What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-05 compared with 2020-03-16 · 552 added, 487 removed, 790 unchanged (57% of the section changed)

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We have audited the accompanying consolidated balance sheets of Universal Electronics Inc.

(a Delaware corporation) (the "Company") as of December 31, 2019 and 2018 , the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019 , and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 , in conformity with accounting principles generally accepted in the United States of America.

(a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules included under Item 15 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial positi on of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 5, 2021 expressed an unqualified opinion.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASC 842, Leases .

Basis for opinion

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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 supporting the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue recognition – Identifying and evaluating terms and conditions in contracts for the timing of revenue recognition

As described further in Note 2 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 title of the underlying asset.

We identified the determination of over time verses point in time revenue recognition as a critical audit matter.

The principal considerations for our determination that over time verses 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 legal terms and rights within each jurisdiction that the Company operates and evaluation of whether it is possible, contractually or economically, to repurpose or redirect products.

Our audit procedures related to the over time verses 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 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, specifically those associated with determination and classification of a product as having no alternative use.

• Performed tests of details, on a sample basis from the Company’s active products listing, 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, such as brand names and custom designs within the plastic molding process.

• For a sample 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 over time revenue recognition.

• For a sample 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 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's auditor since 2005.

Los Angeles, California

Newport Beach, California

March 5, 2021

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(In thousands, except share-related data)

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Current assets:

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Contract assets 9,685 12,579

Inventories, net

Inventories 120,430 145,135

Prepaid expenses and other current assets 6,828 6,733

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Property, plant and equipment, net 87,285 90,732

Goodwill 48,614 48,447

Intangible assets, net 19,710 19,830

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Deferred income taxes 5,564 4,409

Other assets 2,752 2,163

Total assets $ 510,290 $ 564,159

LIABILITIES AND STOCKHOLDERS' EQUITY

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Operating lease obligations 13,681 15,639

Long-term contingent consideration

Contingent consideration 292 4,349

Deferred income taxes 1,913 1,703

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Treasury stock, at cost, 10,618,002 and 10,174,199 shares on December 31, 2020 and 2019, respectively

( 295,495 ) ( 277,817 )

Accumulated other comprehensive income (loss) ( 18,522 ) ( 22,781 )

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Year Ended December 31,

2020 2019 2018

Net sales $ 614,680 $ 753,477 $ 680,241

Cost of sales 438,424 583,274 538,437

Gross profit 176,256 170,203 141,804

Research and development expenses 31,450 29,412 23,815

Factory transition restructuring charges

Selling, general and administrative expenses 107,539 125,476 119,654

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Interest income (expense), net ( 1,422 ) ( 3,918 ) ( 4,690 )

Accrued social insurance adjustment 9,464 — —

Gain on sale of Guangzhou factory — — 36,978

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Provision for income taxes 5,333 6,772 14,242

Net income (loss)

Earnings (loss) per share:

Shares used in computing earnings (loss) per share:

Net income $ 38,572 $ 3,630 $ 11,924

Earnings per share:

Basic $ 2.78 $ 0.26 $ 0.85

Diluted $ 2.72 $ 0.26 $ 0.85

Shares used in computing earnings per share:

Basic 13,893 13,879 13,948

Diluted 14,166 14,109 14,060

See Note 5 for further information concerning our purchases from related party vendors.

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Year Ended December 31,

Net income (loss)

2020 2019 2018

Net income $ 38,572 $ 3,630 $ 11,924

Other comprehensive income (loss):

Change in foreign currency translation adjustment 4,259 ( 2,500 ) ( 3,682 )

Comprehensive income (loss)

Comprehensive income $ 42,831 $ 1,130 $ 8,242

See Note 5 for further information concerning our purchases from related party vendors.

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(In thousands)

Issued Common Stock

in Treasury Paid-in

Capital Accumulated

Comprehensive

Income (Loss)

Income (Loss) Retained

Earnings Totals

Shares Amount Shares Amount

Balance at January 1, 2018 23,760 $ 238 ( 9,703 ) $ ( 262,065 ) $ 265,195 $ ( 16,599 ) $ 270,864 $ 257,633

Net income 11,924 11,924

Currency translation adjustment ( 3,682 ) ( 3,682 )

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Balance at December 31, 2018 23,933 239 ( 10,116 ) ( 275,889 ) 276,103 ( 20,281 ) 282,788 262,960

Impact to retained earnings from adoption of ASU 2016-09

Balance at January 1, 2018

Net income 3,630 3,630

Currency translation adjustment ( 2,500 ) ( 2,500 )

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Balance at December 31, 2019 24,118 241 ( 10,174 ) ( 277,817 ) 288,338 ( 22,781 ) 286,418 274,399

Net income 38,572 38,572

Currency translation adjustment 4,259 4,259

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Year Ended December 31,

2020 2019 2018

Cash provided by operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Net income $ 38,572 $ 3,630 $ 11,924

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 29,735 31,926 33,602

Provision for doubtful accounts

Provision for credit losses 332 441 305

Gain on sale of Guangzhou factory — — ( 36,978 )

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Impairment of long-term assets 134 1,506 4,907

Accrued social insurance adjustment ( 9,464 ) — —

Loss on sale of Ohio call center 712 — —

Changes in operating assets and liabilities:

Accounts receivable and contract assets 14,884 17,203 5,455

Inventories 28,295 ( 1,914 ) ( 11,215 )

Prepaid expenses and other assets ( 245 ) 4,648 ( 587 )

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Acquisitions of intangible assets ( 6,372 ) ( 2,655 ) ( 2,521 )

Acquisition of net assets of Residential Control Systems, Inc.

Payment on sale of Ohio call center ( 500 ) — —

Net cash provided by (used for) investing activities ( 23,734 ) ( 23,968 ) 23,575

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Net cash provided by (used for) financing activities ( 65,964 ) ( 39,231 ) ( 53,318 )

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of year

Cash, cash equivalents and restricted cash at end of period

Effect of exchange rate changes on cash and cash equivalents ( 843 ) ( 963 ) 2,756

Net increase (decrease) in cash and cash equivalents ( 17,149 ) 21,095 ( 14,132 )

Cash and cash equivalents at beginning of year 74,302 53,207 67,339

Cash and cash equivalents at end of period $ 57,153 $ 74,302 $ 53,207

Supplemental cash flow information:

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Universal Electronics Inc.

("UEI"), based in Scottsdale, Arizona, designs, develops, manufactures and ships control and sensor technology solutions and a broad line of pre-programmed and universal control products, audio-video ("AV") accessories, and intelligent wireless security and smart home products that are used by the world's leading brands in the consumer electronics, subscription broadcasting, home entertainment, automation, security, hospitality and climate control markets.

In addition, over the past 34 years, we have developed a broad portfolio of patented technologies and a database of home connectivity software that we license to our customers, including many leading Fortune 500 companies.

Our principal markets are the subscription broadcast, consumer and mobile electronics, residential security and hospitality markets where our customers include service providers, original equipment manufacturers ("OEMs"), international retailers, private label brands, pro-security dealers and companies in the computing industry.

We sell directly to our customers and, for retail, we also sell through distributors throughout the world under the One For All ® brand name.

We provide subscription broadcasting providers, both domestically and internationally, with our universal remote control devices and integrated circuits, on which our software and device code libraries are embedded.

We also sell integrated circuits, on which our software and device control code libraries are embedded, and license our device control solutions to OEMs that manufacture televisions, digital audio and video players, streamer boxes, cable converters, satellite receivers, set-top boxes, room and central heating, ventilation and air conditioning equipment, game consoles, and wireless mobile phones and tablets.

("UEI"), based in Scottsdale, Arizona, designs, develops, manufactures, ships and supports control and sensor technology solutions and a broad line of universal control systems, audio-video ("AV") accessories, and intelligent 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.

In addition, over the past 35 years, we have developed a broad portfolio of patented technologies and a cloud-based connectivity and control software solution that we license to our customers, including many leading Fortune 500 companies.

Distribution methods for our control solutions vary depending on the sales channel.

We license our connectivity and control solution technologies across a variety of channels, primarily to original equipment manufacturers ("OEMs").

We distribute remote control devices, integrated circuits, sensors, connected thermostats and AV accessories directly to video and security service providers and OEMs, both domestically and internationally.

We also distribute home security sensors and connected thermostats to pro-security installers and hospitality system integrators in the United States and Europe through a network of national and regional distributors and dealers.

Additionally, we sell our wireless control devices and AV accessories under the One For All® and private label brand names to retailers through our international subsidiaries and direct to retailers in key markets, such as in the United States, United Kingdom, Germany, France, Spain, and Italy.

We utilize third-party distributors for the retail channel in countries where we do not have subsidiaries.

As used herein, the terms "we", "us" and "our" refer to Universal Electronics Inc.

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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, allowances for doubtful accounts, inventory valuation, impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes, stock-based compensation expense and performance-based common stock warrants.

On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for credit losses, inventory valuation, impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes, stock-based compensation expense and performance-

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

based common stock warrants.

Actual results may differ from these assumptions and estimates, and they may be adjusted as more information becomes available.

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Control is considered to be transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of that good or service.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

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.

Revenue - Product revenue is generated through manufacturing and delivering universal control, sensing and automation products and AV accessories, which are sold through multiple channels.

Revenues are generated from manufacturing, shipping and supporting control and sensor technology solutions and a broad line of pre-programmed and universal control products, AV accessories, and intelligent wireless security and smart home products that are used in the video services, consumer electronics, security, home automation, climate control, and home appliance market, 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.

Revenue - Product revenue is generated through manufacturing, shipping and supporting control and sensor technology solutions and a broad line of pre-programmed and universal control products, AV accessories, and intelligent wireless security and smart home products that are used in the video services, consumer electronics, security, home automation, climate control, and home appliance market, which are sold through multiple channels.

Our performance obligations are satisfied over time or at a point in time, depending on the nature of the product.

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Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates.

If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net revenue in the period in which we make such a determination.

We license our intellectual property including our patented technologies and database of control codes.

If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net sales in the period in which we make such a determination.

We license our intellectual property including our patented technologies and database o f control codes.

We record license revenue for per-unit based licenses when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment.

We record revenue upon delivery of intellectual property for fixed up-front fee licenses or if the contract contains a minimum guarantee.

We record revenue over the license period for minimum guarantees.

We record revenue upon delivery of intellectual property for fixed up-front fee licenses.

Tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers.

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Accruals for discounts and rebates are recorded as a reduction to sales in the same period as the related revenue.

Such discounts were $15.9 million and $14.6 million at December 31, 2019 and 2018 , respectively.

Such discounts were $ 15.9 million at December 31, 2020 and 2019.

Changes in such accruals may be required if future rebates and incentives differ from our estimates.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.

Sales allowances are recognized as reductions of gross accounts receivable to arrive at accounts receivable, net if the sales allowances are distributed in customer account credits.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Trade receivables are recorded at the invoiced amount and do not bear interest.

Sales allowances are recognized as reductions of trade receivables to arrive at trade receivables, net if the sales allowances are distributed in customer account credits.

See Note 4 for further information concerning our sales allowances.

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The government-assessed taxes are recorded in our consolidated balance sheets until they are remitted to the government agency.

Adoption of revenue recognition standard - On January 1, 2018, we adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," and all related amendments.

The guidance provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most existing revenue recognition guidance.

The primary impact to our revenue recognition policies resulting from this standard relates to the timing of revenue recognition for products which are customized for a specific customer.

Results for reporting periods beginning after January 1, 2018 are presented under the new standard while prior periods have not been adjusted.

We applied the modified retrospective method of adoption with the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

cumulative effect of the initial adoption of $4.1 million reflected as an adjustment to the opening balance of retained earnings as of January 1, 2018.

Income tax expense includes U.S.

and foreign income taxes.

We account for income taxes using the liability method.

We record deferred tax assets and deferred tax liabilities on our balance sheet for expected future tax consequences of events recognized in our financial statements in a different period than our tax return using enacted tax rates that will be in effect when these differences reverse.

We record a valuation allowance to reduce net deferred tax assets if we determine that it is more likely than not that the deferred tax assets will not be realized.

A current tax asset or liability is recognized for the estimated taxes refundable or payable for the current year.

Accounting standards prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of positions taken or expected to be taken in a tax return.

For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities, or else a full reserve is established against the tax asset or a liability is recorded.

A "more likely than not" tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

We provide for income taxes utilizing the asset and liability approach of accounting for income taxes.

Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid.

Deferred taxes are presented net as non-current.

The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.

Deferred taxes result from the differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.

Valuation allowances are recorded to reduce deferred tax assets when a judgment is made that is considered more likely than not that a tax benefit will not be realized.

A decision to record a valuation allowance results in an increase in income tax expense or a decrease in income tax benefit.

If the valuation allowance is released in a future period, income tax expense will be reduced accordingly.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations.

The impact of an uncertain income tax position is recognized at the largest amount that is "more likely than not" to be sustained upon audit by the relevant taxing authority.

An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

We continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist.

Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.

The Tax Cuts and Jobs Act (the "Tax Act") subjects a U.S.

shareholder to tax on Global Intangible Low-Taxed Income ("GILTI") earned by certain foreign subsidiaries.

We have elected to account for GILTI in the year the tax is incurred as a period expense.

See Note 10 for further information concerning income taxes.

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We include shipping and handling fees billed to customers in net sales.

Shipping and handling costs associated with in-bound freight are recorded in cost of goods sold.

Shipping and handling costs associated with in-bound freight are recorded in cost of sales.

Other shipping and handling costs are included in selling, general and administrative expenses.

Shipping and handling fees and costs totaled $ 9.9 million, $ 13.2 million and $ 12.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Stock-Based Compensation

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Forfeitures of stock-based awards are accounted for as they occur.

Upon the exercise of stock options or the vesting of restricted stock awards, newly issued shares of our common stock are issued.

We determine the fair value of restricted stock awards utilizing the average of the high and low trading prices of our common shares on the date they were granted.

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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

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DECEMBER 31, 2019

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 FASB issued guidance in November 2019 that clarifies the accounting for share-based payments issued as sales incentives to customers.

The guidance requires that stock-based compensation expense be recorded as a reduction in the transaction price on the basis of the grant-date fair value.

The transition provisions require that equity-classified awards be measured at the adoption date fair value if the measurement date has not been established prior to the adoption date.

The measurement periods for the first two successive two-year periods of our outstanding performance-based common stock warrants were completed prior to adoption and were not impacted by this updated guidance.

The measurement period for the final two-year period began on January 1, 2020, and, accordingly, we measured the fair value of the award as of our adoption date on January 1, 2020 using 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, expected life in years and dividend yield.

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 price of our common stock is equal to the average of the high and low trade prices of our common stock on the grant date.

The risk-free interest rate over the expected life is equal to the prevailing U.S.

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Our intercompany foreign investments and long-term debt that are not intended for settlement are translated using historical exchange rates.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

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.

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Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt.

The carrying value of our financial instruments approximates fair value as a result of their short maturities.

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, debt and derivatives.

The carrying value of our financial instruments, excluding derivatives, approximates fair value as a result of their short maturities.

Our derivatives are carried at fair value.

See Notes 3, 4, 9, 11, 12 and 19 for further information concerning our financial instruments.

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See Note 3 for further information concerning cash and cash equivalents.

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 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Allowance for Credit Losses

We maintain an allowance for credit losses for estimated losses on our trade receivables, resulting from the inability of our customers to make payments for products sold or services rendered.

The allowance for credit losses is based on a variety of factors, including credit reviews, historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior.

We also record specific provisions for individual accounts when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position.

If circumstances related to a customer change, our estimates of the recoverability of the receivables would be further adjusted.

See Note 4 for further information concerning our allowance for doubtful accounts.

See Note 4 for further information concerning our allowance for credit losses.

Inventories consist of remote controls, wireless sensors and AV accessories, as well as the related component parts and raw materials.

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These estimates are based upon management's judgment about future demand and market conditions.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Property, Plant, and Equipment

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Estimated useful lives are as follows:

Tooling and equipment

Computer equipment

Furniture and fixtures

Leasehold and building improvements

Lesser of lease term or useful life

Buildings 25 - 33 years

Tooling and equipment 2 - 7 Years

Computer equipment 3 - 5 Years

Software 3 - 7 Years

Furniture and fixtures 5 - 8 Years

Leasehold and building improvements Lesser of lease term or useful life

(approximately 2 to 10 years)

See Note 6 for further information concerning our property, plant, and equipment.

We adopted ASU 2016-02, "Leases," and all related amendments as of January 1, 2019.

We determine if an arrangement is a lease at inception and determine the classification of the lease, as either operating or finance, at commencement.

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Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Some of our leases include options to extend with a range of three to five years with up

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

to two extensions at the then current market rate.

Some of our leases include options to extend with a range of one to five years with up to two extensions at the then current market rate.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Leases with an initial term of twelve months or less are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term.

Leases with an initial term of twelve months or less, or on a month-to-month basis, are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term.

If applicable, we combine lease and non-lease components, which primarily relate to ancillary expenses associated with real estate leases such as common area maintenance charges and management fees.

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(1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.

Effective in the year ended December 31, 2019, we perform our annual impairment test using a qualitative assessment weighing the relative impact of factors that are specific to our single reporting unit as well as industry and macroeconomic factors.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

We perform our annual impairment test using a qualitative assessment weighing 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 not more likely than not that the fair value of our single reporting unit is less than the carrying value.

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When calculating fair value, we make assumptions regarding estimated future cash flows, discount rates and other factors.

See Notes 6 for further information concerning long-lived assets.

See Note 6 for further information concerning long-lived assets.

See Note 7 for further information concerning intangible assets.

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• future cash flow from customer contracts, customer lists, distribution agreements, acquired developed technologies, trademarks, trade names and patents;

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DECEMBER 31, 2019

• expected costs to complete development of in-process technology into commercially viable products and cash flows from the products once they are completed;

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• discount rates utilized in discounted cash flow models.

Results of operations and cash flows of acquired businesses are included in our operating results from the date of acquisition.

In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date.

We re-measure this liability at each reporting period and record changes in the fair value within operating expenses.

Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of earnings estimates or in the timing or likelihood of achieving earnings-based milestones.

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

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

amount of earnings estimates or in the timing or likelihood of achieving earnings-based milestones.

Contingent consideration is recorded in other accrued liabilities and long-term contingent consideration in our consolidated balance sheets.

Results of operations and cash flows of acquired businesses are included in our operating results from the date of acquisition.

See Note 21 for further information concerning business combinations.

Our foreign currency exposures are primarily concentrated in the Argentinian Peso, Brazilian Real, British Pound, Chinese Yuan Renminbi, Euro, Indian Rupee, Japanese Yen, Mexican Peso and Philippine Peso.

See Note 12 for further information concerning contingent consideration.

Our foreign currency exposures are primarily concentrated in the Argentinian Peso, Brazilian Real, British Pound, Chinese Yuan Renminbi, Euro, Indian Rupee, Japanese Yen, and Mexican Peso.

We periodically enter into foreign currency exchange contracts with terms normally lasting less than nine months , to protect against the adverse effects that exchange-rate fluctuations may have on our foreign currency-denominated receivables, payables, cash flows and reported income.

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Fair-Value Measurements

We measure fair value using the framework established by the Financial Accounting Standards Board ("FASB") for fair value measurements and disclosures.

We measure fair value using the framework established by the FASB in ASC Topic 820, for fair value measurements and disclosures.

This framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

8 unchanged sentences

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 (with amendments issued in 2018), which changes the accounting for leases and requires expanded disclosures about leasing activities.

This new guidance also requires lessees to recognize a ROU asset and a lease liability at the commencement date for all leases with terms greater than twelve months.

Accounting by lessors is largely unchanged.

ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018.

We adopted ASU 2016-02 on January 1, 2019 using the modified retrospective optional transition method.

Thus, the standard was applied starting January 1, 2019 and prior periods were not restated.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", which updates existing guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred loss impairment model with an expected loss impairment model.

Accordingly, financial assets are presented at amortized costs net of an allowance for expected credit losses over the lifetime of the assets.

We adopted this new guidance on January 1, 2020 using the modified retrospective method.

Our adoption did not result in a cumulative adjustment in our consolidated statement of financial position nor materially impact our consolidated statement of financial position, results of operations and cash flows.

See Note 3 for further discussion on our allowance for credit losses.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit.

Our adoption on January 1, 2020 did not have a material impact on our consolidated statement of financial position, results of operations and cash flows.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

We applied the package of practical expedients permitted under the transition guidance.

As a result, we did not reassess the identification, classification and initial direct costs of leases commencing before the effective date.

We also applied the practical expedient to not separate lease and non-lease components to all new leases as well as leases commencing before the effective date.

Upon adoption, ASU 2016-02 resulted in the recognition of lease ROU assets, accrued liabilities and long-term liabilities related to operating leases of $20.7 million , $3.3 million and $17.0 million , respectively.

In addition, assets and liabilities totaling $2.5 million and $2.3 million , respectively, were reclassified into the opening ROU asset balance.

The adoption of ASU 2016-02 did not result in any cumulative-effect adjustment to the opening balance of retained earnings and did not have any impact on our results of operations, cash flows or debt covenants.

See Note 12 for additional information.

In November 2019, the FASB issued ASU 2019-08, "Improvements - Share-based Consideration Payable to a Customer", which clarifies the accounting for share-based payments issued as sales incentives to customers.

The guidance requires that stock-based compensation expense is recorded as a reduction in the transaction price on the basis of the grant-date fair value.

The grant-date fair value is calculated using the provisions defined under Accounting Standards Codification "Stock Compensation".

The transition provisions require that equity-classified awards be measured at the adoption date fair value if the measurement date has not been established prior to the adoption date.

This guidance impacts the measurement date of our performance-based common stock warrants.

The measurement period for the final two-year period began on January 1, 2020, and accordingly, we measured the fair value of the award as of our adoption date on January 1, 2020.

We adopted this guidance using the modified retrospective method.

Our adoption did not result in a cumulative adjustment in our consolidated statement of financial position.

See Note 16 for further discussion on the performance-based common stock warrants.

Other Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07, "Improvements to Non-employee Share-Based Payment Accounting." This guidance expands the scope of Topic 718 "Compensation - Stock Compensation" to include share-based payment transactions for acquiring goods and services from non-employees, but excludes awards granted in conjunction with selling goods or services to a customer as part of a contract accounted for under ASC 606, "Revenue from Contracts with Customers." The adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which amends ASC 350-40, "Intangibles - Goodwill and Other - Internal-Use Software." The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and requires the capitalized implementation costs to be expensed over the term of the hosting arrangement.

The accounting for the service element of a hosting arrangement that is a service contract is not affected.

ASU 2018-15 is effective for fiscal periods beginning after December 15, 2019, and interim periods within those fiscal years.

The adoption of ASU 2018-15, effective January 1, 2019, did not have a material impact on our consolidated financial statements.

Recent Accounting Updates Not Yet Effective

Accounting Updates Not Yet Effective

In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes." This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

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ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.

We are currently evaluating the impact of this guidance.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This guidance updates existing guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the "incurred loss" model with an "expected loss" model.

Accordingly, these financial assets will be presented at the net amount expected to be collected.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019.

Early adoption is permitted.

We do not expect the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This guidance simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

ASU 2017-04 is effective for fiscal periods beginning after December 31, 2019.

Early adoption is permitted.

We do not expect the adoption of ASU 2017-04 to have a material impact on our consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

We do not expect adoption of ASU 2019-12 to have a material impact on our consolidated statement of financial position, results of operations and cash flows.

Note 3 — Cash and Cash Equivalents

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(In thousands) 2020 2019

United States

North America $ 9,812 $ 16,751

People's Republic of China ("PRC") 14,244 13,700

Asia (excluding the PRC) 13,518 21,691

Europe 10,926 9,081

South America 8,653 13,079

Total cash and cash equivalents

$ 57,153 $ 74,302

Note 4 — Revenue and Accounts Receivable, Net

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Goods and services transferred over time 119,647 195,116 103,156

Net sales $ 614,680 $ 753,477 $ 680,241

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Our net sales to external customers by geographic area were as follows:

2 unchanged sentences

United States $ 255,651 $ 407,291 $ 315,214

Asia (excluding PRC)

Asia (excluding the PRC) 117,142 104,324 124,657

Europe 108,185 94,491 85,228

People's Republic of China 88,246 83,677 91,446

Latin America 17,481 30,006 30,954

Other 27,975 33,688 32,742

Total net sales $ 614,680 $ 753,477 $ 680,241

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

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

Net sales to the following customer totaled more than 10% of our net sales:

Year Ended December 31,

$ (thousands)

2020 2019 2018

$ (thousands) % of Net

Sales $ (thousands) % of Net

Comcast Corporation $ 123,574 20.1 % $ 119,561 15.9 % $ 119,809 17.6 %

(1) Sales associated with this customer did not total more than 10% of our net sales for the indicated period.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Accounts Receivable, Net

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Trade receivables, gross $ 122,828 $ 130,888

Allowance for doubtful accounts

Allowance for credit losses ( 1,412 ) ( 1,492 )

Allowance for sales returns ( 761 ) ( 623 )

Net trade receivables

Trade receivables.

net 120,655 128,773

Other 8,778 10,425

Accounts receivable, net $ 129,433 $ 139,198

Allowance for Doubtful Accounts

Changes in the allowance for doubtful accounts were as follows:

(In thousands)

Year Ended December 31,

Allowance for Credit Losses

Changes in the allowance for credit losses were as follows:

(In thousands) Year Ended December 31,

2020 2019 2018

Balance at beginning of period $ 1,492 $ 1,121 $ 1,064

Additions to costs and expenses 332 441 305

Cash receipts ( 157 ) — —

Write-offs/Foreign exchange effects ( 255 ) ( 70 ) ( 248 )

Balance at end of period $ 1,412 $ 1,492 $ 1,121

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Trade receivables associated with these significant customers that totaled more than 10% of our accounts receivable, net were as follows:

$ (thousands)

% of Accounts Receivable, Net

$ (thousands)

% of Accounts Receivable, Net

$ (thousands) % of Accounts Receivable, Net $ (thousands) % of Accounts Receivable, Net

Comcast Corporation $ 19,782 15.3 % $ — (1)

Dish Network Corporation $ — (1)

$ 14,677 10.5 %

(1) Trade receivables associated with this customer did not total more than 10% of our accounts receivable, net for the indicated period.

Note 5 — Inventories, Net and Significant Suppliers

Inventories, net were as follows:

Note 5 — Inventories and Significant Suppliers

Inventories were as follows:

(In thousands) 2020 2019

Raw materials $ 44,273 $ 56,352

Components 16,954 24,599

Work in process 6,211 1,526

Finished goods 52,992 62,658

Reserve for excess and obsolete inventory

Inventories, net

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Reserve for Excess and Obsolete Inventory

Changes in the reserve for excess and obsolete inventory were as follows:

Year Ended December 31,

(In thousands)

Balance at beginning of period

Additions charged to costs and expenses

Sell through (1)

(Write-offs)/Foreign exchange effects

Balance at end of period

These amounts represent the reversal of reserves associated with inventory items that were sold during the period.

Inventories $ 120,430 $ 145,135

Significant Suppliers

We purchase integrated circuits, components and finished goods from multiple sources.

Purchases from the following supplier totaled more than 10% of our total inventory purchases:

Year Ended December 31,

$ (thousands)

Inventory Purchases

$ (thousands)

Inventory Purchases

$ (thousands)

Inventory Purchases

Texas Instruments

(1) Purchases associated with this supplier did not total more than 10% of our total inventory purchases for the indicated period.

Purchases from our supplier, Qorvo International Pte Ltd., totaled $ 43.5 million or 14.2 % of our total inventory purchases for the year ended December 31, 2020.

No supplier totaled 10% or more of our total inventory purchases for the years ended December 31, 2019 and 2018.

No supplier totaled 10% or more of our accounts payable balance at December 31, 2020.

Accounts payable from our supplier, Zhejiang Zhen You Electronics Co.

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Related Party Supplier

During the years ended December 31, 2018 and 2017 , we purchased certain printed circuit board assemblies from a related party supplier.

During the year ended December 31, 2018, we purchased certain printed circuit board assemblies from a related party supplier.

The supplier was considered a related party for financial reporting purposes because our Senior Vice President of Strategic Operations owned 40 % of this supplier.

In the second quarter of 2018, our Senior Vice President sold his interest in this supplier, and thus this supplier is no longer considered a related party.

Total inventory purchases made from this supplier while it was a related party were $1.1 million and $5.2 million during the twelve months ended December 31, 2018 , and 2017 , respectively.

Total inventory purchases made from this supplier while it was a related party were $ 1.1 million during the twelve months ended December 31, 2018.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3 unchanged sentences

(In thousands) 2020 2019

Machinery and equipment

Leasehold and building improvements

Furniture and fixtures

Buildings $ 19,984 $ 18,570

Computer equipment 10,213 9,935

Furniture and fixtures 3,972 3,905

Leasehold and building improvements 39,656 37,527

Machinery and equipment 101,117 94,274

Software 24,915 25,910

Tooling 34,379 32,267

234,236 222,388

Accumulated depreciation ( 154,216 ) ( 135,254 )

80,020 87,134

Construction in progress 7,265 3,598

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Depreciation expense was $ 23.2 million, $ 24.7 million and $ 26.4 million for the years ended December 31, 2020, 2019, and 2018, respectively.

The net book value of property, plant and equipment located within the PRC was $61.7 million and $76.4 million on December 31, 2019 and 2018 , respectively.

The net book value of property, plant and equipment located in Mexico was $13.6 million and $3.3 million on December 31, 2019 and 2018 , respectively.

During the year ended December 31, 2018, we incurred $ 2.9 million in impairment on tooling and equipment as a result of the transition of manufacturing operations between our PRC-based manufacturing facilities following the closure of our Guangzhou factory, which was sold in 2018.

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in 2018 on certain products manufactured in the PRC and imported into the U.S.

These impairment charges, aggregating to $0.1 million and $4.9 million , are recorded within cost of goods sold for the year ended December 31, 2019 and 2018 , respectively.

These impairment charges, aggregating to $ 0.1 million and $ 4.9 million, are recorded within cost of sales for the year ended December 31, 2019 and 2018, respectively.

Impairment charges were immaterial for the year ended December 31, 2020.

Construction in progress was as follows:

(In thousands) 2020 2019

Machinery and equipment

Leasehold and building improvements $ 2,487 $ 574

Machinery and equipment 3,075 1,428

Software 213 518

Tooling 1,397 759

Total construction in progress

$ 7,265 $ 3,598

We expect that most of the assets under construction will be placed into service during the first six months of 2021.

We will begin to depreciate the cost of these assets under construction once they are placed into service.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Long-lived tangible assets by geographic area were as follows:

Long-lived tangible assets by geographic area, which include property, plant, and equipment, net and operating lease right-of-use assets, were as follows:

(In thousands) 2020 2019

1 unchanged sentence

People's Republic of China 64,197 67,625

Mexico 22,410 16,644

All other countries 4,789 6,351

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The components of intangible assets, net were as follows:

(In thousands)

(In thousands) Gross (1)

Amortization (1)

Distribution rights (10 years)

Patents (10 years)

Trademarks and trade names

Developed and core technology

Capitalized software development costs ( 2 years)

$ 477 $ — $ 477 $ — $ — $ —

Customer relationships

( 10 - 15 years)

8,100 ( 4,329 ) 3,771 32,534 ( 25,956 ) 6,578

Developed and core technology

( 5 - 15 years)

4,080 ( 3,044 ) 1,036 12,480 ( 10,016 ) 2,464

Distribution rights ( 10 years)

352 ( 261 ) 91 322 ( 210 ) 112

Patents ( 10 years)

21,601 ( 7,574 ) 14,027 16,587 ( 6,491 ) 10,096

Trademarks and trade names

800 ( 492 ) 308 2,785 ( 2,205 ) 580

Total intangible assets, net $ 35,410 $ ( 15,700 ) $ 19,710 $ 64,708 $ ( 44,878 ) $ 19,830

(1) This table excludes the gross value of fully amortized intangible assets totaling $ 42.7 million and $ 7.4 million on December 31, 2020 and 2019, respectively.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9 unchanged sentences

(In thousands)

Thereafter 5,256

Total $ 19,710

The remaining weighted average amortization period of our intangible assets is 6.6 years.

Note 8 — Leases

We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world.

At December 31, 2020, our operating leases had remaining lease terms of up to 40 years, including any reasonably probable extensions.

Rent expense under the Company's operating leases during the years ended December 31, 2018, prior to our adoption of the new lease guidance on January 1, 2019, was $ 4.9 million.

Lease balances within our consolidated balance sheet were as follows:

(In thousands) December 31, 2020 December 31, 2019

Operating lease right-of-use assets

$ 19,522 $ 19,826

Other accrued liabilities

$ 6,094 $ 4,903

Long-term operating lease obligations

13,681 15,639

Total lease liabilities

$ 19,775 $ 20,542

We recorded an impairment of a ROU asset of $ 0.8 million during the fourth quarter of the year ended December 31, 2019.

This impairment was associated with the sale of our call center in Euclid, Ohio, which was completed in February 2020.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Operating lease expense, including variable and short-term lease costs which were insignificant to the total, operating lease cash flows and supplemental cash flow information were as follows:

Year Ended December 31,

(In thousands) 2020 2019

Cost of sales $ 1,896 $ 1,945

Selling, general and administrative expenses 4,040 4,389

Total operating lease expense $ 5,936 $ 6,334

Operating cash outflows from operating leases $ 6,552 $ 6,617

Operating lease right-of-use assets obtained in exchange for lease obligations $ 3,743 $ 4,302

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

Year Ended December 31,

Weighted average lease liability term (in years) 3.70 4.30

Weighted average discount rate 3.84 % 4.50 %

The following table reconciles the undiscounted cash flows for each of the first five years and thereafter to the operating lease liabilities recognized in our consolidated balance sheet at December 31, 2020.

The reconciliation excludes short-term leases that are not recorded on the balance sheet.

(In thousands)

Thereafter 964

Total lease payments 21,261

imputed interest ( 1,486 )

Total lease liabilities $ 19,775

At December 31, 2020, we had four operating leases that had not yet commenced with terms ranging from approximately two to four years .

The total initial lease liability associated with these leases is $ 0.4 million, which is not reflected within the maturity schedule above.

On January 29, 2021, we entered into an agreement with the landlord of our Euclid, Ohio lease and the buyer of our call center, thereby releasing us from all obligations under the lease.

The associated December 31, 2020 lease liability of $ 0.7 million was reversed in January 2021.

Rental Costs During Construction

Rental costs associated with operating leases incurred during a construction period were expensed for the years ended December 31, 2020, 2019 and 2018.

Prepaid Land Lease

We operate one factory within the PRC on which the land is leased from the government as of December 31, 2020.

This land lease was prepaid to the PRC government at the time our subsidiary occupied the land.

We have obtained a land-use right certificate for the land pertaining to this factory.

The factory is located in the city of Yangzhou in the Jiangsu province.

The remaining net book value of this operating lease ROU was $ 2.4 million at December 31, 2020, and is being amortized on a straight-line basis over the remaining term of approximately 38 years.

The buildings located on this land had a net book value of $ 16.9 million at December 31, 2020 and are being depreciated over a remaining weighted average period of 19 years.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Note 9 — Line of Credit

2 unchanged sentences

Bank") to November 1, 2021.

The Second Amended Credit Agreement provided for a $130.0 million revolving line of credit ("Credit Line") through June 30, 2019 and a $125.0 million Credit Line thereafter and through its expiration date.

The Second Amended Credit Agreement provided for a $ 130.0 million revolving line of credit ("Credit Line") through June 30, 2019 and currently provides for a $ 125.0 million Credit Line through its expiration date.

The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures.

Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $ 2.7 million at December 31, 2020.

On January 7, 2021, we executed an amendment to extend the term of our Second Amended Credit Agreement to November 1, 2022.

All obligations under the Credit Line are secured by substantially all of our U.S.

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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, 2019 was 3.03% .

The interest rates in effect at December 31, 2020 and 2019 were 1.39 % and 3.03 %, respectively.

There are no commitment fees or unused line fees under the Second Amended Credit Agreement.

The amendment executed on January 7, 2021 defines the Secured Overnight Financing Rate ("SOFR") as a replacement benchmark for LIBOR upon its phase out.

The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio.

3 unchanged sentences

Our total interest expense on borrowings was $ 1.6 million, $ 4.3 million and $ 5.0 million during the years ended December 31, 2020, 2019 and 2018, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Note 10 — Income Taxes

4 unchanged sentences

Foreign operations 59,616 39,331 54,648

Total $ 43,905 $ 10,402 $ 26,166

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

The provision for income taxes charged to operations was as follows:

2 unchanged sentences

Current tax expense:

federal $ ( 193 ) $ ( 188 ) $ ( 1,074 )

State and local ( 54 ) 82 83

Foreign 6,525 8,217 10,829

Total current 6,278 8,111 9,838

Deferred tax (benefit) expense:

federal — — 3,961

State and local — — 1,930

Foreign ( 945 ) ( 1,339 ) ( 1,487 )

Total deferred ( 945 ) ( 1,339 ) 4,404

Total provision for income taxes $ 5,333 $ 6,772 $ 14,242

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Net deferred tax assets were comprised of the following:

1 unchanged sentence

Deferred tax assets:

Inventory reserves

Capitalized research costs

Capitalized inventory costs

Net operating losses

Acquired tangible assets

Accrued liabilities $ — $ 4,070

Amortization of intangible assets 1,904 2,169

Capitalized inventory costs 2,945 3,156

Depreciation 2,530 426

Income tax credits 15,558 11,800

Inventory reserves 3,383 2,887

Net operating losses 2,844 2,644

Operating lease obligations 4,639 7,878

Stock-based compensation 4,600 4,018

Amortization of intangible assets

Total deferred tax assets 38,812 39,119

Deferred tax liabilities:

Allowance for doubtful accounts

Accrued liabilities ( 1,939 ) —

Allowance for credit losses ( 710 ) ( 270 )

Right of use assets ( 4,577 ) ( 7,480 )

Other ( 29 ) ( 3,866 )

Total deferred tax liabilities ( 7,255 ) ( 11,616 )

2 unchanged sentences

Net deferred tax assets $ 3,651 $ 2,706

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5 unchanged sentences

Tax provision at statutory U.S.

rate $ 9,220 $ 2,185 $ 5,495

Increase (decrease) in tax provision resulting from:

State and local taxes, net

Federal research and development credits ( 2,119 ) ( 884 ) ( 713 )

Foreign permanent benefit ( 2,842 ) ( 856 ) ( 7,077 )

Foreign tax rate differential ( 1,595 ) ( 1,810 ) ( 2,079 )

Foreign undistributed earnings, net of credits 3,319 1,181 5,329

Nondeductible items

Federal research and development credits

Non-deductible items 1,637 1,236 1,197

Non-territorial income ( 2,493 ) ( 1,806 ) ( 1,079 )

Withholding tax

Uncertain tax positions

Provision to return ( 343 ) 584 —

State and local taxes, net ( 1,932 ) ( 1,903 ) ( 1,792 )

Stock-based compensation ( 266 ) 262 213

Federal tax rate change

Tax rate change ( 1,527 ) ( 412 ) 466

Uncertain tax positions ( 1,565 ) ( 294 ) ( 159 )

Valuation allowance 3,109 7,524 8,057

Foreign permanent benefit

Provision to return

Withholding tax 2,320 1,082 5,454

Other 410 683 930

Tax provision $ 5,333 $ 6,772 $ 14,242

3 unchanged sentences

At December 31, 2020, we had state and foreign net operating loss carryforwards of $ 37.3 million and $ 0.5 million, respectively.

The state and foreign carryforwards begin to expire in 2026 and 2023, respectively.

The state and foreign net operating loss carryforwards begin to expire in 2026 and 2023, respectively.

At December 31, 2020, we assessed the realizability of our deferred tax assets by considering whether it is "more likely than not" some portion or all of the deferred tax assets will not be realized.

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We had cumulative operating losses for the three years ended in 2020 for our U.S.

operations and state operations and accordingly, have provided a full valuation allowance on our U.S.

federal and state operations and accordingly, have provided a full valuation allowance on our U.S.

federal and state deferred tax assets of $ 13.3 million and $ 14.4 million, respectively, as we have determined that it is more likely than not that the tax benefits will not be realized in the future.

Additionally, we recorded a valuation allowance of $ 0.3 million at December 31, 2020 related to certain deferred tax assets in our Argentina office due to sustained losses in that jurisdiction.

If and when recognized, the tax benefits relating to any reversal of valuation allowance will be recorded as a reduction of income tax expense.

If and when recognized, the tax benefits relating to any reversal of the valuation allowance will be recorded as a reduction of income tax expense.

The valuation allowance increased by $ 3.1 million and $ 7.5 million during the years ended December 31, 2020 and 2019, respectively.

1 unchanged sentence

At December 31, 2020 and 2019, we had unrecognized tax benefits of approximately $ 3.1 million and $ 4.3 million, respectively, including interest and penalties.

In accordance with accounting guidance, we have elected to classify interest and penalties as components of tax expense.

Interest and penalties were $0.2 million , $0.5 million , and $0.5 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

We have elected to classify interest and penalties as components of tax expense.

Interest and penalties were immaterial for the year ended December 31, 2020.

Interest and penalties were $ 0.2 million and $ 0.5 million for the years ended December 31, 2019 and 2018, respectively.

Interest and penalties are included in the unrecognized tax benefits.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7 unchanged sentences

Lapse in statute of limitations ( 51 ) ( 92 ) ( 80 )

Settlements — ( 227 ) ( 1,612 )

Other ( 1,317 ) — —

Balance at end of period $ 3,020 $ 4,094 $ 4,040

1 unchanged sentence

We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next twelve months.

We anticipate a decrease in unrecognized tax benefits of approximately $0.2 million within the next twelve months based on federal, state, and foreign statute expirations in various jurisdictions.

We do not anticipate a decrease in unrecognized tax benefits within the next twelve months based on federal, state, and foreign statute expirations in various jurisdictions.

We have classified uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year.

2 unchanged sentences

As of December 31, 2020, the open statutes of limitations for our significant tax jurisdictions are as follows:

federal for 2016 through 2018 , state for 2015 through 2018 , and non-U.S.

for 2013 through 2018 .

federal for 2017 through 2019, state for 2016 through 2019, and foreign for 2014 through 2019.

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the "Tax Act") was enacted in the U.S.

The Tax Act was enacted in the U.S.

on December 22, 2017.

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federal corporate income tax rate to 21% from 35%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign-sourced earnings.

In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Tax Act by applying the guidance in SEC Staff Accounting Bulletin No.

118 because we had not yet completed our enactment-date accounting for these effects.

In 2018 and 2017, we recorded tax expense related to the enactment-date effects of the Tax Act that included recording the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries that were not previously taxed, adjusting deferred tax assets and liabilities and recognizing the effects of provisionally electing to account for Global Intangible Low-Taxed Income ("GILTI") as a period cost.

The changes to 2017 enactment-date provisional amounts decreased tax expense in 2018 by an insignificant amount.

In 2019, federal and state tax authorities issued additional guidance related to transition tax, GILTI, deduction for foreign-derived intangible income and GILTI, tax treatment of qualified transportation fringe benefits, timing of income recognition, cost recovery and bonus depreciation, and business interest expense limitation.

This guidance generally provided additional information related to the calculation of such items that became effective in 2017 and 2018.

We reviewed and applied the guidance in the period such information was published.

The application of the issued guidance in 2019 did not materially change our tax expense estimated in prior years.

SAB 118 Measurement Period

We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018.

At December 31, 2017, we had not completed our accounting for all of the enactment-date income tax effects of the Tax Act under ASC 740, "Income Taxes," for the following aspects:

remeasurement of deferred tax assets and liabilities, one-time transition tax, and tax on GILTI.

At December 31, 2018, we had completed our accounting for all of the enactment-date income tax effects of the Tax Act.

Transition Tax

The one-time transition tax is based on our total post-1986 earnings and profits, the tax on which we previously deferred from U.S.

income taxes under U.S.

We recorded a provisional amount for our one-time transition tax liability for each of our foreign subsidiaries, resulting in a transition tax liability of $2.2 million at December 31, 2017 .

Upon further analyses of the Tax Act and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Notices and regulations issued and proposed by the U.S.

Department of the Treasury and the Internal Revenue Service, we finalized our calculations of the transition tax liability during 2018 .

We decreased our December 31, 2017 provisional amount by an immaterial amount, which is included as a component of income tax expense during the year ended December 31, 2018.

We have elected to pay our transition tax over the eight-year period provided in the Tax Act.

As of December 31, 2019 , the remaining balance of our transition tax obligation was $1.1 million , which will be paid over the next five years .

Deferred Tax Assets and Liabilities

As of December 31, 2017 , we remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21% ), by recording a provisional amount of $2.3 million .

Upon further analysis of certain aspects of the Tax Act and refinement of our calculations during the year ended December 31, 2018 , we adjusted our provisional amount by $0.3 million , which is included as a component of income tax expense.

The Tax Act subjects a U.S.

shareholder to tax on GILTI earned by certain foreign subsidiaries.

The FASB Staff Q&A, Topic 740, No.

5, "Accounting for Global Intangible Low-Taxed Income," states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.

Because we were evaluating the provision of GILTI as of December 31, 2017 , we recorded no GILTI-related deferred amounts in 2017 .

We have elected to account for GILTI in the year the tax is incurred.

For the year ended December 31, 2018, we completed our analysis and accounting for the Tax Act, recording tax expense for the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries that were not previously taxed, adjusting deferred tax assets and liabilities, and recognizing the effects of electing to account for GILTI as a period cost.

Indefinite Reinvestment Assertion

Beginning in 2018, the Tax Act generally provides a 100% federal deduction for dividends received from foreign subsidiaries.

Nevertheless, companies must still apply the guidance of ASC Topic 740 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S.

subsidiaries, including potential foreign withholding taxes on distributions.

Historically, the undistributed earnings of our foreign subsidiaries were considered to be indefinitely reinvested.

Previously, no provision for U.S.

Nevertheless, companies must still apply the guidance of ASC Topic 740 to account for the tax consequences of outside basis differences and other tax impacts of their investments in foreign subsidiaries, including potential foreign withholding taxes on distributions.

Historically, the undistributed earnings of our foreign subsidiaries were considered to be indefinitely reinvested and no provision for U.S.

federal and state income taxes or foreign withholding taxes had been provided on U.S.

In 2018 , we changed our assertion, and provided a $1.2 million deferred tax liability related to state tax and foreign tax withholding liabilities on future distributions.

In 2019, the deferred tax liability related to state tax and foreign tax withholding liabilities on future distributions increased to $1.7 million .

This assertion was changed in 2018.

For the years ended December 31, 2020, 2019 and 2018, we recorded a deferred tax liability of $ 2.1 million, $ 1.7 million and $ 1.2 million, respectively, relating to state tax and foreign tax withholding liabilities on future distributions.

Coronavirus Aid, Relief and Economic Security Act

On March 27, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law.

The CARES Act provides economic stimulus and relief to address the impact of the COVID-19 pandemic.

For the year ended December 31, 2020, our income tax expense was not significantly impacted by the CARES Act.

We will continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects from future legislation.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Note 11 — Accrued Compensation

In June 2018, we sold our Guangzhou entity via a stock deal, and the terms of the agreement included a two-year indemnification period.

In June 2020, the indemnification period expired and we determined we were no longer legally liable for any liabilities associated with our Guangzhou entity.

Accordingly, we reversed the accrued social insurance by the amount associated with the Guangzhou entity, which was approximately $ 9.5 million.

The components of accrued compensation were as follows:

(In thousands) 2020 2019

Accrued social insurance (1)

Accrued salary/wages

Accrued vacation/holiday

Accrued bonus $ 7,602 $ 13,965

Accrued commission 1,779 1,283

Accrued salary/wages 7,107 7,465

Accrued social insurance (1)

Accrued vacation/holiday 3,307 2,766

Other accrued compensation 1,761 1,601

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This amount represents our estimate of the amounts due to the PRC government for social insurance on December 31, 2020 and 2019.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Note 12 — Other Accrued Liabilities

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(In thousands) 2020 2019

Contract liabilities

Duties $ 4,469 $ 3,731

Expense associated with fulfilled performance obligations 1,372 1,010

Freight and handling fees 2,218 3,769

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Professional fees 3,794 2,833

Sales taxes and VAT

Sales taxes and value added taxes 5,118 3,926

Short-term contingent consideration 1,758 5,428

Total other accrued liabilities $ 33,057 $ 35,445

Note 12 — Leases

We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world.

At December 31, 2019 , our operating leases had remaining lease terms of up to 41 years .

Rent expense under the Company's operating leases during the years ended December 31, 2018 and 2017 , prior to our adoption of the new lease guidance on January 1, 2019, was $4.9 million and $4.2 million , respectively.

Lease balances within our consolidated balance sheet were as follows:

(In thousands)

December 31, 2019

Operating lease right-of-use assets

Other accrued liabilities

Long-term operating lease obligations

Total lease liabilities

We recorded an impairment of a ROU asset of $0.8 million during the fourth quarter of the year ended December 31, 2019.

This impairment is associated with the disposal of our call center in Euclid, Ohio.

Operating lease expense, including variable lease costs, which are insignificant to the total, and short-term lease costs, and operating lease cash flows and supplemental cash flow information were as follows.

Short-term lease costs were approximately $1.3 million during the year ended December 31, 2019 .

(In thousands)

Year Ended December 31, 2019

Cost of sales

Selling, general and administrative expenses

Total operating lease expense

Operating cash outflows from operating leases

Operating lease right-of-use assets obtained in exchange for lease obligations

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

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

December 31, 2019

Weighted average lease liability term (in years)

Weighted average discount rate

The reconciliation excludes short-term leases that are not recorded on the balance sheet.

(In thousands)

December 31, 2019

Total lease payments

imputed interest

Total lease liabilities

As of December 31, 2019 , we have one operating lease that has not yet commenced with the total initial lease liability of approximately $1.6 million with a five -year term, which is not reflected within the maturity schedule above.

Our future minimum lease obligations under non-cancelable operating leases as of December 31, 2018 were comparable to the undiscounted lease payments included in the table above.

Non-level Rents and Lease Incentives

Some of our leases are subject to rent escalations.

Prior to the adoption of the new lease guidance on January 1, 2019, for these leases, we recognized rent expense for the total contractual obligation utilizing the straight-line method over the lease term, ranging from 48 months to 125 months .

At December 31, 2018 , the related short-term liability was recorded in other accrued liabilities and the related long term liability was recorded in other long-term liabilities.

The total liability related to rent escalations was $1.1 million at December 31, 2018 .

At December 31, 2018 , the lease agreements for our offices in Santa Ana, California and Scottsdale, Arizona contained allowances for moving expenses and tenant improvements aggregating $1.8 million .

These moving and tenant improvement allowances were recorded within other accrued liabilities and other long-term liabilities, depending on the short-term or long-term nature, and were being amortized as a reduction of rent expense over the related lease term.

Rental Costs During Construction

Rental costs associated with operating leases incurred during a construction period were expensed for the years ended December 31, 2019 , 2018 and 2017 .

Prepaid Land Lease

We operate one factory within the PRC on which the land is leased from the government as of December 31, 2019 .

This land lease was prepaid to the PRC government at the time our subsidiary occupied the land.

We have obtained a land-use right certificate for the land pertaining to this factory.

The factory is located in the city of Yangzhou in the Jiangsu province.

The remaining net book value of this operating lease ROU was $2.4 million at December 31, 2019 , and is amortized on a straight-line basis over the remaining term of approximately 39 years .

The buildings located on this land had a net book value of $17.1 million at December 31, 2019 and is being depreciated over a remaining weighted average period of 20 years .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Prior to adoption of the new lease guidance on January 1, 2019, the remaining net book value of this prepaid land lease was included within prepaid expenses and other current assets and other assets, depending on the short-term or long-term nature.

(1) Includes $ 0.3 million and $ 0.5 million of contract liabilities at December 31, 2020 and 2019, respectively.

Note 13 — Commitments and Contingencies

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Management is not aware of any matters that require indemnification of its officers or directors.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Fair Price Provisions and Other Anti-Takeover Measures

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Settlements (in cash or in kind) during the period ( 463 ) ( 504 ) ( 849 )

Foreign currency translation gain (loss) 92 — ( 1 )

Balance at end of period $ 1,721 $ 1,514 $ 276

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On June 26, 2018, all conditions to closing were satisfied and the sale was completed, resulting in a pre-tax gain of $ 37.0 million ($ 32.1 million, net of income taxes).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Other Restructuring Activities

In the fourth quarter of 2018, we implemented a plan to relocate our corporate office from Santa Ana, California to Scottsdale, Arizona and to relocate our Asian engineering leadership, supply chain and customer support functions from Hong Kong to our other facilities in the PRC.

In connection with these restructuring activities, we incurred severance costs o f $0.4 million and $0.9 million during the year ended December 31, 2019 and 2018 , respectively, which are included within selling, general and administrative expenses.

On or about June 10, 2015, FM Marketing GmbH ("FMH") and Ruwido Austria GmbH ("Ruwido") filed a Summons in Summary Proceedings in Belgium court against one of our subsidiaries, Universal Electronics BV ("UEBV"), and one of its customers, Telenet N.V.

("Telenet"), claiming that one of the products UEBV supplied to Telenet violates two design patents and one utility patent owned by FMH and/or Ruwido.

By this summons, FMH and Ruwido sought to enjoin Telenet and UEBV from continued distribution and use of the product at issue.

After the September 29, 2015 hearing, the court issued its ruling in our and Telenet’s favor, rejecting FMH and Ruwido’s request entirely.

On October 22, 2015, Ruwido filed its notice of appeal to this ruling.

On September 16, 2019, the appellate court ruled in our favor concluding that our original product did not infringe Ruwido's design rights.

Ruwido subsequently filed an appeal of this decision with the Belgium Supreme Court.

Our brief in opposition to Ruwido's appeal has been submitted and we are waiting to learn if the Supreme Court will hear Ruwido's appeal.

In addition, Ruwido appealed the lower court's ruling against it with respect to its claims of infringement and unfair competition.

Briefing is to be completed by the end of April 2020 and in May 2020 the court will set a date for oral hearing which we expect to be sometime in late 2020.

Subsequent to the Court's ruling in September 2017 that our second product could not be added to the first case on the merits, Ruwido filed a separate case on the merits with respect to this second product, claiming that it too infringes the same patent at issue in the first suit.

We have denied these claims.

Presently, the oral hearing on the merits with respect to this matter is set for April 7, 2020.

In September 2015, UEBV filed an Opposition with the EPO seeking to invalidate the one utility patent asserted against UEBV and Telenet by Ruwido.

The hearing on this opposition was held in July 2017.

During this hearing the panel requested additional information.

We have assembled this additional information and the final hearing was scheduled for January 29, 2019.

The EPO held this hearing on January 29 and 30, 2019 and revoked Ruwido's patent as originally filed.

The EPO, however, maintained the patent in an amended form with a much narrower claim.

On August 23, 2019, the EPO issued its written opinion.

Both UEBV and Ruwido have appealed the EPO's decision and briefing is due by May 13, 2020.

In connection with these restructuring activities, we incurred severance costs o f $ 0.4 million and $ 0.9 million during the years ended December 31, 2019 and 2018, respectively, which are included within selling, general and administrative expenses.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

On September 5, 2018, we filed a lawsuit against Roku, Inc.

("Roku") in the United States District Court, Central District of California (Universal Electronics Inc.

Roku, Inc.) alleging that Roku is willfully infringing nine of our patents that are in four patent families related to remote control set-up and touchscreen remotes.

("Roku") in the United States District Court, Central District of California, alleging that Roku is willfully infringing nine of our patents that are in four patent families related to remote control set-up and touchscreen remotes.

On December 5, 2018, we amended our complaint to add additional details supporting our infringement and willfulness allegations.

We have alleged that this complaint relates to multiple Roku streaming players and components therefore and certain universal control devices, including but not limited to the Roku App, Roku TV, Roku Express, Roku Streaming Stick, Roku Ultra, Roku Premiere, Roku 4, Roku 3, Roku 2, Roku Enhanced Remote and any other Roku product that provides for the remote control of an external device such as a TV, audiovisual receiver, sound bar or Roku TV Wireless Speakers.

Roku has answered our complaint with a general denial.

In September and October, 2019, Roku filed Inter Party Review ("IPR") requests with the Patent Trial and Appeals Board (the "PTAB") on the nine patents at issue in this case, seeking to invalidate our patents.

We will vigorously defend against the IPRs.

As a further result of Roku filing the IPRs, the Court has stayed the underlying patent lawsuit pending the resolution of IPRs.

We have filed our responses to Roku's IPR requests.

We expect to learn if the PTAB will institute the IPRs or any of them during the second quarter of 2020.

In October 2019, the Court stayed this lawsuit pending action by the Patent Trial and Appeals Board (the "PTAB") with respect to Roku's Inter Partes Review requests (see discussion below).

International Trade Commission Investigation of Roku, TCL, Hisense and Funai

On April 16, 2020, we filed a complaint with the International Trade Commission (the "ITC") against Roku, TCL Electronics Holding Limited and related entities (collectively, "TCL"), Hisense Co., Ltd.

and related entities (collectively, "Hisense"), and Funai Electric Company, Ltd.

and related entities (collectively, "Funai") claiming that certain of their televisions, set-top boxes, remote control devices, human interface devices, streaming devices, and sound bars infringe certain of our patents.

We asked the ITC to issue a permanent limited exclusion order prohibiting the importation of these infringing products into the United States and a cease and desist order to stop these parties from continuing their infringing activities.

On May 18, 2020, the ITC announced that it instituted its investigation as requested by us.

The discovery phase of this investigation has been completed and trial is set to commence on April 19, 2021.

Inter Partes Reviews

In September and October 2019, Roku filed Inter Partes Review ("IPR") requests with the PTAB on the nine patents at issue in the 2018 Lawsuit (see discussion above).

To date, the PTAB has denied Roku's request with respect to three of the nine patents and granted Roku's request with respect to six of the nine patents.

As for those IPRs for which the PTAB granted Roku's request for review, we will vigorously defend our patents.

In May and June 2020, Roku filed four IPR requests against three patents asserted in the ITC investigation.

We have responded to these requests and are awaiting the PTAB decision in early- to mid-2021.

On February 11, 2021, Roku filed an additional IPR with respect to one of the patents asserted against it in the April 2020 District Court actions (see decision below for a description of the April 2020 District Court actions).

Federal District Court Actions against each of Roku, TCL, Hisense, and Funai related to the ITC Matter

On April 9, 2020, we filed separate actions against each of Roku, TCL, Hisense, and Funai in the United States District Court, Central District of California, alleging that Roku is willfully infringing five of our patents and TCL, Hisense, and Funai are willfully infringing six of our patents by incorporating our patented technology into certain of their televisions, set-top boxes, remote control devices, human interface devices, streaming devices, and sound bars.

These matters have been stayed pending the results of the ITC investigation mentioned above.

Court of International Trade Action against the United States of America, et.

On October 9, 2020, we and our subsidiaries, Ecolink Intelligent Technology, Inc.

("Ecolink") and RCS Technology, LLC ("RCS") filed an amended complaint (20-cv-00670) in the Court of International Trade (the "CIT") against the United States of America;

the Office of the United States Trade Representative;

Lighthizer, U.S.

Trade Representative;

Customs & Border Protection;

Customs & Border Protection Acting Commissioner, challenging both the substantive and procedural processes followed by the United States Trade Representative ("USTR") when instituting Section 301 Tariffs on imports from China under Lists 3 and 4A.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

By this complaint, we, Ecolink and RCS are alleging that USTR's institution of Lists 3 and 4A tariffs violated the Trade Act of 1974 (the "Trade Act") on the grounds that the USTR failed to make a determination or finding that there was an unfair trade practice that required a remedy and moreover, that Lists 3 and 4A tariffs were instituted beyond the 12-month time limit provided for in the governing statute.

We, Ecolink and RCS also allege that the manner in which the Lists 3 and 4A tariff actions were implemented violated the Administrative Procedures Act (the "APA") by failing to provide adequate opportunity for comments, failed to consider relevant factors when making its decision and failed to connect the record facts to the choices it made by not explaining how the comments received by USTR came to shape the final implementation of Lists 3 and 4A.

We, Ecolink and RCS are asking the CIT to declare that Defendants' actions resulting in the tariffs on products covered by Lists 3 and 4A are unauthorized by and contrary to the Trade Act and were arbitrarily and unlawfully promulgated in violation of the APA;

to vacate the Lists 3 and 4A tariffs;

to order a refund (with interest) of any Lists 3 and 4A duties paid by us, Ecolink and RCS;

to permanently enjoin the U.S.

government from applying Lists 3 and 4A duties against us, Ecolink and RCS;

and award us, Ecolink and RCS our costs and reasonable attorney fees.

The Government has requested an automatic stay of all pending cases challenging the Lists 3 and 4A tariffs except for one or more "test cases." It proposed the first-filed case—the case filed by HMTX—as the test case.

The government also asked the court to appoint a "steering committee" consisting of several lead counsel for the plaintiffs to direct the litigation.

The government proposed a bifurcated briefing schedule, under which the parties would first brief the government's upcoming motion to dismiss before briefing the merits of plaintiffs' claims.

We will agree to a stay in our case.

HMTX has filed a response agreeing to the stay and to being the test case but opposed the Government's proposed briefing schedule.

On February 10, 2021, the CIT's three-judge panel issued an order establishing a master case for filings that relate to some or all of the Section 301 cases.

It also establishes a deadline of March 12, 2021 for the government to file a "master answer" to all the complaints.

We are still awaiting the CIT's decision on other case management procedures and processes.

There are no other material pending legal proceedings to which we or any of our subsidiaries is a party or of which our respective property is the subject.

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Moreover, we believe that our products do not infringe any third parties' patents or other intellectual property rights.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

We maintain directors' and officers' liability insurance which insures our individual directors and officers against certain claims, as well as attorney's fees and related expenses incurred in connection with the defense of such claims.

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During the years ended December 31, 2020, 2019, and 2018, the net periodic benefit costs were also not material.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Note 14 — Treasury Stock

From time to time, our Board of Directors authorizes management to repurchase shares of our issued and outstanding common stock on the open market.

On October 30, 2018, our Board approved an adjustment to the amount of common stock that we could purchase under our existing repurchase plan to an amount not to exceed $5.0 million of our common stock ("2018 Plan").

As of December 31, 2019 , we had $3.9 million of authorized repurchases remaining under the 2018 Plan.

On March 10, 2020, our Board of Directors replaced the 2018 Plan with a new repurchase plan authorizing the repurchase of up to 300,000 shares.

On October 28, 2020, our Board of Directors approved a new repurchase plan with an effective date of November 10, 2020 (the "November 2020 Program").

Pursuant to the November 2020 Program, we may, from time to time until February 18, 2021, repurchase up to 500,000 shares.

At December 31, 2020, we had 500,000 shares of common stock authorized for repurchase remaining under the November 2020 Program.

O n February 11, 2021, our Board approved a new share repurchase program with an effective date of February 23, 2021 (the "February 2021 Program").

Pursuant to the February 2021 Program, we may, from time to time until May 6, 2021, repurchase up to 300,000 shares of our common stock.

We may utilize various methods to effect the repurchases, which may include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans.

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We hold these shares for future use as management and the Board of Directors deem appropriate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Note 15 — Stock-Based Compensation

6 unchanged sentences

Selling, general and administrative expenses:

6,257 6,431 6,491

Outside directors

1,584 1,179 1,501

Total employee and director stock-based compensation expense $ 9,122 $ 8,845 $ 8,820

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Year Ended December 31,

2020 2019 2018

Weighted average fair value of grants $ 17.70 $ 11.51 $ 14.26

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Expected life in years 4.59 4.60 4.53

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Stock option activity was as follows:

Number of Options

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

Number of Options

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

2020 2019 2018

Number of Options

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

(in 000's) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term

(in years) Aggregate Intrinsic Value

(in 000's) Number of Options

(in 000's) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term

(in years) Aggregate Intrinsic Value

(in 000's) Number of Options

(in 000's) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term

(in years) Aggregate Intrinsic Value

Outstanding at beginning of the year 745 $ 41.73 597 $ 44.27 520 $ 42.56

Granted 109 46.17 170 30.08 119 44.95

Exercised ( 80 ) 35.28 $ 1,334 ( 22 ) 20.34 $ 569 ( 35 ) 24.67 $ 744

Forfeited/canceled/expired — — — — ( 7 ) 27.74

Outstanding at end of the year (1)

774 $ 43.01 3.71 $ 9,228 745 $ 41.73 3.97 $ 9,798 597 $ 44.27 4.08 $ 758

Vested and expected to vest at the end of the year (1)

774 $ 43.01 3.71 $ 9,228 745 $ 41.73 3.97 $ 9,798 597 $ 44.27 4.08 $ 758

Exercisable at the end of the year (1)

582 $ 43.90 2.98 $ 6,887 517 $ 44.95 3.01 $ 5,636 430 $ 42.30 3.43 $ 758

(1) The aggregate intrinsic value represents the total pre-tax value (the difference between our closing stock price on the last trading day of 2020, 2019, and 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on December 31, 2020, 2019, and 2018.

This amount will change based on the fair market value of our stock.

Cash received from option exercises for the years ended December 31, 2019 , 2018 , and 2017 was $0.4 million , $0.9 million , and $1.4 million , respectively.

The value of shares withheld in lieu of receiving cash from option exercises in the year ended December 31, 2020 was $ 2.8 million.

Cash received from option exercises for the years ended December 31, 2019 and 2018 was $ 0.4 million and $ 0.9 million, respectively.

The actual tax benefit realized from option exercises was $ 0.3 million, $ 0.01 million and $ 0.2 million for the years ended December 31, 2020, 2019, and 2018, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Significant option groups outstanding at December 31, 2020 and the related weighted average exercise price and life information were as follows:

Options Outstanding

Options Exercisable

Range of Exercise Prices

Weighted-Average

Contractual Term (in years)

Weighted-Average

Exercise Price

Weighted-Average

Options Outstanding Options Exercisable

Range of Exercise Prices Number

(in 000's) Weighted-Average

Contractual Term (in years) Weighted-Average

Exercise Price Number

(in 000's) Weighted-Average

Exercise Price

$ 19.25 to $ 27.07

263 3.72 $ 23.83 200 $ 22.82

$ 35.28 to $ 46.17

229 5.44 45.47 113 44.84

$ 51.38 to $ 65.54

282 2.61 58.85 269 59.15

774 3.71 $ 43.01 582 $ 43.90

As of December 31, 2020, we expect to recognize $ 2.2 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 1.8 years.

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The total grant date fair value of these awards was $ 1.9 million.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Restricted Stock

Non-vested restricted stock award activity was as follows:

Weighted-Average

2020 2019 2018

(in 000's) Weighted-Average

Fair Value Shares

(in 000's) Weighted-Average

Fair Value Shares

(in 000's) Weighted-Average

Non-vested at beginning of the year 310 $ 34.99 204 $ 49.23 162 $ 61.19

Granted 238 36.85 268 30.67 167 42.65

Vested ( 166 ) 38.28 ( 141 ) 47.26 ( 109 ) 56.16

Forfeited ( 8 ) 43.44 ( 21 ) 35.78 ( 16 ) 54.16

Non-vested at end of the year 374 $ 34.53 310 $ 34.99 204 $ 49.23

As of December 31, 2020, we expect to recognize $ 8.4 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of 1.7 years.

On February 12, 2020, certain executive employees were granted 41,695 restricted stock awards in connection with the 2019 annual review cycle.

In February 2021, certain executives and employees were granted 111,775 restricted stock awards in connection with the 2020 annual review cycle.

These awards were granted as part of long-term incentive compensation to assist us in meeting our performance and retention objectives and are subject to a three-year vesting period ( 32,395 of these awards will vest 33.33 % on February 11, 2022 and 8.33 % each quarter thereafter and 79,380 of these awards will vest at a rate of 33.33 % per year beginning on February 25, 2022).

The total grant date fair value of these awards was $ 6.7 million.

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Restricted stock awards vest in various proportions over a one - to three-year time period.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Detailed information regarding our active Stock Incentive Plans was as follows at December 31, 2020:

Approval Date

Initial Shares

Name Approval Date Initial Shares

Available for Grant

Under the Plan

Remaining Shares

Under the Plan Remaining Shares

Available for Grant

Under the Plan

Outstanding Shares

Under the Plan Outstanding Shares

Under the Plan

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2018 Equity and Incentive Compensation Plan 6/4/2018 1,000,000 223,199 627,545

223,199 1,148,202

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Note 16 — Performance-Based Common Stock Warrants

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The right to exercise the warrants is subject to vesting over three successive two-year periods (with the first two-year period commencing on January 1, 2016) based on the level of purchases of goods and services from us by Comcast and its affiliates, as defined in the warrants.

The table below presents the purchase levels and number of warrants that will vest in each period based upon achieving these purchase levels.

Incremental Warrants That Will Vest

Aggregate Level of Purchases by Comcast and Affiliates

January 1, 2016 - December 31, 2017

January 1, 2018 - December 31, 2019

January 1, 2020 - December 31, 2021

The table below presents the purchase levels and potential number of warrants to vest in each period based upon achieving these purchase levels.

Potential Warrants To Vest

Aggregate Level of Purchases by Comcast and Affiliates January 1, 2016 - December 31, 2017 January 1, 2018 - December 31, 2019 January 1, 2020 - December 31, 2021

$ 260 million 100,000 100,000 75,000

$ 300 million 75,000 75,000 75,000

$ 340 million 75,000 75,000 75,000

Maximum Potential Warrants Earned by Comcast 250,000 250,000 225,000

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This threshold was not met in either the first or second two-year period.

For the two-year period ended December 31, 2017, Comcast earned and vested in 175,000 out of the maximum potential 250,000 warrants.

For the two-year period ended December 31, 2019, Comcast earned and vested in 100,000 out of the maximum potential 250,000 warrants.

At December 31, 2020, 275,000 vested warrants were outstanding.

To fully vest in the rights to purchase all of the remaining unearned 225,000 underlying shares, Comcast and its affiliates must purchase an aggregate of $ 340 million in goods and services from us during the period January 1, 2020 through December 31, 2021.

Any and all warrants that vest will expire on January 1, 2023.

All warrants that vest will expire on January 1, 2023.

The warrants provide for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions.

Additionally, in connection with the common stock purchase warrants, we have also entered into a registration rights agreement with Comcast under which Comcast may from time to time request that we register the shares of common stock underlying vested warrants with the SEC.

Because the warrants contain performance criteria under which Comcast must achieve specified aggregate purchase levels for the warrants to vest, as detailed above, the measurement date for the warrants is the date on which the warrants vest.

For the two-year period ended December 31, 2017, Comcast earned and vested in 175,000 out of the maximum potential 250,000 warrants.

For the two -year period ended December 31, 2019 , Comcast earned and vested in 100,000 out of the maximum potential 250,000 warrants.

As the warrants contain performance criteria under which Comcast must achieve specified aggregate purchase levels for the warrants to vest, as detailed above, the measurement date for the warrants for the first two-year successive periods was the date on which the warrants vested.

The FASB issued guidance in November 2019 that clarifies the accounting for share-based payments issued as sales incentives to customers.

The guidance requires that stock-based compensation expense be recorded as a reduction in the transaction price on the basis of the grant-date fair value.

The transition provisions require that equity-classified awards be measured at the adoption date fair value if the measurement date has not been established prior to the adoption date.

Through December 31, 2020, none of the warrants had vested for the two-year period beginning January 1, 2020.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

The assumptions we utilized in the Black-Scholes option pricing model and the resulting grant-date fair value of the warrants as of January 1, 2020 were the following:

Fair value $ 17.19

Price of Universal Electronics Inc.

common stock $ 52.21

Risk-free interest rate 1.62 %

Expected volatility 48.86 %

Expected life in years 3.00

Prior to the adoption of the new guidance on January 1, 2020, we adjusted the estimated weighted average fair value of the warrants each period.

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

Year Ended December 31,

Fair value $ 21.60 $ 3.45

Price of Universal Electronics Inc.

common stock $ 58.01 $ 24.81

Risk-free interest rate 1.65 % 2.49 %

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Net gain (loss) on foreign currency exchange contracts (1)

$ ( 310 ) $ ( 62 ) $ 545

Net gain (loss) on foreign currency exchange transactions ( 1,675 ) ( 870 ) ( 4,987 )

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See Note 19 for further information concerning our foreign currency exchange contracts.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Note 18 — Earnings (Loss) Per Share

Earnings (loss) per share was calculated as follows:

Note 18 — Earnings Per Share

Earnings per share was calculated as follows:

Year Ended December 31,

(In thousands, except per-share amounts) 2020 2019 2018

Net income (loss)

Net income $ 38,572 $ 3,630 $ 11,924

Weighted-average common shares outstanding 13,893 13,879 13,948

Basic earnings (loss) per share

Net income (loss)

Basic earnings per share $ 2.78 $ 0.26 $ 0.85

Net income $ 38,572 $ 3,630 $ 11,924

Weighted-average common shares outstanding for basic 13,893 13,879 13,948

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Weighted-average common shares outstanding on a diluted basis 14,166 14,109 14,060

Diluted earnings (loss) per share

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

Diluted earnings per share $ 2.72 $ 0.26 $ 0.85

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

Year Ended December 31,

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The following table sets forth the total net fair value of derivatives:

December 31, 2019

December 31, 2018

Fair Value Measurement Using

Total Balance

Fair Value Measurement Using

Total Balance

(In thousands)

December 31, 2020 December 31, 2019

Fair Value Measurement Using Total Balance Fair Value Measurement Using Total Balance

(In thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

Foreign currency exchange contracts $ — $ 113 $ — $ 113 $ — $ ( 172 ) $ — $ ( 172 )

We held foreign currency exchange contracts which resulted in a net pre-tax loss of $0.1 million , a net pre-tax gain of $0.5 million , and a net pre-tax loss of $3.6 million for the years ended December 31, 2019 , 2018 , and 2017 , respectively.

We held foreign currency exchange contracts which resulted in a net pre-tax loss of $ 0.3 million, a net pre-tax loss of $ 0.1 million, and a net pre-tax gain of $ 0.5 million for the years ended December 31, 2020, 2019, and 2018, respectively.

See Note 17 for further information concerning our foreign currency exchange contracts.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Details of foreign currency exchange contracts held were as follows:

Position Held

Notional Value

(in millions)

Unrealized Gain/(Loss) Recorded at Balance Sheet

Date Held Currency Position Held Notional Value

(in millions) Forward Rate Unrealized Gain/(Loss) Recorded at Balance Sheet

(in thousands) (1)

Settlement Date

December 31, 2019

USD/Chinese Yuan Renminbi

January 23, 2020

December 31, 2019

USD/Brazilian Real

January 24, 2020

December 31, 2019

January 24, 2020

December 31, 2019

USD/Brazilian Real

January 24, 2020

December 31, 2018

January 25, 2019

December 31, 2018

USD/Chinese Yuan Renminbi

January 25, 2019

December 31, 2018

USD/Chinese Yuan Renminbi

January 25, 2019

December 31, 2018

USD/Brazilian Real

January 25, 2019

December 31, 2020 USD/Chinese Yuan Renminbi CNY $ 55.0 6.5370 $ 239 January 29, 2021

December 31, 2020 USD/Brazilian Real USD $ 0.9 5.1714 $ 4 January 29, 2021

December 31, 2020 USD/Euro USD $ 28.0 1.2177 $ ( 106 ) January 29, 2021

December 31, 2020 USD/Mexican Peso USD $ 1.9 20.1915 $ ( 24 ) January 29, 2021

December 31, 2019 USD/Chinese Yuan Renminbi CNY $ 35.0 6.9867 $ 100 January 23, 2020

December 31, 2019 USD/Brazilian Real USD $ 0.5 4.0560 $ ( 6 ) January 24, 2020

December 31, 2019 USD/Euro USD $ 28.0 1.1133 $ ( 253 ) January 24, 2020

December 31, 2019 USD/Brazilian Real USD $ 0.7 4.0870 $ ( 13 ) January 24, 2020

(1) Unrealized gains on foreign currency exchange contracts are recorded in prepaid expenses and other current assets.

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We recorded $ 1.2 million, $ 0.9 million and $ 1.1 million of expense for company contributions for the years ended December 31, 2020, 2019, and 2018, respectively.

Note 21 — Business Combinations

On April 6, 2017, we acquired substantially all of the net assets of Residential Control Systems, Inc.

("RCS"), a U.S.-based designer and manufacturer of energy management and control products for the residential, small commercial and hospitality markets.

The purchase price of $12.6 million was comprised of $8.9 million in cash and $3.7 million of contingent consideration.

Additionally, we incurred $0.1 million in acquisition costs, consisting primarily of accounting related expenses, which are included within selling, general and administrative expenses for the year ended December 31, 2017.

The acquisition of these assets allows us to expand our product offering of home sensing, monitoring and control solutions to include smart thermostat, sensing and monitoring products previously sold and marketed by RCS.

Our consolidated statements of operations for the years ended December 31, 2019 , 2018 and 2017 include net sales of $3.9 million , $5.1 million , and $3.5 million , respectively;

and net losses of $2.4 million , $0.2 million , and $0.4 million , respectively, attributable to RCS.

Contingent Consideration

We are required to make additional earnout payments of up to $10.0 million upon the achievement of certain operating income levels attributable to RCS over the period commencing on the acquisition date through June 30, 2022.

The amount of contingent consideration is calculated at the end of each calendar year and is based on the agreed upon percentage of operating income as defined in the Asset Purchase Agreement (the "APA").

Operating income is calculated using certain revenues, costs and expenses directly attributable to RCS as specified in the APA.

At the acquisition date, the value of earnout contingent consideration was estimated using a valuation methodology based on projections of future operating income calculated in accordance with the APA.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Such projections were then discounted using an average discount rate of 24.8% to reflect the risk in achieving the projected operating income levels as well as the time value of money.

The fair value measurement of the earnout contingent consideration was based primarily on significant inputs not observable in an active market and thus represents a Level 3 measurement as defined under U.S.

At December 31, 2018 , the fair value of the earnout contingent consideration attributable to RCS was $0.7 million .

During the year ended December 31, 2019, the fair value of earnout contingent consideration attributable to RCS decreased $0.5 million to $0.2 million .

Changes in the fair value of earnout contingent consideration primarily reflect adjustments to the timing and amount of payments as well as the related accretion driven by the time value of money.

These adjustments are recorded within selling, general and administrative expenses.

At December 31, 2019 , the fair value of earnout contingent consideration attributable to RCS is presented within long-term contingent consideration in our consolidated balance sheet.

Pro Forma Results (Unaudited)

The unaudited pro forma financial information presents the combined results of our operations and the operations of RCS as if the RCS acquisition had occurred on January 1, 2017.

This unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been achieved had the acquisition actually been completed as of January 1, 2017, and should not be taken as a projection of the future consolidated results of our operations.

For the year ended December 31, 2017 , pro forma net sales were $696.4 million ;

pro forma net loss was $10.5 million ;

pro forma basic and diluted loss per share was $0.73 .

For purposes of determining pro forma net loss, adjustments were made, as follows, to derive the information presented above.

The pro forma net loss assumes that amortization of acquired intangible assets began at January 1, 2017 rather than on April 6, 2017.

The result is a net increase in amortization expense of $25 thousand for the year ended December 31, 2017 .

Additionally, acquisition costs totaling $0.1 million are excluded from pro forma net loss.

All adjustments have been made net of their related tax effects.

Note 21 — Quarterly Financial Data (Unaudited)

Summarized quarterly financial data is as follows:

(In thousands, except per share amounts)

September 30,

Operating income (loss)

Net income (loss)

Earnings (loss) per share (1) :

(In thousands, except per share amounts) March 31, June 30, September 30, December 31,

Net sales $ 151,778 $ 153,133 $ 153,505 $ 156,264

Gross profit 42,941 38,075 44,156 51,084

Operating income 8,046 6,460 10,246 12,515

Net income 5,846 14,400 6,168 12,158

Earnings per share (1) :

Basic $ 0.42 $ 1.03 $ 0.44 $ 0.88

Diluted $ 0.41 $ 1.02 $ 0.43 $ 0.86

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

(In thousands, except per share amounts)

September 30,

(In thousands, except per share amounts) March 31, June 30, September 30, December 31,

Net sales $ 184,163 $ 193,896 $ 200,724 $ 174,694

Gross profit 39,874 33,993 46,479 49,857

Operating income (loss) 1,663 ( 3,926 ) 6,127 11,451

1 unchanged sentence

Earnings (loss) per share (1) :

Basic $ ( 0.07 ) $ ( 0.37 ) $ 0.19 $ 0.50

Diluted $ ( 0.07 ) $ ( 0.37 ) $ 0.19 $ 0.49

(1) The earnings per common share calculations for each of the quarters were based upon the weighted average number of shares and share equivalents outstanding during each period, and the sum of the quarters may not be equal to the full year earnings per share amounts.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data