Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
(unaudited)
(1)
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of VOXX International Corporation and Subsidiaries ("Voxx" or the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America and include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year or any interim period. These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto contained in the Company's Form 10-K for the fiscal year ended
February 28, 2017
. Certain amounts in the prior year have been reclassified to conform to the current year presentation.
We operate in three reportable segments, Automotive, Premium Audio and Consumer Accessories. See Note 21 for the Company's segment reporting disclosures.
(2)
Acquisitions and Divestitures
Rosen Electronics LLC
On April 6, 2017, Voxx acquired the inventory and all intellectual property, including patents and trademarks of Rosen Electronics LLC. As consideration for the Rosen asset purchase, the Company paid
$1,814
. In addition, the Company agreed to pay a 2% royalty related to future net sales of Rosen products for three years.
Rosen's results of operations have been included in the consolidated financial statements from the date of acquisition. The purpose of this acquisition was to increase the Company's market share and strengthen its intellectual property related to the rear seat entertainment market.
The following summarizes the preliminary allocation of the purchase price for the fair value of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
Assets acquired:
|
|
Inventory
|
$
|
2,310
|
|
Intangible assets including trademarks, customer relationships and patents
|
604
|
|
Total assets acquired
|
$
|
2,914
|
|
|
|
Liabilities assumed:
|
|
Warranty accrual
|
$
|
500
|
|
Other liabilities acquired
|
600
|
|
Total
|
$
|
1,100
|
|
Total purchase price
|
$
|
1,814
|
|
Hirschmann Car Communication GmbH
On June 25, 2017, the Company entered into a definitive agreement to sell Hirschmann Car Communication GmbH and its subsidiaries. See Note 24 for more details of this subsequent event.
(3)
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is based upon the weighted-average common shares outstanding during the period. Diluted net income (loss) per common share reflects the potential dilution that would occur if common stock equivalent securities or other contracts to issue common stock were exercised or converted into common stock.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
There are no reconciling items which impact the numerator of basic and diluted net income (loss) per common share. A reconciliation between the denominator of basic and diluted net income (loss) per common share is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
|
2017
|
|
2016
|
Weighted-average common shares outstanding
|
|
24,160,324
|
|
|
24,160,324
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options, warrants and restricted stock
|
|
—
|
|
|
—
|
|
Weighted-average common shares and potential common shares outstanding
|
|
24,160,324
|
|
|
24,160,324
|
|
Restricted stock, stock options and warrants totaling
553,693
and
413,164
for the
three months ended
May 31, 2017
and
2016
, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these stock options and warrants was greater than the average market price of the Company’s common stock during these periods, or the inclusion of these components would have been anti-dilutive.
(4)
Fair Value Measurements and Derivatives
The Company applies the authoritative guidance on “Fair Value Measurements," which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. This guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that market participants would use.
The following table presents assets measured at fair value on a recurring basis at
May 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
8,060
|
|
|
$
|
8,060
|
|
|
$
|
—
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
(1,022
|
)
|
|
$
|
—
|
|
|
$
|
(1,022
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
3,468
|
|
|
$
|
3,468
|
|
|
$
|
—
|
|
Available-for-sale securities
|
6
|
|
|
6
|
|
|
—
|
|
Other investments at cost (a)
|
6,274
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
9,748
|
|
|
$
|
3,474
|
|
|
$
|
—
|
|
The following table presents assets measured at fair value on a recurring basis at
February 28, 2017
:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
7,800
|
|
|
$
|
7,800
|
|
|
$
|
—
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
335
|
|
|
$
|
—
|
|
|
$
|
335
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
4,094
|
|
|
$
|
4,094
|
|
|
$
|
—
|
|
Available-for-sale securities
|
6
|
|
|
6
|
|
|
—
|
|
Other investments at cost (a)
|
6,288
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
10,388
|
|
|
$
|
4,100
|
|
|
$
|
—
|
|
|
|
(a)
|
Included in this balance are investments in two non-controlled corporations accounted for at cost (see Note 5). The fair values of these investments would be based upon Level 3 inputs. At
May 31, 2017
and
February 28, 2017
, it is not practicable to estimate the fair values of these items.
|
The carrying amount of the Company's accounts receivable, short-term debt, accounts payable, accrued expenses, bank obligations and long-term debt approximates fair value because of (i) the short-term nature of the financial instrument; (ii) the interest rate on the financial instrument being reset every quarter to reflect current market rates, and (iii) the stated or implicit interest rate approximates the current market rates or are not materially different than market rates.
Derivative Instruments
The Company's derivative instruments include forward foreign currency contracts utilized to hedge a portion of its foreign currency inventory purchases, local operating expenses, as well as its general economic exposure to foreign currency fluctuations created in the normal course of business. The forward foreign currency derivatives qualifying for hedge accounting are designated as cash flow hedges and valued using observable forward rates for the same or similar instruments (Level 2). The duration of open forward foreign currency contracts ranges from 1 - 9 months and are classified in the balance sheet according to their terms. The Company also has an interest rate swap agreement as of
May 31, 2017
that hedges interest rate exposure related to the forecasted outstanding balance of its Florida Mortgage, with monthly payments due through March 2026. The swap agreement locks the interest rate on the debt at
3.48%
(inclusive of credit spread) through the maturity date of the loan. During the first quarter of Fiscal 2017, the Company unwound another interest rate swap agreement that hedged interest rate exposure related to one of its mortgage notes when that mortgage was paid in full. The fair value of that interest rate swap agreement on the date it was unwound was
$(114)
, and was charged to interest expense in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) during the three months ended
May 31, 2016
. Interest rate swap agreements qualifying for hedge accounting are designated as cash flow hedges and valued based on a comparison of the change in fair value of the actual swap contracts designated as the hedging instruments and the change in fair value of a hypothetical swap contract (Level 2). We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Interest rate swaps are classified in the balance sheet as either assets or liabilities based on the fair value of the instruments at the end of the period.
It is the Company's policy to enter into derivative instrument contracts with terms that coincide with the underlying exposure being hedged. As such, the Company's derivative instruments are expected to be highly effective. Hedge ineffectiveness, if any, is recognized as incurred through Other Income (Expense) in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) and amounted to
$(52)
for the
three months ended
May 31, 2017
, and
$(50)
for the
three months ended
May 31, 2016
.
Financial Statement Classification
The Company holds derivative instruments that are designated as hedging instruments. The following table discloses the fair value as of
May 31, 2017
and
February 28, 2017
of derivative instruments:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets and Liabilities
|
|
|
|
|
Fair Value
|
|
|
Account
|
|
May 31, 2017
|
|
February 28, 2017
|
Designated derivative instruments
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
26
|
|
|
$
|
654
|
|
|
|
Accrued expenses and other current liabilities
|
|
(706
|
)
|
|
(21
|
)
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other long-term liabilities
|
|
(342
|
)
|
|
(298
|
)
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
(1,022
|
)
|
|
$
|
335
|
|
Cash flow hedges
During Fiscal 2017, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of
$34,260
and are designated as cash flow hedges at
May 31, 2017
. The current outstanding notional value of the Company's interest rate swap at
May 31, 2017
is
$8,988
. For cash flow hedges, the effective portion of the gain or loss is reported as a component of Other Comprehensive Income (Loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
Activity related to cash flow hedges recorded during the
three months ended
May 31, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Three months ended
|
|
May 31, 2017
|
|
May 31, 2016
|
|
Pretax Gain(Loss) Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a)
|
|
Gain (Loss)for Ineffectiveness in Other Income
|
|
Pretax Gain (Loss) Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a)
|
|
Gain (Loss) for Ineffectiveness in Other Income
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
(1,208
|
)
|
|
$
|
299
|
|
|
$
|
(52
|
)
|
|
$
|
(818
|
)
|
|
$
|
324
|
|
|
$
|
(50
|
)
|
Interest rate swaps
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
(a) Gains and losses related to foreign currency contracts are reclassified to cost of sales. Gains and losses related to interest rate swaps are reclassified to interest expense.
The net income (loss) recognized in Other Comprehensive Income (Loss) for foreign currency contracts is expected to be recognized in cost of sales within the next twelve months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of
May 31, 2017
,
no
foreign currency contracts originally designated for hedge accounting were de-designated or terminated.
(5)
Investment Securities
As of
May 31, 2017
and
February 28, 2017
, the Company had the following investments:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
February 28, 2017
|
|
Cost
Basis
|
|
Unrealized
Holding
Gain/(Loss)
|
|
Fair
Value
|
|
Cost
Basis
|
|
Unrealized
Holding
Gain/(Loss)
|
|
Fair
Value
|
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation
|
$
|
3,468
|
|
|
$
|
—
|
|
|
$
|
3,468
|
|
|
$
|
4,094
|
|
|
$
|
—
|
|
|
$
|
4,094
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cellstar
|
—
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
6
|
|
Total Marketable Securities
|
3,468
|
|
|
6
|
|
|
3,474
|
|
|
4,094
|
|
|
6
|
|
|
4,100
|
|
Other Long-Term Investments
|
6,274
|
|
|
—
|
|
|
6,274
|
|
|
6,288
|
|
|
—
|
|
|
6,288
|
|
Total Investment Securities
|
$
|
9,742
|
|
|
$
|
6
|
|
|
$
|
9,748
|
|
|
$
|
10,382
|
|
|
$
|
6
|
|
|
$
|
10,388
|
|
Long-Term Investments
Trading Securities
The Company’s trading securities consist of mutual funds, which are held in connection with the Company’s deferred compensation plan. Unrealized holding gains and losses on trading securities are offset by changes in the corresponding deferred compensation liability.
Available-For-Sale Securities
The Company’s available-for-sale marketable securities include a less than
20%
equity ownership in CLST Holdings, Inc. (“Cellstar").
Unrealized holding gains and losses, net of the related tax effect (if applicable), on available-for-sale securities are reported as a component of Accumulated Other Comprehensive Income (Loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis and reported in Other Income (Expense).
A decline in the market value of any available-for-sale security below cost that is deemed other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.
No
other-than-temporary losses were incurred by the Company during the
three months ended
May 31, 2017
or
2016
.
Other Long-Term Investments
Other long-term investments include investments in two non-controlled corporations accounted for by the cost method. As of
May 31, 2017
, the Company's investments in Rx Networks and 360fly, Inc. totaled
$1,821
and
$4,453
, respectively, or a total investment balance of
$6,274
. We held
10.2%
and
4.7%
of the outstanding shares of Rx Networks and 360fly, Inc., respectively, at
May 31, 2017
. No additional investment was made in either of these companies during the
three months ended
May 31, 2017
.
(6)
Accumulated Other Comprehensive (Loss) Income
The Company’s accumulated other comprehensive (losses) income consist of the following:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Gains (Losses)
|
|
Unrealized gains (losses) on investments, net of tax
|
|
Pension plan adjustments, net of tax
|
|
Derivatives designated in a hedging relationship, net of tax
|
|
Total
|
Balance at February 28, 2017
|
|
$
|
(41,831
|
)
|
|
$
|
(98
|
)
|
|
$
|
(2,282
|
)
|
|
$
|
313
|
|
|
$
|
(43,898
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
7,359
|
|
|
(4
|
)
|
|
(120
|
)
|
|
(845
|
)
|
|
6,390
|
|
Reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(207
|
)
|
|
(207
|
)
|
Net current-period other comprehensive income (loss)
|
|
7,359
|
|
|
(4
|
)
|
|
(120
|
)
|
|
(1,052
|
)
|
|
6,183
|
|
Balance at May 31, 2017
|
|
$
|
(34,472
|
)
|
|
$
|
(102
|
)
|
|
$
|
(2,402
|
)
|
|
$
|
(739
|
)
|
|
$
|
(37,715
|
)
|
During the
three months ended
May 31, 2017
, the Company recorded tax expense (benefit) related to unrealized losses on investments of
$0
, pension plan adjustments of
$0
, and derivatives designated in a hedging relationship of
$(466)
.
Included in foreign currency translation gains of
$7,359
for the
three months ended
May 31, 2017
, was
$1,677
of net gains resulting from translating the financial statements of the Company’s non-U.S. dollar functional currency subsidiaries into our reporting currency, which is the U.S. dollar, as well as approximately
$4,511
of gains resulting from the re-measurement of an intercompany loan, payable in Euros, which is of a long-term investment nature. Remaining gains or losses pertain to the re-measurement of intercompany transactions of a long-term investment nature, with certain subsidiaries whose functional currency is not the U.S. dollar. Intercompany loans and transactions that are of a long-term investment nature are remeasured, and resulting gains and losses are reported in the same manner as translation adjustments. Within foreign exchange gains and losses in Other Comprehensive Income (Loss) for the
three months ended
May 31, 2017
, the Company recorded gains of
$7,258
related to the Euro, which was caused by the weakening of the U.S. dollar against the Euro by approximately
5%
, and a net gain of
$101
related to various other currencies.
(7)
Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
|
2017
|
|
2016
|
Non-cash investing and financing activities:
|
|
|
|
|
Capital expenditures funded by long-term obligations
|
|
$
|
1,917
|
|
|
$
|
—
|
|
Mortgage settlement funded by long-term obligations
|
|
—
|
|
|
5,590
|
|
Deferred financing costs funded by long-term obligations
|
|
—
|
|
|
1,753
|
|
Cash paid during the period:
|
|
|
|
|
Interest (excluding bank charges)
|
|
$
|
1,142
|
|
|
$
|
1,102
|
|
Income taxes (net of refunds)
|
|
$
|
53
|
|
|
$
|
2,288
|
|
(8)
Accounting for Stock-Based Compensation
The Company has various stock-based compensation plans, which are more fully described in Note 1 of the Company’s Form 10-K for the fiscal year ended
February 28, 2017
.
Information regarding the Company's stock options and warrants is summarized below:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
Outstanding at February 28, 2017
|
|
116,250
|
|
|
$
|
7.76
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
Forfeited/expired
|
|
—
|
|
|
—
|
|
|
|
Outstanding and exercisable at May 31, 2017
|
|
116,250
|
|
|
$
|
7.76
|
|
|
0.38
|
A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are subject to forfeiture if employment terminates for a reason other than death, disability or retirement, prior to the release of the restrictions. The Company has a Supplemental Executive Retirement Plan (SERP), which was established in Fiscal 2014. Shares are granted based on certain performance criteria and vest on the later of three years from the date of grant (or three years from the date of participation in the SERP with respect to grants made when the plan was established in Fiscal 2014), or the grantee reaching the age of 65 years. The shares will also vest upon termination of the grantee's employment by the Company without cause, provided that the grantee, at the time of termination, has been employed by the Company for at least 10 years. When vested shares are issued to the grantee, the awards will be settled in shares or in cash, at the Company's sole option. The grantee cannot transfer the rights to receive shares before the restricted shares vest. There are no market conditions inherent in the award, only an employee performance requirement, and the service requirement that the respective employee continues employment with the Company through the vesting date. The Company expenses the cost of the restricted stock awards on a straight-line basis over the requisite service period of each employee or a maximum, which is
12.75
years. For these purposes, the fair market value of the restricted stock is determined based on the mean of the high and low price of the Company's common stock on the grant dates.
The following table presents a summary of the Company's restricted stock activity for the
three months ended
May 31, 2017
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Balance at February 28, 2017
|
437,443
|
|
$
|
6.99
|
|
Granted
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Balance at May 31, 2017
|
437,443
|
|
|
$
|
6.99
|
|
Vested and unissued at May 31, 2017
|
56,181
|
|
|
$
|
13.62
|
|
During the
three months ended
May 31, 2017
, the Company recorded
$142
in stock-based compensation related to restricted stock awards. As of
May 31, 2017
, there was
$1,200
of unrecognized stock-based compensation expense related to unvested restricted stock awards.
(9)
Supply Chain Financing
The Company has supply chain financing agreements and factoring agreements that were entered into for the purpose of accelerating receivable collection and better managing cash flow. The balances under the agreements are sold without recourse and are accounted for as sales of accounts receivable. Total receivable balances sold for the
three months ended
May 31, 2017
, net of discounts, were
$60,290
, compared to
$59,044
for the
three months ended
May 31, 2016
.
(10)
Research and Development
Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to
$7,810
for the
three months ended
May 31, 2017
, compared to
$10,256
for the
three months ended
May 31, 2016
, net of customer
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
reimbursements, and are included within Engineering and Technical Support Expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company enters into development and long-term supply agreements with certain of its OEM ("Original Equipment Manufacturer") customers. Reimbursements of the development services are recorded based upon the milestone method of revenue recognition provided certain criteria are met. Amounts due from OEM customers for development services are reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company's operations. For the
three months ended
May 31, 2017
, the Company recorded
$1,489
of development service reimbursements as a reduction of research and development expense based upon the achievement of a milestone, as compared to
$460
for the
three months ended
May 31, 2016
.
(11)
Goodwill and
Intangible Assets
The change in goodwill by segment is as follows:
|
|
|
|
|
Automotive:
|
Amount
|
Beginning balance at March 1, 2017
|
$
|
56,680
|
|
Currency translation
|
2,586
|
|
Balance at May 31, 2017
|
$
|
59,266
|
|
|
|
Gross carrying amount at May 31, 2017
|
$
|
59,266
|
|
Accumulated impairment charge
|
—
|
|
Net carrying amount at May 31, 2017
|
$
|
59,266
|
|
|
|
Premium Audio:
|
|
Beginning balance at March 1, 2017
|
$
|
46,533
|
|
Activity during the period
|
—
|
|
Balance at May 31, 2017
|
$
|
46,533
|
|
|
|
Gross carrying amount at May 31, 2017
|
$
|
78,696
|
|
Accumulated impairment charge
|
(32,163
|
)
|
Net carrying amount at May 31, 2017
|
$
|
46,533
|
|
|
|
Total Goodwill, net
|
$
|
105,799
|
|
Note: The Company's Consumer Accessories segment did not carry a goodwill balance at
May 31, 2017
or
February 28, 2017
.
At
May 31, 2017
, intangible assets consisted of the following:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
65,941
|
|
|
$
|
29,472
|
|
|
$
|
36,469
|
|
Trademarks/Tradenames
|
|
415
|
|
|
396
|
|
|
19
|
|
Developed technology
|
|
31,290
|
|
|
4,762
|
|
|
26,528
|
|
Patents
|
|
8,821
|
|
|
5,133
|
|
|
3,688
|
|
License
|
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contract
|
|
2,141
|
|
|
1,761
|
|
|
380
|
|
Total finite-lived intangible assets
|
|
$
|
110,008
|
|
|
$
|
42,924
|
|
|
67,084
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
108,648
|
|
Total net intangible assets
|
|
|
|
|
|
$
|
175,732
|
|
At
February 28, 2017
, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
64,780
|
|
|
$
|
27,830
|
|
|
$
|
36,950
|
|
Trademarks/Tradenames
|
|
415
|
|
|
395
|
|
|
20
|
|
Developed technology
|
|
31,290
|
|
|
4,081
|
|
|
27,209
|
|
Patents
|
|
8,494
|
|
|
4,775
|
|
|
3,719
|
|
License
|
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contract
|
|
2,141
|
|
|
1,732
|
|
|
409
|
|
Total finite-lived intangible assets
|
|
$
|
108,520
|
|
|
$
|
40,213
|
|
|
68,307
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
107,982
|
|
Total net intangible assets
|
|
|
|
|
|
$
|
176,289
|
|
The Company recorded amortization expense of
$2,026
for the
three months ended
May 31, 2017
and
$2,051
for the
three months ended
May 31, 2016
. The estimated aggregate amortization expense for all amortizable intangibles for
May 31
of each of the succeeding years is as follows:
|
|
|
|
|
|
Year
|
|
Amount
|
2018
|
|
$
|
8,037
|
|
2019
|
|
7,920
|
|
2020
|
|
7,866
|
|
2021
|
|
7,672
|
|
2022
|
|
7,157
|
|
(12)
Equity Investment
As of
May 31, 2017
and
February 28, 2017
, the Company had a
50%
non-controlling ownership interest in ASA Electronics, LLC and Subsidiary (“ASA") which acts as a distributor of mobile electronics specifically designed for niche
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
markets within the automotive industry, including RV's; buses; and commercial, heavy duty, agricultural, construction, powersport, and marine vehicles.
The following presents summary financial information for ASA. Such summary financial information has been provided herein based upon the individual significance of ASA to the consolidated financial information of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2017
|
|
February 28,
2017
|
Current assets
|
|
$
|
43,456
|
|
|
$
|
43,643
|
|
Non-current assets
|
|
6,379
|
|
|
6,207
|
|
Current liabilities
|
|
7,403
|
|
|
5,998
|
|
Members' equity
|
|
42,432
|
|
|
43,852
|
|
|
|
Three Months Ended
May 31,
|
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
24,895
|
|
|
$
|
24,975
|
|
Gross profit
|
|
7,983
|
|
|
7,897
|
|
Operating income
|
|
3,573
|
|
|
3,607
|
|
Net income
|
|
3,606
|
|
|
3,616
|
|
The Company's share of income from ASA was
$1,803
for the
three months ended
May 31, 2017
and
$1,808
for the
three months ended
May 31, 2016
.
(13)
Income Taxes
For the
three months ended
May 31, 2017
, the Company recorded an income tax benefit of
$4,063
, which includes a discrete income tax provision of
$11
. The calculation of the overall income tax benefit primarily consists of foreign taxes and an income tax provision resulting from the increase in deferred tax liabilities related to indefinite-lived intangible assets. The discrete income tax provision for the
three months ended
May 31, 2017
relates to the accrual of interest for unrecognized tax benefits. For the
three months ended
May 31, 2016
, the Company recorded an income tax benefit of
$1,392
.
The effective tax rate for the
three months ended
May 31, 2017
was an income tax benefit of
45.3%
, compared to an income tax benefit of
18.5%
in the comparable prior period. The effective tax rate for the
three months ended
May 31, 2017
differs from the U.S. statutory rate of
35%
primarily due to the mix of domestic and foreign earnings, and an income tax provision resulting from the increase in deferred tax liabilities related to indefinite-lived intangible assets.
At
May 31, 2017
, the Company had an uncertain tax position liability of
$3,244
, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local and foreign tax issues.
(14)
Inventory
Inventories by major category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2017
|
|
February 28,
2017
|
Raw materials
|
|
$
|
49,521
|
|
|
$
|
43,791
|
|
Work in process
|
|
4,758
|
|
|
5,225
|
|
Finished goods
|
|
111,130
|
|
|
104,037
|
|
Inventory, net
|
|
$
|
165,409
|
|
|
$
|
153,053
|
|
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(15)
Financing Arrangements
The Company has the following financing arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2017
|
|
February 28,
2017
|
Debt
|
|
|
|
|
Domestic credit facility (a)
|
|
$
|
97,325
|
|
|
$
|
92,793
|
|
Florida mortgage (b)
|
|
8,988
|
|
|
9,113
|
|
Euro asset-based lending obligation (c)
|
|
4,120
|
|
|
3,905
|
|
Schwaiger mortgage (d)
|
|
614
|
|
|
644
|
|
Klipsch note (e)
|
|
57
|
|
|
113
|
|
Voxx Germany mortgage (f)
|
|
3,890
|
|
|
3,875
|
|
Hirschmann line of credit (g)
|
|
997
|
|
|
1,002
|
|
Total debt
|
|
115,991
|
|
|
111,445
|
|
Less: current portion of long-term debt
|
|
10,420
|
|
|
10,217
|
|
Long-term debt
|
|
105,571
|
|
|
101,228
|
|
Debt issuance costs
|
|
3,275
|
|
|
3,481
|
|
Total long-term debt, net of debt issuance costs
|
|
$
|
102,296
|
|
|
$
|
97,747
|
|
(a)
Domestic Credit Facility
From March 1, 2016 through April 25, 2016, the Company had a senior secured credit facility (the "Credit Facility") with an aggregate availability of
$125,000
, consisting of a revolving credit facility of
$125,000
, with a
$30,000
multicurrency revolving credit facility sublimit, a
$15,625
sublimit for Letters of Credit and a
$6,250
sublimit for Swingline Loans. This Credit Facility was due on January 9, 2019; however, it was subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement).
On April 26, 2016, the Company amended and restated the Credit Facility ("Amended Credit Facility"). The Amended Credit Facility provides for a revolving credit facility with committed availability of up to
$140,000
, which may be increased, at the option of the Company, up to a maximum of
$175,000
, and a term loan in the amount of
$15,000
. The Amended Credit Facility also includes a
$15,000
sublimit for letters of credit and a
$15,000
sublimit for swingline loans. The availability under the revolving credit line within the Amended Credit Facility is subject to a borrowing base, which is based on eligible accounts receivable, eligible inventory and certain real estate, subject to reserves as determined by the lender, and is also limited by amounts outstanding under the Florida Mortgage (see Note 15(b)). As of
May 31, 2017
,
$86,075
was outstanding under the revolving credit facility. The remaining availability under the revolving credit line of the Amended Credit Facility was
$16,710
as of
May 31, 2017
.
The balance outstanding on the term loan at
May 31, 2017
was
$11,250
. The term loan is repayable in consecutive quarterly installments of
$938
through April 1, 2020. All other amounts outstanding under the Amended Credit Facility will mature and become due on April 26, 2021; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Amended Credit Agreement). The Company may prepay any amounts outstanding at any time, subject to payment of certain breakage and redeployment costs relating to LIBOR Rate Loans, provided that the term loan shall not be voluntarily prepaid except as set forth in the agreement. The commitments under the Amended Credit Facility may be irrevocably reduced at any time, without premium or penalty as set forth in the agreement.
Generally, the Company may designate specific borrowings under the Amended Credit Facility as either Base Rate Loans or LIBOR Rate Loans, except that swingline loans may only be designated as Base Rate Loans. Loans designated as LIBOR Rate Loans bear interest at a rate equal to the then applicable LIBOR rate plus a range of
1.75
-
2.25%
. Loans designated as Base Rate loans bear interest at a rate equal to the applicable margin
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
for Base Rate Loans of
0.75
-
1.25%
as defined in the agreement. Amounts outstanding in respect of the term loan bear interest at a rate equal to either (as selected by the Company pursuant to the agreement) (a) the then-applicable LIBOR Rate (not to be less than
0.00%
) plus
4.25%
or (b) the then-applicable Base Rate plus
3.25%
. As of
May 31, 2017
, the weighted average interest rate on the facility was
3.39%
.
The Amended Credit Facility requires compliance with a financial covenant calculated as of the last day of each month, consisting of a Fixed Charge Coverage Ratio. The Amended Credit Facility also contains covenants that limit the ability of the loan parties and certain of their subsidiaries which are not loan parties to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or dispose of a substantial portion of their business; (iv) transfer or dispose of assets; (v) change their name, organizational identification number, state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any Change of Control; (ix) make any Restricted Junior Payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transaction with an affiliate of any borrower or any of their subsidiaries; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the Amended Credit Facility were to fall below certain specified levels, as defined in the agreement, the lenders would have the right to assume dominion and control over the Company's cash. As of
May 31, 2017
, the Company was in compliance with this cash dominion covenant.
The Obligations under the loan documents are secured by a general lien on and security interest in substantially all of the assets of the borrowers and certain of the guarantors, including accounts receivable, equipment, real estate, general intangibles and inventory. The Company has guaranteed the obligations of the borrowers under the Amended Credit Agreement.
Charges incurred on the unused portion of the Amended Credit Facility during the
three months ended
May 31, 2017
totaled
$61
, compared to
$49
during the
three months ended
May 31, 2016
. These charges are included within Interest and Bank Charges on the Consolidated Statement of Operations and Comprehensive Income (Loss).
The Company accounted for the latest amendment as a modification of debt and added the costs incurred to amend the agreement, totaling
$1,779
, to the remaining financing costs related to the previous credit facility. These deferred financing costs are included in Long-term debt on the accompanying Consolidated Balance Sheets as a contra-liability balance, and are amortized through Interest and bank charges in the Consolidated Statements of Operations and Comprehensive Income (Loss) over the five year term of the Amended Credit Facility. During the
three months ended
May 31, 2017
, the Company amortized
$198
of these costs, compared to
$196
for the
three months ended
May 31, 2016
. The net unamortized balance of these debt issuance costs as of
May 31, 2017
was
$3,003
.
(b)
Florida Mortgage
On July 6, 2015, VOXX HQ LLC, the Company’s wholly owned subsidiary, closed on a
$9,995
industrial development revenue tax exempt bond under a loan agreement in favor of the Orange County Industrial Development Authority (the “Authority”) to finance the construction of the Company's manufacturing facility and executive offices in Lake Nona, Florida. Wells Fargo Bank, N.A. ("Wells Fargo") was the purchaser of the bond and U.S. Bank National Association is the trustee under an Indenture of Trust with the Authority. Voxx borrowed the proceeds of the bond purchase from the Authority during construction as a revolving loan, which converted to a permanent mortgage upon completion of the facility in January 2016 (the "Florida Mortgage"). The Company makes principal and interest payments to Wells Fargo, which began March 1, 2016 and will continue through March of 2026. The Florida Mortgage bears interest at
70%
of 1-month LIBOR plus
1.54%
(
2.25%
at
May 31, 2017
) and is secured by a first mortgage on the property, a collateral assignment of leases and rents and a guaranty by the Company. The financial covenants of the Florida Mortgage are as defined in the Company’s Amended Credit Facility with Wells Fargo dated April 26, 2016.
The Company incurred debt financing costs totaling approximately
$332
as a result of obtaining the Florida Mortgage, which are recorded as deferred financing costs and included in Long-term debt as a contra-liability balance on the accompanying Consolidated Balance Sheet and are being amortized through Interest and bank
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
charges in the Consolidated Statement of Operations and Comprehensive Income (Loss) over the ten year term of the Florida Mortgage. The Company amortized
$8
of these costs during both of the
three months ended
May 31, 2017
and 2016, respectively.
On July 20, 2015, the Company entered into an interest rate swap agreement in order to hedge interest rate exposure related to the Florida Mortgage and pays a fixed rate of
3.48%
under the swap agreement (See Note 4).
(c)
Euro Asset-Based Lending Obligation
Foreign bank obligations include a Euro accounts receivable factoring arrangement, which has a credit limit of up to
60%
of eligible non-factored accounts receivable (see Note 9), and a Euro Asset-Based Lending ("ABL") credit facility, which has a credit limit of
€8,000
and expires on
July 31, 2017
for the Company's subsidiary, VOXX Germany. The rate of interest for these credit facilities is the three month Euribor plus
1.6%
(
1.27%
at
May 31, 2017
). As of
May 31, 2017
, the amounts outstanding under these credit facilities, which are payable on demand, do not exceed their respective credit limits.
(d)
Schwaiger Mortgage
In January 2012, the Company's Schwaiger subsidiary purchased a building, entering into a mortgage note payable. The mortgage note bears interest at
3.75%
and will be fully paid by December 2019.
(e)
Klipsch Notes
This balance represents a mortgage on a facility included in the assets acquired in connection with the Klipsch acquisition on March 1, 2011 and assumed by Voxx. The balance of this note will be fully paid by the end of Fiscal 2018.
(f)
Voxx Germany Mortgage
This balance represents a mortgage on the land and building housing Voxx Germany's headquarters in Pulheim, Germany, which was entered into in January 2013. The mortgage bears interest at
2.85%
, payable in twenty-six quarterly installments through June 2019.
(g)
Hirschmann Line of Credit
In December 2014, Hirschmann entered into an agreement for a
€8,000
working capital line of credit with a financial institution. The line of credit is payable on demand and is mutually cancelable. The rate of interest is the three month Euribor plus
2%
(
1.67%
at
May 31, 2017
). Hirschmann and Voxx Germany are joint and severally liable for the line of credit balance, which is also guaranteed by VOXX International Corporation.
(16)
Other Income (Expense)
Other income (expense) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
Foreign currency loss
|
|
$
|
(832
|
)
|
|
$
|
(706
|
)
|
|
Interest income
|
|
18
|
|
|
25
|
|
|
Rental income
|
|
144
|
|
|
173
|
|
|
Miscellaneous
|
|
(350
|
)
|
|
(4
|
)
|
|
Total other, net
|
|
$
|
(1,020
|
)
|
|
$
|
(512
|
)
|
|
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(17)
Foreign Currency
The Company has a subsidiary in Venezuela. Venezuela is currently experiencing significant political and civil unrest and economic instability and has implemented various foreign currency and price controls. The country has also experienced high rates of inflation over the last several years. The President of Venezuela has the authority to legislate certain areas by decree, which allows the government to nationalize certain industries or expropriate certain companies and property. These factors have had a negative impact on our business and our financial condition. In 2003, Venezuela created the Commission of Administration of Foreign Currency ("CADIVI") which establishes and administers currency controls and their associated rules and regulations. These controls include creating a fixed exchange rate between the Bolivar Fuerte and the U.S. Dollar, and the ability to restrict the exchange of Bolivar Fuertes for U.S. Dollars and vice versa.
Effective January 1, 2010, according to the guidelines in ASC 830, "Foreign Currency," Venezuela was designated as a hyper-inflationary economy. A hyper-inflationary economy designation occurs when a country has experienced cumulative inflation of approximately 100 percent or more over a 3-year period. The hyper-inflationary designation requires the local subsidiary in Venezuela to record all transactions as if they were denominated in U.S. dollars. The Company transitioned to hyper-inflationary accounting on March 1, 2010 for Venezuela and continues to account for the subsidiary under this method.
From February 2013 through March 2016, the official exchange rate of the Venezuelan Bolivar Fuerte was
6.3
per U.S. dollar; however, since January 2014, the Venezuelan government has created multiple alternative exchange rates designated to be used for the purchase of goods and services deemed non-essential. In February 2015, the Venezuelan government introduced a new currency system, referred to as the Marginal Currency System, or SIMADI rate. This market-based exchange system consisted of a mechanism from which both businesses and individuals were allowed to purchase and sell foreign currency at the price set by the market. In March 2016, the Venezuelan government enacted further changes to its foreign currency exchange mechanisms, including a 59% devaluation of the official government exchange rate (re-named DIPRO) from
6.3
bolivars to
10.0
bolivars to the U.S. dollar. Additionally, the SIMADI exchange rate was replaced by the DICOM, a new floating exchange rate for non-essential imports. The Venezuelan government reported that the DICOM exchange rate would be allowed to float to meet market needs. In May 2017, the Venezuelan government significantly devalued this currency further and as of
May 31, 2017
, the published DIPRO and DICOM rates offered were
10.0
and
2,010
bolivars to the U.S. dollar, respectively. As of
May 31, 2017
, the DICOM rate continues to be the appropriate rate to use for remeasuring its Venezuelan subsidiary’s financial statements. Total net currency exchange losses for Venezuela of
$(84)
were recorded for the
three months ended
May 31, 2017
, as compared to
$(69)
for the
three months ended
May 31, 2016
, and are included in Other Income (Expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Our investment in Venezuela mainly consists of
$3,645
of properties that are currently being held for investment purposes. No impairments were recorded related to these properties during the
three months ended
May 31, 2017
. The Company continues to monitor closely the continued economic instability, increasing inflation and currency restrictions imposed by the government and will continue to evaluate its local properties. Further devaluations or regulatory actions could impair the carrying value of these properties.
(18)
Lease Obligations
At
May 31, 2017
, the Company was obligated under non-cancelable operating leases for equipment, as well as warehouse and office facilities for minimum annual rental payments as follows:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
Operating
Leases
|
2018
|
$
|
4,345
|
|
2019
|
1,491
|
|
2020
|
457
|
|
2021
|
245
|
|
2022
|
187
|
|
Thereafter
|
364
|
|
Total minimum lease payments
|
$
|
7,089
|
|
The Company has capital leases with a total lease liability of
$3,685
at
May 31, 2017
. These leases have maturities through Fiscal 2022.
(19)
Capital Structure
The Company's capital structure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Outstanding
|
|
|
|
|
Security
|
|
Par
Value
|
|
May 31,
2017
|
|
February 28,
2017
|
|
May 31,
2017
|
|
February 28,
2017
|
|
Voting
Rights per
Share
|
|
Liquidation
Rights
|
Preferred Stock
|
|
$
|
50.00
|
|
|
50,000
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$50 per share
|
Series Preferred Stock
|
|
$
|
0.01
|
|
|
1,500,000
|
|
|
1,500,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Class A Common Stock
|
|
$
|
0.01
|
|
|
60,000,000
|
|
|
60,000,000
|
|
|
21,899,370
|
|
|
21,899,370
|
|
|
1
|
|
Ratably with Class B
|
Class B Common Stock
|
|
$
|
0.01
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
2,260,954
|
|
|
2,260,954
|
|
|
10
|
|
Ratably with Class A
|
Treasury Stock at cost
|
|
at cost
|
|
|
2,168,074
|
|
|
2,168,074
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
(20)
Variable Interest Entities
A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:
•
the power to direct the activities that most significantly impact the economic performance of the VIE; and
•
the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.
On September 1, 2015, Voxx acquired a majority voting interest in substantially all of the assets and certain specified liabilities of EyeLock, Inc. and EyeLock Corporation, a market leader of iris-based identity authentication solutions, through a newly-formed entity, EyeLock LLC. In connection with the acquisition, the Company entered into a Loan Agreement with EyeLock LLC. The terms of the Loan Agreement allowed EyeLock LLC to borrow up to
$12,000
, at an interest rate of
10%
. During the second and third quarters of Fiscal 2017, as well as during the first quarter of Fiscal 2018, the Company issued three convertible promissory notes to EyeLock LLC, allowing EyeLock to borrow up to a
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
total of
$15,000
in additional funds. The outstanding principal balance of these promissory notes are convertible at the sole option of Voxx into units of EyeLock LLC. The convertible promissory notes bear interest at
10%
and can be used for working capital purposes related to new business opportunities. If Voxx chooses not to convert into equity, the outstanding loan principal will be repaid at a multiple ranging from
1.35
to
1.45
based on the repayment date. Amounts outstanding under the first loan agreement, as well as the convertible promissory note executed during the second quarter of Fiscal 2017 are due on September 1, 2017, while amounts outstanding under the convertible promissory note executed during the third quarter of Fiscal 2017 are due on November 1, 2017 and amounts outstanding under the convertible note executed during the first quarter of Fiscal 2018 are due on April 24, 2018. All three agreements include customary events of default and are collateralized by all of the property of Eyelock LLC.
We determined that we hold a variable interest in EyeLock LLC as a result of:
•
our majority voting interest and ownership of substantially all of the assets and certain liabilities of the entity; and
•
the loan agreements with EyeLock LLC, executed in conjunction with the acquisition, as well as during Fiscal 2017 and Fiscal 2018. The total outstanding balance of these loans as of
May 31, 2017
was
$25,345
.
We concluded that we became the primary beneficiary of EyeLock LLC on September 1, 2015 in conjunction with the acquisition. This was the first date on which we had the power to direct the activities that most significantly impact the economic performance of the entity because we acquired a majority interest in substantially all of the assets and certain liabilities of EyeLock, Inc. and EyeLock Corporation on this date, as well as obtained a majority voting interest as a result of this transaction. Although we are considered to have control over EyeLock LLC under ASC 810, due to our majority ownership interest, the assets of EyeLock LLC can only be used to satisfy the obligations of EyeLock LLC. As a result of our majority ownership interest in the entity and our primary beneficiary conclusion, we consolidated EyeLock LLC within our consolidated financial statements beginning on September 1, 2015.
Assets and Liabilities of EyeLock LLC
The following table sets forth the carrying values of assets and liabilities of EyeLock LLC that were included on our Consolidated Balance Sheet as of
May 31, 2017
and
February 28, 2017
:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
February 28, 2017
|
|
Assets
|
|
(
unaudited
)
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26
|
|
|
$
|
11
|
|
Accounts receivable, net
|
|
352
|
|
|
295
|
|
Inventory, net
|
|
181
|
|
|
135
|
|
Prepaid expenses and other current assets
|
|
207
|
|
|
189
|
|
Total current assets
|
|
766
|
|
|
630
|
|
Property, plant and equipment, net
|
|
251
|
|
|
276
|
|
Intangible assets, net
|
|
38,422
|
|
|
39,187
|
|
Other assets
|
|
90
|
|
|
96
|
|
Total assets
|
|
$
|
39,529
|
|
|
$
|
40,189
|
|
Liabilities and Partners' Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
439
|
|
|
$
|
710
|
|
Accrued expenses and other current liabilities
|
|
4,415
|
|
|
3,506
|
|
Total current liabilities
|
|
4,854
|
|
|
4,216
|
|
Long-term debt
|
|
25,345
|
|
|
22,098
|
|
Other long-term liabilities
|
|
1,200
|
|
|
1,200
|
|
Total liabilities
|
|
31,399
|
|
|
27,514
|
|
Commitments and contingencies
|
|
|
|
|
Partners' equity:
|
|
|
|
|
Capital
|
|
41,153
|
|
|
40,891
|
|
Retained earnings
|
|
(33,023
|
)
|
|
(28,216
|
)
|
Total partners' equity
|
|
8,130
|
|
|
12,675
|
|
Total liabilities and partners' equity
|
|
$
|
39,529
|
|
|
$
|
40,189
|
|
Revenue and Expenses of EyeLock LLC
The following table sets forth the revenues and expenses of EyeLock LLC that were included in our Consolidated Statements of Operations for the
three months ended
May 31, 2017
and 2016, respectively:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
Three months ended
|
|
|
May 31, 2017
|
Net sales
|
|
$
|
64
|
|
Cost of sales
|
|
(22
|
)
|
Gross profit
|
|
86
|
|
Operating expenses:
|
|
|
Selling
|
|
593
|
|
General and administrative
|
|
1,658
|
|
Engineering and technical support
|
|
2,033
|
|
Total operating expenses
|
|
4,284
|
|
Operating loss
|
|
(4,198
|
)
|
Interest and bank charges
|
|
(609
|
)
|
Loss before income taxes
|
|
(4,807
|
)
|
Income tax expense
|
|
—
|
|
Net loss
|
|
$
|
(4,807
|
)
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
May 31, 2016
|
Net sales
|
|
$
|
47
|
|
Cost of sales
|
|
9
|
|
Gross profit
|
|
38
|
|
Operating expenses:
|
|
|
Selling
|
|
670
|
|
General and administrative
|
|
1,686
|
|
Engineering and technical support
|
|
2,056
|
|
Total operating expenses
|
|
4,412
|
|
Operating loss
|
|
(4,374
|
)
|
Interest and bank charges
|
|
(275
|
)
|
Loss before income taxes
|
|
(4,649
|
)
|
Income tax expense
|
|
—
|
|
Net loss
|
—
|
|
$
|
(4,649
|
)
|
(21)
Segment Reporting
The Company operates in three distinct segments based upon our products and our internal organizational structure. The three operating segments, which are also the Company's reportable segments, are Automotive, Premium Audio and Consumer Accessories.
Our Automotive segment designs, manufactures, distributes
and markets rear-seat entertainment devices, satellite radio products, automotive security, remote start systems, digital TV tuners, mobile antennas, mobile multimedia devices, aftermarket/OE-styled radios, car link-smartphone telematics applications, collision avoidance systems and location-based services.
Our Premium Audio segment designs, manufactures, distributes
and markets home theater systems, high-end loudspeakers, outdoor speakers, iPod/computer speakers, business music systems, cinema speakers, flat panel speakers, Bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance) compatible devices.
Our Consumer Accessories segment designs, markets and distributes remote controls; wireless and Bluetooth speakers; karaoke products; action cameras; iris identification and security related products; personal sound amplifiers; infant/
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
nursery products; and A/V connectivity, portable/home charging, reception, and digital consumer products.
The accounting principles applied at the consolidated financial statement level are generally the same as those applied at the operating segment level and there are no material intersegment sales. The segments are allocated interest expense, based upon a pre-determined formula, which utilizes a percentage of each operating segment's intercompany balance, which is offset in Corporate/Eliminations.
Segment data for each of the Company's segments are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Premium Audio
|
|
Consumer Accessories
|
|
Corporate/ Eliminations
|
|
Total
|
Three Months Ended May 31, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
81,303
|
|
|
$
|
37,728
|
|
|
$
|
39,928
|
|
|
$
|
144
|
|
|
$
|
159,103
|
|
Equity in income of equity investees
|
1,803
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,803
|
|
Interest expense and bank charges
|
915
|
|
|
1,944
|
|
|
1,712
|
|
|
(2,658
|
)
|
|
1,913
|
|
Depreciation and amortization expense
|
1,675
|
|
|
883
|
|
|
1,164
|
|
|
723
|
|
|
4,445
|
|
Income (loss) before income taxes
|
3,981
|
|
|
(3,871
|
)
|
|
(7,125
|
)
|
|
(1,954
|
)
|
|
(8,969
|
)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
81,406
|
|
|
$
|
32,134
|
|
|
$
|
41,685
|
|
|
$
|
231
|
|
|
$
|
155,456
|
|
Equity in income of equity investees
|
1,808
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,808
|
|
Interest expense and bank charges
|
953
|
|
|
1,193
|
|
|
1,021
|
|
|
(1,472
|
)
|
|
1,695
|
|
Depreciation and amortization expense
|
1,861
|
|
|
865
|
|
|
1,155
|
|
|
668
|
|
|
4,549
|
|
Income (loss) before income taxes
|
1,466
|
|
|
(523
|
)
|
|
(5,549
|
)
|
|
(2,906
|
)
|
|
(7,512
|
)
|
(22)
Contingencies
The Company is currently, and has in the past been a party to various routine legal proceedings incident to the ordinary course of business. If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for. The Company does not believe that any of its current outstanding litigation matters will have a material adverse effect on the Company's financial statements, individually, or in the aggregate.
The products the Company sells are continually changing as a result of improved technology. As a result, although the Company and its suppliers attempt to avoid infringing known proprietary rights, the Company may be subject to legal proceedings and claims for alleged infringement by patent, trademark or other intellectual property owners. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require the Company to either enter into royalty or license agreements that are not advantageous to the Company, or pay material amounts of damages.
(23)
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenues from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements comprehensive information about the nature, amounts, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. ASU 2014-09 defines a five-step process to achieve this core principle and in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than are required under existing guidance, including identifying performance obligations in
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations, among others.
Retrospective or modified retrospective application of the accounting standard is required. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” an amendment deferring the effective date of ASU 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016. The FASB issued additional amendments to the initial guidance in March 2016, April 2016, May 2016, December 2016 and February 2017 within ASU 2016-08, ASU 2016-10, ASU 2016-11 ASU 2016-12, ASU 2016-20 and ASU 2017-05. We expect to adopt the provisions of ASU 2014-09 effective March 1, 2018.
Preliminarily, the Company expects to use the modified retrospective method upon adoption of the standard. The Company has reviewed selected customer contracts representing certain of our revenue streams for the current fiscal year. The assessment of the impact on revenue and expenses based on these reviews to determine the impact to the Company's results of operations, financial position and cash flows as a result of this guidance is ongoing. The Company will continue to review customer contracts during Fiscal 2018. Any preliminary assessments are subject to change.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory.” The new standard amends the guidelines for the measurement of inventory from lower of cost or market to the lower of cost and net realizable value (NRV). NRV is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Under existing standards, inventory is measured at lower of cost or market, which requires the consideration of replacement cost, NRV and NRV less an amount that approximates a normal profit margin. This ASU eliminates the requirement to determine and consider replacement cost or NRV less an approximately normal profit margin for inventory measurement. This standard was effective for the quarter ended May 31, 2017 and did not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities," which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This amendment will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.
In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)." ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 was effective for the quarter ended May 31, 2017 and did not have a material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, "Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting," which eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
influence by the investor. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. ASU 2016-07 was effective for the quarter ended May 31, 2017 and did not have a material effect on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments," which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact of the future adoption of this standard on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control.” This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendments in this ASU were effective for the quarter ended May 31, 2017 and did not have a material impact on the consolidated financial statements.
In November 2016, the FASB issued
ASU No. 2016-18
,
"Statement of Cash Flows (Topic 230)"
to reduce
diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. The revised guidance requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be applied on a retrospective basis beginning with the earliest period presented. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business," with the objective to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The amendments in ASU 2017-01 provide a screen to determine when a set of
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen is expected to reduce the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (i) require that to be considered a business, a set of assets and liabilities acquired must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output; and (ii) remove the evaluation of whether a market participant could replace missing elements. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date of ASU 2017-01, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company is currently assessing the impact of the adoption of this pronouncement on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates today's requirement to calculate goodwill impairment using Step 2, which calculates an impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual or any interim goodwill impairments tests in fiscal years beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The new standard requires that an employer disaggregate the service cost component of net benefit cost. Also, these amendments provide guidance on how to present the service cost component and the other components of net benefit costs in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The guidance is effective for fiscal years beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)-Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for fiscal years beginning after December 15, 2018 and is not expected to have a significant impact on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements. The standard provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The new standard is effective for annual periods beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
(24)
Subsequent Event
On June 25, 2017, the Company entered into a definitive agreement to sell Hirschmann Car Communication GmbH and its worldwide subsidiaries (collectively, “Hirschmann”), to a subsidiary of TE Connectivity Ltd. Under the terms of the Stock Purchase Agreement (the “Agreement”), TE Connectivity (“TE”) will acquire all of the outstanding stock of Hirschmann for a total consideration of €
148,500
or approximately
$166,000
, subject to certain contingencies and adjustments, less related transaction fees and expenses. Voxx International (Germany) GmbH, the Company's German wholly-owned subsidiary, is the selling entity in this transaction.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Agreement contains representations, warranties and covenants that are customary for a transaction of this size and nature. The completion of the acquisition is subject to customary closing conditions and regulatory approvals. The Hirschmann subsidiary group, which is included within the Automotive segment, will be presented as discontinued operations in accordance with ASC 205-20 for the Company's second quarter ending August 31, 2017.