Universal Electronics(UEIC) - 2021 Q4 - Annual Report

Part I Business Overview UEI designs, develops, and manufactures control and sensor technology solutions for video, consumer electronics, security, and climate control brands Sales and Product Offerings UEI's sales are driven by diverse control and sensor technology solutions, including remote controls, ICs, software, and cloud services, distributed to service providers, OEMs, and retail channels * UEI's product offerings include universal remote controls, integrated circuits (ICs) with embedded software, cloud services, licensed intellectual property, RF sensors, and AV accessories[26] Major Customer Sales Concentration | Customer | 2021 (% of Net Sales) | 2020 (% of Net Sales) | 2019 (% of Net Sales) | | :--- | :--- | :--- | :--- | | Comcast Corporation | 16.3% | 20.1% | 15.9% | | Daikin Industries Ltd. | 11.8% | N/A | N/A | Technology and Software Solutions UEI's technology centers on QuickSet® software for universal device control, expanding to nevo.ai for connected home digital assistants and Interoperability as a Service for IoT compatibility * QuickSet® software is embedded or cloud-enabled in over 550 million devices globally, providing automated universal device control setup and operation[28] * The company's technology pipeline includes nevo.ai, an artificial intelligence platform for a connected home digital assistant, and Nevo Butler, a turnkey smart home hub product[30] Markets and Competition UEI operates in evolving video services, home entertainment, security, and HVAC markets, facing competition from Asian manufacturers and specialists, with a shift towards digital streaming customers * The company has experienced a market shift with the rise of direct-to-consumer streaming video, leading to new customers in the digital media streaming domain[33] * Key competitors include Remote Solutions, Omni Remotes, and SMK in home entertainment, and OEMs, Nortek Control, Honeywell, and Johnson Controls in smart home and HVAC markets[36][38] Resources UEI's resources include engineering teams, over 600 U.S. patents, a global manufacturing footprint in PRC, Mexico, and Brazil, with a new Vietnam facility planned to de-risk supply chain * Engineering efforts in 2021 focused on broadening the product portfolio, launching new embedded software, improving existing products, and developing sustainable solutions[47] * The company holds over 600 issued and pending U.S. patents and a proprietary device control library covering nearly 13,000 brands and over 989,000 device models[44][50] * UEI is diversifying its manufacturing footprint by leasing a factory in Vietnam, expected to commence operations in Q3 2022, to reduce reliance on its PRC-based supply chain[53] Government Regulation and Environmental Matters UEI complies with international environmental regulations like RoHS, REACH, and WEEE, actively pursuing sustainability initiatives such as energy efficiency, plastic reduction, and product refurbishment * The company complies with the European Union's WEEE, RoHS, and REACH directives regarding electronic waste and hazardous substances[61][65] * UEI is investing in sustainable products, including an Android TV remote with a rechargeable battery and ultra-low power connectivity chips that can extend battery life up to ten times[66] Human Capital As of December 31, 2021, UEI employed 3,945 staff globally, with 3,135 agency workers in PRC, and 43.9% of employees unionized in Mexico and Brazil Employee Breakdown by Function (as of Dec 31, 2021) | Function | Number of Staff | | :--- | :--- | | Manufacturing & Supply Chain | 2,850 | | Engineering & R&D | 675 | | Sales & Marketing | 109 | | Consumer Service & Support | 31 | | Executive & Administrative | 280 | | Total Employees | 3,945 | * Approximately 43.9% of the company's 3,945 employees were represented by labor unions in Mexico and Brazil as of year-end 2021[73] Executive Officers This section provides biographical information for the company's executive officers as of March 4, 2022, detailing their professional backgrounds and qualifications Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Paul D. Arling | 59 | Chairman of the Board and Chief Executive Officer | | Bryan M. Hackworth | 52 | Senior Vice President and Chief Financial Officer | | Ramzi S. Ammari | 56 | Senior Vice President, Corporate Planning and Strategy | | David Chong | 60 | Executive Vice President, Asia | | Richard A. Firehammer, Jr. | 64 | Senior Vice President, General Counsel and Secretary | | Menno V. Koopmans | 46 | Senior Vice President, Global Sales | | Joseph E. Miketo | 65 | Senior Vice President, Operations (to retire on June 30, 2022) | Risk Factors The company faces material risks from the COVID-19 pandemic, supply chain disruptions, cybersecurity, reliance on key customers and suppliers, PRC manufacturing, trade policies, intellectual property litigation, and financial market volatility Risks Relating to the COVID-19 Pandemic The COVID-19 pandemic continues to pose significant risks, impacting sales demand into H1 2022 and causing supply chain disruptions, IC shortages, and increased logistics costs * The company expects sales demand to be negatively impacted into at least the first half of 2022 due to the ongoing global reach and economic impact of the COVID-19 pandemic[89] * The company has experienced significant supply chain disruptions, including difficulty obtaining ICs and substantial delays in transportation due to worldwide port congestion, resulting in increased logistics costs[89] Risks Relating to Operations Operational risks include cybersecurity, technology defects, customer dependence, global IC shortages, rising costs, and foreign manufacturing reliance, particularly in the PRC, with labor practice and UFLPA concerns * The global shortage of ICs is expected to continue adversely affecting the business through at least mid-to-late 2022, potentially impacting production volumes and customer demand[111] * The company faces reputational and financial risk related to the use of third-party labor agencies in China, following a report about Uyghur workers at a subsidiary's factory, which has already led one customer to put business on hold[104][106] * The Uyghur Forced Labor Prevention Act (UFLPA), effective June 2022, creates a risk that goods could be barred from U.S. entry, potentially affecting the company's business despite not sourcing from the XUAR region[107] Risks Related to Doing Business in the PRC Operating in the PRC exposes the company to risks from Chinese Yuan fluctuations, rising labor costs, workforce maintenance challenges, and uncertain government policy changes * A significant appreciation of the Chinese Yuan Renminbi against the U.S. Dollar could lead to higher manufacturing costs for the company's products[122] * Business operations may be adversely affected by changes in Chinese laws and regulations related to taxation, labor, and tariffs, which are often vague and subject to uncertain interpretation[125][126] Risks Relating to Regulation and Legal The company faces regulatory and legal risks from climate change, U.S. trade policies, international compliance (e.g., FCPA), potential patent infringement, and various litigation, including product liability * U.S. government tariffs on certain goods imported from the PRC, where a substantial amount of the company's products are manufactured, may adversely impact demand, costs, and margins[130] * The company is subject to complex domestic and foreign laws, including anti-corruption regulations like the U.S. Foreign Corrupt Practices Act, and violations could result in significant penalties and reputational harm[138][139] * The company faces risks from patent litigation, where its patents may be challenged or it may unknowingly infringe on the patents of others, potentially leading to costly legal battles[143][144][145] Risks Relating to Finance Financial risks include inaccurate projections leading to impairment, fluctuating quarterly results, foreign currency and interest rate exposure (including LIBOR phase-out), and cash generation dependence on subsidiary earnings * The company periodically evaluates goodwill and intangible assets for impairment, and future events or changing market conditions could result in substantial impairment charges[152] * The company is exposed to interest rate risk, and the planned phase-out of LIBOR, to be replaced by SOFR, could negatively impact business and financial results[160] * A significant portion of operations is conducted through subsidiaries, and the ability to meet cash needs depends on the earnings of these subsidiaries and their ability to transfer funds, which may be subject to restrictions[162] Risks Relating to Our Stock The company's common stock price is volatile with low trading volumes, susceptible to large institutional sales, and protected by anti-takeover provisions * The trading market for the company's common stock has historically been at low volumes and the market price is volatile, fluctuating in response to numerous factors[165] * Sales of large portions of holdings by significant institutional stockholders could negatively affect the prevailing market price of the common stock[168] General Risks The business is sensitive to global economic conditions, and natural disasters, geopolitical strife, or diseases could disrupt operations, increase costs, and adversely affect earnings * The business is sensitive to global economic downturns, which can reduce demand for products and impair the ability of customers and suppliers to meet their obligations[172] * Events like natural disasters, war (including the recent actions by Russia against Ukraine), or pandemics could disrupt supply chains, increase costs, and reduce the ability to manufacture and supply products[177] Unresolved Staff Comments The company reports no unresolved staff comments * None[178] Properties The company leases all its global facilities, including headquarters in Arizona, R&D centers, and manufacturing sites in Brazil, Mexico, and the PRC Key Leased Facilities | Location | Purpose or Use | Status | | :--- | :--- | :--- | | Scottsdale, Arizona | Corporate headquarters, engineering, R&D | Leased, expires Feb 2027 | | Manaus, Brazil | Manufacturing facility | Leased, expires Aug 2022 | | Monterrey, Mexico | Manufacturing facility (2 locations) | Leased, expires Sep 2023 & Jul 2025 | | Qinzhou, PRC | Manufacturing facility (3 locations) | Leased, various expiries | | Yangzhou, PRC | Manufacturing facility | Land leased, expires Jul 2055 | Legal Proceedings The company is subject to lawsuits, with detailed litigation information incorporated by reference from Note 13 of the Financial Statements * Information regarding legal proceedings is incorporated by reference from Note 13 of the Consolidated Financial Statements[183] Mine Safety Disclosures This item is not applicable to the company * Not applicable[184] Part II Market for Common Equity, Stockholder Matters, and Equity Purchases UEI's common stock trades on NASDAQ, with no cash dividends paid, and this section details Q4 2021 stock repurchases and five-year performance Market Information and Dividends The company's common stock trades on NASDAQ (UEIC), with no cash dividends paid or intended, as earnings are retained for business expansion * The company's common stock trades on the NASDAQ Global Select Market (UEIC)[186] * UEI has never paid cash dividends and does not intend to in the foreseeable future[186] Issuer Purchases of Equity Securities During Q4 2021, the company repurchased 384,526 shares at an average price of $40.17, with new repurchase programs approved in October 2021 and February 2022 Q4 2021 Stock Repurchases | Period | Total Shares Purchased | Weighted Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2021 | 57,296 | $49.47 | | Nov 2021 | 162,818 | $38.31 | | Dec 2021 | 164,412 | $38.78 | | Total Q4 | 384,526 | $40.17 | * A new share repurchase program was approved in February 2022, authorizing the repurchase of up to 300,000 shares of common stock until May 5, 2022[187] Stock Performance Chart The stock performance chart compares UEI's five-year cumulative total return against market indices, showing an initial $100 investment would be worth $63 by December 31, 2021 Comparison of 5-Year Cumulative Total Return | Index | 12/31/2016 | 12/31/2021 | | :--- | :--- | :--- | | Universal Electronics Inc. | $100 | $63 | | S&P Small Cap 600 | $100 | $167 | | NASDAQ Composite Index | $100 | $291 | | Peer Group Index | $100 | $232 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's 2021 financial condition and operations, covering business overview, COVID-19 and IC shortage impacts, critical accounting estimates, operating results, and liquidity Overview and Strategic Objectives In 2021, net sales decreased to $601.6 million, operating income fell to $23.3 million, and the effective tax rate rose to 67.0%, with 2022 objectives focusing on product development, software expansion, and manufacturing diversification 2021 Financial Recap | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $601.6M | $614.7M | -2.1% | | Gross Profit % | 28.8% | 28.7% | +0.1pp | | Operating Income | $23.3M | $37.3M | -37.5% | | Operating Margin % | 3.9% | 6.1% | -2.2pp | | Effective Tax Rate | 67.0% | 12.1% | +54.9pp | * Strategic objectives for 2022 include continuing to develop advanced remote control products, broadening home control offerings, expanding software and service platforms, and reducing manufacturing concentration in the PRC[199] COVID-19 and Global Supply Chain Impacts The company continues to face negative impacts from COVID-19 and the global IC shortage, causing supply chain disruptions, order fulfillment difficulties, increased costs, and expected persistence through mid-to-late 2022 * The company anticipates negative impacts on business activity and sales demand into at least the first half of 2022 due to the COVID-19 pandemic[203] * The global shortage of ICs is expected to continue through at least mid-to-late 2022, creating difficulties in production and meeting customer demand[205] Critical Accounting Estimates Management identifies critical accounting estimates requiring significant judgment, including revenue recognition, inventory valuation, long-lived asset and goodwill impairment, and income tax provisions and deferred tax asset realizability * Revenue Recognition: Significant judgment is used to determine if revenue for custom products should be recognized over time or at a point in time[211] * Inventories: Inventory is written down for estimated excess and obsolescence based on forecasts of future demand and market conditions[215] * Goodwill: Goodwill is tested for impairment annually using a qualitative assessment, which involves assumptions about future performance and market conditions[217][218] * Income Taxes: The company makes estimates for its tax provisions and assesses the need for a valuation allowance against deferred tax assets based on projections of future taxable income[220][221] Results of Operations (2021 vs. 2020) In 2021, net sales decreased to $601.6 million, SG&A expenses increased, a $6.1 million loss was recorded on a subsidiary sale, and the effective tax rate rose to 67.0% Results of Operations (% of Net Sales) | Line Item | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | 100.0% | 100.0% | | Gross profit | 28.8% | 28.7% | | R&D expenses | 5.1% | 5.1% | | SG&A expenses | 19.8% | 17.5% | | Operating income | 3.9% | 6.1% | | Net income | 0.9% | 6.3% | * Net sales decreased by 2.1% to $601.6 million in 2021 from $614.7 million in 2020, driven by lower sales in the subscription broadcast channel in North America[228] * SG&A expenses increased by 10.5% to $118.8 million, primarily due to an increase in outside legal expenses[230] * The effective tax rate increased to 67.0% in 2021 from 12.1% in 2020, mainly due to the mix of pre-tax income among jurisdictions and non-deductible losses on subsidiary sales[235] Liquidity and Capital Resources The company's liquidity relies on cash from operations and a $125.0 million credit line, with $60.8 million cash and $66.3 million available as of December 31, 2021, and $51.9 million in material cash commitments Cash Flow Summary (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $40,283 | $73,392 | | Net cash used for investing activities | ($17,041) | ($23,734) | | Net cash used for financing activities | ($22,026) | ($65,964) | * As of Dec 31, 2021, the company had $60.8 million in cash and $66.3 million available under its revolving credit facility[238][240] * During 2021, the company purchased 1,243,196 shares of its common stock for $59.7 million, a significant increase from the $17.7 million spent on repurchases in 2020[247] Material Cash Commitments (in thousands) | Commitment | Total | Less than 1 year | | :--- | :--- | :--- | | Operating lease obligations | $27,217 | $6,826 | | Property, plant, and equipment purchases | $2,638 | $2,638 | | Inventory purchases | $18,530 | $18,530 | | Software license | $3,519 | $53 | | Total | $51,904 | $28,047 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on its credit line and significant foreign currency exposure, primarily to CNY, EUR, and MXN, mitigated by hedging Interest Rate Risk The company's interest rate risk stems from its variable-rate credit line, with a 100 basis point increase potentially impacting annual net income by approximately $0.4 million * A 100 basis point increase in interest rates would impact annual net income by approximately $0.4 million, based on the outstanding credit line balance at December 31, 2021[252] Foreign Currency Exchange Rate Risk UEI has significant foreign currency exposure, primarily to CNY, EUR, GBP, and MXN, with a 10% fluctuation potentially impacting Q1 2022 net income by approximately $8.6 million, partially mitigated by hedging * The most significant foreign currency exposure is to the Chinese Yuan Renminbi, as a stronger Yuan increases manufacturing costs[255] * A hypothetical 10% fluctuation in the exchange rates for key currencies (CNY, EUR, GBP, MXN, INR, BRL, JPY) relative to the USD would impact net income in the first quarter of 2022 by approximately $8.6 million[258] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2021, including balance sheets, income statements, cash flows, and detailed notes, along with the auditor's report Report of Independent Registered Public Accounting Firm Grant Thornton LLP issued unqualified opinions on the company's FY2021 financial statements and internal controls, identifying revenue recognition timing as a critical audit matter due to significant management judgment * The auditor, Grant Thornton LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[264][265] * The determination of over time versus point in time revenue recognition was identified as a critical audit matter, requiring significant judgment by management regarding contract terms and product characteristics[269][270] Consolidated Financial Statements The consolidated financial statements show total assets of $510.3 million and liabilities of $234.4 million as of December 31, 2021, with net sales of $601.6 million, operating income of $23.3 million, and net income of $5.3 million for the year Key Financial Data (Year Ended Dec 31, 2021, in thousands) | Metric | Amount | | :--- | :--- | | Balance Sheet: | | | Total Assets | $510,348 | | Total Liabilities | $234,399 | | Total Stockholders' Equity | $275,949 | | Income Statement: | | | Net Sales | $601,602 | | Gross Profit | $173,016 | | Operating Income | $23,253 | | Net Income | $5,301 | | Cash Flow: | | | Net Cash from Operations | $40,283 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, financial components, commitments, and contingencies, covering revenue, major customers, inventory, goodwill, leases, debt, income taxes, legal proceedings (including Roku), and stock-based compensation * Note 4 (Revenue): In 2021, Comcast accounted for 16.3% of net sales and Daikin Industries accounted for 11.8%[365] * Note 9 (Line of Credit): The company has a $125.0 million revolving credit line, with $56.0 million outstanding as of December 31, 2021[391][398] * Note 13 (Litigation): The company is involved in multiple legal actions with Roku, Inc., including a lawsuit, an ITC investigation where an exclusion order was issued against Roku, and several Inter Partes Reviews of its patents[422][423][426] * Note 14 (Treasury Stock): The company repurchased 1.24 million shares for $59.7 million in 2021[438] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure * None[470] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes in Q4 2021 * Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[472] * Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, an assessment also confirmed by Grant Thornton LLP[474][475] * No changes in internal control over financial reporting occurred during the fourth quarter of 2021 that materially affected, or are reasonably likely to affect, internal controls[476] Other Information The company reports no other information for this item * None[485] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company * Not applicable[486] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement, with executive officer details also in Part I * Required information is incorporated by reference from the company's 2022 Proxy Statement[488][490] Executive Compensation Information on executive compensation is incorporated by reference from the company's 2022 Proxy Statement * Required information is incorporated by reference from the company's 2022 Proxy Statement[491] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2022 Proxy Statement, detailing outstanding and available securities under equity compensation plans as of December 31, 2021 Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 800,440 | $45.55 | 1,095,728 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement * Required information is incorporated by reference from the company's 2022 Proxy Statement[495] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement * Required information is incorporated by reference from the company's 2022 Proxy Statement[496] Part IV Exhibits, Financial Statement Schedules This section provides an index of financial statements, schedules, and exhibits filed with the Form 10-K report, including corporate governance documents and material contracts * This item provides an index of all financial statements, schedules, and exhibits filed with the annual report[498][499][500] Form 10-K Summary The company reports no Form 10-K summary for this item * None[509]