Universal Electronics Inc.

Good afternoon. My name is Angelina, and I will be your conference operator today. Now, I would like to welcome everyone to Universal Electronics' second quarter 2026 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I will now turn today's conference call over to our General Counsel, Ryan Ho-Seng. Please go ahead.

Thank you, Operator, and thank you all for joining us for the Universal Electronics Second Quarter 2026 Financial Results Conference Call. By now, you should have received a copy of the press release. If you have not, please visit the investor relations section of the website. This call is being broadcast live over the internet. A webcast replay of this call, including any additional updated material, non-public information that might be discussed during this call, will be available on the company's website at www.uei.com for a period of one year. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company and cautions you that these statements are just projections and actual results or events may differ materially from those projections. These statements include the company's goals, focus, strategies and opportunities, market trends including in the connected home and the home entertainment markets, expectations with respect to customer orders and customer demand including short-term and long-term demand, expectations with respect to supply chain actions and procurement R&D and product development activities, executive management transition action, restructuring plans and actions, including expected benefits and timing, financial projections and forecasts, including revenue, gross profit, operating profit and net income, adjusted free cash flow, cash, cost reductions, and working capital, our ability to respond to business and regulatory changes, such as tariffs and macroeconomic conditions, and expectations with respect to our ongoing litigation. The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today's date unless required by law or regulation and refers you to the press release mentioned at the beginning of this call and the documents the company has filed with the SEC, including the 2025 annual report on Form 10-K and the periodic and current reports filed at Furnished Sense Net. In management's financial remarks, adjusted non-gap metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them for budget planning purposes and for making operational and financial decisions and believes that providing these non-GAAP financial measures to investors as a supplement to GAAP financial measures helps investors evaluate UEI's core operating and financial performance and business trends consistent with how management evaluates such performance and trends. In addition, management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors and other companies. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP are included in the company's press release issued today. Joining me today are Interim CEO and Chief Operating Officer Rick Carnifax and Chief Financial Officer Wade Jekyll. Rick will provide an overview of our business and Wade will deliver our financial results. It's my pleasure to introduce Rick Carnifax. Please go ahead, Rick.

Thank you, Ryan, and thank you all for joining us. Before I turn to the quarter, I want to acknowledge the announcement in this afternoon's release. As disclosed, I will be stepping down as Interim Chief Executive Officer effective today, August 6th. The Board has appointed Wade Janke as Chief Executive Officer, and I look forward to supporting him through an orderly transition. The details are in the release and the Form 8-K filed this afternoon. This does not change the operating plan, the framework we are reaffirming today, or the actions underway across the business, and I will keep my remarks on the quarter. Two quarters ago, we outlined three structural moves for 2026, and last quarter we reported the early proof points. Q2 is the quarter where those actions moved from early progress into the results themselves. Total revenue was $73.2 million, down 25% year-over-year, including the impact of customer refund accruals associated with the tariff recovery. And reflecting conditions we have described before, component and memory cost inflation working through our customers' programs, legacy video and structural decline, European retail under pressure, and a connected home inflection still delayed. Those conditions have not eased, and we have not been waiting for them to. What has changed is the company is now profitable through them on less revenue than in Q1. The clearest way to see that is the trajectory across the two quarters. In Q1, we reported an adjusted non-GAAP loss of approximately $0.10 per share. In Q2, on slightly lower revenue, we earned approximately $0.04 per share, or $0.34, including a one-time recovery of previously paid tariffs. The $5.1 million recovery is non-recurring and is cash recovered rather than operating performance. Excluding it, the company still moved from a loss to a profit on lower revenue, and that came from the cost structure we have been rebuilding since the start of the year, not from any recovery in demand. Let me provide a progress report on the three structural moves. First, aligning our cost structure to our current revenue and margin expectations. In Q1, adjusted non-GAAP operating expenses were down $5.3 million year-over-year. In Q2, they were down $6.2 million, or 24%, as roles transitioned, programs wound down, and structural changes annualized. The labor reductions we described last quarter are now carried in the run rate rather than promised into it, and they came from decisions already executed rather than spending deferred into later periods. You can see the effect beyond the P&L as well. We ended the quarter with $11.6 million in net cash. Second, tightening portfolio focus. R&D expense stepped down again this quarter as we continued to direct resources toward initiatives with the clearest path to accretive return. This is not about stepping away from what makes UEI valuable. We are not narrowing what this company is capable of. We are narrowing what we choose to fund to work that carries a defined customer and a defined return. Third, retaining key employees, preserving customer continuity, and keeping suppliers engaged. This is the move that is hardest to show in a line item, and the clearest evidence in Q2 came from what customers themselves decided. With one of our largest video customers, we moved from primary supplier to sole source on a remote control program entering production in November. We also shipped the first mass production lot of a new smart thermostat platform for a major HVAC OEM, which has since asked for additional volume in the fourth quarter, even as the broader timing there continues to be shaped by component supply and integration work across the industry. Those are decisions about who a customer intends to rely on, and they went in our favor at a time when the company was visibly restructuring. On profitability, Q2 continues to reflect a margin profile under pressure. Adjusted non-GAAP gross margin was 35.4% as reported and approximately 27% excluding the tariff recovery against 29.9% a year ago. Input costs remain a material drag and very little of that is specific to UEI. Component and commodity pressure has been brought across our industry and it reaches us on a lap because we bill to forecast against orders already placed. Where specific input costs have moved and is attributable, we recovered on the evidence account by account. Broader inflation, we worked through sourcing and design. The P&L is carrying this cost today. Recovery will take time, but the cost work we have done is why we can still hold the framework we set in January. On inventory, the balance moved up modestly from Q1, reflecting the higher volume we expect in the second half. Lead times on memory, capacitors, and printed circuit boards now exceed our planning horizon. In that environment, the discipline is forward commitment against the longer forecast, rather than buying reactively at a premium. We are buying ahead where material carries across programs. The work of the last two quarters is being measured across the second half than in any single quarter's balance. Looking forward, our message is unchanged. We are reaffirming our four-year framework of adjusted non-GAAP diluted EPS of 45 cents to 65 cents against 31 cents in fiscal 2025 on a basis that excludes the tariff recovery. What I said in April was that our outlook would be grounded in execution rather than in demand rebounds. Q2 is the evidence. A profit on lower revenue than the prior quarter, a lower cost base, and a stronger balance sheet. The credit belongs to a team that absorbed a great deal of change and kept doing what customers count on us for, delivering on the programs in production today and designing the ones that follow. With that, I'll turn the call over to our CFO, Wade Janke, to walk through the quarter in more detail and review our outlook.

Thanks, Rick, and good afternoon, everyone. I'll walk through our second quarter 2026 financial performance with a focus on profitability, cost discipline, cash flow, and balance sheet strength, and then touch briefly on financial execution for the remainder of the year. Turning to our second quarter results, net sales were 73.2 million compared to 97.7 million in the second quarter of 2025, a decline of approximately 25%. The decline includes an accrual for tariff refunds to customers, plus we continue to see top-line pressure across both our end markets consistent with the difficult demand environment we have previously discussed. Connected home net sales were $25.1 million compared to $34.1 million in the prior year quarter. The decline was primarily driven by reduced demand from large climate control and home automation customers. Home entertainment net sales were $48.1 million compared to $63.6 million a year ago, primarily reflecting lower demand for subscription broadcasting products. Despite the lower revenue environment, gross margin improved meaningfully. GAAP gross margin and adjusted non-GAAP gross margin were both 35.4% compared to 29.9% in the prior year quarter. The year-over-year margin improvement was primarily driven by the sale of the tariff claims which contributed approximately 690 basis points and the tariff refund accrual mix effect of 160 basis points. We also had improved management of inbound freight costs which contributed approximately 90 basis points. These benefits were partially offset by higher component costs which reduced gross margin by approximately 240 basis points and the weaker US dollar relative to the Chinese renminbi which had an adverse impact of approximately 150 basis points. Throughout the quarter, we remained highly focused on cost, discipline, structural, expense reduction, GAAP operating expenses decreased by 7.1 million year over year and adjusted non-GAAP operating expenses declined by $6.2 million or 24%, reflecting continued progress in aligning our cost structure with current revenue levels. R&D expenses declined to $4.3 million from $7 million in the prior year quarter, primarily reflecting reductions in payroll and related personnel expenses following headcount optimization actions. SG&A expenses declined to $16.8 million from $21.2 million in the prior year quarter. The decrease reflected lower volume-driven expenses, people-related savings from organizational rightsizing, and reductions in discretionary spending, including travel and professional fees. During the first half of the year, we continued to benefit from the global reduction in force and related cost actions we initiated earlier in the year. These actions have led to a leaner, more agile cost structure focused on cost reduction, cash generation and profit improvement. GAAP operating income for the quarter was 4.8 million compared to GAAP operating income of 1 million in the prior year quarter. Adjusted non-GAAP operating income was 5.8 million compared to 2.9 million in the prior year quarter. Adjusted non-GAAP operating income as the percentage of net sales improved to 7.9% compared to 2.9% last year. GAAP net income was 1.6 million or 12 cents per diluted share compared to a GAAP net loss of 2.9 million or 22 cents per diluted share in the second quarter of 2025. Adjusted non-GAAP NEN income was $4.6 million or $0.34 per diluted share compared to adjusted non-GAAP NEN income of $2.4 million or $0.18 per diluted share in the prior year quarter. Now turning to our cash flow and balance sheet. Cash and cash equivalents at the end of the quarter were $32.4 million compared to $32.3 million at the year end 2025. For the first six months of 2026, operating cash flow was 5.5 million positive. Cash flow benefited from working capital actions, including an 8.1 million reduction in inventories during the first half of the year. Inventory ended the quarter at 70 million, down from 77.8 million at year-end 2025. Accounts receivable and contract assets increased versus year-end, primarily reflecting the timing of sales. We also strengthened liquidity during the quarter. Available borrowing resources were $48.7 million at June 30, 2026, compared to $42.5 million at December 31, 2025. At quarter end, there were no borrowings outstanding under the U.S. credit line. Now, turning to our outlook. For fiscal year 2026, we remain focused on areas within our control. Thank you for joining us. With Q2 now behind us, we have a greater visibility into the year ahead and our guidance remains unchanged as we execute against our 2026 business plan. Thank you all and I'll hand it back to Rick.

Thanks, Wade. Overall, the restructuring and refocusing actions we initiated are now delivering measurable results in the areas we control. We are equally clear about what has not yet turned, and component costs and availability remain the central operational risk into the second half. We are reaffirming our earlier framework based on the durable actions we have taken, rather than on an assumption about conditions. On a personal note, it has been a privilege to lead this company through this period, and my thanks to our employees, our customers, and suppliers, and the board. The plan we are executing was developed with the board and is directed to what matters to shareholders, improving profitability, generating cash, and rebuilding financial flexibility. That is how we build a stronger UEI. With that, operator, please open the call for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, You will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Stephen Frankel from Rosenblatt Securities. Please go ahead.

Good afternoon. Thank you. First of all, Rick, I wish you good luck and congratulations on your new position. Wade, a couple questions for you. You talked in the release about litigation against Amazon. Give us some thoughts about the timeline here and while we're at it, an update on the Roku litigation, which has been going on for multiple years.

Yeah, thank you, Frankel. I appreciate the question. So obviously with Amazon being very fresh, that lawsuit was just filed today. The timing remains uncertain. But UAI believes filing this action was necessary to protect our IP rights, and we're seeking appropriate remedies. So the time was right to file, but I can't really comment on the future timing. In terms of Roku, that case is ongoing and some of those details are moving forward. There is a court date scheduled for 2027, but beyond that, I can't comment further.

Okay. In terms of your guidance for the year, does that incorporate any further tariff refunds or have you gotten all the refunds that you're going to get?

Yeah, we've gotten all the refunds that we're going to get. The tariff monetization was for materially the whole lot. So all of that is in the guidance.

Okay, and then... Just remind us what the customer concentration was in the quarter.

Yeah, sure. We had Daikin at 21%, and then we had Comcast at 11.4%, and then followed up third place with Sony at 8%. I'll give you the top three there.

Okay, great. That is helpful. And then maybe the last question. Any more... We're very excited. We began this journey a couple years ago with the customer, their major HVAC in the market and we've been developing the product

and we just had a really big production shipment and more to follow in the second half. So we'll be able to share that in the coming quarters.

All right, thank you very much.

Yeah, you're welcome.

This concludes the question and answer session. I would now like to turn it back to management for closing remarks.

Thank you everyone for participating today in our earnings call for Q2 2026. A big thank you to Rick Carnifax for all his leadership and his great ability to create wonderful strategy here that has made a huge difference. We owe him a lot. We wish you the best in your new career. Thank you so much and thank you everyone. Thank you Wade and thanks everyone for your continued support of Universal Electronics.

Thank you for your participation today in today's conference. This does conclude the program. You may now disconnect.