Quarterly Report (10-q)

Date : 07/10/2019 @ 9:16PM
Source : Edgar (US Regulatory)
Stock : VOXX International Corporation (VOXX)
Quote : 5.04  0.04 (0.80%) @ 6:19PM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-28839

 

VOXX International Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

13-1964841

(IRS Employer Identification No.)

2351 J Lawson Blvd., Orlando, Florida

(Address of principal executive offices)

 

32824

(Zip Code)

 

 

 

(800) 654-7750

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

Trading Symbol:

Name of Each Exchange on which Registered

Class A Common Stock $.01 par value

VOXX

The Nasdaq Stock Market LLC

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company, as defined in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes        No  

Number of shares of each class of the issuer's common stock outstanding as of the latest practicable date.

 

Class

 

As of July 9, 2019

Class A Common Stock

 

21,938,100 Shares

Class B Common Stock

 

2,260,954 Shares

 

 

 


 

VOXX International Corporation and Subsidiaries

Table of Contents

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1

 

FINANCIAL STATEMENTS

 

 

 

 

Consolidated Balance Sheets at May 31, 2019 (unaudited) and February 28, 2019

 

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended May 31, 2019 and 2018

 

4

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months Ended May 31, 2019 and 2018

 

5

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2019 and 2018

 

6

 

 

Notes to Unaudited Consolidated Financial Statements

 

7

Item 2

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

30

Item 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

39

Item 4

 

CONTROLS AND PROCEDURES

 

39

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

LEGAL PROCEEDINGS

 

40

Item 1A

 

RISK FACTORS

 

40

Item 2

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

40

Item 6

 

EXHIBITS

 

41

SIGNATURES

 

42

 

 

 

 

2


 

PART I - FINANC IAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

VOXX International Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

May 31,

2019

 

 

February 28,

2019

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,004

 

 

$

58,236

 

Accounts receivable, net

 

 

61,585

 

 

 

73,391

 

Inventory, net

 

 

103,275

 

 

 

102,379

 

Receivables from vendors

 

 

547

 

 

 

1,009

 

Prepaid expenses and other current assets

 

 

9,572

 

 

 

10,449

 

Income tax receivable

 

 

1,041

 

 

 

921

 

Total current assets

 

 

236,024

 

 

 

246,385

 

Investment securities

 

 

2,994

 

 

 

2,858

 

Equity investment

 

 

21,853

 

 

 

21,885

 

Property, plant and equipment, net

 

 

59,695

 

 

 

60,493

 

Operating lease, right of use asset

 

 

2,187

 

 

 

 

Goodwill

 

 

54,785

 

 

 

54,785

 

Intangible assets, net

 

 

117,588

 

 

 

119,449

 

Deferred income tax assets

 

 

78

 

 

 

79

 

Other assets

 

 

2,816

 

 

 

2,877

 

Total assets

 

$

498,020

 

 

$

508,811

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

32,349

 

 

$

31,143

 

Accrued expenses and other current liabilities

 

 

34,395

 

 

 

39,129

 

Income taxes payable

 

 

227

 

 

 

1,349

 

Accrued sales incentives

 

 

11,069

 

 

 

13,574

 

Current portion of long-term debt

 

 

8,554

 

 

 

10,021

 

Total current liabilities

 

 

86,594

 

 

 

95,216

 

Long-term debt, net of debt issuance costs

 

 

5,859

 

 

 

5,776

 

Finance lease liabilities, less current portion

 

 

404

 

 

 

516

 

Operating lease liabilities, less current portion

 

 

1,689

 

 

 

 

Deferred compensation

 

 

2,931

 

 

 

2,605

 

Deferred income tax liabilities

 

 

4,148

 

 

 

5,284

 

Other tax liabilities

 

 

1,337

 

 

 

1,332

 

Other long-term liabilities

 

 

3,074

 

 

 

2,981

 

Total liabilities

 

 

106,036

 

 

 

113,710

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock:

 

 

 

 

 

 

 

 

No shares issued or outstanding (see Note 20)

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

Class A, $.01 par value, 60,000,000 shares authorized, 24,106,194 shares issued and 21,938,100 shares outstanding at both May 31, 2019 and February 28, 2019

 

 

242

 

 

 

242

 

Class B Convertible, $.01 par value, 10,000,000 shares authorized, 2,260,954 shares issued and outstanding at both May 31, 2019 and February 28, 2019

 

 

22

 

 

 

22

 

Paid-in capital

 

 

297,105

 

 

 

296,946

 

Retained earnings

 

 

147,434

 

 

 

148,582

 

Accumulated other comprehensive loss

 

 

(17,848

)

 

 

(16,944

)

Treasury stock, at cost, 2,168,094 shares of Class A Common Stock at both May 31, 2019 and February 28, 2019

 

 

(21,176

)

 

 

(21,176

)

Total VOXX International Corporation stockholders' equity

 

 

405,779

 

 

 

407,672

 

Non-controlling interest

 

 

(13,795

)

 

 

(12,571

)

Total stockholders' equity

 

 

391,984

 

 

 

395,101

 

Total liabilities and stockholders' equity

 

$

498,020

 

 

$

508,811

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


 

VOXX International Corporation and Subsidiaries

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income

(In thousands, except share and per share data)

 

 

 

Three months ended

May 31,

 

 

 

2019

 

 

2018

 

Net sales

 

$

93,454

 

 

$

100,855

 

Cost of sales

 

 

67,445

 

 

 

73,178

 

Gross profit

 

 

26,009

 

 

 

27,677

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling

 

 

9,881

 

 

 

10,694

 

General and administrative

 

 

17,425

 

 

 

16,112

 

Engineering and technical support

 

 

5,807

 

 

 

5,911

 

Total operating expenses

 

 

33,113

 

 

 

32,717

 

Operating loss

 

 

(7,104

)

 

 

(5,040

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest and bank charges

 

 

(997

)

 

 

(1,100

)

Equity in income of equity investee

 

 

1,440

 

 

 

1,814

 

Other, net

 

 

1,644

 

 

 

661

 

Total other income, net

 

 

2,087

 

 

 

1,375

 

Loss before income taxes

 

 

(5,017

)

 

 

(3,665

)

Income tax benefit

 

 

(2,645

)

 

 

(1,113

)

Net loss

 

 

(2,372

)

 

 

(2,552

)

Less: net loss attributable to non-controlling interest

 

 

(1,224

)

 

 

(1,613

)

Net loss attributable to VOXX International Corporation

 

$

(1,148

)

 

$

(939

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(811

)

 

 

(2,020

)

Derivatives designated for hedging

 

 

(107

)

 

 

442

 

Pension plan adjustments

 

 

14

 

 

 

36

 

Unrealized holding gain on available-for-sale investment securities, net of tax

 

 

 

 

 

24

 

Other comprehensive loss, net of tax

 

 

(904

)

 

 

(1,518

)

Comprehensive loss attributable to VOXX International Corporation

 

$

(2,052

)

 

$

(2,457

)

Loss per share - basic: Attributable to VOXX International Corporation

 

$

(0.05

)

 

$

(0.04

)

Loss per share - diluted: Attributable to VOXX International Corporation

 

$

(0.05

)

 

$

(0.04

)

Weighted-average common shares outstanding (basic)

 

 

24,355,791

 

 

 

24,316,103

 

Weighted-average common shares outstanding (diluted)

 

 

24,355,791

 

 

 

24,316,103

 

 

See accompanying notes to unaudited consolidated financial statements.

4


 

VOXX International Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity

(In thousands, except share and per share data)

 

 

 

Class A

and Class B

Common

Stock

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Non-

controlling

Interests

 

 

Treasury

Stock

 

 

Total

Stock-

holders'

Equity

 

Balances at February 28, 2019

 

$

264

 

 

$

296,946

 

 

$

148,582

 

 

$

(16,944

)

 

$

(12,571

)

 

$

(21,176

)

 

$

395,101

 

Net loss

 

 

 

 

 

 

 

 

(1,148

)

 

 

 

 

 

(1,224

)

 

 

 

 

 

(2,372

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(904

)

 

 

 

 

 

 

 

 

(904

)

Stock-based compensation expense

 

 

 

 

 

159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

159

 

Balances at May 31, 2019

 

$

264

 

 

$

297,105

 

 

$

147,434

 

 

$

(17,848

)

 

$

(13,795

)

 

$

(21,176

)

 

$

391,984

 

Balances at February 28, 2018

 

$

278

 

 

$

296,395

 

 

$

194,673

 

 

$

(14,222

)

 

$

(5,830

)

 

$

(21,176

)

 

$

450,118

 

Net loss

 

 

 

 

 

 

 

 

(939

)

 

 

 

 

 

(1,613

)

 

 

 

 

 

(2,552

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(1,518

)

 

 

 

 

 

 

 

 

(1,518

)

Adjustment to common stock

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

Stock-based compensation expense

 

 

 

 

 

107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107

 

Balances at May 31, 2018

 

$

264

 

 

$

296,502

 

 

$

193,734

 

 

$

(15,740

)

 

$

(7,443

)

 

$

(21,176

)

 

$

446,141

 

 

5


 

VOXX International Corporation and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

 

 

 

 

Three months ended

May 31,

 

 

 

 

2019

 

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

$

(2,372

)

 

 

$

(2,552

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

3,292

 

 

 

 

2,962

 

Amortization of debt discount

 

 

 

206

 

 

 

 

206

 

Bad debt expense

 

 

 

52

 

 

 

 

95

 

(Gain) loss on forward contracts

 

 

 

(107

)

 

 

 

244

 

Equity in income of equity investees

 

 

 

(1,440

)

 

 

 

(1,814

)

Distribution of income from equity investees

 

 

 

1,472

 

 

 

 

1,444

 

Deferred income tax benefit

 

 

 

(1,154

)

 

 

 

(716

)

Non-cash compensation adjustment

 

 

 

326

 

 

 

 

(600

)

Stock based compensation expense

 

 

 

159

 

 

 

 

107

 

Loss (gain) on sale of property, plant and equipment

 

 

 

1

 

 

 

 

(1

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

11,401

 

 

 

 

14,606

 

Inventory

 

 

 

(1,278

)

 

 

 

(1,531

)

Receivables from vendors

 

 

 

462

 

 

 

 

(1,226

)

Prepaid expenses and other

 

 

 

1,099

 

 

 

 

8

 

Investment securities-trading

 

 

 

(136

)

 

 

 

788

 

Accounts payable, accrued expenses, accrued sales incentives and other liabilities

 

 

 

(6,502

)

 

 

 

(6,385

)

Income taxes payable

 

 

 

(1,213

)

 

 

 

(2,350

)

Net cash provided by operating activities

 

 

 

4,268

 

 

 

 

3,285

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

 

(703

)

 

 

 

(179

)

Proceeds from sale of property, plant and equipment

 

 

 

 

 

 

 

1

 

Issuance of notes receivable

 

 

 

 

 

 

 

(1,700

)

Net cash used in investing activities

 

 

 

(703

)

 

 

 

(1,878

)

Cash flows (used in) provided by financing activities:

 

 

 

 

 

 

 

 

 

 

Principal payments on finance lease obligation

 

 

 

(108

)

 

 

 

(86

)

Repayment of bank obligations

 

 

 

(1,428

)

 

 

 

(679

)

Borrowings on bank obligations

 

 

 

 

 

 

 

911

 

Net cash (used in) provided by financing activities

 

 

 

(1,536

)

 

 

 

146

 

Effect of exchange rate changes on cash

 

 

 

(261

)

 

 

 

(3,466

)

Net increase (decrease) in cash and cash equivalents

 

 

 

1,768

 

 

 

 

(1,913

)

Cash and cash equivalents at beginning of period

 

 

 

58,236

 

 

 

 

51,740

 

Cash and cash equivalents at end of period

 

 

$

60,004

 

 

 

$

49,827

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


 

VOXX International Corporation and Subsidiaries

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, changes in stockholders’ equity, 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, 2019.

Effective March 1, 2019, the Company revised its reportable segments to better reflect the way the Company now manages its business. To reflect management's revised perspective, the Company now classifies its operations in the following three reportable segments: Automotive Electronics, Consumer Electronics, and Biometrics. Prior year segment amounts have been reclassified to conform to the current presentation. See Note 22 for the Company's segment reporting disclosures.

( 2 )

Net (Loss) Income Per Common Share

Basic net (loss) income per common share, net of non-controlling interest, is based upon the weighted-average common shares outstanding during the period. Diluted net (loss) income per common share, 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 (loss) income per common share.  A reconciliation between the denominator of basic and diluted net (loss) income per common share is as follows:

 

 

 

Three months ended

May 31,

 

 

 

2019

 

 

2018

 

Weighted-average common shares outstanding (basic)

 

 

24,355,791

 

 

 

24,316,103

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Restricted stock

 

 

 

 

 

 

Weighted-average common shares and potential common shares outstanding (diluted)

 

 

24,355,791

 

 

 

24,316,103

 

 

Restricted stock totaling 627,544 and 439,299 for the three months ended May 31, 2019 and 2018, respectively, were not included in the net (loss) income 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.

 

 

7


VOXX International Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(Amounts in thousands, except share and per share data)

 

( 3 )

Investment Securities

As of May 31, 2019, and February 28, 2019, the Company had the following investments:

 

 

 

May 31, 2019

 

 

 

Fair Value

 

Investment Securities

 

 

 

 

Marketable Equity Securities

 

 

 

 

Mutual funds

 

$

2,994

 

Total Marketable Equity Securities

 

 

2,994

 

Total Investment Securities

 

$

2,994

 

 

 

 

February 28, 2019

 

 

 

Fair Value

 

Investment Securities

 

 

 

 

Marketable Equity Securities

 

 

 

 

Mutual funds

 

$

2,858

 

Total Marketable Securities

 

 

2,858

 

Total Investment Securities

 

$

2,858

 

 

Equity Securities

On March 1, 2018, the Company adopted ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), the impact of which resulted in a cumulative effect adjustment of $24, which was recorded in other income (expense) in the Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended May 31, 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.

 

( 4 )

Fair Value Measurements and Derivatives

The Company applies the authoritative guidance on “Fair Value Measurements," which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. This guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment.  Investments with readily available active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 - Quoted market prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.

Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that market participants would use.

8


VOXX International Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(Amounts in thousands, except share and per share data)

 

The following table presents financial assets measured at fair value on a recurring basis at May 31, 2019 :

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

60,004

 

 

$

60,004

 

 

$

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Designated for hedging

 

$

19

 

 

$

 

 

$

19

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

2,994

 

 

$

2,994

 

 

$

 

Total investment securities

 

$

2,994

 

 

$

2,994

 

 

$

 

 

The following table presents financial assets and liabilities measured at fair value on a recurring basis at February 28, 2019:

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

58,236

 

 

$

58,236

 

 

$

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Designated for hedging

 

$

88

 

 

$

 

 

$

88

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

2,858

 

 

$

2,858

 

 

$

 

Total investment securities

 

$

2,858

 

 

$

2,858

 

 

$

 

 

At May 31, 2019, the carrying amount of the Company's accounts receivable, short-term debt, accounts payable, accrued expenses, bank obligations and long-term debt approximates fair value because of (i) the short-term nature of the financial instrument; (ii) the interest rate on the financial instrument being reset every quarter to reflect current market rates; 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 - 9 months and are classified in the balance sheet according to their terms. The Company also has an interest rate swap agreement as of May 31, 2019 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.

9


VOXX International Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(Amounts in thousands, except share and per share data)

 

Financial Statement Classification

The following table discloses the fair value as of May 31, 2019 and February 28, 2019 of derivative instruments:

 

 

 

Derivative Assets and Liabilities

 

 

 

 

 

Fair Value

 

 

 

Account

 

May 31, 2019

 

 

February 28, 2019

 

Designated derivative instruments

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Prepaid expenses and other current assets

 

$

275

 

 

$

172

 

Interest rate swap agreements

 

Other long-term liabilities

 

 

(256

)

 

 

(84

)

Total derivatives

 

 

 

$

19

 

 

$

88

 

 

Cash Flow Hedges

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. On March 1, 2019, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities , which eliminated the requirement to separately measure and report hedge ineffectiveness. For derivative instruments that are designated and qualify as a cash flow hedge, the entire change in fair value of the hedging instrument included in the assessment of the hedge ineffectiveness is recorded to other comprehensive income (“OCI”). When the amounts recorded in OCI are reclassified to earnings, they are presented in the same income statement line item as the effect of the hedged item. The adoption of ASU No. 2017-12 did not have a material impact on the Company’s consolidated financial statements.

During Fiscal 2019, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $7,200 and are designated as cash flow hedges at May 31, 2019. The current outstanding notional value of the Company's interest rate swap at May 31, 2019 is $7,989. For cash flow hedges, the gain or loss is reported as a component of Other comprehensive (loss) income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The net (loss) income recognized in Other comprehensive (loss) income for foreign currency contracts is expected to be recognized in Cost of sales within the next twelve months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. The gain or loss on the Company’s interest rate swap is recorded in Other comprehensive (loss) income and subsequently reclassified into Interest and bank charges in the period in which the hedged transaction affects earnings. As of May 31, 2019, no foreign currency contracts or interest rate swaps originally designated for hedge accounting were de-designated or terminated.

Activity related to cash flow hedges recorded during the three months ended May 31, 2019  and 2018 was as follows:

 

 

 

Three months ended

 

 

 

May 31, 2019

 

 

 

Pretax Gain (Loss)

Recognized in

Other

Comprehensive

Income

 

 

Pretax (Loss) Gain

Reclassified from

Accumulated Other

Comprehensive

Income

 

 

Gain (Loss) for

Ineffectiveness

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

218

 

 

$

119

 

 

$

 

Interest rate swaps

 

 

(172

)

 

 

 

 

 

 

10


VOXX International Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(Amounts in thousands, except share and per share data)

 

 

 

 

Three months ended

 

 

 

May 31, 2018

 

 

 

Pretax Gain

Recognized in

Other

Comprehensive

Income

 

 

Pretax Loss

Reclassified from

Accumulated Other

Comprehensive

Income

 

 

Gain for

Ineffectiveness

in Other

Income (a)

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

366

 

 

$

(235

)

 

$

33

 

Interest rate swaps

 

 

11

 

 

 

 

 

 

 

 

 

(a)

Amount represents the ineffectiveness recorded in the prior year quarter. Prior to the adoption of ASU 2017-12, hedge ineffectiveness (as defined under ASC 815) was recorded in Other income (loss).

( 5 )

Accumulated Other Comprehensive (Loss) Income

The Company’s accumulated other comprehensive (loss) income consists of the following:

 

 

 

Foreign

Currency

Translation

Losses

 

 

Pension plan

adjustments,

net of tax

 

 

Derivatives

designated

in a hedging

relationship,

net of tax

 

 

Total

 

Balance at February 28, 2019

 

$

(16,222

)

 

$

(798

)

 

$

76

 

 

$

(16,944

)

Other comprehensive (loss) income before reclassifications

 

 

(811

)

 

 

14

 

 

 

(20

)

 

 

(817

)

Reclassified from accumulated other comprehensive loss

 

 

 

 

 

 

 

 

(87

)

 

 

(87

)

Net current-period other comprehensive loss

 

 

(811

)

 

 

14

 

 

 

(107

)

 

 

(904

)

Balance at May 31, 2019

 

$

(17,033

)

 

$

(784

)

 

$

(31

)

 

$

(17,848

)

 

During the three months ended May 31, 2019, the Company recorded tax expense related to derivatives designated in a hedging relationship of $32 and pension plan adjustments of $0.

The other comprehensive (loss) income before reclassification of $(811) includes the remeasurement of intercompany transactions of a long-term investment nature of $(159) with certain subsidiaries whose functional currency is not the U.S. dollar, and $(652) 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.

( 6 )

Supplemental Cash Flow Information

The following is supplemental information relating to the Unaudited Consolidated Statements of Cash Flows, including continuing and discontinued operations:

 

 

 

Three months ended

May 31,

 

 

 

2019

 

 

2018

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Interest (excluding bank charges)

 

$

337

 

 

$

346

 

Income taxes (net of refunds)

 

 

289

 

 

 

1,851

 

 

( 7 )

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, 2019.

11


VOXX International Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(Amounts in thousands, except share and per share data)

 

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 employ ed 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 emplo yee performance requirement, and the service requirement that the respective employee continues employment with the Company through the vesting date. The Company expenses the cost of the restricted stock awards on a straight-line basis over the requisite s ervice 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 following table presents a summary of the Company's restricted stock activity for the three months ended May 31, 2019:

 

 

 

Number

of Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Balance at February 28, 2019

 

 

627,544

 

 

$

6.60

 

Granted

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Balance at May 31, 2019

 

 

627,544

 

 

$

6.60

 

Vested and unissued at May 31, 2019