Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
(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 unaudited 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, 2018
. The Company's financial statements for the prior periods presented herein have been recast to reflect a certain business that was classified as discontinued operations during the second quarter of Fiscal 2018. See Note 2 for additional information. Net income (loss) per share amounts for continuing and discontinued operations are computed independently. As a result, the sum of the per share amounts may not equal the total.
We operate in
three
reportable segments, Automotive, Premium Audio and Consumer Accessories. See Note 22 for the Company's segment reporting disclosures.
(2)
Dispositions
Hirschmann Car Communication GmbH
On August 31, 2017 (the "Closing Date"), the Company completed its sale of Hirschmann Car Communication GmbH and its subsidiaries (collectively, “Hirschmann”) to a subsidiary of TE Connectivity Ltd ("TE"). The consideration received by the Company was €
148,500
. The purchase price, at the exchange rate as of the close of business on the Closing Date approximated
$177,000
, and is subject to adjustment based upon the final working capital. VOXX International (Germany) GmbH, the Company's German wholly-owned subsidiary, was the selling entity in this transaction.
The Hirschmann subsidiary group, which was included within the Automotive segment, qualified to be presented as a discontinued operation in accordance with ASC 205-20 beginning in the Company's Fiscal 2018 second quarter ending August 31, 2017. Voxx has not had any continuing involvement in the Hirschmann business subsequent to the Closing Date. Hirschmann and TE are not related parties of the Company subsequent to the deconsolidation of Hirschmann.
In order to hedge the fluctuation in the exchange rate before closing, the Company entered into forward contracts totaling €
148,500
, which could be settled on dates ranging from August 31, 2017 through September 6, 2017. As the sale of Hirschmann closed on August 31, 2017, the Company settled all of the forward contracts on this date. The forward contracts were not designated for hedging and a total foreign currency loss of
$(6,618)
was recorded when the contracts were settled, within continuing operations for the
nine months ended
November 30, 2017
.
The following table presents a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net income from discontinued operations, net of tax, presented separately in the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2017
|
Net sales
|
|
$
|
—
|
|
|
$
|
91,824
|
|
Cost of sales
|
|
—
|
|
|
63,610
|
|
Gross profit
|
|
—
|
|
|
28,214
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Selling
|
|
—
|
|
|
2,778
|
|
General and administrative
|
|
12
|
|
|
14,688
|
|
Engineering and technical support
|
|
—
|
|
|
7,920
|
|
Total operating expenses
|
|
12
|
|
|
25,386
|
|
Operating (loss) income of discontinued operations
|
|
(12
|
)
|
|
2,828
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
Interest and bank charges (a)
|
|
—
|
|
|
(279
|
)
|
Other, net
|
|
7
|
|
|
145
|
|
Total other expense (income) of discontinued operations, net
|
|
7
|
|
|
(134
|
)
|
|
|
|
|
|
Gain on sale of discontinued operations before taxes
|
|
—
|
|
|
36,118
|
|
Total (loss) income from discontinued operations before taxes
|
|
(5
|
)
|
|
38,812
|
|
Income tax expense on discontinued operations (b)
|
|
363
|
|
|
6,470
|
|
(Loss) income from discontinued operations, net of taxes
|
|
$
|
(368
|
)
|
|
$
|
32,342
|
|
(Loss) income per share - basic
|
|
$
|
(0.02
|
)
|
|
$
|
1.34
|
|
(Loss) income per share - diluted
|
|
$
|
(0.02
|
)
|
|
$
|
1.34
|
|
(a) Includes an allocation of consolidated interest expense and interest expense directly related to debt assumed by the buyer. The allocation of consolidated interest expense was based upon the ratio of net assets of the discontinued operations to that of the consolidated Company.
(b) The income tax expense on discontinued operations for the
three and nine months ended
November 30, 2017
was positively impacted by an income tax benefit related to the partial reversal of the Company’s valuation allowance as the Company utilized a significant portion of its tax attributes to offset the U.S. tax gain related to the sale of Hirschmann.
The following table presents supplemental cash flow information of the discontinued operation:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
Operating activities:
|
|
|
Depreciation and amortization expense
|
|
$
|
2,939
|
|
Stock-based compensation expense
|
|
50
|
|
|
|
|
Investing activities:
|
|
|
Capital expenditures
|
|
$
|
2,652
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
Capital expenditures funded by long-term obligations
|
|
$
|
1,916
|
|
(3)
Net Income (Loss) Per Common Share
Basic
net income (loss)
per common share from continuing operations, net of non-controlling interest, is based upon the weighted-average common shares outstanding during the period. Diluted
net income (loss)
per common share from continuing operations, net of non-controlling interest 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.
There are
no
reconciling items which impact the numerator of basic and diluted
net income (loss)
common share. A reconciliation between the denominator of basic and diluted
net income (loss)
per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average common shares outstanding (basic)
|
|
24,355,791
|
|
|
24,238,493
|
|
|
24,355,791
|
|
|
24,222,973
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
273,045
|
|
|
259,651
|
|
|
—
|
|
|
—
|
|
Weighted-average common shares and potential common shares outstanding (diluted)
|
|
24,628,836
|
|
|
24,498,144
|
|
|
24,355,791
|
|
|
24,222,973
|
|
Restricted stock totaling
0
, and restricted stock, options and warrants totaling
55,918
for the
three months ended
November 30, 2018
and
2017
, respectively, and
531,375
and
545,102
for the
nine months ended
November 30, 2018
and
2017
, respectively, were not included in the
net income (loss)
per diluted share calculation because the exercise price of the restricted stock 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)
Investment Securities
As of
November 30, 2018
, and
February 28, 2018
, the Company had the following investments:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2018
|
|
|
|
|
|
Carrying Value
|
Investment Securities
|
|
|
|
|
|
|
|
Marketable Equity Securities
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
|
|
$
|
2,718
|
|
Total Marketable Equity Securities
|
|
|
|
|
2,718
|
|
Investment Held at Cost, Less Impairment
|
|
|
|
|
525
|
|
Total Investment Securities
|
|
|
|
|
$
|
3,243
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
Cost
Basis
|
|
Unrealized
Holding
Gain/(Loss)
|
|
Fair
Value
|
Investment Securities
|
|
|
|
|
|
Marketable Equity Securities
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Mutual funds
|
$
|
3,620
|
|
|
$
|
—
|
|
|
$
|
3,620
|
|
Total Marketable Securities
|
3,620
|
|
|
—
|
|
|
3,620
|
|
Other Long-Term Investment at Cost
|
547
|
|
|
—
|
|
|
547
|
|
Total Investment Securities
|
$
|
4,167
|
|
|
$
|
—
|
|
|
$
|
4,167
|
|
Equity Securities
As required, in the first quarter of Fiscal 2019 the Company adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” ("ASU 2016-01"), which requires changes to the accounting for financial instruments that affect the Company’s equity investments and the presentation and disclosure for such instruments. Marketable equity securities previously classified as available-for-sale equity investments are now measured and recorded at fair value with changes in fair value recorded in the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
. The impact of adopting ASU 2016-01 resulted in a cumulative effect adjustment of
$24
, which was recorded in other income (expense) in the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
for the
nine months ended
November 30, 2018
, rather than in retained earnings, as it was not considered material to the Company's consolidated financial statements for the period.
Mutual Funds
The Company’s mutual funds are held in connection with its deferred compensation plan. Changes in the carrying value of these securities are offset by changes in the corresponding deferred compensation liability.
Upon the adoption of ASU 2016-01, changes in fair value of equity securities are now recorded within the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
, and as such, other than temporary impairment ("OTTI") considerations are no longer made with respect to equity securities. Prior to the adoption of ASU 2016-01, in determining whether equity securities were other than temporarily impaired, the Company considered its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost, along with factors including the length of time each security had been in an unrealized loss position, the extent of the decline and the near-term prospect for recovery. Additionally, on a quarterly basis, the Company was required to make a qualitative assessment of whether the investment was impaired.
No
OTTI losses were incurred by the Company during the
three and nine months ended
November 30, 2017
.
Investment Held at Cost, Less Impairment
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Company's investment held at cost, less impairment, represents an investment in Fathom Systems Inc. ("Fathom"), a non-controlled corporation. On
July 31, 2017
, RxNetworks, a Canadian company in which Voxx held a cost method investment consisting of shares of the investee's preferred stock, was sold to a third party. In consideration for its holdings in RxNetworks on July 31, 2017, Voxx received cash, as well as a proportionate share of the value (consisting of preferred stock) in Fathom, a newly formed Canadian entity, formerly a subsidiary of RxNetworks. As a result of this transaction, Voxx recognized a gain of
$1,416
for the
nine months ended
November 30, 2017
. The cash proceeds were subject to a hold-back provision, which was not included in the calculation of the gain recognized. On March 1, 2018, the Company adopted ASU No. 2016-01. This guidance requires equity investments to be measured at fair value with changes in fair value recognized in net income. Since it does not have a readily determinable market value, the Company has elected to measure its investment in Fathom at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment.
No
adjustments have been made to the value of the Company’s investment in Fathom for the
three and nine months ended
November 30, 2018
either due to impairment or based on observable price changes. The variance in the balance of this investment is attributable solely to foreign currency adjustments. The Company monitors any events or changes in circumstances that may have a significant adverse effect on the fair value of this investment and makes any necessary adjustments. As of
November 30, 2018
, the Company's investment in Fathom totaled
$525
, or
8.7%
of the outstanding shares of this company.
The Company holds various notes receivable from 360fly, Inc., designers and creators of 360° cameras and technology. These notes receivable, which aggregate
$15,588
principal amount, are recorded in the Company's Consolidated Balance Sheet at
November 30, 2018
under the caption Prepaid expenses and other current assets. Of the
$15,588
notes receivable,
$12,453
are convertible into preferred stock of 360fly, Inc. At
November 30, 2018
, all of the notes receivable were due on August 31, 2019. On December 12, 2018, one of the notes was amended to increase the available amount under the note by
$1,100
and amend the due date to January 7, 2019. Of the notes receivable outstanding at November 30, 2018, a
$5,000
aggregate principal amount then became payable on January 7, 2019, and a
$10,588
aggregate principal balance will be payable on August 31, 2019. These notes receivable are senior secured notes that are collateralized by the intangible and tangible assets of 360fly, Inc. The notes bear interest at
8%
per annum. Each month, the interest (to the extent not paid in cash) is added to the principal balance due. Prior to close of business on January 7, 2019, the Company amended the note receivable that was due on January 7, 2019 increasing the amount available under the note by an additional
$500
and extending the payment terms to January 19, 2019. Subsequent to
November 30, 2018
, the Company lent additional funds of
$595
to 360fly, Inc., and secured a cash advance of
$231
, both of which were originally due to be repaid on January 7, 2019. These additional funds were drawn under the note for which the due date was extended to January 19, 2019. As of this filing, the total amount due from 360fly, Inc., net of reserves of
$2,134
, is
$15,681
.
As all of the currently outstanding notes receivable are due from the same debtor, all the notes are deemed to have the same credit quality. The notes receivable were on a non-accrual status during the
three and nine months ended
November 30, 2018
, and during the fiscal year ended
February 28, 2018
, as payment of interest was not reasonably assured. The credit quality of the notes receivable was previously deemed to not present a significant risk of loss or default of the principal payments based upon on-going business developments. During the fourth quarter of Fiscal 2019, the credit quality of the debtor has deteriorated.
The Company is currently having on-going negotiations with the other secured lenders of 360fly, Inc. with respect to a potential filing by 360fly, Inc. of a voluntary petition under Chapter 11 of the Bankruptcy Code with the Company providing the debtor-in-possession financing. Additionally, the Company is discussing future purchase commitments with 360fly, Inc.'s customers (one of which is also a secured lender). If the Company and the other secured lenders were the successful bidder, they would own all of the equity in the newly reorganized entity, which in turn would own all of the assets of 360fly, Inc. including its intellectual property. There can be no assurance that the Company's negotiations will be successful, that 360fly, Inc. will file a Chapter 11 reorganization plan, or that the plan will be successfully consummated. If the Company is unsuccessful in completing its negotiations with the other secured lenders and customers, or if 360fly, Inc. is unsuccessful in completing a Chapter 11 reorganization, the Company may record an impairment charge in the future. As a result of these uncertainties, any estimate of such charge is inherently subjective as it is susceptible to significant revision as more information and developments become available.
The Company has not recorded an impairment charge for the three or nine months ended
November 30, 2018
. Given that the credit quality of the notes receivable has deteriorated subsequent to
November 30, 2018
, the Company has begun performing an impairment analysis. As the notes are collateral dependent notes, the estimated fair value of the collateral
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
is being developed for comparison to the carrying value of the notes. The Company will record an impairment charge in the future if the carrying value of the notes receivable exceeds the estimated fair value of the underlying collateral.
(5)
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 financial assets measured at fair value on a recurring basis at
November 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
48,718
|
|
|
$
|
48,718
|
|
|
$
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
158
|
|
|
$
|
—
|
|
|
$
|
158
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
2,718
|
|
|
$
|
2,718
|
|
|
$
|
—
|
|
Investment held at cost, less impairment (a)
|
525
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
3,243
|
|
|
$
|
2,718
|
|
|
$
|
—
|
|
The following table presents financial assets and liabilities measured at fair value on a recurring basis at
February 28, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
51,740
|
|
|
$
|
51,740
|
|
|
$
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
(262
|
)
|
|
$
|
—
|
|
|
$
|
(262
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
3,620
|
|
|
$
|
3,620
|
|
|
$
|
—
|
|
Other investment at cost (a)
|
547
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
4,167
|
|
|
$
|
3,620
|
|
|
$
|
—
|
|
|
|
(a)
|
This balance represents an investment in a non-controlled corporation held at cost, less impairment (see Note 4). The fair value of this investment would be based upon Level 3 inputs and is not considered material to the Company's consolidated financial statements.
|
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
At
November 30, 2018
, the carrying amount of the Company's accounts receivable, notes 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; or (iii) the stated or implicit interest rate approximates the current market rates or are not materially different from 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. 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 month
-
3 months
and are classified in the balance sheet according to their terms. The Company also has an interest rate swap agreement as of
November 30, 2018
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. 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
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
and amounted to
$20
and
$45
for the
three and nine months ended
November 30, 2018
, respectively, and
$46
and
$(49)
for the
three and nine months ended
November 30, 2017
, respectively.
Financial Statement Classification
The following table discloses the fair value as of
November 30, 2018
and
February 28, 2018
of derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets and Liabilities
|
|
|
|
|
Fair Value
|
|
|
Account
|
|
November 30, 2018
|
|
February 28, 2018
|
Designated derivative instruments
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
127
|
|
|
$
|
—
|
|
|
|
Accrued expenses and other current liabilities
|
|
—
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other assets
|
|
31
|
|
|
—
|
|
|
|
Other long-term liabilities
|
|
—
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
158
|
|
|
$
|
(262
|
)
|
Cash flow hedges
During Fiscal 2018, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of
$2,400
and are designated as cash flow hedges at
November 30, 2018
. The current outstanding notional value of the Company's interest rate swap at
November 30, 2018
is
$8,236
. 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 pertaining to continuing operations recorded during the
three and nine months ended
November 30, 2018
and
2017
was as follows:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
November 30, 2018
|
|
November 30, 2018
|
|
Pretax Gain(Loss) Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
(Loss) Gain for Ineffectiveness in Other Income
|
|
Pretax Gain (Loss) Recognized in Other Comprehensive Income
|
|
Pretax (Loss) Gain Reclassified from Accumulated Other Comprehensive Income
|
|
Gain (Loss) for Ineffectiveness in Other Income
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
116
|
|
|
$
|
80
|
|
|
$
|
20
|
|
|
$
|
538
|
|
|
$
|
(134
|
)
|
|
$
|
45
|
|
Interest rate swaps
|
28
|
|
|
—
|
|
|
—
|
|
|
66
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
November 30, 2017
|
|
November 30, 2017
|
|
Pretax (Loss) Gain Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
(Loss) Gain for Ineffectiveness in Other Income
|
|
Pretax (Loss) Gain Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
(Loss) Gain for Ineffectiveness in Other Income
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
(103
|
)
|
|
$
|
(218
|
)
|
|
$
|
46
|
|
|
$
|
(1,369
|
)
|
|
$
|
99
|
|
|
$
|
(49
|
)
|
Interest rate swaps
|
148
|
|
|
—
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
—
|
|
The net (loss) income recognized in Other Comprehensive Income (Loss) for foreign currency contracts is expected to be recognized in cost of sales within the next
six months
. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of
November 30, 2018
,
no
foreign currency contracts originally designated for hedge accounting were de-designated or terminated.
(6)
Accumulated Other Comprehensive (Loss) Income
The Company’s accumulated other comprehensive (loss) income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation (Losses) Gains
|
|
Unrealized (losses) gains on investments, net of tax (a)
|
|
Pension plan adjustments, net of tax
|
|
Derivatives designated in a hedging relationship, net of tax
|
|
Total
|
Balance at February 28, 2018
|
|
$
|
(13,027
|
)
|
|
$
|
(24
|
)
|
|
$
|
(786
|
)
|
|
$
|
(385
|
)
|
|
$
|
(14,222
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(3,333
|
)
|
|
—
|
|
|
57
|
|
|
450
|
|
|
(2,826
|
)
|
Reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
24
|
|
|
—
|
|
|
92
|
|
|
116
|
|
Net current-period other comprehensive (loss) income
|
|
(3,333
|
)
|
|
24
|
|
|
57
|
|
|
542
|
|
|
(2,710
|
)
|
Balance at November 30, 2018
|
|
$
|
(16,360
|
)
|
|
$
|
—
|
|
|
$
|
(729
|
)
|
|
$
|
157
|
|
|
$
|
(16,932
|
)
|
(a) Pursuant to ASU 2016-01 adopted by the Company (see Note 4), beginning on March 1, 2018, changes in fair value of the Company's investments in equity investments are recorded in earnings.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
During the
three and nine months ended
November 30, 2018
, the Company recorded tax expense related to derivatives designated in a hedging relationship of
$11
and
$202
, respectively, and pension plan adjustments of
$0
in both periods.
The other comprehensive (loss) income before reclassification of
$(3,333)
includes the remeasurement of intercompany transactions of a long-term investment nature of
$(1,000)
with certain subsidiaries whose functional currency is not the U.S. dollar, and
$(2,333)
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.
(7)
Supplemental Cash Flow Information
The following is supplemental information relating to the Unaudited Consolidated Statements of Cash Flows, including continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30,
|
|
|
2018
|
|
2017
|
Non-cash investing and financing activities:
|
|
|
|
|
Capital expenditures funded by long-term obligations
|
|
$
|
—
|
|
|
$
|
1,993
|
|
Cash paid during the period:
|
|
|
|
|
Interest (excluding bank charges)
|
|
$
|
1,322
|
|
|
$
|
2,675
|
|
Income taxes (net of refunds)
|
|
2,290
|
|
|
2,359
|
|
See Note 2 for additional supplemental cash flow information pertaining to discontinued operations.
(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, 2018
.
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 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, or as a result of the sale of all of the issued and outstanding stock, or all, or substantially all, of the assets of the subsidiary of which the grantee serves as CEO and/or President. 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. During July 2018, the Company granted
188,245
shares of restricted stock under the SERP. The Company expenses the cost of the restricted stock awards on a straight-line basis over the requisite service period of each employee. 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 fair market value of the restricted stock granted in July 2018 was
$5.50
per share.
The following table presents a summary of the Company's restricted stock activity for the
nine months ended
November 30, 2018
:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Balance at February 28, 2018
|
439,299
|
|
$
|
7.08
|
|
Granted
|
188,245
|
|
|
5.50
|
|
Forfeited
|
—
|
|
|
—
|
|
Balance at November 30, 2018
|
627,544
|
|
|
$
|
6.60
|
|
Vested and unissued at November 30, 2018
|
156,737
|
|
|
$
|
9.96
|
|
During the
three and nine months ended
November 30, 2018
, the Company recorded
$159
and
$393
, respectively, and during the
three and nine months ended
November 30, 2017
, the Company recorded
$146
and
$396
, respectively, in stock-based compensation related to restricted stock awards for continuing operations. As of
November 30, 2018
, there was approximately
$1,684
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 and nine months ended
November 30, 2018
, net of discounts, were
$35,047
and
$82,971
, respectively, compared to
$46,309
and
$110,024
, for the
three and nine months ended
November 30, 2017
, respectively.
(10)
Research and Development
Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to
$2,309
and
$6,869
for the
three and nine months ended
November 30, 2018
, respectively, compared to
$2,340
and
$8,526
for the
three and nine months ended
November 30, 2017
, respectively, net of customer reimbursements, and are included in continuing operations within engineering and technical support expenses on the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
.
(11)
Goodwill and Intangible Assets
The change in goodwill pertaining to continuing operations by segment is as follows:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
Automotive:
|
Amount
|
Beginning balance at March 1, 2018
|
$
|
8,252
|
|
Activity during the period
|
—
|
|
Balance at November 30, 2018
|
$
|
8,252
|
|
|
|
Gross carrying amount at November 30, 2018
|
$
|
8,252
|
|
Accumulated impairment charge
|
—
|
|
Net carrying amount at November 30, 2018
|
$
|
8,252
|
|
|
|
Premium Audio:
|
|
Beginning balance at March 1, 2018
|
$
|
46,533
|
|
Activity during the period
|
—
|
|
Balance at November 30, 2018
|
$
|
46,533
|
|
|
|
Gross carrying amount at November 30, 2018
|
$
|
78,696
|
|
Accumulated impairment charge
|
(32,163
|
)
|
Net carrying amount at November 30, 2018
|
$
|
46,533
|
|
|
|
Total Goodwill, net
|
$
|
54,785
|
|
Note: The Company's Consumer Accessories segment did not carry a goodwill balance at
November 30, 2018
or
February 28, 2018
.
At
November 30, 2018
, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
49,721
|
|
|
$
|
28,896
|
|
|
$
|
20,825
|
|
Trademarks/Tradenames
|
|
485
|
|
|
405
|
|
|
80
|
|
Developed technology
|
|
31,290
|
|
|
8,843
|
|
|
22,447
|
|
Patents
|
|
2,789
|
|
|
2,219
|
|
|
570
|
|
License
|
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contract
|
|
2,141
|
|
|
1,936
|
|
|
205
|
|
Total finite-lived intangible assets
|
|
$
|
87,826
|
|
|
$
|
43,699
|
|
|
44,127
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
90,914
|
|
Total net intangible assets
|
|
|
|
|
|
$
|
135,041
|
|
At
February 28, 2018
, intangible assets consisted of the following:
VOXX International Corporation and Subsidiaries
Notes to Unaudited 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
|
|
$
|
50,249
|
|
|
$
|
26,807
|
|
|
$
|
23,442
|
|
Trademarks/Tradenames
|
|
415
|
|
|
400
|
|
|
15
|
|
Developed technology
|
|
31,290
|
|
|
6,802
|
|
|
24,488
|
|
Patents
|
|
2,830
|
|
|
2,138
|
|
|
692
|
|
License
|
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contract
|
|
2,141
|
|
|
1,849
|
|
|
292
|
|
Total finite-lived intangible assets
|
|
$
|
88,325
|
|
|
$
|
39,396
|
|
|
48,929
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
101,391
|
|
Total net intangible assets
|
|
|
|
|
|
$
|
150,320
|
|
During the second quarter of Fiscal 2019, the Company re-evaluated its projections for several brands in its Consumer Accessory and Automotive segments based on lower than anticipated results due to lower product load-ins, increased competition for certain product lines, a streamlining of SKU’s, and its marketing strategy for one of its brands. Accordingly, these were considered indicators of impairment requiring the Company to test the related indefinite-lived tradenames for impairment at the lowest level for which there are separately identifiable cash flows.
The Company tested these indefinite-lived intangible assets as of August 31, 2018, the end of the Company's Fiscal 2019 second quarter. The respective fair values were estimated using a Relief-from-Royalty Method, applying royalty rates of
0.5%
to
5.5%
for the trademarks after reviewing comparable market rates, the profitability of the products associated with relative intangible assets, and other qualitative factors. We determined that risk-adjusted discount rates ranging from
12.6%
to
13.1%
were appropriate (developed using a weighted average cost of capital analysis). The long-term growth rates ranged from
0%
to
2.0%
. As a result of this analysis, it was determined that several of the Company's Consumer Accessory trademarks and one Automotive trademark were impaired at August 31, 2018. The Company recorded an impairment charge of
$9,814
for the
nine months ended
November 30, 2018
, with
$9,654
related to the Consumer Accessories segment and
$160
related to the Automotive segment. Approximately
46%
(
$42,189
) of the carrying value of the Company's indefinite lived tradenames are close to fair value and sensitive to changes and assumptions. There can be no assurance that the estimates and assumptions made for purposes of impairment testing as of August 31, 2018 will prove to be accurate predictions of the future. Reduced demand for our existing product offerings, less than anticipated results for the holiday season, lack of acceptance of new products, or unfavorable changes in assumptions used in the discounted cash flow model such as discount rates, royalty rates or projected long-term growth rates could result in additional impairment charges in the future. After further evaluation, no additional impairments of long-lived assets were recorded for the
three months ended
November 30, 2018
.
The Company recorded amortization expense for continuing operations of
$1,582
and
$4,745
for the
three and nine months ended
November 30, 2018
, respectively, and
$1,612
and
$4,867
for the
three and nine months ended
November 30, 2017
, respectively. The estimated aggregate amortization expense for continuing operations for all amortizable intangibles for
November 30
of each of the succeeding years is as follows:
|
|
|
|
|
|
Year
|
|
Amount
|
2019
|
|
$
|
6,293
|
|
2020
|
|
6,130
|
|
2021
|
|
5,962
|
|
2022
|
|
5,756
|
|
2023
|
|
5,455
|
|
(12)
Equity Investment
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
As of
November 30, 2018
and
February 28, 2018
, 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
2018
|
|
February 28,
2018
|
Current assets
|
|
$
|
46,733
|
|
|
$
|
42,318
|
|
Non-current assets
|
|
6,072
|
|
|
7,095
|
|
Liabilities
|
|
8,590
|
|
|
5,699
|
|
Members' equity
|
|
44,214
|
|
|
43,714
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30,
|
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
76,753
|
|
|
$
|
72,434
|
|
Gross profit
|
|
24,753
|
|
|
24,397
|
|
Operating income
|
|
10,148
|
|
|
11,359
|
|
Net income
|
|
10,292
|
|
|
11,467
|
|
The Company's share of income from ASA was
$1,695
and
$5,146
for the
three and nine months ended
November 30, 2018
, respectively, and
$2,004
and
$5,734
for the
three and nine months ended
November 30, 2017
, respectively.
(13)
Income Taxes
For the
three months ended
November 30, 2018
, the Company recorded an income tax benefit from continuing operations of
$4,078
, which includes a discrete income tax benefit of
$57
, related primarily to the reversal of unrecognized tax benefits resulting from a lapse of the applicable statute of limitations, offset by an income tax provision related to finalization of our federal, state and foreign tax filings during the quarter ended
November 30, 2018
. For the
three months ended
November 30, 2017
, the Company recorded an income tax benefit from continuing operations of
$568
, which includes a discrete income tax benefit of
$1,309
, related primarily to the reversal of unrecognized tax benefits resulting from a lapse of the applicable statute of limitations.
The effective tax rates for the
three months ended
November 30, 2018
and
November 30, 2017
were an income tax benefit from continuing operations of
62.8%
on pre-tax income of
$6,491
and an income tax benefit of
8.2%
on a pre-tax income of
$6,909
, respectively. The effective tax rate for the
three months ended
November 30, 2018
differs from the U.S. statutory rate of
21%
primarily due to the non-controlling interest related to EyeLock LLC, state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates. In addition, our valuation allowance increased for U.S. tax credits and losses in certain foreign jurisdictions for which a limited tax benefit can be recognized.
For the
nine months ended
November 30, 2018
, the Company recorded an income tax provision from continuing operations of
$3,147
, which includes a discrete income tax benefit of
$256
, related primarily to the reversal of unrecognized tax benefits resulting from a lapse of the applicable statute of limitations, offset by an income tax provision related to finalization of our federal, state and foreign tax filings during the quarter ended
November 30, 2018
. For the
nine months ended
November 30, 2017
, the Company recorded an income tax benefit from continuing operations of
$4,531
, which includes a discrete income tax benefit of
$1,244
, related primarily to the reversal of unrecognized tax benefits resulting from a lapse of the applicable statute of limitations.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The effective tax rates for the
nine months ended
November 30, 2018
and
November 30, 2017
were an income tax provision from continuing operations of
27.8%
on a pre-tax loss of
$(11,338)
and an income tax benefit of
23.1%
on a pre-tax loss of
$(19,586)
, respectively. The effective tax rate for the
nine months ended
November 30, 2018
differs from the U.S. statutory rate of
21%
primarily due to the non-controlling interest related to EyeLock LLC, state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates. In addition, the valuation allowance increased for tax credits and losses in certain foreign jurisdictions for which a limited tax benefit can be recognized.
At
November 30, 2018
, the Company had an uncertain tax position liability from continuing operations of
$1,377
, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local, and foreign tax issues.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB No. 118”), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act ("TCJA"). The purpose of SAB No. 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB No. 118 addresses situations in which the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period that includes the enactment date. SAB No. 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB No. 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.
The Company’s accounting for certain elements of the TCJA was incomplete as of the fiscal year ended
February 28, 2018
, some of which remains incomplete at
November 30, 2018
. As of the quarter ended
November 30, 2018
, the Company completed its accounting for the mandatory one-time transition tax and the remeasurement of its deferred tax assets and liabilities at the reduced U.S. federal rate of
21%
. There are no significant differences from our provisional estimates recorded at
February 28, 2018
. The Company has also made a policy election to account for income taxes for global intangible low taxed income (GILTI) as a period expense.
Pursuant to SAB 118, the Company continues to assess the impact of the TCJA on certain elements of its financial statements, including its indefinite reinvestment assertion. The Company is evaluating making certain basis elections under IRC Section 965. As of
November 30, 2018
, the Company has not made any adjustments to its indefinite reinvestment assertion.
(14)
Inventory
Inventories by major category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
2018
|
|
February 28,
2018
|
Raw materials
|
|
$
|
26,835
|
|
|
$
|
28,071
|
|
Work in process
|
|
3,004
|
|
|
2,485
|
|
Finished goods
|
|
88,977
|
|
|
87,436
|
|
Inventory, net
|
|
$
|
118,816
|
|
|
$
|
117,992
|
|
(15)
Product Warranties and Product Repair Costs
The following table provides a summary of the activity with respect to product warranties and product repair costs. Liabilities for product warranties and product repair costs are included within accrued expenses and other current liabilities on the Consolidated Balance Sheets.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Opening balance
|
$
|
4,855
|
|
|
$
|
5,966
|
|
|
$
|
6,233
|
|
|
$
|
5,608
|
|
Liabilities acquired during acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Liabilities for warranties accrued during the period
|
1,729
|
|
|
1,512
|
|
|
4,595
|
|
|
5,621
|
|
Balances transferred (a)
|
—
|
|
|
—
|
|
|
(832
|
)
|
|
—
|
|
Warranties paid during the period
|
(1,699
|
)
|
|
(1,783
|
)
|
|
(5,111
|
)
|
|
(6,034
|
)
|
Ending balance
|
$
|
4,885
|
|
|
$
|
5,695
|
|
|
$
|
4,885
|
|
|
$
|
5,695
|
|
(a) In conjunction with the implementation of ASC Topic 606, Revenue from Contracts with Customers (see Note 23), the Company recorded a refund liability, representing the amount of consideration received for products sold that the Company expects to refund to customers, as well as a corresponding return asset that reflects the Company's right to receive goods back from customers. The return asset is calculated as the carrying amount of goods at the time of sale, less any expected costs to recover the goods and any expected reduction in value and is included in prepaid expenses and other current assets on the Unaudited Consolidated Balance Sheet at
November 30, 2018
. The balance above represents amounts that would reduce the value of inventory returned to the Company and has been reclassified to the return asset in order to properly reflect the value of the inventory the Company expects to receive back from customers.
(16)
Financing Arrangements
The Company has the following financing arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
2018
|
|
February 28,
2018
|
Debt
|
|
|
|
|
Domestic credit facility (a)
|
|
$
|
—
|
|
|
$
|
—
|
|
Florida mortgage (b)
|
|
8,236
|
|
|
8,613
|
|
Euro asset-based lending obligation (c)
|
|
6,907
|
|
|
6,119
|
|
Schwaiger mortgage (d)
|
|
294
|
|
|
468
|
|
Voxx Germany mortgage (e)
|
|
2,777
|
|
|
3,665
|
|
Total debt
|
|
18,214
|
|
|
18,865
|
|
Less: current portion of long-term debt
|
|
10,417
|
|
|
7,730
|
|
Long-term debt
|
|
7,797
|
|
|
11,135
|
|
Less: debt issuance costs
|
|
2,043
|
|
|
2,659
|
|
Total long-term debt, net of debt issuance costs
|
|
$
|
5,754
|
|
|
$
|
8,476
|
|
(a)
Domestic Credit Facility
The Company has a senior secured credit facility (the "Credit Facility") that 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 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 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 16(b)). In conjunction with the sale of Hirschmann on August 31, 2017 (see Note 2), the Company paid down substantially all of the outstanding balance of the revolving credit facility, as well as the entire outstanding balance of the term loan, which is not renewable. As of
November 30, 2018
, there was
no
balance outstanding under the revolving credit facility. The availability under the revolving credit line of the Credit Facility was
$101,773
as of
November 30, 2018
.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
All amounts outstanding under the 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 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. The commitments under the 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 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 for Base Rate Loans of
0.75
-
1.25%
as defined in the agreement. As of
November 30, 2018
, the weighted average interest rate on the facility was
6.00%
.
The 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 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; or (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the 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
November 30, 2018
, the Company was in compliance with all debt covenants, including cash dominion.
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 Credit Agreement.
Charges incurred on the unused portion of the Credit Facility during the
three and nine months ended
November 30, 2018
totaled
$124
and
$396
, respectively, compared to
$123
and
$241
during the
three and nine months ended
November 30, 2017
, respectively. These charges are included within interest and bank charges on the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
.
The Company has deferred financing costs related to the Credit Facility and a previous amendment and modification of the 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
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
over the five-year term of the Credit Facility. During both the
three and nine months ended
November 30, 2018
and
2017
, the Company amortized
$198
and
$593
of these costs, respectively. The net unamortized balance of these deferred financing costs as of
November 30, 2018
is
$1,817
.
(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").
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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%
(
3.18%
at
November 30, 2018
) 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 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 Sheets and are being amortized through interest and bank charges in the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
over the ten-year term of the Florida Mortgage. The Company amortized
$8
and
$23
of these costs during both the
three and nine months ended
November 30, 2018
and
2017
, respectively. The net unamortized balance of these deferred financing costs as of
November 30, 2018
is
$225
.
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, 2020
for the Company's subsidiary, VOXX Germany. The rate of interest for the factoring arrangement is the three-month Euribor plus
1.6%
(
1.24%
at
November 30, 2018
) and the rate of interest for the ABL is the three-month Euribor plus
2.3%
(
1.94%
at
November 30, 2018
). As of
November 30, 2018
, 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)
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 September 2019.
(17)
Other Income (Expense)
Other income (expense) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Foreign currency (loss) gain
|
|
$
|
(41
|
)
|
|
$
|
(77
|
)
|
|
$
|
164
|
|
|
$
|
(8,296
|
)
|
Interest income
|
|
312
|
|
|
51
|
|
|
788
|
|
|
82
|
|
Rental income
|
|
133
|
|
|
140
|
|
|
386
|
|
|
415
|
|
Miscellaneous
|
|
(144
|
)
|
|
363
|
|
|
(165
|
)
|
|
27
|
|
Total other, net
|
|
$
|
260
|
|
|
$
|
477
|
|
|
$
|
1,173
|
|
|
$
|
(7,772
|
)
|
Included within the foreign currency loss for the
nine months ended
November 30, 2017
is a loss on forward contracts totaling
$(6,618)
incurred in conjunction with the sale of Hirschmann (see Note 2).
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(18)
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. On March 1, 2010, the Company transitioned to hyper-inflationary accounting for Venezuela in accordance with the guidelines in ASC 830, "Foreign Currency." 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.
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 January 2018, the Venezuelan government eliminated the official government DIPRO exchange rate, stating that all currency transactions would be carried out at the DICOM rate, which was the floating exchange rate previously used only for non-essential imports and was allowed to float to meet market needs. On August 20, 2018, the government further devalued the Bolivar Fuerte in an attempt to address continuing hyperinflation, also renaming it the Sovereign Bolivar. As of
November 30, 2018
, the DICOM rate for the Sovereign Bolivar was approximately
86
bolivars to the U.S. dollar. Total net currency exchange (losses) of
$(1)
and
$(6)
were recorded for the
three and nine months ended
November 30, 2018
, respectively, for Venezuela, as compared to
$(1)
and
$(106)
for the
three and nine months ended
November 30, 2017
, respectively, and are included in other income (expense) on the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
.
The Company has certain long-lived assets in Venezuela, which are held for investment purposes. During the second quarter of Fiscal 2019, the Company made an assessment of the recoverability of these properties as a result of the country's continued economic deterioration, which included the significant currency devaluation in August of 2018. The Company estimated the future undiscounted cash flows expected to be received from these properties. The estimate of the future undiscounted cash flows considered the Company’s financial condition and its intent and ability to retain its investments for a period of time sufficient to allow for the recovery of the carrying value. The future undiscounted cash flows did not exceed the net carrying value for the long-lived assets. The estimated fair value of the properties, which also considered the current conditions of the economy in Venezuela, the volatility of the real estate market, and the significant political unrest, resulted in a full non-cash impairment charge of
$3,473
for the
nine months ended
November 30, 2018
. The non-cash impairment charge is included in Other Income (Expense) on the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
.
(19)
Lease Obligations
At
November 30, 2018
, the Company was obligated under non-cancelable operating leases for equipment, as well as warehouse and office facilities for minimum annual rental payments for continuing operations, for each of the succeeding years, as follows:
|
|
|
|
|
|
Operating
Leases
|
2019
|
$
|
1,097
|
|
2020
|
545
|
|
2021
|
398
|
|
2022
|
293
|
|
2023
|
192
|
|
Thereafter
|
188
|
|
Total minimum lease payments
|
$
|
2,713
|
|
The Company has capital leases with a total lease liability of
$1,064
at
November 30, 2018
. These leases have maturities through Fiscal 2021.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(20)
Capital Structure
The Company's capital structure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Outstanding
|
|
|
|
|
Security
|
|
Par
Value
|
|
November 30,
2018
|
|
February 28,
2018
|
|
November 30,
2018
|
|
February 28,
2018
|
|
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
|
|
|
21,938,100
|
|
|
21,938,100
|
|
|
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
|
|
|
2,168,094
|
|
|
2,168,094
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
(21)
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 funds for working capital purposes. During Fiscal 2017 and Fiscal 2018, the Company issued convertible promissory notes to EyeLock LLC, allowing the entity to borrow additional funds. On September 24, 2018, all outstanding promissory notes were amended and restated with Voxx issuing a consolidated convertible promissory note to EyeLock LLC to borrow up to
$43,000
. The promissory note bears interest at
10%
and can be used to repay protective advances and to fund working capital requirements of the company. The amended and restated promissory note is due on February 28, 2019. The outstanding principal balance of this promissory note is convertible at the sole option of Voxx into units of EyeLock LLC. If Voxx chooses not to convert into equity, the outstanding loan principal of the amended and restated promissory note will be repaid at a multiple of
1.50
based on the repayment date. The agreement includes customary events of default and is collateralized by all of the property of EyeLock LLC.
We determined that we hold a variable interest in EyeLock LLC as a result of:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
•
our majority voting interest and ownership of substantially all of the assets and certain liabilities of the entity; and
•
the loan agreement with EyeLock LLC, which has a total outstanding balance of
$42,093
as of
November 30, 2018
.
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 Sheets as of
November 30, 2018
and
February 28, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2018
|
|
February 28, 2018
|
|
Assets
|
|
(
unaudited
)
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
—
|
|
Accounts receivable, net
|
|
222
|
|
|
128
|
|
Inventory, net
|
|
37
|
|
|
(119
|
)
|
Receivables from vendors
|
|
10
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
166
|
|
|
117
|
|
Total current assets
|
|
435
|
|
|
126
|
|
Property, plant and equipment, net
|
|
136
|
|
|
186
|
|
Intangible assets, net
|
|
33,829
|
|
|
36,126
|
|
Other assets
|
|
302
|
|
|
119
|
|
Total assets
|
|
$
|
34,702
|
|
|
$
|
36,557
|
|
Liabilities and Partners' Deficit
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
8,408
|
|
|
$
|
4,711
|
|
Accrued expenses and other current liabilities
|
|
1,335
|
|
|
2,557
|
|
Current portion of debt
|
|
42,093
|
|
|
—
|
|
Total current liabilities
|
|
51,836
|
|
|
7,268
|
|
Long-term debt
|
|
—
|
|
|
33,722
|
|
Other long-term liabilities
|
|
1,200
|
|
|
1,200
|
|
Total liabilities
|
|
53,036
|
|
|
42,190
|
|
Commitments and contingencies
|
|
|
|
|
Partners' deficit:
|
|
|
|
|
Capital
|
|
41,416
|
|
|
41,416
|
|
Retained losses
|
|
(59,750
|
)
|
|
(47,049
|
)
|
Total partners' deficit
|
|
(18,334
|
)
|
|
(5,633
|
)
|
Total liabilities and partners' deficit
|
|
$
|
34,702
|
|
|
$
|
36,557
|
|
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Revenue and Expenses of EyeLock LLC
The following table sets forth the revenues and expenses of EyeLock LLC that were included in our
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
for the
three and nine months ended
November 30, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
331
|
|
|
$
|
63
|
|
|
$
|
547
|
|
|
$
|
277
|
|
Cost of sales
|
|
23
|
|
|
33
|
|
|
59
|
|
|
90
|
|
Gross profit
|
|
308
|
|
|
30
|
|
|
488
|
|
|
187
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
301
|
|
|
281
|
|
|
925
|
|
|
1,636
|
|
General and administrative
|
|
1,202
|
|
|
1,437
|
|
|
3,745
|
|
|
5,114
|
|
Engineering and technical support
|
|
1,982
|
|
|
1,492
|
|
|
5,600
|
|
|
5,310
|
|
Total operating expenses
|
|
3,485
|
|
|
3,210
|
|
|
10,270
|
|
|
12,060
|
|
Operating loss
|
|
(3,177
|
)
|
|
(3,180
|
)
|
|
(9,782
|
)
|
|
(11,873
|
)
|
Interest and bank charges
|
|
(1,032
|
)
|
|
(753
|
)
|
|
(2,919
|
)
|
|
(2,056
|
)
|
Loss before income taxes
|
|
(4,209
|
)
|
|
(3,933
|
)
|
|
(12,701
|
)
|
|
(13,929
|
)
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss
|
|
$
|
(4,209
|
)
|
|
$
|
(3,933
|
)
|
|
$
|
(12,701
|
)
|
|
$
|
(13,929
|
)
|
(22)
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, 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, iPad/iPod and 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 biometric security related products; personal sound amplifiers; infant/nursery products; activity tracking bands; smart-home security and safety 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 from continuing operations for each of the Company's segments are presented below:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Premium Audio
|
|
Consumer Accessories
|
|
Corporate/ Eliminations
|
|
Total
|
Three Months Ended November 30, 2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
45,053
|
|
|
$
|
49,666
|
|
|
$
|
34,661
|
|
|
$
|
257
|
|
|
$
|
129,637
|
|
Equity in income of equity investees
|
1,695
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,695
|
|
Interest expense and bank charges
|
267
|
|
|
1,894
|
|
|
1,958
|
|
|
(2,945
|
)
|
|
1,174
|
|
Depreciation and amortization expense
|
186
|
|
|
826
|
|
|
1,100
|
|
|
775
|
|
|
2,887
|
|
Income (loss) before income taxes
|
5,596
|
|
|
6,458
|
|
|
(5,062
|
)
|
|
(501
|
)
|
|
6,491
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
40,634
|
|
|
$
|
57,386
|
|
|
$
|
58,461
|
|
|
$
|
82
|
|
|
$
|
156,563
|
|
Equity in income of equity investees
|
2,004
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,004
|
|
Interest expense and bank charges
|
336
|
|
|
2,120
|
|
|
1,857
|
|
|
(3,098
|
)
|
|
1,215
|
|
Depreciation and amortization expense
|
216
|
|
|
862
|
|
|
1,159
|
|
|
756
|
|
|
2,993
|
|
Income (loss) before income taxes
|
3,486
|
|
|
6,262
|
|
|
(2,013
|
)
|
|
(826
|
)
|
|
6,909
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
124,705
|
|
|
$
|
121,707
|
|
|
$
|
92,264
|
|
|
$
|
683
|
|
|
$
|
339,359
|
|
Equity in income of equity investees
|
5,146
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,146
|
|
Interest expense and bank charges
|
752
|
|
|
5,504
|
|
|
5,633
|
|
|
(8,498
|
)
|
|
3,391
|
|
Depreciation and amortization expense
|
649
|
|
|
2,498
|
|
|
3,325
|
|
|
2,339
|
|
|
8,811
|
|
Income (loss) before income taxes (a)
|
11,121
|
|
|
9,586
|
|
|
(28,779
|
)
|
|
(3,266
|
)
|
|
(11,338
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
110,342
|
|
|
$
|
135,055
|
|
|
$
|
138,976
|
|
|
$
|
483
|
|
|
$
|
384,856
|
|
Equity in income of equity investees
|
5,734
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,734
|
|
Interest expense and bank charges
|
624
|
|
|
6,056
|
|
|
5,303
|
|
|
(7,133
|
)
|
|
4,850
|
|
Depreciation and amortization expense
|
768
|
|
|
2,655
|
|
|
3,496
|
|
|
2,229
|
|
|
9,148
|
|
Income (loss) before income taxes
|
8,910
|
|
|
1,547
|
|
|
(17,412
|
)
|
|
(12,631
|
)
|
|
(19,586
|
)
|
(a) Included in income (loss) before income taxes for the
nine months ended
November 30, 2018
are intangible asset impairment charges totaling
$9,814
(
$9,654
within the Consumer Accessories segment and
$160
within the Automotive segment) (see Note 11), as well as the impairment charge of
$(3,473)
related to investment properties in Venezuela within the Automotive segment (see Note 18).
(23)
Revenue from Contract with Customers
On March 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments (“ASC Topic 606”), using the modified retrospective method. In addition, we elected to apply certain of the permitted practical expedients within the revenue recognition guidance and make certain accounting policy elections, including those related to significant financing components, sales taxes and shipping and handling activities. Most of the changes resulting from the adoption of ASC Topic 606 on March 1, 2018 were changes in presentation within the Unaudited Consolidated Balance Sheet. Therefore, while we made adjustments to certain opening balances on our March 1, 2018 Unaudited Consolidated Balance Sheet, we made no adjustment to opening Retained Earnings. We expect the impact of the adoption of ASC Topic 606 to be immaterial to our net income on an ongoing basis; however, adoption did increase the level of disclosures concerning our net sales. Results for reporting periods beginning March 1, 2018 are presented under the new guidance, while prior period amounts continue to be reported in accordance with previous guidance without revision.
Revenue from Contracts with Customers
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The core principle of ASC Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods and 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. We apply the FASB’s guidance on revenue recognition, which requires us to recognize the amount of revenue and consideration that we expect to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy a performance obligation.
We account for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Contracts with customers are evaluated to determine if there are separate performance obligations related to timing of product shipment that will be satisfied in different accounting periods. When that is the case, revenue is deferred until each performance obligation is met.
No
performance obligation related amounts were deferred as of
November 30, 2018
. Within our Automotive segment, while the majority of the contracts we enter into with Original Equipment Manufacturers (“OEM”) are long-term supply arrangements, the performance obligations are established by the enforceable contract, which is generally considered to be the purchase order. The purchase orders are of durations less than one year. As such, the Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis.
Performance Obligations
The Company’s primary source of revenue is derived from the manufacture and distribution of premium audio, consumer accessories, and automotive products. Our consumer accessories products primarily consist of finished goods sold to retail customers, while our premium audio products primarily consist of finished goods sold to both retail and commercial customers. Our automotive products are sold both to OEM and aftermarket customers. The majority of the products sold to our automotive customers are manufactured by the Company. We recognize revenue for sales to our customers when transfer of control of the related good or service has occurred. All of our revenue was recognized under the point in time approach for the
three and nine months ended
November 30, 2018
. Contract terms with certain of our OEM customers could result in products and services being transferred over time as a result of the customized nature of some of our products, together with contractual provisions in the customer contracts that provide us with an enforceable right to payment for performance completed to date; however, under typical terms, we do not have the right to consideration until the time of shipment from our manufacturing facilities or distribution centers, or until the time of delivery to our customers. If certain contracts in the future provide the Company with this enforceable right of payment, the timing of revenue recognition from products transferred to customers over time may be slightly accelerated compared to our right to consideration at the time of shipment or delivery.
Our typical payment terms vary based on the
customer and the type of goods and services in the contract or purchase order. The period of time between invoicing and when payment is due is not significant. Amounts billed and due from our customers are classified as receivables on the Unaudited Consolidated Balance Sheet. As our standard payment terms are less than one year, we have elected the practical expedient under ASC paragraph 606-10-32-18 to not assess whether a contract has a significant financing component.
Our customers take delivery of goods, and they are recognized as revenue at the time of transfer of control to the customer, which is usually at the time of shipment, unless otherwise specified in the customer contract or purchase order. This determination is based on applicable shipping terms, as well as the consideration of other indicators, including timing of when the Company has a present right to payment, when physical possession of products is transferred to customers, when the customer has the significant risks and rewards of ownership of the asset, and any provisions in contracts regarding customer acceptance.
While unit prices are generally fixed, we provide variable consideration for certain of our customers, typically in the form of promotional incentives at the time of sale. We utilize the most likely amount consistently to estimate the effect of uncertainty on the amount of variable consideration to which we would be entitled. The most likely amount method considers the single most likely amount from a range of possible consideration amounts. The most likely amounts are based upon the contractual terms of the incentives and historical experience with each customer. We record estimates for cash discounts, promotional rebates, and other promotional allowances in the period the related revenue is recognized (“Customer Credits”). The provision for Customer
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Credits is recorded as a reduction from gross sales and reserves for Customer Credits are presented within accrued sales incentives on the Unaudited Consolidated Balance Sheet. Actual Customer Credits have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales and costs associated with shipping and handling are included in cost of sales. We have concluded that our estimates of variable consideration are not constrained according to the definition within the standard. Additionally, the Company applies the practical expedient in ASC paragraph 606-10-25-18B and accounts for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity, rather than a separate performance obligation.
With the adoption of ASC Topic 606, we reclassified certain amounts related to variable consideration. Under ASC Topic 606, we are required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet, whereas in periods prior to adoption, we presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. The changes in the refund liability are reported in net sales, and the changes in the return asset are reported in cost of sales in the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
. As a result, the balance sheet presentation was adjusted beginning in Fiscal 2019. As of
November 30, 2018
, the balance of the return asset is
$1,682
and the balance of the refund liability is
$3,696
, and they are presented within prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively, on the Unaudited Consolidated Balance Sheet.
We warrant our products against certain defects in material and workmanship when used as designed, which primarily range from 30 days to 3 years. We offer limited lifetime warranties on certain products, which limit the customer’s remedy to the repair or replacement of the defective product or part for the designated lifetime of the product, or for the life of the vehicle for the original owner, if it is an automotive product. We do not sell extended warranties.
Contract Balances
Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. The Company has
no
contract assets or contract liability balances at
November 30, 2018
.
Disaggregation of Revenue
The Company operates in three reportable segments: Automotive, Premium Audio and Consumer Accessories. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales are disaggregated by segments and sales channel for the
three and nine months ended
November 30, 2018
and
2017
:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Automotive Segment
|
|
|
|
|
|
|
|
Original Equipment Manufacturers
|
$
|
24,472
|
|
|
$
|
17,903
|
|
|
$
|
70,782
|
|
|
$
|
52,769
|
|
Aftermarket
|
20,581
|
|
|
22,731
|
|
|
53,923
|
|
|
57,573
|
|
Total Automotive Segment
|
45,053
|
|
|
40,634
|
|
|
124,705
|
|
|
110,342
|
|
|
|
|
|
|
|
|
|
Premium Audio Segment
|
|
|
|
|
|
|
|
Retail
|
48,017
|
|
|
55,854
|
|
|
117,265
|
|
|
130,319
|
|
Commercial
|
1,649
|
|
|
1,532
|
|
|
4,442
|
|
|
4,736
|
|
Total Premium Audio Segment
|
49,666
|
|
|
57,386
|
|
|
121,707
|
|
|
135,055
|
|
|
|
|
|
|
|
|
|
Consumer Accessories Segment
|
|
|
|
|
|
|
|
Retail
|
34,661
|
|
|
58,461
|
|
|
92,264
|
|
|
138,976
|
|
Total Consumer Accessories Segment
|
34,661
|
|
|
58,461
|
|
|
92,264
|
|
|
138,976
|
|
|
|
|
|
|
|
|
|
Corporate/Eliminations
|
257
|
|
|
82
|
|
|
683
|
|
|
483
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
$
|
129,637
|
|
|
$
|
156,563
|
|
|
$
|
339,359
|
|
|
$
|
384,856
|
|
|
|
|
|
|
|
|
|
(24)
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 Company has been a plaintiff in a counterfeit lawsuit with ePro ("the Defendant") in the United States District Court for the Southern District of New York. On September 30, 2016, the judge in the lawsuit awarded the Company
$2,681
. During the Company's first quarter of Fiscal 2019, payment of the award was received and recorded by Voxx. On December 6, 2018, Voxx and ePro entered into a permanent injunction and final judgment on consent in which Voxx was paid
$990
from ePro's restrained account and ePro agreed to be permanently enjoined from using Klipsch's specified trademarks or any counterfeit or imitation of Klipsch's specified trademarks in connection with the distribution, marketing and sale of non-genuine Klipsch products. The Company recorded
$990
and
$3,066
of this settlement as a reduction of general and administrative expense on the
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three and
nine months ended
November 30, 2018
, respectively, and
$605
as an offset against prepaid legal fees recorded in prior periods.
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.
(25)
New Accounting Pronouncements
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11 “Leases (Topic 842) Targeted Improvements" in July 2018, and ASU No. 2018-20 "Leases (Topic 842) - Narrow Scope Improvements for Lessors" in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments that affect narrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional (and optional) transition method of adoption, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will adopt this guidance beginning with its first quarter ended May 31, 2019.
The Company has established a task force, comprised of multiple functional groups inside the Company, and continues to evaluate critical components of ASC Topic 842 and the potential impact of the guidance on the Company's financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard in determining the discount rate to be used in valuing new and existing leases, procedural and operational changes that may be necessary to comply with the provisions of the guidance, and all applicable financial statement disclosures required by the guidance, all of which are areas that may be impacted by adoption of the ASC. The Company is also in the process of determining which practical expedients will be applied by the Company for implementation of the ASC. At this time, the Company has not completed its full evaluation; however, it believes the adoption of ASC Topic 842, at a minimum, will increase the total assets and total liabilities reported on the Company's Consolidated Balance Sheet.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendment to the guidance, ASU 2018-19 in November 2018. 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. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. 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 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 its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the application of the hedge
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
accounting guidance in current GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income due to the enactment of the Tax Cuts and Jobs Act ("TCJA") on December 22, 2017, which changed the Company's income tax rate from 35% to 21%. The amendments to the ASU changed US GAAP whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The amendments of the ASU may be adopted in total or in part using a full retrospective or modified retrospective method. The amendments of the ASU are effective for periods beginning after December 15, 2018. Early adoption is permitted. The Company is assessing the effect of ASU 2018-02 on its consolidated financial statements.
The effects of changes in tax laws are required to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA’s provisions, the FASB issued ASU 2018-06,
"
Income Taxes (Topic 740),"
pursuant to
the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment. The Company’s accounting for certain elements of the TCJA was incomplete as of the fiscal year ended February 28, 2018, some of which remains incomplete at
November 30, 2018
(see Note 13).
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement ('Topic 820'): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the effect, if any, that ASU 2018-13 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2020. The amendments in ASU 2018-14 must be applied on a retrospective basis. The Company is currently assessing the effect, if any, that ASU 2018-14 will have on its consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-17: Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU requires entities to consider indirect interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest. The ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods therein, with early adoption permitted. The Company is currently evaluating the effect, if any, that ASU 2018-18 will have on its consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606." The ASU clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. This ASU is effective for public companies for annual reporting
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the effect, if any, that ASU 2018-18 will have on its consolidated financial statements.
(26) Subsequent Events
On December 19, 2018, Johnson Safety Inc. (“JSI”) and Voxx International Corporation and certain subsidiaries (collectively, “Voxx”) entered into a Settlement and License Agreement (with an effective date of March 1, 2018) in which JSI sold, transferred and assigned to Voxx its patent portfolio relating to rear seat entertainment. In addition, Voxx granted JSI a royalty-free non-exclusive license, without the right to sublicense, in and to the JSI patent portfolio sold and transferred to Voxx. In consideration of the foregoing patent purchase, Voxx previously advanced
$2,600
in connection with this matter. The Company will perform a valuation on these intangible assets during the fourth quarter of Fiscal 2019.