Universal Electronics Inc: Form 10-Q for the period ended Sep 30, 2025

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this report.

Cautionary Statement

All statements in this report are made as of the date this Form 10-Q is filed with the U.S. Securities and Exchange Commission (the "SEC"). We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise. We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information available to us through the date this Form 10-Q is filed with the SEC. Forward-looking statements include: supply chain issues; customer demand for our products and solutions; expectations with respect to the markets in which we operate, including for specific geographic markets; other future demand and recovery trends and expectations; the delay by or failure of our customers to order products from us; plans to shut down our Mexico manufacturing facility, including the timing thereof and related costs; expected benefits of our restructuring and cost-reduction activities; continued availability of cash through borrowing under our revolving lines of credit; risks related to interest rates and foreign currency exchange rates; the effects of doing business internationally, including expanded use of tariffs, pertaining to the importation of our products, particularly in light of the recent U.S. presidential administrative actions and the responsive retaliatory actions of foreign governments; our expectations regarding our ability to meet our liquidity requirements; our capital expenditures and other investment spending expectations; our expectations with respect to the impact of changes in tax laws; and other statements that are preceded by, followed by, or include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," "foresees," or similar expressions; and similar statements concerning anticipated future events and expectations that are not historical facts.

We caution you that these statements are not guarantees of future performance and are subject to numerous evolving risks and uncertainties that we may not be able to accurately predict or assess, including the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 ("2024 Form 10-K"), Part II, Item 1A of this report, and other factors we describe from time to time in our periodic filings with the SEC.

Overview

We design, develop, manufacture, ship and support climate control solutions, wireless sensor and smart home control products, home entertainment control products, technology and software solutions and audio-video ("AV") accessories, that are used by the world's leading brands in the climate control, security, home automation, home appliance, home entertainment and consumer electronics markets. Our channel offerings include:

Connected home:

• Climate Control Solutions: Our innovative climate control solutions include wireless and wired controllers, smart thermostats and connected peripherals for sensing and smart energy management. These products are primarily sold to original equipment manufacturer ("OEM") customers, as well as hotels, utilities and system integrators. Our UEI TIDE Family of Climate Control solutions feature advanced technologies such as Wi-Fi, BLE, Zigbee and Matter, and connect to sensors for temperature, humidity, proximity, occupancy and carbon dioxide sensing.
• Smart Home and Security Products: We offer proprietary and standards-based radio frequency ("RF") wireless remote controls and sensors designed for residential security, safety and a broad variety of home automation applications, such as smart lighting and motorized shades.

Home entertainment:

• Home Entertainment Products: Our industry-leading portfolio includes RF-capable, voice-enabled universal remote control products; low-power RF and energy-harvesting microcontrollers, as well as embedded and Cloud software for AV and Smart Home device and content discovery and control. These solutions are sold primarily to video service providers and consumer electronics OEMs. We also distribute a broad portfolio of replacement remote controls, powerful free-to-air antennae and television and soundbar wall mounts direct to retailers worldwide under the One For All brand.
• Software and Cloud Services: Our software, firmware and technology solutions enable devices such as smart TVs, hybrid set-top boxes, game consoles and other consumer electronic and smart home devices to wirelessly connect and interoperate on the home network. These solutions support control and delivery of home entertainment application services and content, smart home services and device or system information. New features include private, on-premise user presence and occupancy detection to enhance user experiences and extend user engagement on connected devices.
• Intellectual Property and Licensing: We license our intellectual property primarily to OEMs and video service providers. Our cloud-enabled software provides reliable firmware update provisioning and digital rights management validation services to major consumer electronics brands. We offer regular control library database and software updates to our licensing customers to ensure their systems are compatible with the latest devices entering the home. Our integrated circuits, on which our software and universal control database is embedded, are sold primarily to OEMs, video service providers, smart home dealers and private label customers.

We operate as one business segment. We have 24 international subsidiaries located in Brazil, the British Virgin Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Korea, Mexico (2), the Netherlands, the People's Republic of China (the "PRC") (6), Singapore, Spain, United Kingdom and Vietnam.

To recap our results for the three months ended September 30, 2025:

• Net sales decreased 11.3% to $90.6 million for the three months ended September 30, 2025 from $102.1 million for the three months ended September 30, 2024.
• Our gross margin percentage decreased to 27.7% for the three months ended September 30, 2025 from 30.1% for the three months ended September 30, 2024.
• Operating expenses, as a percentage of net sales, increased to 32.7% for the three months ended September 30, 2025 from 29.7% for the three months ended September 30, 2024.
• Our operating loss was $4.5 million for the three months ended September 30, 2025 compared to operating income of $0.4 million for the three months ended September 30, 2024. Our operating loss percentage was 5.0% for the three months ended September 30, 2025 compared to our operating income percentage of 0.4% for the three months ended September 30, 2024.
• Income tax expense was $2.6 million for the three months ended September 30, 2025 compared to $2.5 million for the three months ended September 30, 2024.

Our strategic business objectives for 2025 include the following:

• Build long-term (3-5 year) revenue pipeline by engaging with industry leading brands and securing new and continued product design wins with major HVAC OEMs in North America, Europe and Asia Pacific;
• Commercially deploy the UEI TIDE family of products in multiple dwelling unit and utility channels and leverage initial deployments to validate, and promote, turnkey solutions to address industry need;
• Build a footprint in broadband gateway platforms with expanded QuickSet Cloud software offerings;
• Expand QuickSet Cloud software penetration in the TV OS market through development and commercial deployment of QuickSet features such as content personalization, privacy-first presence detection and monitoring;
• Expand AI-powered cloud services, and on-device AI developments to generate opportunities for recurring revenue streams in software licensing;
• Position UEI as the development partner of choice in smart thermostat control through innovation and next generation products;
• Launch new product categories in direct-to-consumer channel and build a growth revenue business with sustainable gross margins;
• Expand our technology offerings and development capabilities in new standards such as WiFi6, Thread, Matter and Z-Wave Long Range;
• Seek potential acquisitions or strategic partners that complement and strengthen our existing commercial footprint, add new capabilities, and offer strong synergies; and
• Manage our long-term global manufacturing footprint by optimizing internal investments and seeking external manufacturing partnerships where appropriate.

We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

Macroeconomic Conditions

We have been negatively impacted and we expect to continue to be negatively impacted by adverse macroeconomic conditions, including new tariffs imposed or to be imposed on goods manufactured in Vietnam, Taiwan, the PRC, and Mexico, and reduced consumer spending on durable goods. Economic tensions and changes in international trade policies, including the recent widespread tariffs announced by the U.S. on its major trading partners, higher tariffs on imported goods, actions taken in response (such as retaliatory tariffs or other trade protectionist measures or the renegotiation of free trade agreements), could also further impact the global market for our products. The full impact of these governmental actions on macroeconomic conditions and on our business is uncertain and difficult to predict and may result in lower sales and/or cost increases, which would negatively impact our gross margins and overall financial results. Management will continue to seek ways to lessen the impact these pressures may have on our margins and financial results; however, these mitigation efforts may not be successful and these pressures may have a material adverse effect on our business.

Manufacturing Footprint

We have continued to evaluate our global manufacturing footprint as part of our overall cost optimization and return to profitability strategy. In late July 2025, our Board approved a plan to shut down our Mexico manufacturing facility based upon strong productivity at our Vietnam factory and decreased demand in our home entertainment channel. We expect this shut down to be completed by the end of 2025 with additional shutdown-related expenses recorded throughout the remainder of the year.

Short-Term Employee Furlough

In October 2025, we announced a short-term furlough program affecting approximately 4.3% of our workforce. This action is taken in response to cost containment efforts, and was designed to align labor costs with current business activity levels during the year-end holiday season, while preserving long-term employment relationships. The furloughs are temporary in nature, with affected employees returning to work after 80 hours. During the furlough period, the Company will continue to provide certain benefits to affected employees, including healthcare coverage. The anticipated impact of this furlough program is expected to modestly reduce labor-related expenses and support ongoing cost management objectives.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation and income taxes. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant and may have a material impact on our consolidated financial statements.

An accounting estimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the nine months ended September 30, 2025 to the items that we disclosed as our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our 2024 Form 10-K.

Recent Accounting Pronouncements

See Note 1 contained in the "Notes to Consolidated Financial Statements" for a discussion of recent accounting pronouncements.

Results of Operations

The following table sets forth our reported results of operations expressed as a percentage of net sales for the periods indicated.

Three Months Ended September 30, 2025 versus Three Months Ended September 30, 2024

Net sales. Net sales for the three months ended September 30, 2025 were $90.6 million compared to $102.1 million for the three months ended September 30, 2024. Net sales by channel were as follows:

(In thousands)

Net sales in connected home were $29.8 million for the three months ended September 30, 2025 compared to $26.4 million for the three months ended September 30, 2024. This growth is driven primarily by shipments to large climate control and home automation customers relating to projects won over the past couple of years.

Net sales in home entertainment were $60.8 million for the three months ended September 30, 2025 compared to $75.7 million for the three months ended September 30, 2024. The decrease in sales within the home entertainment channel was primarily driven by lower demand for subscription broadcasting products in Europe and Latin America, particularly for basic remote controls with lower price points and limited or no advanced features. In addition, several customers in the consumer electronics industry experienced reduced demand for televisions, which led to a corresponding decline in remote control sales in this channel. The retail market also remains weak, reflecting elevated inventory levels and soft sell-through performance.

Gross profit. Gross profit for the three months ended September 30, 2025 was $25.1 million compared to $30.7 million for the three months ended September 30, 2024. Gross profit as a percentage of sales decreased to 27.7% for the three months ended September 30, 2025 from 30.1% for the three months ended September 30, 2024. The decline in gross margin primarily reflects a one-time impairment charge of approximately $1.2 million related to machinery and equipment that will no longer be utilized following the planned closure of our Mexico facility by the end of 2025. This charge reduced the gross margin rate by approximately 130 basis points. In addition, higher tariff costs and unfavorable sales mix together contributed to an additional 270 basis point decline in gross margin during the period. These pressures were partially offset by realized procurement savings, which improved gross margin by approximately 80 basis points. We also benefited from favorable foreign exchange movements driven by a weaker U.S. Dollar relative to the Euro and British Pound and a stronger U.S. Dollar relative to Vietnamese Dong, resulting in an additional 80 basis points of margin improvement.

Research and development ("R&D") expenses. R&D expenses decreased to $6.7 million for the three months ended September 30, 2025 from $7.3 million for the three months ended September 30, 2024 attributable to reductions in payroll and related personnel expenses following headcount optimization actions.

Selling, general and administrative ("SG&A") expenses. SG&A expenses decreased to $22.1 million for the three months ended September 30, 2025 from $22.9 million for the three months ended September 30, 2024. The decrease reflects lower volume-driven expenses of $0.9 million, consistent with the decline in sales volume. In addition, ongoing cost-reduction initiatives, including organizational rightsizing, resulted in savings from headcount reductions. People-related expenses decreased by $1.8 million, complemented by an additional $1.0 million reduction in other discretionary spending. These savings were largely offset by one-time charges incurred during the period, including $1.3 million related to the abandonment of office space in Carlsbad, California and $1.7 million of severance costs associated with our global reduction in force.

Factory restructuring charges. During the three months ended September 30, 2025, we recorded $0.8 million in expense, including severance and moving costs associated with the closure of our factory in Mexico. During the three months ended September 30, 2024, we recorded $0.1 million in expense, which included severance and moving costs associated with the streamlining of our factory in Mexico.

Interest income (expense), net. Interest expense, net decreased to $0.2 million for the three months ended September 30, 2025 from $0.9 million for the three months ended September 30, 2024, as a result of a lower average loan balance and lower interest rates.

Other income (expense), net. Other expense, net was $1.0 million for the three months ended September 30, 2025 compared to other income, net of $0.3 million for the three months ended September 30, 2024. This increase was attributable to foreign currency losses arising from the persistent weakness of the U.S. Dollar in the third quarter of 2025.

Provision for income taxes. Income tax expense was $2.6 million for the three months ended September 30, 2025, relative to a pre-tax loss of $5.8 million, compared to income tax expense of $2.5 million for the three months ended September 30, 2024, relative to a pre-tax loss of $0.2 million. Consistent with 2024, we expect the U.S. to be in a pre-tax loss position without benefit for the full year 2025, resulting in an elevated effective tax rate.

Nine Months Ended September 30, 2025 versus Nine Months Ended September 30, 2024

Net sales. Net sales for the nine months ended September 30, 2025 were $280.5 million compared to $284.4 million for the nine months ended September 30, 2024. Net sales by channel were as follows:

(In thousands)

Net sales in connected home were $95.6 million for the nine months ended September 30, 2025 compared to $73.8 million for the nine months ended September 30, 2024. This growth is driven primarily by shipments to large climate control and home automation customers relating to projects won over the past couple of years.

Net sales in home entertainment were $184.9 million for the nine months ended September 30, 2025 compared to $210.6 million for the nine months ended September 30, 2024. The decrease primarily reflects lower demand for subscription broadcasting products in Europe and Latin America, particularly basic remote control models at lower price points and limited to no advanced features. In addition, reduced demand for televisions among certain consumer electronics customers contributed to a corresponding decline in remote control sales within this channel.

Gross profit. Gross profit for the nine months ended September 30, 2025 was $80.4 million compared to $82.7 million for the nine months ended September 30, 2024. Gross profit as a percentage of sales decreased to 28.7% for the nine months ended September 30, 2025 from 29.1% for the nine months ended September 30, 2024. The decline in gross margin primarily reflects a one-time impairment charge of approximately $1.2 million related to machinery and equipment that will no longer be utilized following the planned closure of our Mexico facility by the end of 2025. This charge reduced the gross margin rate by approximately 40 basis points. In addition, an unfavorable sales mix contributed an additional 80 basis point decline in gross margin during the period. These pressures were partially offset by favorable foreign exchange impacts driven by a stronger U.S. Dollar relative to the Mexican Peso and Vietnamese Dong and a weaker U.S. Dollar relative to the Euro and British Pound, which together provided approximately 90 basis points of margin improvement.

R&D expenses. R&D expenses decreased to $20.9 million for the nine months ended September 30, 2025 from $22.7 million for the nine months ended September 30, 2024 attributable to reductions in payroll and related personnel expenses following headcount optimization actions.

SG&A expenses. SG&A expenses decreased to $65.9 million for the nine months ended September 30, 2025 from $68.2 million for the nine months ended September 30, 2024. The decrease reflects lower volume-driven expenses of $1.3 million, consistent with the decline in sales volume. In addition, ongoing cost-reduction initiatives, including organizational rightsizing, resulted in savings from headcount reductions. People-related expenses decreased by $3.3 million, complemented by an additional $1.9 million reduction in other discretionary spending. These reductions were partially offset by one-time charges incurred during the period, including $1.3 million related to the abandonment of office space in Carlsbad, California, $2.3 million of severance costs associated with our global reduction in force and $0.6 million related to additional director compensation.

Factory restructuring charges. During the nine months ended September 30, 2025, we recorded $0.8 million in expense, including severance and moving costs associated with the closure of our factory in Mexico. During the nine months ended September 30, 2024, we recorded $2.7 million in expense, which included severance and moving costs associated with the closure of our southern China factory and the streamlining of our factory in Mexico.

Interest income (expense), net. Interest expense, net decreased to $1.0 million for the nine months ended September 30, 2025 from $2.7 million for the nine months ended September 30, 2024, as a result of a lower average loan balance and lower interest rates.

Other income (expense), net. Other expense, net was $2.7 million for the nine months ended September 30, 2025 compared to other income, net of $0.1 million for the nine months ended September 30, 2024. This increase was attributable to foreign currency losses arising from the persistent weakness of the U.S. Dollar in 2025.

Provision for income taxes. Income tax expense was $6.6 million for the nine months ended September 30, 2025, relative to a pre-tax loss of $10.9 million, compared to income tax expense of $6.0 million for the nine months ended September 30, 2024, relative to a pre-tax loss of $13.5 million. Consistent with 2024, we expect the U.S. to be in a pre-tax loss position without benefit for the full year 2025, resulting in an elevated effective tax rate.

Liquidity and Capital Resources

Sources of Cash

Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have typically been sufficient to support our business operations, capital expenditures and discretionary share repurchases. When needed, we have utilized our revolving lines of credit to fund operations, share repurchases and acquisitions. We anticipate that we will continue to utilize both cash flows from operations and our revolving lines of credit to support ongoing business operations, capital expenditures, discretionary share repurchases and potential acquisitions. We believe our current cash balances, anticipated cash flow to be generated from operations and available borrowing resources will be sufficient to cover expected cash outlays for at least the next twelve months and for the foreseeable future thereafter; however, because our cash is located in various jurisdictions throughout the world, we may at times need to increase borrowing from our revolving lines of credit or take on additional debt until we are able to transfer cash among our various entities.

Our liquidity is subject to various risks including the risks discussed under "Item 3. Quantitative and Qualitative Disclosures about Market Risk."

(In thousands)

Cash and cash equivalents – On September 30, 2025, we had $2.7 million, $11.6 million, $4.4 million, $7.5 million and $5.3 million of cash and cash equivalents in North America, the PRC, Asia (excluding the PRC), Europe, and South America, respectively. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash and cash equivalents with financial institutions we believe are high quality.

Our cash balances are held in numerous locations throughout the world. The majority of our cash is held outside of the United States and may be repatriated to the United States but, under current law, may be subject to federal and state income taxes and foreign withholding taxes. Additionally, repatriation of some foreign balances is restricted by local laws.

Available Borrowing Resources – Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association provides for a revolving line of credit ("U.S. Credit Line") that expires on April 30, 2026. We expect to renew the U.S. Credit Line prior to its expiration; however, no assurance can be given that future financing will be available or, if available, that we will be offered terms satisfactory to us.

The U.S. Credit Line has a maximum availability of up to $75.0 million, subject to meeting certain financial conditions, including an accounts receivable coverage ratio ("AR Ratio"). This AR Ratio is calculated monthly and adjusts the current U.S. Credit Line total availability. At September 30, 2025, the U.S. Credit Line total availability was $54.1 million based upon the AR Ratio. At October 23, 2025, the U.S. Credit Line total availability was $50.4 million based upon the AR Ratio.

The U.S. 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 U.S. Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $0.5 million at September 30, 2025. At September 30, 2025, we had no outstanding balance on our U.S. Credit Line and $53.6 million of availability.

Our subsidiary, Gemstar Technology (Yangzhou) Co. Ltd. ("GTY"), has a Line of Credit Agreement ("Line of Credit Agreement") with the Bank of China, which provides for a revolving line of credit ("China Credit Line" and, together with the U.S. Credit Line, "Credit Lines"). As a continuation of the agreement, on July 30, 2025, we executed an amendment to the Line of Credit Agreement, which extends the term of the China Credit Line to July 16, 2026. We expect to renew our China Credit Line prior to its expiration; however, no assurance can be given that future financing will be available or, if available, that we will be offered terms satisfactory to us.

At September 30, 2025, the China Credit Line had a maximum availability of up to RMB 130.0 million (approximately $18.3 million), subject to meeting certain financial conditions.

The China Credit Line may be used for working capital purposes. Amounts available for borrowing under the China Credit Line are reduced by the balance of any outstanding letters of credit, of which there were none at September 30, 2025. At September 30, 2025, we had an outstanding balance of RMB 130.0 million (approximately $18.3 million) on our China Credit Line and no remaining availability.

See Note 8 contained in the "Notes to Consolidated Financial Statements" for further information regarding our Credit Lines.

Sources and Uses of Cash

Our cash flows were as follows:

(In thousands)

36

Net cash provided by operating activities was $27.8 million during the nine months ended September 30, 2025 compared to $8.3 million during the nine months ended September 30, 2024. The improvement in operating cash flows primarily reflects changes in working capital, particularly in accounts receivable and contract assets, as well as improved inventory management. Net loss was $17.5 million for the nine months ended September 30, 2025, compared to net loss of $19.5 million in the prior-year period. Depreciation and amortization expense was $11.1 million during the nine months ended September 30, 2025 compared to $13.5 million during the nine months ended September 30, 2024, primarily due to lower capital expenditures in recent years, consistent with the decline in production volumes. Inventories decreased by $1.4 million during the nine months ended September 30, 2025, compared to an increase of $0.5 million during the same period in 2024, reflecting improved inventory management practices. A decrease in accounts receivable and contract assets, mainly due to lower sales outstanding, resulted in cash inflows of $38.9 million in 2025 compared to $5.4 million in 2024. Days sales outstanding improved to 72 days at September 30, 2025, from 91 days at September 30, 2024. A decrease in accounts payable and accrued liabilities, primarily driven by lower inventory purchases and timing of payments, resulted in cash outflows of $22.2 million during the nine months ended September 30, 2025, compared to $0.1 million in the prior-year period. Additionally, a decrease in prepaid expenses and other assets, primarily related to the release of a deposit associated with our litigation with Tongshun Company, generated cash inflows of $5.7 million in 2025 compared to $0.8 million in 2024.

Net cash used for investing activities during the nine months ended September 30, 2025 was $5.7 million, of which $2.5 million, $3.1 million and $2.4 million was used for the purchase of Blue Chip Swap securities, capital expenditures and the development of patents, respectively. Offsetting these amounts was $2.3 million received upon the sale of Blue Chip Swap securities. Net cash used for investing activities during the nine months ended September 30, 2024 was $6.7 million, of which $3.5 million and $3.2 million was used for capital expenditures and the development of patents, respectively.

Future cash flows used for investing activities are largely dependent on the timing and amount of capital expenditures and the development of patents, respectively. We estimate that we will incur between $2.0 million and $3.0 million during the remainder of 2025.

Net cash used for financing activities was $19.8 million during the nine months ended September 30, 2025 compared to $17.1 million during the nine months ended September 30, 2024. The primary financing activities during the nine months ended September 30, 2025 and 2024 were borrowings and repayments on our Credit Lines and repurchases of shares of our common stock. Net repayments on our Credit Lines were $19.0 million during the nine months ended September 30, 2025 compared to $15.2 million during the nine months ended September 30, 2024. During the nine months ended September 30, 2025, we repurchased 107,000 shares of our common stock at a cost of $0.8 million compared to our repurchase of 200,552 shares at a cost of $1.9 million during the nine months ended September 30, 2024.

Future cash flows used for financing activities are affected by our financing needs, which are largely dependent on the level of cash provided by or used in operations and the level of cash used in investing activities. Additionally, potential future repurchases of shares of our common stock will impact our cash flows used for financing activities. See Note 13 contained in the "Notes to Consolidated Financial Statements" for further information regarding our share repurchase programs.

Material Cash Commitments – The following table summarizes our material cash commitments and the effect these commitments are expected to have on our cash flows in future periods:

(In thousands)

We anticipate meeting our material cash commitments with our cash generated from operations and available borrowing on our Credit Lines.

We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, procedures and internal processes governing our management of these risks and the use of financial instruments to mitigate our risk exposure.

Interest Rate Risk

We are exposed to interest rate risk related to our debt. From time to time, we borrow amounts on our Credit Lines for working capital and other liquidity needs. Under the Second Amended Credit Agreement, we pay interest on outstanding borrowings on our U.S. Credit Line based on the Secured Overnight Financing Rate ("SOFR") plus an applicable margin as defined in the Second Amended Credit Agreement. Under our Line of Credit Agreement, we pay interest on outstanding borrowings on our China Credit Line based on the one-year rate from the National Interbank Funding Center, less a 0.1% margin. Accordingly, changes in interest rates would impact our results of operations in future periods. A 100 basis point increase in interest rates would have an approximately $0.2 million annual impact on net income based on our outstanding Credit Lines balance at September 30, 2025.

We cannot make any assurances that we will not need to borrow additional amounts in the future or that funds from the existing Credit Lines will continue to be available to us or that other funds will be extended to us under comparable terms or at all. If funding is not available to us at a time when we need to borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our operating results, financial position and cash flows.

Foreign Currency Exchange Rate Risk

At September 30, 2025, we had wholly-owned subsidiaries in Brazil, the British Virgin Islands, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, the PRC, Singapore, Spain, United Kingdom and Vietnam. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases, operating expenses, assets and liabilities denominated in currencies other than the U.S. Dollar. The most significant foreign currencies to our operations are the Chinese Yuan Renminbi, Euro, British Pound, Mexican Peso, Vietnamese Dong, Indian Rupee, Hong Kong Dollar, Brazilian Real, Japanese Yen and Korean Won. Our most significant foreign currency exposure is to the Chinese Yuan Renminbi as this is the functional currency of our PRC-based factory where the majority of our products originate. If the Chinese Yuan Renminbi were to strengthen against the U.S. Dollar, our manufacturing costs would increase. We are generally a net payor of the Chinese Yuan Renminbi, Mexican Peso, Vietnamese Dong, Indian Rupee, Hong Kong Dollar, Japanese Yen and Korean Won and therefore benefit from a stronger U.S. Dollar and are adversely affected by a weaker U.S. Dollar relative to the foreign currency. For the Euro, British Pound and Brazilian Real, we are generally a net receiver of the foreign currency and therefore benefit from a weaker U.S. Dollar and are adversely affected by a stronger U.S. Dollar relative to the foreign currency. Even where we are a net receiver, a weaker U.S. Dollar may adversely affect certain expense figures taken alone.

From time to time, we enter into foreign currency exchange agreements to manage the foreign currency exchange rate risks inherent in our forecasted income and cash flows denominated in foreign currencies. The terms of these foreign currency exchange agreements normally last less than nine months. We recognize the gains and losses on these foreign currency contracts in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures.

It is difficult to estimate the impact of fluctuations on reported income, as it depends on the opening and closing rates, the average net balance sheet positions held in a foreign currency and the amount of income generated in local currency. We routinely forecast what these balance sheet positions and income generated in local currency may be and we take steps to minimize exposure as we deem appropriate. Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures, primarily if such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or the currency is difficult or too expensive to hedge. We do not enter into any derivative transactions for speculative purposes.

The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an approximate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currency with all other variables held constant. The analysis includes all of our foreign currency contracts offset by the underlying exposures. Based on our overall foreign currency rate exposure at September 30, 2025, we believe that movements in foreign currency rates may have a material effect on our financial position and results of operations. We estimate that if the exchange rates for the Chinese Yuan Renminbi, Euro, British Pound, Mexican Peso, Indian Rupee, Hong Kong Dollar, Brazilian Real, Japanese Yen, Korean Won and Vietnamese Dong relative to the U.S. Dollar fluctuate 10% from September 30, 2025, net income in the fourth quarter of 2025 would fluctuate by approximately $2.7 million.

Evaluation of Disclosure Controls and Procedures

Rule 13a-15(d) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") defines "disclosure controls and procedures" to mean controls and procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. The definition further states that disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Quarterly Report on Form 10-Q, to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The reader should carefully consider, in connection with the other information in this report, the risk factors discussed in "Part I, Item 1A: Risk Factors" of the 2024 Form 10-K and in the periodic reports we have filed since then. These factors may cause our actual results to differ materially from those stated in forward-looking statements contained in this Quarterly Report on Form 10-Q and elsewhere.

We recently experienced the departures of our CEO and CFO and changes to our board and executive management. These changes may create uncertainty and, more generally, if we are unable to attract and retain qualified management and key personnel, our business will be harmed.

We have experienced recent changes to our senior management and board, including the retirement of our Chief Executive Officer, Paul D. Arling, in May 2025, the retirement of our Chief Financial Officer, Bryan M. Hackworth, in September 2025, and the retirement of a member of the board and Audit Committee Chair, Edward K. Zinser, in August 2025. In addition, our director William C. Mulligan announced his intention to not stand for re-election at our 2026 Annual Meeting. Richard K. Carnifax, who served as our Chief Operating Officer, is currently serving as our Interim Chief Executive Officer and as principal executive officer, and Sui Man Ho (a.k.a. Raymond Ho), who served as our Senior Vice President, Finance, is currently serving as our Interim Chief Financial Officer, principal financial officer and principal accounting officer.

Although we have endeavored to implement these management transitions in a non-disruptive manner, such transitions can be inherently difficult to manage and may hamper our ability to meet our financial and operational goals. Such changes may also give rise to uncertainty among our customers, investors, vendors, suppliers, employees and others concerning our future direction and performance. Replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals with the skills and experience required. If we are unable to attract and retain high-quality personnel, our ability to pursue our strategy will be limited. Changes in our board and senior management and uncertainty regarding pending changes may disrupt our business, financial condition, results of operations, cash flows and ability to execute on our business plans and impair our ability to recruit and retain other key personnel. Any such disruption or impairment could have an adverse effect on our business.

Our future performance will also depend, in part, on our ability to successfully integrate newly hired executive officers into our management team, and our ability to develop effective working relationships amongst senior management. Our failure to integrate these individuals and create effective working relationships amongst them and other members of management could result in inefficiencies, harming sales of our products and our results of operations. Additionally, we do not currently maintain "key person" life insurance on the lives of our executives or any of our employees.