | | | | (7,022 | ) | | | | | | (7,022 | ) | Currency translation adjustment | | 4,259 | | | 4,259 | | |
Shares issued for employee benefit plan and compensation | 130 |
| | 1 |
| | | | | | 912 |
| | | | | | | | 913 |
| Shares issued for employee benefit plan and compensation | 169 | | | 1 | | | 1,135 | | | 1,136 | | |
Purchase of treasury shares | | | | | (198 | ) | | (12,647 | ) | | | | | | | | | | (12,647 | ) | Purchase of treasury shares | | (444) | | | (17,678) | | | (17,678) | | |
Stock options exercised | 239 |
| | 3 |
| | | | | | 6,241 |
| | | | | | | | 6,244 |
| Stock options exercised | 80 | | | 1 | | | 2,804 | | | 2,805 | | |
Shares issued to directors | 30 |
| | — |
| |
|
| |
|
| | — |
| | | | | | | | — |
| Shares issued to directors | 25 | | | 1 | | | (1) | | | — | | |
Employee and director stock-based compensation | | | | | | | | | 10,324 |
| | | | | | | | 10,324 |
| Employee and director stock-based compensation | | 9,122 | | | 9,122 | | |
Tax benefit from exercise of non-qualified stock options and vested restricted stock | | | | | | | | | 2,007 |
| | | | | | | | 2,007 |
| |
Performance - based common stock warrants | | | | | | | | | 2,728 |
| | | | | | | | 2,728 |
| |
Deconsolidation of Encore Controls LLC | | | | | | | | | | | | | | | (329 | ) | | (329 | ) | |
Balance at December 31, 2016 | 23,575 |
| | 236 |
| | (9,023 | ) | | (222,980 | ) | | 250,481 |
| | (22,821 | ) | | 275,594 |
| | — |
| | 280,510 |
| |
Impact to retained earnings from adoption of ASU 2016-09 | | | | | | | | |
|
| | | | 1,509 |
| | | | 1,509 |
| |
Balance at January 1, 2017 | 23,575 |
| | 236 |
| | (9,023 | ) | | (222,980 | ) | | 250,481 |
| | (22,821 | ) | | 277,103 |
| | — |
| | 282,019 |
| |
Net loss | | | | | | | | | | | | | (10,323 | ) | |
|
| | (10,323 | ) | |
Performance-based common stock warrants | | Performance-based common stock warrants | | 686 | | | 686 | | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | 24,392 | | | 244 | | | (10,618) | | | (295,495) | | | 302,084 | | | (18,522) | | | 324,990 | | | 313,301 | | |
Net income | | Net income | | 5,301 | | | 5,301 | | |
Currency translation adjustment | | Currency translation adjustment | | (427) | | | (427) | | |
Change in foreign currency translation due to sale of Argentina subsidiary | | Change in foreign currency translation due to sale of Argentina subsidiary | | 5,425 | | | 5,425 | | |
Shares issued for employee benefit plan and compensation | | Shares issued for employee benefit plan and compensation | 203 | | | 2 | | | 1,090 | | | 1,092 | | |
Purchase of treasury shares | | Purchase of treasury shares | | (1,243) | | | (59,664) | | | (59,664) | | |
Stock options exercised | | Stock options exercised | 54 | | | 1 | | | 1,637 | | | 1,638 | | |
Shares issued to directors | | Shares issued to directors | 30 | | | — | | | — | | | — | | |
Employee and director stock-based compensation | | Employee and director stock-based compensation | | 9,969 | | | 9,969 | | |
Performance-based common stock warrants | | Performance-based common stock warrants | | (686) | | | (686) | | |
Balance at December 31, 2021 | | Balance at December 31, 2021 | 24,679 | | | 247 | | | (11,861) | | | (355,159) | | | 314,094 | | | (13,524) | | | 330,291 | | | 275,949 | | |
Net income | | Net income | | 407 | | | 407 | | |
Currency translation adjustment | | | | | | | | | | | 6,222 |
| | | | | | 6,222 |
| Currency translation adjustment | | (7,663) | | | (7,663) | | |
Shares issued for employee benefit plan and compensation | 99 |
| | 1 |
| | | | | | 647 |
| | | | | | | | 648 |
| Shares issued for employee benefit plan and compensation | 212 | | | 2 | | | 1,197 | | | 1,199 | | |
Purchase of treasury shares | | | | | (680 | ) | | (39,085 | ) | | | | | | | | | | (39,085 | ) | Purchase of treasury shares | | (434) | | | (13,035) | | | (13,035) | | |
Stock options exercised | 56 |
| | 1 |
| | | | | | 1,441 |
| | | | | | | | 1,442 |
| Stock options exercised | 80 | | | 1 | | | 1,535 | | | 1,536 | | |
Shares issued to directors | 30 |
| | — |
| | | | | | — |
| | | | | | | | — |
| Shares issued to directors | 29 | | | — | | | — | | | — | | |
Employee and director stock-based compensation | | | | | | | | | 11,943 |
| | | | | | | | 11,943 |
| Employee and director stock-based compensation | | 10,013 | | | 10,013 | | |
Performance-based common stock warrants | | | | | | | | | 683 |
| | | | | | | | 683 |
| |
Balance at December 31, 2017 | 23,760 |
| | $ | 238 |
| | (9,703 | ) | | $ | (262,065 | ) | | $ | 265,195 |
| | $ | (16,599 | ) | | $ | 266,780 |
| | $ | — |
| | $ | 253,549 |
| |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | 25,000 | | | $ | 250 | | | (12,295) | | | $ | (368,194) | | | $ | 326,839 | | | $ | (21,187) | | | $ | 330,698 | | | $ | 268,406 | | |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL ELECTRONICS INC.
The accompanying notes are an integral part of these consolidated financial statements.
Universal Electronics Inc. ("UEI"), based in Southern California,Scottsdale, Arizona, designs, develops, manufactures, ships and manufacturessupports control and sensor technology solutions and a broad line of easy-to-use, pre-programmed universal control products,systems, audio-video ("AV") accessories, and intelligent wireless security and smart home products as well as software designed to enable consumers to wirelessly connect,that are used by the world's leading brands in the video services, consumer electronics, security, home automation, climate control, and interact with an increasingly complex home entertainment, automation and security environment.appliance markets. In addition, over the past 3037 years, we have developed a broad portfolio of patented technologies and a database of homecloud-based connectivity and control software solutions that we license to our customers, including many leading Fortune 500 companies.
As used herein, the terms "we", "us" and "our" refer to Universal Electronics Inc. and its subsidiaries unless the context indicates to the contrary.
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries and jointly owned entities in which we have a controlling interest.subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowancesallowance for sales returns and doubtful accounts,credit losses, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes and related valuation allowances, stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these assumptions and estimates, and they may be adjusted as more information becomes available. Any adjustment may be material.
We present all non-income government-assessed taxes (sales, use and value added taxes) collected from our customers and remitted to governmental agencies on a net basis (excluded from revenue) in our financial statements. The government-assessed taxes are recorded in other accrued liabilitiesour consolidated balance sheets until they are remitted to the government agency.
Research and development costs are expensed as incurred and consist primarily of salaries, employee benefits, supplies and materials.
Advertising costs are expensed as incurred. Advertising expense totaled $1.1$0.5 million, $1.1$0.8 million and $1.1$0.9 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
We include shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound freight or amounts billed to customers are recorded in cost of goods sold.sales. Other shipping and handling costs are included in selling, general and administrative expensesexpenses. Shipping and handling fees and costs totaled $12.2$10.8 million, $11.6$11.8 million and $12.7$9.9 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
We determine the fair value of restricted stock awards utilizing the average of the high and low tradetrading prices of our Company'scommon shares on the date they were granted.
The fair value of stock options granted to employees and directors 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
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. If we do not have a reliable forecast of future purchases to be made by the customer by which to estimate the number of warrants that will vest, then the maximum number of potential warrants is assumed until such time that a reliable forecast of future purchases is available. To the extent that our projections change in the future as to the number of warrants that will vest, a cumulative catch-up adjustment will be recorded in the period in which our estimates change.
We use the U.S. Dollar as our functional currency for financial reporting purposes. The functional currency for most of our foreign subsidiaries is their local currency. The translation of foreign currencies into U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using the average exchange rate during each period. The gains and losses resulting from the translation are included in the foreign currency translation adjustment account, a component of accumulated other comprehensive income in stockholders' equity, and are excluded from net income. The portions of intercompany accounts receivable and accounts payable that are intended for settlement are translated at exchange rates in effect at the balance sheet date. Our intercompany foreign investments and long-term debt that are not intended for settlement are translated using historical exchange rates.
Transaction gains and losses generated by the effect of changes in foreign currency exchange rates on recorded assets and liabilities denominated in a currency different than the functional currency of the applicable entity are recorded in other income (expense), net. See Note 1817 for further information concerning transaction gains and losses.
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares, including the dilutive effect of stock option andoptions, restricted stock awards,and common stock warrants, outstanding during the period. Dilutive potential common shares for all periods presented are computed utilizing the treasury stock method; however, dilutive potential common shares are excluded where their inclusion would be anti-dilutive.
Cash and cash equivalents include cash accounts and all investments purchased with initial maturities of three months or less. Our term deposit had an initial maturity of one year, but was redeemed prior to December 31, 2022. Domestically, we generally maintain balances in excess of federally insured limits. We attempt to mitigate our exposure to liquidity,
We also record specific provisions for individual accounts when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer change, our estimates of the recoverability of the receivables would be further adjusted.
Product innovations and technological advances may shorten a given product's life cycle. We continually monitor our inventories to identify any excess or obsolete items on hand. We write-downwrite down our inventories for estimated excess and obsolescence in an amount equal to the difference between the cost of the inventories and estimated net realizable value. These estimates are based upon management's judgment about future demand and market conditions.
Property, plant, and equipment are recorded at cost. The cost of property, plant, and equipment includes the purchase price of the asset and all expenditures necessary to prepare the asset for its intended use. We capitalize additions and improvements and expense maintenance and repairs as incurred. To qualify for capitalization, an asset, excluding computer equipment, must have a useful life greater than one year and a cost equal to or greater than $5,000 for individual assets or $5,000 for assets purchased in bulk. To qualify for capitalization, computer equipment, must have a useful life of greater than one year and a cost equal to or greater than $1,000 for individual assets or $5,000 for assets purchased in bulk.
For financial reporting purposes, depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included as a component of depreciation expense.
See Note 6 for further information concerning our property, plant, and equipment.
We record the excess purchase price of net tangible and intangible assets acquired over their estimated fair value as goodwill. We evaluate the carrying value of goodwill on December 31 of each year and between annual evaluations if events occur or circumstances change that may reduce the fair value of the reporting unit below its carrying amount. Such circumstances may include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,a decline in macroeconomic conditions, (3) a significant decline in our financial performance or (3) an adverse action or(4) a significant decline in the price of our common stock for a sustained period of time.
See Note 7 for further information concerning goodwill.
We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which may trigger an impairment review include the following: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner or use of the assets or strategy for the overall business; (3) significant negative industry or economic trendstrends; and (4) a significant decline in our stock price for a sustained period.
We conduct an impairment review when we determine that the carrying value of a long-lived or intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment. The asset is impaired if its carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In assessing recoverability, we make assumptions regarding estimated future cash flows and other factors.
An impairment loss is the amount by which the carrying value of an asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model. When calculating fair value, we make assumptions regarding estimated future cash flows, discount rates and other factors.
We allocate the purchase price of acquired businesses to the tangible and intangible assets and the liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant fair value estimates and assumptions, especially with respect to intangible assets and contingent consideration. Management estimates the fair value of certain intangible assets and contingent consideration by utilizing the following (but not limited to):
In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability at each reporting period and record changes in the fair value within operating expenses. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of earnings estimates or in the timing or likelihood of achieving earnings-based milestones.
fluctuations may have on our foreign currency-denominated receivables, payables, cash flows and reported income. We do not enter into financial instruments for speculation or trading purposes.
The valuation techniques are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources. Unobservable inputs require management to make certain assumptions and judgments based on the best information available. Observable inputs are the preferred data source. These two types of inputs result in the following fair value hierarchy:
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%a guaranty of our ownership interest in Enson Assets Limited,the Credit Line by our wholly-owned subsidiary, which controls our manufacturing factories in the PRC.Universal Electronics BV.
Under the Second Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Second Amended Credit Agreement) plus an applicable margin (varying from 0.00% to 0.50% ).). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Second Amended Credit Agreement. The interest raterates in effect at December 31, 2017 was 3.04%.2022 and 2021 were 5.62% and 1.35%, respectively. There are no commitment fees or unused line fees under the Second Amended Credit Agreement.
The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. As of December 31, 2017,2022, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.