UNIVERSAL ELECTRONICS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 41 Consolidated Balance Sheets at December 31, 202 2 and 202 1 43 Consolidated Statements of Operations for the Years Ended December 31, 202 2 , 202 1 and 20 2 0 44 Consolidated Comprehensive Income (Loss) Statements for the Years Ended December 31, 202 2 , 202 1 and 20 2 0 45 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 202 2 , 202 1 and 20 2 0 46 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2 , 202 1 and 20 2 0 47 Notes to Consolidated Financial Statements 48 All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 40 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Universal Electronics Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Universal Electronics Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2022, 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 position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2022, 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 8, 2023, expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence 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 and Note 4 to the consolidated financial statements, product revenue is generated through manufacturing and delivering universal control, sensing, and automation products, and AV accessories. The Company recognizes revenue over time for custom products with no alternative use when the Company has an enforceable right to payment for performance completed to date, including a reasonable margin, through a contractual commitment from the customer. Revenue is recognized at a point in time if the criteria for recognizing revenue over time are not met. For each new contract and/or product, management performs an analysis to determine whether the asset created is a custom asset with no alternative use and whether the terms and conditions of the contract indicate the Company has an enforceable right to payment for performance completed prior to the transfer of the underlying asset. We identified the determination of overtime versus point in time revenue recognition as a critical audit matter. 41 Table of Contents The principal considerations for our determination that overtime versus point in time revenue recognition is a critical audit matter is the significant judgment exercised by management in identifying and evaluating whether new contracts and/or products meet the criteria for over time or point in time revenue recognition. Significant judgments include the evaluation of contractual legal terms and rights within each jurisdiction in which the Company operates and evaluation of whether it is possible, contractually or economically, to repurpose or redirect products for an alternative use. Our audit procedures related to the overtime versus point in time revenue recognition included the following, among others: • We tested the design and operating effectiveness of key controls over the Company's new and amended contract review process, specifically those related to the identification and evaluation of terms and conditions associated with an enforceable right to payment. • We tested design and operating effectiveness of key controls associated with the Company's classification of new products, including those associated with determination and classification of a product as having no alternative use. • For a selection of parts from the Company's active products listing, we performed testing to determine whether products marked as custom with no alternative use are restricted contractually or economically to be repurposed or redirected. This includes evaluating management assumptions regarding the economic feasibility of repurposing a finished product and evidence to support that the final product has no alternative use. • For a selection of contracts, obtained the contract and management's analysis over the enforceable right to payment and validated that the payment terms within the contract were properly evaluated and the contract was properly included or excluded from the overtime revenue recognition. • For a selection of revenue transactions, we traced the products sold into the Company's listing of active products and determined whether that product was appropriately classified as custom or non-custom by applying the same testing approach noted above. For transactions selected with custom products, we also obtained and read the contract and contract amendments to determine whether the payment terms within the contract specifically identified an enforceable right to payment, including a reasonable margin, upon cancellation. The two parts to this test serve to determine whether the transaction was appropriately recorded over time or at a point in time. /s/ GRANT THORNTON LLP We have served as the Company's auditor since 2005. Newport Beach, California March 8, 2023 42 Table of Contents UNIVERSAL ELECTRONICS INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share-related data) December 31, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 66,740 $ 60,813 Accounts receivable, net 112,346 129,215 Contract assets 7,996 5,012 Inventories 140,181 134,469 Prepaid expenses and other current assets 6,647 7,289 Income tax receivable 4,130 348 Total current assets 338,040 337,146 Property, plant and equipment, net 62,791 74,647 Goodwill 49,085 48,463 Intangible assets, net 24,470 20,169 Operating lease right-of-use assets 21,599 19,847 Deferred income taxes 6,242 7,729 Other assets 1,936 2,347 Total assets $ 504,163 $ 510,348 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 71,373 $ 92,707 Line of credit 88,000 56,000 Accrued compensation 20,904 24,217 Accrued sales discounts, rebates and royalties 6,477 9,286 Accrued income taxes 5,585 3,737 Other accrued liabilities 24,134 30,840 Total current liabilities 216,473 216,787 Long-term liabilities: Operating lease obligations 15,027 14,266 Deferred income taxes 2,724 2,394 Income tax payable 723 939 Other long-term liabilities 810 13 Total liabilities 235,757 234,399 Commitments and contingencies Stockholders' equity: Preferred stock, $ 0.01 par value, 5,000,000 shares authorized; none issued or outstanding — — Common stock, $ 0.01 par value, 50,000,000 shares authorized; 24,999,951 and 24,678,942 shares issued on December 31, 2022 and 2021, respectively 250 247 Paid-in capital 326,839 314,094 Treasury stock, at cost, 12,295,305 and 11,861,198 shares on December 31, 2022 and 2021, respectively ( 368,194 ) ( 355,159 ) Accumulated other comprehensive income (loss) ( 21,187 ) ( 13,524 ) Retained earnings 330,698 330,291 Total stockholders' equity 268,406 275,949 Total liabilities and stockholders' equity $ 504,163 $ 510,348 The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents UNIVERSAL ELECTRONICS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Net sales $ 542,751 $ 601,602 $ 614,680 Cost of sales 390,459 428,586 438,424 Gross profit 152,292 173,016 176,256 Research and development expenses 32,452 30,917 31,450 Selling, general and administrative expenses 105,292 118,846 107,539 Operating income 14,548 23,253 37,267 Interest income (expense), net ( 2,200 ) ( 566 ) ( 1,422 ) Loss on sale of Argentina subsidiary — ( 6,050 ) — Accrued social insurance adjustment — — 9,464 Other income (expense), net ( 955 ) ( 557 ) ( 1,404 ) Income before provision for income taxes 11,393 16,080 43,905 Provision for income taxes 10,986 10,779 5,333 Net income $ 407 $ 5,301 $ 38,572 Earnings per share: Basic $ 0.03 $ 0.39 $ 2.78 Diluted $ 0.03 $ 0.39 $ 2.72 Shares used in computing earnings per share: Basic 12,703 13,465 13,893 Diluted 12,779 13,742 14,166 The accompanying notes are an integral part of these consolidated financial statements. 44 Table of Contents UNIVERSAL ELECTRONICS INC. CONSOLIDATED COMPREHENSIVE INCOME (LOSS) STATEMENTS (In thousands) Year Ended December 31, 2022 2021 2020 Net income $ 407 $ 5,301 $ 38,572 Other comprehensive income (loss): Change in foreign currency translation adjustment ( 7,663 ) ( 427 ) 4,259 Change in foreign currency translation due to sale of Argentina subsidiary — 5,425 — Comprehensive income (loss) $ ( 7,256 ) $ 10,299 $ 42,831 The accompanying notes are an integral part of these consolidated financial statements. 45 Table of Contents UNIVERSAL ELECTRONICS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Common Stock Issued Common Stock in Treasury Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Totals Shares Amount Shares Amount Balance at January 1, 2020 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 Shares issued for employee benefit plan and compensation 169 1 1,135 1,136 Purchase of treasury shares ( 444 ) ( 17,678 ) ( 17,678 ) Stock options exercised 80 1 2,804 2,805 Shares issued to directors 25 1 ( 1 ) — Employee and director stock-based compensation 9,122 9,122 Performance-based common stock warrants 686 686 Balance at December 31, 2020 24,392 244 ( 10,618 ) ( 295,495 ) 302,084 ( 18,522 ) 324,990 313,301 Net income 5,301 5,301 Currency translation adjustment ( 427 ) ( 427 ) Change in foreign currency translation due to sale of Argentina subsidiary 5,425 5,425 Shares issued for employee benefit plan and compensation 203 2 1,090 1,092 Purchase of treasury shares ( 1,243 ) ( 59,664 ) ( 59,664 ) Stock options exercised 54 1 1,637 1,638 Shares issued to directors 30 — — — Employee and director stock-based compensation 9,969 9,969 Performance-based common stock warrants ( 686 ) ( 686 ) Balance at December 31, 2021 24,679 247 ( 11,861 ) ( 355,159 ) 314,094 ( 13,524 ) 330,291 275,949 Net income 407 407 Currency translation adjustment ( 7,663 ) ( 7,663 ) Shares issued for employee benefit plan and compensation 212 2 1,197 1,199 Purchase of treasury shares ( 434 ) ( 13,035 ) ( 13,035 ) Stock options exercised 80 1 1,535 1,536 Shares issued to directors 29 — — — Employee and director stock-based compensation 10,013 10,013 Balance at December 31, 2022 25,000 $ 250 ( 12,295 ) $ ( 368,194 ) $ 326,839 $ ( 21,187 ) $ 330,698 $ 268,406 The accompanying notes are an integral part of these consolidated financial statements. 46 Table of Contents UNIVERSAL ELECTRONICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 407 $ 5,301 $ 38,572 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 24,033 26,747 29,735 Provision for credit losses ( 182 ) — 332 Deferred income taxes 1,377 ( 1,560 ) ( 478 ) Shares issued for employee benefit plan 1,199 1,092 1,136 Employee and director stock-based compensation 10,013 9,969 9,122 Performance-based common stock warrants — ( 686 ) 686 Impairment of long-term assets 2,888 3,338 134 Loss on sale of Argentina subsidiary, net of cash transferred — 5,960 — 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 12,765 2,007 14,884 Inventories ( 9,913 ) ( 14,985 ) 28,295 Prepaid expenses and other assets ( 917 ) ( 630 ) ( 245 ) Accounts payable and accrued liabilities ( 28,670 ) 870 ( 33,543 ) Accrued income taxes ( 2,074 ) 2,860 ( 6,486 ) Net cash provided by (used for) operating activities 10,926 40,283 73,392 Cash flows from investing activities: Purchase of term deposit ( 7,487 ) — — Redemption of term deposit 7,803 — — Acquisition of the net assets of Qterics, Inc. ( 939 ) — — Acquisitions of property, plant and equipment ( 14,006 ) ( 12,586 ) ( 16,862 ) Acquisitions of intangible assets ( 6,579 ) ( 4,455 ) ( 6,372 ) Payment on sale of Ohio call center — — ( 500 ) Net cash provided by (used for) investing activities ( 21,208 ) ( 17,041 ) ( 23,734 ) Cash flows from financing activities: Borrowings under line of credit 133,000 112,000 75,000 Repayments on line of credit ( 101,000 ) ( 76,000 ) ( 123,000 ) Proceeds from stock options exercised 1,536 1,638 2,805 Treasury stock purchased ( 13,035 ) ( 59,664 ) ( 17,678 ) Contingent consideration payments in connection with business combinations — — ( 3,091 ) Net cash provided by (used for) financing activities 20,501 ( 22,026 ) ( 65,964 ) Effect of foreign currency exchange rate changes on cash and cash equivalents ( 4,292 ) 2,444 ( 843 ) Net increase (decrease) in cash and cash equivalents 5,927 3,660 ( 17,149 ) Cash and cash equivalents at beginning of period 60,813 57,153 74,302 Cash and cash equivalents at end of period $ 66,740 $ 60,813 $ 57,153 Supplemental cash flow information: Income taxes paid $ 10,922 $ 10,093 $ 12,712 Interest paid $ 2,214 $ 620 $ 1,610 The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Note 1 — Description of Business Universal Electronics Inc. ("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 37 years, we have developed a broad portfolio of patented technologies and cloud-based connectivity and control software solutions that we license to our customers, including many leading Fortune 500 companies. Distribution methods for our control solutions vary depending on the sales channel. We 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. and its subsidiaries unless the context indicates to the contrary. Note 2 — Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Reportable Segment An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited extent. Our chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance. Accordingly, we only have a single operating and reportable segment. Estimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for credit losses, inventory valuation, impairment of long-lived assets, intangible assets and goodwill, business combinations, income taxes and related valuation allowances, stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these assumptions and estimates, and they may be adjusted as more information becomes available. Any adjustment may be material. 48 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Revenue Recognition Revenue is recognized when control of a good or service is transferred to a customer. Control is considered to be transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of that good or service. Revenues are generated from manufacturing, shipping and supporting 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. We also generate revenues from a cloud-based software solution enabling software updates, digital rights management provisioning and remote technical support to consumer electronics customers. Revenue - Product revenue is generated through manufacturing, shipping and supporting 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. Our contracts have an anticipated duration of less than a year and consideration may be variable based on indeterminate volumes. Revenue is recognized over time when our performance creates an asset with no alternative use to us (custom products) and we have an enforceable right to payment for performance completed to date, including a reasonable margin, through a contractual commitment from the customer. Custom products are those products for which we are unable to redirect the asset to another customer in the foreseeable future without significant rework. The method for measuring progress towards satisfying a performance obligation for a custom product is based on the costs incurred to date (cost-to-cost method). We believe that the costs associated with production are most closely aligned with the revenue associated with those products. We recognize revenue at a point in time if the criteria for recognizing revenue over time are not met, the title of the goods has transferred and we have a present right to payment. A provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net sales in the period in which we make such a determination. We license our symbolic intellectual property which includes our patented technologies and database of control codes. Royalty revenue is recognized for these licensing arrangements on an over time basis. We record license revenue for per-unit based licenses when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment. We record per-unit-based licenses with minimum guarantees ratably over the license period to which the minimum guarantee relates and any per-unit sales in excess of the minimum guarantee in the period in which the sale occurs. We record licenses with fixed consideration ratably over the license period. Tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers. We recognize service revenues related to our cloud-based software solution on an over-time basis, as our customers simultaneously receive and consume the benefits provided by our performance. Revenues are recognized over the period during which the performance obligations are satisfied, and control of the service is transferred to the customers. Contract assets - Contract assets represent the value of revenue recognized over time for which we have not yet invoiced the customer. Generally, we invoice the customer within 90 days of revenue recognition. Contract liabilities - A contract liability is recorded when consideration is received from a customer prior to fully satisfying a performance obligation in a contract. Our contract liabilities primarily consist of cash received in advance of providing our cloud-based software services. These contract liabilities will be recognized as revenues when control of the related product or service is transferred to the customer. See Note 12 for further information concerning contract liabilities. 49 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Other sales-related matters - Trade receivables are recorded at the invoiced amount and do not bear interest. Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components. We accrue for discounts and rebates based on historical experience and our expectations regarding future sales to our customers. Accruals for discounts and rebates are recorded as a reduction to sales in the same period as the related revenue. Such discounts were $ 12.2 million and $ 14.4 million at December 31, 2022 and 2021, respectively. Changes in such accruals may be required if future rebates and incentives differ from our estimates. We present all non-income government-assessed taxes (sales, use and value added taxes) collected from our customers and remitted to governmental agencies on a net basis (excluded from revenue) in our financial statements. The government-assessed taxes are recorded in our consolidated balance sheets until they are remitted to the government agency. Income Taxes We provide for income taxes utilizing the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are presented net as non-current by jurisdiction. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when a judgment is made that is considered more likely than not that a tax benefit will not be realized. A decision to record a valuation allowance results in an increase in income tax expense or a decrease in income tax benefit. If the valuation allowance is released in a future period, income tax expense will be reduced accordingly. The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. The impact of an uncertain income tax position is recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, on a jurisdiction-by-jurisdiction basis, that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We continue to assess the need for a valuation allowance on 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. Research and Development Research and development costs are expensed as incurred and consist primarily of salaries, employee benefits, supplies and materials. Advertising Advertising costs are expensed as incurred. Advertising expense totaled $ 0.5 million, $ 0.8 million and $ 0.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. 50 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Shipping and Handling Fees and Costs We include shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound freight or amounts billed to customers 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 $ 10.8 million, $ 11.8 million and $ 9.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. Stock-Based Compensation We recognize the grant date fair value of stock-based compensation awards as expense in proportion to vesting during the requisite service period, which ranges from one to three years . 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. The fair value of stock options granted to employees and directors is determined utilizing the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, expected life in years and dividend yield. The risk-free interest rate over the expected term is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the stock option. Expected life is computed utilizing historical exercise patterns and post-vesting behavior. The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future. See Note 15 for further information regarding stock-based compensation. Performance-Based Common Stock Warrants The measurement date for performance-based common stock warrants is the date on which the warrants vest. We recognize the fair value of performance-based common stock warrants as a reduction to net sales ratably as the warrants vest based on the projected number of warrants that will vest, the proportion of the performance criteria achieved by the customer within the period relative to the total performance required (aggregate purchase levels) for the warrants to vest and the fair value of the related unvested warrants. If we do not have a reliable forecast of future purchases to be made by the customer by which to estimate the number of warrants that will vest, then the maximum number of potential warrants is assumed until such time that a reliable forecast of future purchases is available. To the extent that our projections change in the future as to the number of warrants that will vest, a cumulative catch-up adjustment will be recorded in the period in which our estimates change. See Note 16 for further information regarding performance-based common stock warrants. Foreign Currency Translation and Foreign Currency Transactions We use the U.S. Dollar as our functional currency for financial reporting purposes. The functional currency for most of our foreign subsidiaries is their local currency. The translation of foreign currencies into U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using the average exchange rate during each period. The gains and losses resulting from the translation are included in the foreign currency translation adjustment account, a component of accumulated other comprehensive income in stockholders' equity, and are excluded from net income. The portions of intercompany accounts receivable and accounts payable that are intended for settlement are translated at exchange rates in effect at the balance sheet date. Our intercompany foreign investments and long-term debt that are not intended for settlement are translated using historical exchange rates. Transaction gains and losses generated by the effect of changes in foreign currency exchange rates on recorded assets and liabilities denominated in a currency different than the functional currency of the applicable entity are recorded in other income (expense), net. See Note 17 for further information concerning transaction gains and losses. 51 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Earnings Per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares, including the dilutive effect of stock options, restricted stock and common stock warrants, outstanding during the period. Dilutive potential common shares for all periods presented are computed utilizing the treasury stock method; however, dilutive potential common shares are excluded where their inclusion would be anti-dilutive. Financial Instruments Our financial instruments consist primarily of cash and cash equivalents, term deposit, accounts receivable, accounts payable, accrued liabilities, debt and derivatives. The carrying value of our financial instruments, excluding derivatives, approximates fair value as a result of their short maturities. Our derivatives are carried at fair value. See Notes 3, 4, 9, 11, 12 and 19 for further information concerning our financial instruments. Cash, Cash Equivalents and Term Deposit Cash and cash equivalents include cash accounts and all investments purchased with initial maturities of three months or less. Our term deposit had an initial maturity of one year , but was redeemed prior to December 31, 2022. Domestically, we generally maintain balances in excess of federally insured limits. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash, cash equivalents and term deposit with financial institutions we believe are high quality. These financial institutions are located in many different geographic regions. As part of our cash and risk management processes, we perform periodic evaluations of the relative credit standing of our financial institutions. We have not sustained credit losses from instruments held at financial institutions. See Note 3 for further information concerning cash, cash equivalents and term deposit. Allowance for Credit Losses We maintain an allowance for credit losses for estimated losses on our trade receivables, resulting from the inability of our customers to make payments for products sold or services rendered. The allowance for credit losses is based on a variety of factors, including credit reviews, historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior. We also record specific provisions for individual accounts when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer change, our estimates of the recoverability of the receivables would be further adjusted. See Note 4 for further information concerning our allowance for credit losses. Inventories Inventories consist of remote controls, wireless sensors and AV accessories, as well as the related component parts and raw materials. Inventoriable costs include materials, labor, freight-in and manufacturing overhead related to the purchase and production of inventories. We value our inventories at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. We attempt to carry inventories in amounts necessary to satisfy our customer requirements on a timely basis. See Note 5 for further information concerning our inventories and suppliers. Product innovations and technological advances may shorten a given product's life cycle. We continually monitor our inventories to identify any excess or obsolete items on hand. We write down our inventories for estimated excess and obsolescence in an amount equal to the difference between the cost of the inventories and estimated net realizable value. These estimates are based upon management's judgment about future demand and market conditions. 52 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. The cost of property, plant, and equipment includes the purchase price of the asset and all expenditures necessary to prepare the asset for its intended use. We capitalize additions and improvements and expense maintenance and repairs as incurred. We capitalize certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. For financial reporting purposes, depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included as a component of depreciation expense. Estimated useful lives are as follows: Buildings 25 - 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. Leases We determine if an arrangement is a lease at inception and determine the classification of the lease, as either operating or finance, at commencement. Operating leases are included in operating lease right-of-use ("ROU") assets, other accrued liabilities and long-term operating lease obligations on our consolidated balance sheets. We presently do not have any finance leases. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date, including the lease term, in determining the present value of lease payments. Operating lease ROU assets also factor in any lease payments made, initial direct costs and lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Some of our leases include options to extend with a range of three years to five years with two extensions at the then current market rate. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 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. See Note 8 for further information concerning our leases. 53 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Goodwill We record the excess purchase price of net tangible and intangible assets acquired over their estimated fair value as goodwill. We evaluate the carrying value of goodwill on December 31 of each year and between annual evaluations if events occur or circumstances change that may reduce the fair value of the reporting unit below its carrying amount. Such circumstances may include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) a decline in macroeconomic conditions, (3) a significant decline in our financial performance or (4) a significant decline in the price of our common stock for a sustained period of time. We perform our annual impairment test 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. Therefore, performing a quantitative impairment test was unnecessary. See Note 7 for further information concerning goodwill. Long-Lived and Intangible Assets Impairment Intangible assets consist of capitalized software development costs, customer relationships, developed and core technologies, distribution rights, patents and trademarks and trade names. Capitalized amounts related to patents represent external legal costs for the application, maintenance and extension of the useful life of patents. Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from two to 15 years. We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which may trigger an impairment review include the following: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner or use of the assets or strategy for the overall business; (3) significant negative industry or economic trends; and (4) a significant decline in our stock price for a sustained period. We conduct an impairment review when we determine that the carrying value of a long-lived or intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment. The asset is impaired if its carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In assessing recoverability, we make assumptions regarding estimated future cash flows and other factors. An impairment loss is the amount by which the carrying value of an asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model. When calculating fair value, we make assumptions regarding estimated future cash flows, discount rates and other factors. See Note 6 for further information concerning long-lived assets. See Note 7 for further information concerning intangible assets. Business Combinations We allocate the purchase price of acquired businesses to the tangible and intangible assets and the liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant fair value estimates and assumptions, especially with respect to intangible assets and contingent consideration. Management estimates the fair value of certain intangible assets and contingent consideration by utilizing the following (but not limited to): • future cash flow from customer contracts, customer lists, distribution agreements, acquired developed technologies, trademarks, trade names and patents; • expected costs to complete development of in-process technology into commercially viable products and cash flows from the products once they are completed; • brand awareness and market position, as well as assumptions regarding the period of time the brand will continue to be used in our product portfolio; and 54 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 • discount rates utilized in discounted cash flow models. Results of operations and cash flows of acquired businesses are included in our operating results from the date of acquisition. In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability at each reporting period and record changes in the fair value within operating expenses. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of earnings estimates or in the timing or likelihood of achieving earnings-based milestones. Contingent consideration is recorded in other accrued liabilities and long-term contingent consideration in our consolidated balance sheets. See Note 21 for further information concerning business combinations. Derivatives Our foreign currency exposures are primarily concentrated in the Brazilian Real, British Pound, Chinese Yuan Renminbi, Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen, Korean Won 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. We do not enter into financial instruments for speculation or trading purposes. The derivatives we enter into have not qualified for hedge accounting. The gains and losses on both the derivatives and the foreign currency-denominated balances are recorded as foreign exchange transaction gains or losses and are classified in other income (expense), net. Derivatives are recorded on the balance sheet at fair value. The estimated fair value of derivative financial instruments represents the amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices. See Note 19 for further information concerning derivatives. Fair-Value Measurements 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. The valuation techniques are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources. Unobservable inputs require management to make certain assumptions and judgments based on the best information available. Observable inputs are the preferred data source. These two types of inputs result in the following fair value hierarchy: Level 1: Quoted prices (unadjusted) for identical instruments in active markets. Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable. Recently Adopted Accounting Pronouncements In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers". This guidance requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, "Revenue from Contracts with Customers". At the acquisition date, the acquirer applies the revenue recognition model as if it had originated the acquired contracts. Our adoption of this guidance on January 1, 2022 did not have a material impact on our consolidated statement of financial position, results of operations and cash flows. 55 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Other Accounting Pronouncements Accounting Updates Not Yet Effective In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform", and in December 2022, the FASB issued ASU 2022-06, "Deferral of the Sunset Date of Topic 848". This guidance is intended to provide temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The amendments in these ASUs are elective and are effective upon issuance for all entities through December 31, 2024. These amendments are not expected to have a material impact on our consolidated statement of financial position, results of operations and cash flows. Note 3 — Cash and Cash Equivalents and Term Deposit Cash and cash equivalents were held in the following geographic regions: December 31, (In thousands) 2022 2021 North America $ 6,825 $ 6,430 People's Republic of China ("PRC") 15,633 16,000 Asia (excluding the PRC) 18,850 11,798 Europe 13,042 17,604 South America 12,390 8,981 Total cash and cash equivalents $ 66,740 $ 60,813 On January 25, 2022, we entered into a one-year term deposit cash account with Banco Santander (Brasil) S.A., denominated in Brazilian Real. The term deposit earned interest at a variable annual rate based upon the Brazilian CDI overnight interbank rate. As of December 31, 2022, all of this term deposit was redeemed. Note 4 — Revenue and Accounts Receivable, Net Revenue Details The pattern of revenue recognition was as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Goods and services transferred at a point in time $ 450,227 $ 498,554 $ 495,033 Goods and services transferred over time 92,524 103,048 119,647 Net sales $ 542,751 $ 601,602 $ 614,680 Our net sales to external customers by geographic area were as follows: Year Ended December 31, (In thousands) 2022 2021 2020 United States $ 167,501 $ 200,136 $ 255,651 Asia (excluding the PRC) 127,702 127,140 117,142 Europe 103,993 126,551 108,185 People's Republic of China 85,215 87,866 88,246 Latin America 28,363 25,943 17,481 Other 29,977 33,966 27,975 Total net sales $ 542,751 $ 601,602 $ 614,680 56 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 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 customer totaled more than 10% of our net sales: Year Ended December 31, 2022 2021 2020 $ (thousands) % of Net Sales $ (thousands) % of Net Sales $ (thousands) % of Net Sales Comcast Corporation $ 78,781 14.5 % $ 98,361 16.3 % $ 123,574 20.1 % Daikin Industries Ltd. $ 78,413 14.4 % $ 70,793 11.8 % $ — (1) — % (1) (1) Sales associated with this customer did not total more than 10% of our net sales for the indicated period. Accounts Receivable, Net Accounts receivable, net were as follows: December 31, (In thousands) 2022 2021 Trade receivables, gross $ 108,030 $ 122,508 Allowance for credit losses ( 957 ) ( 1,285 ) Allowance for sales returns ( 618 ) ( 592 ) Trade receivables, net 106,455 120,631 Other (1) 5,891 8,584 Accounts receivable, net $ 112,346 $ 129,215 (1) Other accounts receivable is primarily comprised of value added tax and supplier rebate receivables. Allowance for Credit Losses Changes in the allowance for credit losses were as follows: (In thousands) Year Ended December 31, 2022 2021 2020 Balance at beginning of period $ 1,285 $ 1,412 $ 1,492 Additions (reductions) to costs and expenses ( 182 ) — 332 Cash receipts — — ( 157 ) Write-offs/Foreign exchange effects ( 146 ) ( 127 ) ( 255 ) Balance at end of period $ 957 $ 1,285 $ 1,412 Trade receivables associated with this significant customer that totaled more than 10% of our accounts receivable, net were as follows: December 31, 2022 2021 $ (thousands) % of Accounts Receivable, Net $ (thousands) % of Accounts Receivable, Net Comcast Corporation $ 15,367 13.7 % $ — (1) — % (1) (1) Trade receivables associated with this customer did not total more than 10% of our accounts receivable, net for the indicated period. 57 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Note 5 — Inventories and Significant Suppliers Inventories were as follows: December 31, (In thousands) 2022 2021 Raw materials $ 58,759 $ 52,617 Components 25,226 25,289 Work in process 2,616 7,102 Finished goods 53,580 49,461 Inventories $ 140,181 $ 134,469 Significant Suppliers We purchase integrated circuits, components and finished goods from multiple sources. Purchases from the following supplier totaled 10% of our total inventory purchases: Year Ended December 31, 2022 2021 2020 $ (thousands) % of Total Inventory Purchases $ (thousands) % of Total Inventory Purchases $ (thousands) % of Total Inventory Purchases Qorvo International Pte Ltd. $ 33,293 11.5 % $ 38,712 11.8 % $ 43,543 14.2 % Purchases from the following supplier totaled more than 10% of our total accounts payable: December 31, 2022 2021 $ (thousands) % of Total Accounts Payable $ (thousands) % of Total Accounts Payable Zhejiang Zhen You Electronics Co. Ltd. $ — (1) — % (1) $ 9,862 10.6 % (1) Accounts payable associated with this supplier did not total more than 10% of our accounts payable for the indicated period. Note 6 — Property, Plant, and Equipment, Net Property, plant, and equipment, net were as follows: December 31, (In thousands) 2022 2021 Buildings $ 18,291 $ 19,830 Computer equipment 9,344 9,655 Furniture and fixtures 3,529 3,905 Leasehold and building improvements 39,761 41,437 Machinery and equipment 96,947 102,864 Software 23,607 23,993 Tooling 31,898 34,000 223,377 235,684 Accumulated depreciation ( 170,474 ) ( 165,906 ) 52,903 69,778 Construction in progress 9,888 4,869 Total property, plant, and equipment, net $ 62,791 $ 74,647 58 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Depreciation expense was $ 19.9 million, $ 22.8 million and $ 23.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. During the year ended December 31, 2022, we incurred $ 2.9 million in impairment charges, recorded in cost of sales, relating to the underutilization of certain property, plant and equipment in our Mexico factory. During the year ended December 31, 2021, we incurred $ 3.3 million in impairment charges, recorded in cost of sales, relating to the underutilization of property, plant and equipment in our PRC-based factories, as a result of our long-term factory planning strategy of reducing our concentration risk in that region. Impairment charges were immaterial for the year ended December 31, 2020. Construction in progress was as follows: December 31, (In thousands) 2022 2021 Leasehold and building improvements $ 475 $ 100 Machinery and equipment 2,282 1,912 Software 4,862 1,272 Tooling 1,827 1,168 Other 442 417 Total construction in progress $ 9,888 $ 4,869 We expect that most of the assets under construction will be placed into service during the first six months of 2023. We will begin to depreciate the cost of these assets under construction once they are placed into service. Long-lived tangible assets by geographic area, which include property, plant, and equipment, net and operating lease ROU assets, were as follows: December 31, (In thousands) 2022 2021 United States $ 16,427 $ 16,804 People's Republic of China 42,893 52,851 Mexico 14,402 20,509 Vietnam 6,923 — All other countries 3,745 4,330 Total long-lived tangible assets $ 84,390 $ 94,494 Note 7 — Goodwill and Intangible Assets, Net Goodwill Changes in the carrying amount of goodwill were as follows: (In thousands) Balance at December 31, 2020 $ 48,614 Foreign exchange effects ( 151 ) Balance at December 31, 2021 48,463 Goodwill acquired during the period (1) 713 Foreign exchange effects ( 91 ) Balance at December 31, 2022 $ 49,085 (1) During the year ended December 31, 2022, we recognized $ 0.7 million of goodwill related to the Qterics, Inc. ("Qterics") acquisition. Refer to Note 21 for further information about this acquisition. 59 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 We conducted annual goodwill impairment reviews on December 31, 2022, 2021 and 2020. Based on the analysis performed, we determined that our goodwill was not impaired. Intangible Assets, Net The components of intangible assets, net were as follows: December 31, 2022 2021 (In thousands) Gross (1) Accumulated Amortization (1) Net (1) Gross (1) Accumulated Amortization (1) Net (1) Capitalized software development costs ( 2 years) $ 1,647 $ ( 44 ) $ 1,603 $ 1,066 $ ( 27 ) $ 1,039 Customer relationships ( 10 - 15 years) 6,340 ( 3,080 ) 3,260 5,000 ( 2,375 ) 2,625 Developed and core technology ( 5 - 15 years) 4,520 ( 3,693 ) 827 4,080 ( 3,335 ) 745 Distribution rights ( 10 years) 308 ( 281 ) 27 325 ( 269 ) 56 Patents ( 10 years) 29,388 ( 10,790 ) 18,598 24,518 ( 9,015 ) 15,503 Trademarks and trade names ( 10 years) 450 ( 295 ) 155 800 ( 599 ) 201 Total intangible assets, net $ 42,653 $ ( 18,183 ) $ 24,470 $ 35,789 $ ( 15,620 ) $ 20,169 (1) This table excludes the gross value of fully amortized intangible assets totaling $ 43.7 million and $ 43.2 million on December 31, 2022 and 2021, respectively. Amortization expense is recorded in selling, general and administrative expenses, except amortization expense related to capitalized software development costs, which is recorded in cost of sales. Amortization expense by statement of operations caption was as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Cost of sales $ 49 $ 27 $ — Selling, general and administrative expenses 3,969 3,963 6,500 Total amortization expense $ 4,018 $ 3,990 $ 6,500 Estimated future annual amortization expense related to our intangible assets at December 31, 2022, is as follows: (In thousands) 2023 $ 4,821 2024 4,545 2025 3,705 2026 3,188 2027 2,596 Thereafter 5,615 Total $ 24,470 The remaining weighted average amortization period of our intangible assets at December 31, 2022 is 6.2 years. Note 8 — Leases We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world. At December 31, 2022, our operating leases had remaining lease terms of up to 38 years, including any reasonably probable extensions. 60 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Lease balances within our consolidated balance sheets were as follows: (In thousands) December 31, 2022 December 31, 2021 Assets: Operating lease right-of-use assets $ 21,599 $ 19,847 Liabilities: Other accrued liabilities $ 5,509 $ 4,769 Long-term operating lease obligations 15,027 14,266 Total lease liabilities $ 20,536 $ 19,035 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) 2022 2021 Cost of sales $ 2,822 $ 2,508 Selling, general and administrative expenses 4,474 4,151 Total operating lease expense $ 7,296 $ 6,659 Operating cash outflows from operating leases $ 7,427 $ 6,555 Operating lease right-of-use assets obtained in exchange for lease obligations $ 8,756 $ 7,017 Non-cash release of operating lease obligations (1) $ — $ 654 (1) During the year ended December 31, 2021, we were released from our guarantee of the lease obligation related to our Ohio call center which was sold in February 2020. The weighted average remaining lease liability term and the weighted average discount rate were as follows: Year Ended December 31, 2022 2021 Weighted average lease liability term (in years) 5.10 4.30 Weighted average discount rate 3.82 % 3.17 % 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, 2022. The reconciliation excludes short-term leases that are not recorded on the balance sheet. (In thousands) 2023 $ 6,182 2024 5,201 2025 4,201 2026 2,629 2027 1,915 Thereafter 2,860 Total lease payments 22,988 Less: imputed interest ( 2,452 ) Total lease liabilities $ 20,536 At December 31, 2022, we did not have any operating leases that had not yet commenced. 61 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Prepaid Land Lease We operate one factory within the PRC on which the land is leased from the government as of December 31, 2022. 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 $ 2.2 million at December 31, 2022, and is being amortized on a straight-line basis over the remaining term of approximately 36 years. The buildings located on this land had a net book value of $ 13.4 million at December 31, 2022 and are being depreciated over a remaining weighted average period of approximately 17 years. Note 9 — Line of Credit Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") provides for a $ 125.0 million revolving line of credit ("Credit Line") that expires on November 1, 2023. We expect to renew our credit agreement with U.S. Bank, for an additional two years , prior to its expiration. The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were none at December 31, 2022. All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets, as well as a guaranty of the Credit Line by our wholly-owned subsidiary, Universal Electronics BV. Under the Second Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25 % to 1.75 %) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Second Amended Credit Agreement) plus an applicable margin (varying from 0.00 % to 0.50 %). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Second Amended Credit Agreement. The interest rates in effect at December 31, 2022 and 2021 were 5.62 % and 1.35 %, respectively. There are no commitment fees or unused line fees under the Second Amended Credit Agreement. On December 31, 2021, the process of cessation of LIBOR as a reference rate began. Between December 31, 2021 and June 30, 2023, any borrowings under our existing Second Amended Credit Agreement may continue to use LIBOR as the basis for interest rates. If the Second Amended Credit Agreement is amended or replaced during this period, any borrowings will no longer use LIBOR as a reference rate and instead will be subject to an interest rate based on either the Secured Overnight Financing Rate ("SOFR"), which is deemed a replacement benchmark for LIBOR under the Second Amended Credit Agreement, or an alternate index to be agreed upon. After June 30, 2023, all borrowings will be based on SOFR or the alternate index. The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. As of December 31, 2022, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement. At December 31, 2022, we had $ 88.0 million outstanding under the Credit Line. Our total interest expense on borrowings was $ 3.3 million, $ 0.9 million and $ 1.6 million during the years ended December 31, 2022, 2021 and 2020, respectively. Note 10 — Income Taxes In 2022, 2021 and 2020, pre-tax income (loss) was attributed to the following jurisdictions: Year Ended December 31, (In thousands) 2022 2021 2020 Domestic operations $ ( 69,058 ) $ ( 38,024 ) $ ( 15,711 ) Foreign operations 80,451 54,104 59,616 Total pre-tax income (loss) $ 11,393 $ 16,080 $ 43,905 62 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The provision for income taxes charged to operations was as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Current tax expense: U.S. federal $ 573 $ 2 $ ( 193 ) State and local 73 75 ( 54 ) Foreign 8,523 12,386 6,525 Total current 9,169 12,463 6,278 Deferred tax (benefit) expense: U.S. federal 230 584 — State and local 36 90 — Foreign 1,551 ( 2,358 ) ( 945 ) Total deferred 1,817 ( 1,684 ) ( 945 ) Total provision for income taxes $ 10,986 $ 10,779 $ 5,333 Net deferred tax assets were comprised of the following: December 31, (In thousands) 2022 2021 Deferred tax assets: Accrued liabilities $ — $ 6,483 Accounts receivable 5,657 — Amortization of intangible assets 5,977 1,412 Capitalized inventory costs 5,060 4,183 Capitalized research & development costs 4,632 — Depreciation 5,067 4,289 Income tax credits 17,234 17,513 Inventory reserves 2,258 2,621 Net operating losses 3,770 3,512 Operating lease obligations 4,212 4,469 Stock-based compensation 4,288 4,569 Other — 4,431 Total deferred tax assets 58,155 53,482 Deferred tax liabilities: Accrued liabilities ( 5,273 ) — Accounts receivable — ( 10,919 ) Right of use assets ( 4,407 ) ( 4,690 ) Other ( 361 ) — Total deferred tax liabilities ( 10,041 ) ( 15,609 ) Net deferred tax assets before valuation allowance 48,114 37,873 Less: Valuation allowance ( 44,596 ) ( 32,538 ) Net deferred tax assets $ 3,518 $ 5,335 63 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from operations as a result of the following: Year Ended December 31, (In thousands) 2022 2021 2020 Tax provision at statutory U.S. rate $ 2,392 $ 3,377 $ 9,220 Increase (decrease) in tax provision resulting from: Distribution of previously taxed foreign earnings and profits ( 16,776 ) — — Federal research and development credits ( 715 ) ( 1,391 ) ( 2,119 ) Foreign permanent benefit ( 1,620 ) ( 1,137 ) ( 2,842 ) Foreign tax rate differential 15,133 ( 2,647 ) ( 1,595 ) Foreign undistributed earnings, net of credits 6,486 6,902 3,319 Liquidation of Cayman subsidiary — 745 — Non-deductible items 601 1,198 1,637 Non-territorial income ( 2,323 ) ( 2,993 ) ( 2,493 ) Provision to return ( 435 ) ( 533 ) ( 343 ) Sale of Argentina subsidiary — 2,084 — Sale of intangible asset ( 3,385 ) — — State and local taxes, net ( 2,408 ) ( 1,435 ) ( 1,932 ) Stock-based compensation 693 ( 616 ) ( 266 ) Tax rate change ( 640 ) — ( 1,527 ) Uncertain tax positions — — ( 1,565 ) Valuation allowance 12,058 4,632 3,109 Withholding tax 2,188 2,333 2,320 Other ( 263 ) 260 410 Tax provision $ 10,986 $ 10,779 $ 5,333 At December 31, 2022, we had federal and state Research and Development ("R&D") income tax credit carryforwards of approximately $ 4.2 million and $ 12.8 million, respectively. The federal R&D income tax credits begin expiring in 2039. The state R&D income tax credits do not have an expiration date. At December 31, 2022, we had state and local and foreign net operating loss carryforwards of approximately $ 50.6 million and $ 0.7 million, respectively. The state and local and foreign net operating loss carryforwards begin to expire in 2023 and 2027, respectively. At December 31, 2022, we assessed the realizability of the Company's 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. 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 considered the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. Due to cumulative operating losses for the three years ended in 2022, we have recorded a full valuation allowance against our U.S. federal and state deferred tax assets of $ 24.5 million and $ 20.1 million, respectively, as we have determined that it is more likely than not that the tax benefits will not be realized in the future. The valuation allowance increased by $ 12.1 million and $ 4.6 million during the years ended December 31, 2022 and 2021, respectively. We have an overall deferred tax liability for U.S. federal and state jurisdictions due to having indefinite lived deferred tax liabilities that cannot be used as a source of income to offset the deferred tax assets. Uncertain Tax Positions At December 31, 2022 and 2021, we had unrecognized tax benefits of approximately $ 3.2 million and $ 3.0 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 immaterial for the year ended December 31, 2022, 2021, and 2020. Interest and penalties are included in the unrecognized tax benefits. 64 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Changes to our gross unrecognized tax benefits were as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Balance at beginning of period $ 3,001 $ 3,020 $ 4,094 Additions as a result of tax provisions taken during the current year 149 226 274 Foreign currency translation — ( 13 ) 20 Lapse in statute of limitations — — ( 51 ) Settlements — ( 232 ) — Other — — ( 1,317 ) Balance at end of period $ 3,150 $ 3,001 $ 3,020 Approximately $ 3.2 million, $ 3.0 million and $ 3.0 million of the total amount of unrecognized tax benefits at December 31, 2022, 2021 and 2020, respectively, if not for the federal and state valuation allowance, would affect the annual effective tax rate, if recognized. 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 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. We file income tax returns in the U.S. jurisdiction and in various state and foreign jurisdictions. As of December 31, 2022, the open statutes of limitations for our significant tax jurisdictions are as follows: U.S. federal for 2019 through 2021, state and local for 2018 through 2021, and non-U.S. for 2016 through 2021. 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 foreign subsidiaries, including potential foreign withholding taxes on distributions. For the years ended December 31, 2022, 2021 and 2020, we recorded a deferred tax liability of $ 0.5 million, $ 0.9 million and $ 2.1 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 and includes provisions addressing the carryback of net operating losses for specific periods, refunds of alternative minimum tax credits, temporary modifications to limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property. Additionally, the CARES Act provides for refundable employee retention tax credits and the deferral of the employer-paid portion of Social Security taxes. For the years ended December 31, 2022, 2021 and 2020, respectively, the Company's income tax provision was not significantly impacted by the CARES Act. The Company will continue to closely monitor any effects from future legislation. CHIPS and Science Act of 2022 On August 9, 2022, the CHIPS and Science Act of 2022 ("CHIPS Act") was enacted in the United States. The CHIPS Act will provide financial incentives to the semiconductor industry which are primarily directed at manufacturing activities within the United States for the qualifying property placed in service after December 31, 2022. As we currently outsource our manufacturing, the CHIPS Act is not expected to have a material impact to our consolidated tax provision for the year ending December 31, 2023. Inflation Reduction Act of 2022 The Inflation Reduction Act of 2022 ("IRA") was signed into law on August 16, 2022. The bill was meant to address the high inflation rate in the United States through various climate, energy, healthcare and other incentives. These incentives are meant to be paid for by the tax provisions included in the IRA, such as a new 15 percent corporate minimum tax, a 1 percent new 65 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 excise tax on stock buybacks, additional IRS funding to improve taxpayer compliance and others. The IRA provisions are effective for tax years beginning after December 31, 2023. 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: December 31, (In thousands) 2022 2021 Accrued bonus $ 3,348 $ 3,460 Accrued commission 609 1,140 Accrued salary/wages 4,433 6,234 Accrued social insurance (1) 7,037 7,562 Accrued vacation/holiday 3,300 3,343 Other accrued compensation 2,177 2,478 Total accrued compensation $ 20,904 $ 24,217 (1) PRC employers are required by law to remit the applicable social insurance payments to their local government. Social insurance is comprised of various components such as pension, medical insurance, job injury insurance, unemployment insurance, and a housing assistance fund, and is administered in a manner similar to social security in the United States. This amount represents our estimate of the amounts due to the PRC government for social insurance on December 31, 2022 and 2021. Note 12 — Other Accrued Liabilities The components of other accrued liabilities were as follows: December 31, (In thousands) 2022 2021 Contract liabilities $ 1,134 $ 390 Duties 470 4,128 Expense associated with fulfilled performance obligations 1,120 991 Freight and handling fees 2,497 3,317 Interest 1,413 287 Operating lease obligations 5,509 4,769 Product warranty claim costs 522 1,095 Professional fees 2,293 4,685 Sales and value added taxes 3,750 5,463 Other 5,426 5,715 Total other accrued liabilities $ 24,134 $ 30,840 66 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Note 13 — Commitments and Contingencies Indemnifications We indemnify our directors and officers to the maximum extent permitted under the laws of the state of Delaware and we have entered into indemnification agreements with each of our directors and executive officers. In addition, we insure our individual directors and officers against certain claims and attorney's fees and related expenses incurred in connection with the defense of such claims. The amounts and types of coverage may vary from period to period as dictated by market conditions. Management is not aware of any matters that require indemnification of its officers or directors. Fair Price Provisions and Other Anti-Takeover Measures Our Restated Certificate of Incorporation, as amended, contains certain provisions restricting business combinations with interested stockholders under certain circumstances and imposing higher voting requirements for the approval of certain transactions ("fair price" provisions). Any of these provisions may delay or prevent a change in control. The "fair price" provisions require that holders of at least two-thirds of our outstanding shares of voting stock approve certain business combinations and significant transactions with interested stockholders. Product Warranties Changes in the liability for product warranty claim costs were as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Balance at beginning of period $ 1,095 $ 1,721 $ 1,514 Accruals for warranties issued during the period 249 2,943 578 Settlements (in cash or in kind) during the period ( 819 ) ( 3,522 ) ( 463 ) Foreign currency translation gain (loss) ( 3 ) ( 47 ) 92 Balance at end of period $ 522 $ 1,095 $ 1,721 Litigation Roku Matters 2018 Lawsuit On September 5, 2018, we filed a lawsuit against Roku, Inc. ("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 therefor 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. In October 2019, the Court stayed this lawsuit pending action by the Patent Trial and Appeals Board (the "PTAB") with respect to Roku's requests for Inter Partes Review ("IPR") (see discussion below). This lawsuit continues to be stayed until such time as the IPR's and all appeals with respect to them have concluded. 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 67 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 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. Prior to the trial, which ended on April 23, 2021, we dismissed TCL, Hisense and Funai from this investigation as they either removed or limited the amount of our technology from their televisions as compared to our patent claims that we asserted at the time. On July 9, 2021, the Administrative Law Judge (the "ALJ") issued his Initial Determination (the "ID") finding that Roku is infringing our patents and as a result is in violation of §337 of the Tariff Act of 1930, as amended (the "Tariff Act"). On July 23, 2021, Roku and we filed petitions to appeal certain portions of the ID. On November 10, 2021, the full ITC issued its final determination affirming the ID and issuing a Limited Exclusion Order (the "LEO") and Cease and Desist Order (the "CDO") against Roku, which became effective on January 9, 2022. Roku continues to be subject to the LEO and CDO. On October 25, 2022, we filed our brief opposing Roku's appeal of the LEO. 2020 Lawsuit As a companion case to our ITC complaint, 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 and continue to be stayed pending the ITC case and any appeals. Inter Partes Reviews Throughout these litigation matters against Roku and the others identified above, Roku has filed multiple IPR requests with the PTAB on all patents at issue in the 2018 Lawsuit, the ITC Action, and the 2020 Lawsuit (see discussion above). To date, the PTAB has denied Roku's request fourteen times and granted Roku's request twelve times. Roku has since filed two IPRs on two of our patents not yet asserted against it, and we are awaiting the PTAB's institution decision with respect to those new IPR requests. Of the twelve IPR requests granted by the PTAB, the results were mixed, with the PTAB upholding the validity of many of our patent claims and invalidating others. We have appealed all but one PTAB decisi on that resulted i n an invalidation of our patent claims and we will continue to do so. International Trade Commission Investigation Request made by Roku against UEI and certain UEI Customers On April 8, 2021, Roku made a request to the ITC to initiate an investigation against us and certain of our customers claiming that certain of our and those customers' remote control devices and televisions infringe two of Roku's recently acquired patents, the '511 patent and the '875 patent. On May 10, 2021, the ITC announced its decision to institute the requested investigation. Immediately prior to trial Roku stipulated to summary determination as to its complaint against us and two of our customers with respect to one of the two patents at issue. This stipulation resulted in the complaint against us and two of our customers with respect to that patent not going to trial. The trial was thus shortened and ended on January 24, 2022. On June 24, 2022, the ALJ, pursuant to Roku's stipulation, found the '511 patent invalid as indefinite. Thereafter, on June 28, 2022, the ALJ issued an ID fully exonerating us and our customers finding the '875 patent invalid and that Roku failed to prove it established the requisite domestic industry and thus no violation of the Tariff Act. In advance of the full Commission's review, Roku and we filed petitions to appeal certain portions of the ID. In addition, the PTAB granted our request for an IPR with respect to the '875 patent. On October 28, 2022, the full ITC issued its final determination affirming the ID, ruling there was no violation of the Tariff Act and terminated the investigation. In December 2022, Roku filed an appeal, which remains pending. As a companion to its ITC request, Roku also filed a lawsuit against us in Federal District Court in the Central District of California alleging that we are infringing the same two patents they alleged being infringed in the ITC investigation explained above. This District Court case has been stayed pending the ITC case, and will likely continue to be stayed pending the conclusion of the '875 IPR investigation, even after Roku's appeal of the ITC case has concluded. Court of International Trade Action against the United States of America, et. al. 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; Robert E. Lighthizer, U.S. Trade Representative; U.S. Customs & Border Protection; and Mark A. Morgan, U.S. Customs & Border Protection Acting Commissioner, challenging both the 68 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 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. Pursuant to this complaint, Ecolink, RCS and we 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. Ecolink, RCS and we 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. Ecolink, RCS and we are asking the CIT to declare that the 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 Ecolink, RCS and us; to permanently enjoin the U.S. government from applying Lists 3 and 4A duties against Ecolink, RCS and us; and award Ecolink, RCS and us our costs and reasonable attorney's fees. In July 2021, the CIT issued a preliminary injunction suspending liquidation of all unliquidated entries subject to Lists 3 and 4A duties and has asked the parties to develop a process to keep track of the entries to efficiently and effectively deal with liquidation process and duties to be paid or refunded when finally adjudicated. On February 5, 2022, the CIT heard oral arguments on dispositive motions filed on behalf of plaintiffs and defendants. On April 1, 2022, the CIT issued its opinion on these dispositive motions, ruling that the USTR had the legal authority to promulgate List 3 and List 4A under Section 307(a)(1)(B) of the Trade Act, but that the USTR violated the APA when it promulgated List 3 and List 4A concluding that the USTR failed to adequately explain its decision as required under the APA. The Court ordered that List 3 and List 4A be remanded to the USTR for reconsideration or further explanation regarding its rationale for imposing the tariffs. The Court declined to vacate List 3 and List 4A, which means that they are still in place while on remand. The Court's preliminary injunction regarding liquidation of entries also remains in effect. The Court initially set a deadline of June 30, 2022, for the USTR to complete this process, which was extended to August 1, 2022. On August 1, 2022, the USTR provided the Court with that further explanation and also purported to respond to the significant comments received during the original notice-and-comment process. On September 14, 2022, the lead plaintiff filed its comments to the USTR's August 1, 2022 filing, asserting that the USTR did not adequately respond to the Court's remand order and requested the Court to vacate the List 3 and List 4A tariffs and issue refunds immediately. On February 7, 2023, the Court heard arguments on these issues and we expect the Court to rule on these filings in mid 2023. There are no other material pending legal proceedings to which we or any of our subsidiaries is a party or of which our respective property is the subject. However, as is typical in our industry and to the nature and kind of business in which we are engaged, from time to time, various claims, charges and litigation are asserted or commenced by third parties against us or by us against third parties arising from or related to product liability, infringement of patent or other intellectual property rights, breach of warranty, contractual relations, or employee relations. The amounts claimed may be substantial, but may not bear any reasonable relationship to the merits of the claims or the extent of any real risk of court awards assessed against us or in our favor. However, no assurances can be made as to the outcome of any of these matters, nor can we estimate the range of potential losses to us. In our opinion, final judgments, if any, which might be rendered against us in potential or pending litigation would not have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Moreover, we believe that our products do not infringe any third parties' patents or other intellectual property rights. We maintain directors' and officers' liability insurance which insures our individual directors and officers against certain claims, as well as attorney's fees and related expenses incurred in connection with the defense of such claims. Defined Benefit Plan Our subsidiary in India maintains a defined benefit pension plan ("India Plan") for local employees, which is consistent with local statutes and practices. The pension plan was adequately funded on December 31, 2022 based on its latest actuarial report. The India Plan has an independent external manager that advises us of the appropriate funding contribution requirements to which we comply. At December 31, 2022, approximately 54 percent of our India subsidiary employees had qualified for eligibility. An individual must be employed by our India subsidiary for a minimum of five years before becoming eligible. 69 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Upon the termination, resignation or retirement of an eligible employee, we are liable to pay the employee an amount equal to 15 days salary for each full year of service completed. The total amount of liability outstanding at December 31, 2022 and 2021 for the India Plan was not material. During the years ended December 31, 2022, 2021 and 2020, the net periodic benefit costs were also not material. 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 February 10, 2022, our Board approved a share repurchase program with an effective date of February 22, 2022 (the "February 2022 Program"). Pursuant to the February 2022 Program, we were authorized to repurchase up to 300,000 shares of our common stock until the Program's expiration on May 5, 2022. Per the terms of the February 2022 Program, we could utilize various methods to effect the repurchases, including open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some or all of which could be effected through Rule 10b5-1 plans. As of May 2, 2022, we repurchased the full 300,000 shares under the February 2022 Program. We also repurchase shares of our issued and outstanding common stock to satisfy the cost of stock option exercises and/or income tax withholding obligations relating to the stock-based compensation of our employees and directors. Repurchased shares of our common stock were as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Open market shares repurchased 300 1,151 325 Stock-based compensation related shares repurchased 134 92 119 Total shares repurchased 434 1,243 444 Cost of open market shares repurchased $ 9,437 $ 54,868 $ 11,851 Cost of stock-based compensation related shares repurchased 3,598 4,796 5,827 Total cost of shares repurchased $ 13,035 $ 59,664 $ 17,678 Repurchased shares are recorded as shares held in treasury at cost. We hold these shares for future use as management and the Board of Directors deem appropriate. Note 15 — Stock-Based Compensation Stock-based compensation expense for each employee and director is presented in the same statement of operations caption as their cash compensation. Stock-based compensation expense by statement of operations caption and the related income tax benefit were as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Cost of sales $ 155 $ 156 $ 182 Research and development expenses 1,342 1,253 1,099 Selling, general and administrative expenses: Employees 7,257 6,997 6,257 Outside directors 1,259 1,563 1,584 Total employee and director stock-based compensation expense $ 10,013 $ 9,969 $ 9,122 Income tax benefit $ 1,660 $ 1,718 $ 1,594 70 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Stock Options The assumptions we utilized in the Black-Scholes option pricing model and the resulting weighted average fair value of stock option grants were the following: Year Ended December 31, 2022 2021 2020 Weighted average fair value of grants $ 14.51 $ 23.97 $ 17.70 Risk-free interest rate 1.93 % 0.41 % 1.44 % Expected volatility 49.35 % 48.49 % 43.95 % Expected life in years 4.73 4.62 4.59 Stock option activity was as follows: 2022 2021 2020 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 (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) Outstanding at beginning of the year 800 $ 45.55 774 $ 43.01 745 $ 41.73 Granted 139 33.42 80 59.43 109 46.17 Exercised ( 80 ) 19.25 $ 292 ( 54 ) 30.04 $ 931 ( 80 ) 35.28 $ 1,334 Forfeited/canceled/expired ( 77 ) 64.81 — — — — Outstanding at end of the year (1) 782 $ 44.16 3.45 $ — 800 $ 45.55 3.15 $ 3,780 774 $ 43.01 3.71 $ 9,228 Vested and expected to vest at the end of the year (1) 782 $ 44.16 3.45 $ — 800 $ 45.55 3.15 $ 3,780 774 $ 43.01 3.71 $ 9,228 Exercisable at the end of the year (1) 600 $ 45.77 2.61 $ — 656 $ 44.08 2.58 $ 3,608 582 $ 43.90 2.98 $ 6,887 (1) The aggregate intrinsic value represents the total pre-tax value (the difference between our closing stock price on the last trading day of 2022, 2021 and 2020 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, 2022, 2021 and 2020. This amount will change based on the fair market value of our stock. The value of shares withheld in lieu of receiving cash from option exercises in the years ended December 31, 2022, 2021 and 2020 was $ 1.5 million, $ 0.6 million and $ 2.8 million, respectively. Cash received from option exercises for the year ended December 31, 2021 was $ 1.0 million. There was no cash received from option exercises for the years ended December 31, 2022 and 2020. The actual tax benefit realized from option exercises was $ 0.1 million, $ 0.2 million and $ 0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Significant option groups outstanding at December 31, 2022 and the related weighted average exercise price and life information were as follows: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding (in 000's) Weighted-Average Remaining Contractual Term (in years) Weighted-Average Exercise Price Number Exercisable (in 000's) Weighted-Average Exercise Price $ 26.64 to $ 34.55 290 4.80 $ 30.12 150 $ 27.07 $ 44.95 to $ 46.17 207 3.60 45.59 198 45.56 $ 51.38 to $ 62.70 285 2.28 57.39 252 57.12 782 3.45 $ 44.16 600 $ 45.77 As of December 31, 2022, we expect to recognize $ 2.3 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. 71 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 On February 9, 2023, certain executive employees were granted stock options to acquire, in the aggregate, up to 235,455 shares of our common stock, in connection with the 2022 annual review cycle. The options were granted as part of the executive compensation program and are subject to a three-year vesting period ( 33.33 % on February 9, 2024 and 8.33 % each quarter thereafter). The total grant date fair value of these awards was $ 2.6 million. Restricted Stock Non-vested restricted stock award activity was as follows: 2022 2021 2020 Shares (in 000's) Weighted-Average Grant Date Fair Value Shares (in 000's) Weighted-Average Grant Date Fair Value Shares (in 000's) Weighted-Average Grant Date Fair Value Non-vested at beginning of the year 310 $ 44.41 374 $ 34.53 310 $ 34.99 Granted 262 31.05 156 56.90 238 36.85 Vested ( 191 ) 41.09 ( 211 ) 36.35 ( 166 ) 38.28 Forfeited ( 5 ) 43.22 ( 9 ) 39.65 ( 8 ) 43.44 Non-vested at end of the year 376 $ 36.82 310 $ 44.41 374 $ 34.53 As of December 31, 2022, we expect to recognize $ 8.8 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. In February 2023, certain executives were granted 102,965 restricted stock awards, in the aggregate, in connection with the 2022 annual review cycle. These awards were granted as part of the executive compensation program and are subject to a three-year vesting period ( 33.33 % on February 9, 2024 and 8.33 % each quarter thereafter). The total grant date fair value of these awards was $ 2.6 million. Stock Incentive Plans Our active stock-based incentive plans include those adopted in 2010, 2014 and 2018 ("Stock Incentive Plans"). Under the Stock Incentive Plans, we may grant stock options, stock appreciation rights, restricted stock units, performance stock units, or any combination thereof for a period of ten years from the approval date of each respective plan, unless the plan is terminated by resolution of our Board of Directors. No stock appreciation rights or performance stock units have been awarded under our Stock Incentive Plans. Only directors and employees meeting certain employment qualifications are eligible to receive stock-based awards. The grant price of stock option and restricted stock awards granted under our Stock Incentive Plans is the average of the high and low trades of our stock on the grant date. We prohibit the re-pricing or backdating of stock options. Our stock options become exercisable in various proportions over a three-year time frame. Stock options have a maximum ten-year term. Restricted stock awards vest in various proportions over a one - to three-year time period. Detailed information regarding our active Stock Incentive Plans was as follows at December 31, 2022: Name Approval Date Total Shares Available for Grant Under the Plan Remaining Shares Available for Grant Under the Plan Outstanding Shares Granted Under the Plan 2010 Stock Incentive Plan 6/15/2010 1,000,000 — 13,219 2014 Stock Incentive Plan 6/12/2014 1,100,000 — 269,891 2018 Equity and Incentive Compensation Plan (1) 6/4/2018 2,196,344 777,152 875,465 777,152 1,158,575 (1) The 2018 Equity and Incentive Compensation Plan was amended in June 2021 to add an additional 1,100,000 shares, as approved by our stockholders. 72 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Note 16 — Performance-Based Common Stock Warrants On March 9, 2016, we issued common stock purchase warrants to Comcast Corporation ("Comcast") at a price of $ 54.55 per share. At December 31, 2022, 275,000 of these warrants were vested and outstanding. All of the warrants expired on January 1, 2023. The impact to net sales recorded in connection with the warrants and the related income tax benefit was as follows: Year Ended December 31, (in thousands) 2022 2021 2020 Reduction (addition) to net sales (1) $ — $ ( 686 ) $ 686 Income tax benefit $ — $ ( 171 ) $ 171 (1) At December 31, 2021, Comcast did not meet the minimum performance obligations to vest in any portion of the warrants associated with the two-year vesting period ended December 31, 2021. As such, all previously recorded expenses associated with this vesting period were reversed. Note 17 — Other Income (Expense), Net and Loss on Sale of Argentina Subsidiary Other income (expense), net consisted of the following: Year Ended December 31, (In thousands) 2022 2021 2020 Net gain (loss) on foreign currency exchange contracts (1) $ ( 1,309 ) $ 2,903 $ ( 310 ) Net gain (loss) on foreign currency exchange transactions 218 ( 4,237 ) ( 1,675 ) Other income (expense) 136 777 581 Other income (expense), net $ ( 955 ) $ ( 557 ) $ ( 1,404 ) (1) This represents the gains (losses) incurred on foreign currency hedging derivatives. See Note 19 for further information concerning our foreign currency exchange contracts. On September 7, 2021, we completed the sale of our subsidiary, One For All Argentina S.R.L, to an unrelated party, recording a loss on sale of $ 6.1 million. Upon divestiture, the successor entity, OFA Express S.R.L., serves as an authorized distributor of certain of our products in Argentina. OFA Express, S.R.L. is not a related party of the Company. Note 18 — Earnings Per Share Earnings per share was calculated as follows: Year Ended December 31, (In thousands, except per-share amounts) 2022 2021 2020 BASIC Net income $ 407 $ 5,301 $ 38,572 Weighted-average common shares outstanding 12,703 13,465 13,893 Basic earnings per share $ 0.03 $ 0.39 $ 2.78 DILUTED Net income $ 407 $ 5,301 $ 38,572 Weighted-average common shares outstanding for basic 12,703 13,465 13,893 Dilutive effect of stock options, restricted stock and common stock warrants 76 277 273 Weighted-average common shares outstanding on a diluted basis 12,779 13,742 14,166 Diluted earnings per share $ 0.03 $ 0.39 $ 2.72 73 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 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, (In thousands) 2022 2021 2020 Stock options 686 412 468 Restricted stock awards 242 65 14 Performance-based warrants 275 206 275 Note 19 — Derivatives The following table sets forth the total net fair value of derivatives: December 31, 2022 December 31, 2021 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 $ — $ 100 $ — $ 100 $ — $ ( 92 ) $ — $ ( 92 ) We held foreign currency exchange contracts which resulted in a net pre-tax loss of $ 1.3 million, a net pre-tax gain of $ 2.9 million, and a net pre-tax loss of $ 0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. See Note 17 for further information concerning our foreign currency exchange contracts. Details of foreign currency exchange contracts held were as follows: Date Held Currency Position Held Notional Value (in millions) Forward Rate Unrealized Gain/(Loss) Recorded at Balance Sheet Date (in thousands) (1) Settlement Date December 31, 2022 USD/Euro USD $ 26.0 1.0529 $ ( 428 ) January 6, 2023 December 31, 2022 USD/Chinese Yuan Renminbi CNY $ 31.0 7.0358 $ 528 January 6, 2023 December 31, 2021 USD/Chinese Yuan Renminbi CNY $ 19.0 6.3777 $ 38 January 7, 2022 December 31, 2021 USD/Euro USD $ 31.0 1.1336 $ ( 130 ) January 7, 2022 (1) Unrealized gains on foreign currency exchange contracts are recorded in prepaid expenses and other current assets. Unrealized losses on foreign currency exchange contracts are recorded in other accrued liabilities. Note 20 — Employee Benefit Plans We maintain a retirement and profit sharing plan under Section 401(k) of the Internal Revenue Code for all of our domestic employees that meet certain qualifications. Participants in the plan may elect to contribute up to the maximum allowed by law. We match 50 % of the participants' contributions up to 15 % of their gross salary in the form of newly issued shares of our common stock. We may also make other discretionary contributions to the plan. We recorded $ 1.2 million, $ 1.1 million and $ 1.2 million of expense for company contributions for the years ended December 31, 2022, 2021 and 2020, respectively. Note 21 — Business Combinations On February 17, 2022, we acquired substantially all of the net assets of Qterics, a U.S.-based provider of multimedia connectivity solutions and services for internet-enabled consumer products. Under the terms of the Asset Purchase Agreement ("APA"), we paid a cash purchase price of approximately $ 0.9 million. The acquisition of these assets will allow us to expand our customer base in the OEM market. Our consolidated income statement for the year ended December 31, 2022 includes net sales of $ 2.1 million and net income of $ 145 thousand, attributable to Qterics for the period commencing on February 17, 2022. 74 Table of Contents UNIVERSAL ELECTRONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 In accordance with the terms of the APA, the initial purchase price was subject to adjustment for differences between the initial estimated working capital balances and the final adjusted balances. This calculation was completed at March 31, 2022. Purchase Price Allocation Using the acquisition method of accounting, the acquisition date fair value of the consideration transferred was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. The excess of the purchase price over the estimated fair value of net assets acquired is recorded as goodwill. The goodwill is expected to be deductible for income tax purposes. Management's purchase price allocation as of December 31, 2022 was the following: (In thousands) Estimated Lives Fair Value Accounts receivable $ 787 Property, plant and equipment 5 years 3 Customer relationships 6 years 1,340 Developed technology 6 years 440 Trade names 6 years 50 Goodwill 713 Operating lease ROU assets 3 years 149 Other assets 2 Other accrued liabilities ( 6 ) Short-term operating lease obligation ( 48 ) Deferred revenue ( 1,539 ) Long-term operating lease obligation ( 101 ) Long-term deferred revenue ( 851 ) Cash paid $ 939 Management's determination of the fair value of intangible assets acquired are based primarily on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under U.S. GAAP. The fair value assigned to the Qterics developed technology and trade names intangible assets were determined utilizing a relief from royalty method. Under the relief from royalty method, the fair value of the intangible asset is estimated to be the present value of the royalties saved because the company owns the intangible asset. Revenue projections and estimated useful life were significant inputs into estimating the value of the Qterics developed technology and trade names. The fair value assigned to Qterics customer relationships intangible assets were determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and utilizes revenue and cost projections, including an assumed contributory asset charge. The developed technology, trade names and customer relationships intangible assets are expected to be deductible for income tax purposes. Pro Forma Results (unaudited) The unaudited pro forma financial information of combined results of our operations and the operations of Qterics as if the transaction had occurred on January 1, 2021, is immaterially different from the net sales, net income and income per share amounts reported in the Consolidated Statements of Operations for the years ended December 31, 2022 and 2021. 75 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.