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
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted-average common shares outstanding (basic)
|
|
|
24,481,477
|
|
|
|
24,355,791
|
|
|
|
24,457,482
|
|
|
|
24,355,791
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average common shares and potential common shares outstanding (diluted)
|
|
|
24,481,477
|
|
|
|
24,355,791
|
|
|
|
24,457,482
|
|
|
|
24,355,791
|
|
Restricted stock totaling 657,015 and 615,267 for the three months ended August 31, 2019 and 2018, respectively, and 642,280 and 527,283 for the six months ended August 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.
8
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 August 31, 2019, and February 28, 2019, the Company had the following investments:
|
|
August 31, 2019
|
|
|
|
Fair Value
|
|
Investment Securities
|
|
|
|
|
Marketable Equity Securities
|
|
|
|
|
Mutual funds
|
|
$
|
2,518
|
|
Total Marketable Equity Securities
|
|
|
2,518
|
|
Total Investment Securities
|
|
$
|
2,518
|
|
|
|
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 six months ended August 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.
Other Long-Term Investments
In July 2017, the Company sold its investment in RxNetworks, a non-controlled corporation, consisting of shares of the investee’s preferred stock. Voxx recognized a gain of $1,416 during Fiscal 2018 for the sale of this investment. A portion of the cash proceeds for the sale was subject to a hold-back provision, which was not included in the calculation of the gain recognized in Fiscal 2018, as it was considered a gain contingency. During the second quarter of Fiscal 2020, the hold-back provision expired, and the Company received the remaining proceeds from the sale in August 2019. The Company recorded an investment gain of $775 for the three and six months ended August 31, 2019 for these proceeds received.
(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.
9
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 August 31, 2019:
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market funds
|
|
$
|
39,294
|
|
|
$
|
39,294
|
|
|
$
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated for hedging
|
|
$
|
(162
|
)
|
|
$
|
—
|
|
|
$
|
(162
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
2,518
|
|
|
$
|
2,518
|
|
|
$
|
—
|
|
Total investment securities
|
|
$
|
2,518
|
|
|
$
|
2,518
|
|
|
$
|
—
|
|
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 August 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 - 6 months and are classified in the balance sheet according to their terms. The Company also has an interest rate swap agreement as of August 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.
10
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 August 31, 2019 and February 28, 2019 of derivative instruments:
|
|
Derivative Assets and Liabilities
|
|
|
|
|
|
Fair Value
|
|
|
|
Account
|
|
August 31, 2019
|
|
|
February 28, 2019
|
|
Designated derivative instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
261
|
|
|
$
|
172
|
|
Interest rate swap agreements
|
|
Other long-term liabilities
|
|
|
(423
|
)
|
|
|
(84
|
)
|
Total derivatives
|
|
|
|
$
|
(162
|
)
|
|
$
|
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 $4,800 and are designated as cash flow hedges at August 31, 2019. The current outstanding notional value of the Company's interest rate swap at August 31, 2019 is $7,883. 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 nine 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 August 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 and six months ended August 31, 2019 and 2018 was as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
August 31, 2019
|
|
|
August 31, 2019
|
|
|
|
Pretax Gain
(Loss)
Recognized in
Other
Comprehensive
Income
|
|
|
Pretax Gain
Reclassified from
Accumulated Other
Comprehensive
Income
|
|
|
Gain (Loss) for
Ineffectiveness
|
|
|
Pretax Gain
(Loss)
Recognized in
Other
Comprehensive
Income
|
|
|
Pretax Gain
Reclassified from
Accumulated Other
Comprehensive
Income
|
|
|
Gain (Loss) for
Ineffectiveness
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
98
|
|
|
$
|
109
|
|
|
$
|
—
|
|
|
$
|
316
|
|
|
$
|
228
|
|
|
$
|
—
|
|
Interest rate swaps
|
|
|
(167
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(339
|
)
|
|
|
—
|
|
|
|
—
|
|
11
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
August 31, 2018
|
|
|
August 31, 2018
|
|
|
|
Pretax Gain
Recognized in
Other
Comprehensive
Income
|
|
|
Pretax Gain
Reclassified
from
Accumulated Other
Comprehensive
Income
|
|
|
Loss for
Ineffectiveness
in Other
Income (a)
|
|
|
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
|
|
$
|
56
|
|
|
$
|
21
|
|
|
$
|
(8
|
)
|
|
$
|
422
|
|
|
$
|
(214
|
)
|
|
$
|
25
|
|
Interest rate swaps
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
(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
|
|
|
(1,026
|
)
|
|
|
23
|
|
|
|
(126
|
)
|
|
|
(1,129
|
)
|
Reclassified from accumulated other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(158
|
)
|
|
|
(158
|
)
|
Net current-period other comprehensive loss
|
|
|
(1,026
|
)
|
|
|
23
|
|
|
|
(284
|
)
|
|
|
(1,287
|
)
|
Balance at August 31, 2019
|
|
$
|
(17,248
|
)
|
|
$
|
(775
|
)
|
|
$
|
(208
|
)
|
|
$
|
(18,231
|
)
|
During the three and six months ended August 31, 2019, the Company recorded tax expense related to derivatives designated in a hedging relationship of $(4) and $28, respectively, and pension plan adjustments of $0 in both periods.
The other comprehensive (loss) income before reclassification of $(1,026) includes the remeasurement of intercompany transactions of a long-term investment nature of $(123) with certain subsidiaries whose functional currency is not the U.S. dollar, and $(903) 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:
|
|
Six months ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures funded by long-term obligations
|
|
$
|
—
|
|
|
$
|
360
|
|
Issuance of redeemable equity
|
|
|
1,025
|
|
|
|
-
|
|
Reclassification of stockholders' equity to redeemable equity
|
|
|
745
|
|
|
|
-
|
|
Cash paid during the period:
|
|
|
|
|
|
|
|
|
Interest (excluding bank charges)
|
|
$
|
554
|
|
|
$
|
764
|
|
Income taxes (net of refunds)
|
|
|
410
|
|
|
|
2,305
|
|
12
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(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.
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 2019, the Company granted 71,352 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 2019 was $4.65.
Grant of Shares to Chief Executive Officer
On July 8, 2019, the Board of Directors approved a five-year Employment Agreement (the “Employment Agreement”), effective March 1, 2019, by and between the Company and Patrick M. Lavelle, the Company’s President and Chief Executive Officer. Under the terms of the Employment Agreement, in addition to a $1,000 salary and cash bonus based on the Company’s Adjusted EBITDA, Mr. Lavelle received certain stock-based compensation as discussed below:
|
-
|
An initial stock grant of 200,000 fully vested shares of Class A Common Stock issued under the 2012 Equity Incentive Plan. Compensation expense of $830 was recognized during the three and six months ended August 31, 2019 based upon the grant fair value of $4.15 per share.
|
|
-
|
Additional stock grants of 100,000 shares of Class A Common Stock to be issued on each of March 1, 2020, March 1, 2021, and March 1, 2022. Compensation expense of $155 was recognized during three and six months ended August 31, 2019 based upon the grant fair value of $4.15 per share using the graded vesting attribution method.
|
|
-
|
Grant of market stock units (“MSU’s”) up to a maximum value of $5,000, based upon the achievement of a 90-calendar day average stock price of no less than $5.49 over the performance period ending on the third and fifth anniversary of the effective date of the Employment Agreement. The value of the MSU award increases based upon predetermined targeted 90-calendar day average stock prices with a maximum of $5,000 if the 90-calendar day average high stock price equals or exceeds $15.00. The award is weighted toward achievement of a significant increase in our stock price as half of the award will be granted to Mr. Lavelle only if the 90-calendar day high stock price equals or exceeds $13.00. The average stock price is calculated based on the highest average closing price of one share of our Class A common stock, as reported on the NASDAQ Stock Market during any 90-calendar day period prior to each measurement date. The number of shares to be issued related to the MSUs based upon achievement of the maximum award value of $5,000 and if issued at $15.00 per share is estimated at 333,333 shares. Actual results may differ based upon when the high average stock price is achieved and settled. The Company used a Monte Carlo simulation to calculate the fair value of the award on the grant date. A Monte Carlo simulation requires the use of various assumptions, including the stock price volatility and risk-free interest rate as of the valuation date. We recognized stock-based compensation expense of $40 related to these MSU’s using the graded vesting attribution method over the performance period. As of August 31, 2019, all of the MSU’s remain outstanding.
|
13
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
All the stock grants under the Employment Agreement are subject to a hold requirement as specified in the Employment Agreement. The Employment Agreement gave Mr. Lavelle, in certain limited change of control situations, the right to require the Company to purchase the shares in connection with the Employment Agreement, shares personally acquired by Mr. Lavelle, and shares issued to him under other incentive compensation arrangements. Accordingly, the stock awards issued in connection with the Employment Agreement are presented as redeemable equity on the consolidated balance sheet at grant-date fair value. Shares previously held by Mr. Lavelle under the SERP and those personally purchased by Mr. Lavelle have been reclassified from permanent equity to redeemable equity. As the contingent events that would allow Mr. Lavelle to redeem the shares are not probable at this time, remeasurement of the amounts in redeemable equity have not been recorded. The Employment Agreement contains certain restrictive and non-solicitation covenants.
The following table presents a summary of the activity related to the SERP and the initial stock grant and additional stock grants under the Employment Agreement for the six months ended August 31, 2019:
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested share balance at February 28, 2019
|
|
|
470,807
|
|
|
$
|
5.49
|
|
Granted
|
|
|
571,352
|
|
|
|
4.52
|
|
Vested
|
|
|
277,696
|
|
|
|
3.99
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Unvested share balance at August 31, 2019
|
|
|
764,463
|
|
|
$
|
5.30
|
|
At August 31, 2019, there were 234,433 shares of vested and unissued shares under the Company’s SERP with a weighted average fair value of $7.55.
During the three and six months ended August 31, 2019, the Company recorded $1,186 and $1,345, respectively, in stock-based compensation related to the SERP, and to the initial stock grant, additional stock grants, and MSU’s under the Employment Agreement. As of August 31, 2019, there was approximately $3,410 of unrecognized stock-based compensation expense related to unvested restricted stock awards.
(8)
|
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 six months ended August 31, 2019, net of discounts, were $14,404 and $36,987, respectively, compared to $24,945 and $47,924, respectively, for the three and six months ended August 31, 2018. During the second quarter of Fiscal 2020, the Company suspended its domestic supply chain financing activities as it has determined it has sufficient cash on hand for operations and does not require additional financing as of August 31, 2019. The Company has the option to resume its activity under the existing arrangements at any time.
(9)
|
Research and Development
|
Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to $1,899 and $3,762 for the three and six months ended August 31, 2019, compared to $2,202 and $4,560 for the three and six months ended August 31, 2018, net of customer reimbursements, and are included within Engineering and technical support expenses on the Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income.
14
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(10)
|
Goodwill and Intangible Assets
|
The change in goodwill by segment is as follows:
Automotive Electronics:
|
|
Amount
|
|
Beginning balance at March 1, 2019
|
|
$
|
8,252
|
|
Activity during the period
|
|
|
—
|
|
Balance at August 31, 2019
|
|
$
|
8,252
|
|
Gross carrying amount at May 31, 2019
|
|
$
|
8,252
|
|
Accumulated impairment charge
|
|
|
—
|
|
Net carrying amount at August 31, 2019
|
|
$
|
8,252
|
|
Consumer Electronics:
|
|
|
|
|
Beginning balance at March 1, 2019
|
|
$
|
46,533
|
|
Activity during the period
|
|
|
—
|
|
Balance at August 31, 2019
|
|
$
|
46,533
|
|
Gross carrying amount at August 31, 2019
|
|
$
|
78,696
|
|
Accumulated impairment charge
|
|
|
(32,163
|
)
|
Net carrying amount at August 31, 2019
|
|
$
|
46,533
|
|
Total Goodwill, net
|
|
$
|
54,785
|
|
Note: The Company's Biometrics segment did not carry a goodwill balance at August 31, 2019 or February 28, 2019.
At August 31, 2019, intangible assets consisted of the following:
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Total Net
Book
Value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
49,541
|
|
|
$
|
31,240
|
|
|
$
|
18,301
|
|
Trademarks/Tradenames
|
|
|
485
|
|
|
|
423
|
|
|
|
62
|
|
Developed technology
|
|
|
31,290
|
|
|
|
10,883
|
|
|
|
20,407
|
|
Patents
|
|
|
5,374
|
|
|
|
3,295
|
|
|
|
2,079
|
|
License
|
|
|
1,400
|
|
|
|
1,400
|
|
|
|
—
|
|
Contract
|
|
|
2,141
|
|
|
|
2,025
|
|
|
|
116
|
|
Total finite-lived intangible assets
|
|
$
|
90,231
|
|
|
$
|
49,266
|
|
|
|
40,965
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
74,804
|
|
Total net intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
115,769
|
|
15
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
At February 28, 2019, intangible assets consisted of the following:
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Total Net
Book
Value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
49,743
|
|
|
$
|
29,746
|
|
|
$
|
19,997
|
|
Trademarks/Tradenames
|
|
|
485
|
|
|
|
413
|
|
|
|
72
|
|
Developed technology
|
|
|
31,290
|
|
|
|
9,523
|
|
|
|
21,767
|
|
Patents
|
|
|
5,390
|
|
|
|
2,907
|
|
|
|
2,483
|
|
License
|
|
|
1,400
|
|
|
|
1,400
|
|
|
|
—
|
|
Contract
|
|
|
2,141
|
|
|
|
1,966
|
|
|
|
175
|
|
Total finite-lived intangible assets
|
|
$
|
90,449
|
|
|
$
|
45,955
|
|
|
|
44,494
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
74,955
|
|
Total net intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
119,449
|
|
During the second quarter of Fiscal 2019, the Company re-evaluated its projections for several brands in its former 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. The Company tested these indefinite-lived intangible assets as of August 31, 2018 and as a result of its 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 three and six months ended August 31, 2018, with $9,654 related to the Consumer Accessories segment and $160 related to the Automotive segment.
The Company recorded amortization expense of $1,748 and $3,496 for the three and six months ended August 31, 2019, respectively, and $1,581 and $3,163 for the three and six months ended August 31, 2018, respectively. The estimated aggregate amortization expense for all amortizable intangibles for August 31 of each of the succeeding years is as follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
6,837
|
|
2021
|
|
|
6,618
|
|
2022
|
|
|
6,137
|
|
2023
|
|
|
5,510
|
|
2024
|
|
|
5,382
|
|
As of August 31, 2019 and February 28, 2019, 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.
|
|
August 31, 2019
|
|
|
February 28, 2019
|
|
Current assets
|
|
$
|
46,707
|
|
|
$
|
45,135
|
|
Non-current assets
|
|
|
5,817
|
|
|
|
6,124
|
|
Liabilities
|
|
|
9,148
|
|
|
|
7,489
|
|
Members' equity
|
|
|
43,376
|
|
|
|
43,770
|
|
16
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
Six months ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
50,281
|
|
|
$
|
50,560
|
|
Gross profit
|
|
|
15,542
|
|
|
|
16,509
|
|
Operating income
|
|
|
5,227
|
|
|
|
6,806
|
|
Net income
|
|
|
5,410
|
|
|
|
6,902
|
|
The Company's share of income from ASA was $1,265 and $2,705 for the three and six months ended August 31, 2019, and $1,637 and $3,451 for the three and six months ended August 31, 2018.
The Company’s provision for income taxes consists of federal, foreign and state taxes necessary to align the Company’s year-to-date tax provision with the annual effective rate that it expects to achieve for the full year. At each interim period, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. The authoritative guidance for accounting for income taxes allows use of the year-to-date effective tax rate (the “discrete method”) when a reliable estimate of the estimated annual effective tax rate cannot be made. During the interim period ended August 31, 2019, the Company determined the use of the discrete method for U.S. operations is more appropriate than the annual effective tax rate method due to sensitivity to small changes to projected pre-tax earnings, which resulted in significant variations in the customary relationship between income tax expense and pretax income. As such, the Company has estimated a foreign effective tax rate and applied that to its foreign year to date results and has discretely calculated the U.S. tax provision (benefit) based on pre-tax results through the six months ended August 31, 2019. The change in estimate is reflected in the tax provision (benefit) for the three and six months ended August 31, 2019.
For the three months ended August 31, 2019, the Company recorded an income tax provision of $1,115, which includes a discrete income tax benefit of $1,400. The Company recorded discrete tax benefits of $1,204 and $196 in connection with excluding the U.S. tax jurisdiction from the estimated annual effective tax rate and the reversal of uncertain tax provision liabilities as result of the lapse of the applicable statute of limitations, respectively. For the three months ended August 31, 2018, the Company recorded an income tax provision of $8,338, which includes a discrete income tax benefit of $226, related primarily to the reversal of uncertain tax provision liabilities, offset by a provision related to the accrual of interest for unrecognized tax benefits and the impact of remeasurement of state deferred taxes based on law changes enacted during the quarter.
The effective tax rates for the three months ended August 31, 2019 and 2018 were an income tax provision of 18.4% on a pre-tax loss of $6,049 and an income tax provision of 58.9% on a pre-tax loss of $14,164, respectively. The effective tax rate for the three months ended August 31, 2019 differs from the U.S. statutory rate of 21% primarily due to the calculation of the U.S. tax provision on a discrete basis, nondeductible permanent differences, non-controlling interest related to EyeLock LLC, an increase in the valuation allowance primarily for capital assets, state and local income taxes, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the three months ended August 31, 2018 differed from the 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 loss jurisdictions for which a limited tax benefit can be recognized.
For the six months ended August 31, 2019, the Company recorded an income tax benefit of $1,530, which includes a discrete income tax benefit of $1,380. The Company recorded discrete tax benefits of $1,204 and $176 in connection with excluding the U.S. tax jurisdiction from the estimated annual effective tax rate and the reversal of uncertain tax provision liabilities as result of lapse of the applicable statute of limitations, respectively. For the six months ended August 31, 2018, the Company recorded an income tax provision of $7,225, which includes a discrete income tax benefit of $199, primarily related to the reversal of uncertain tax provision liabilities, offset by a provision related to the accrual of interest for unrecognized tax benefits and the remeasurement of state deferred taxes based on law changes enacted during the period.
The effective tax rates for the six months ended August 31, 2019 and 2018 were an income tax benefit of 13.8% on a pre-tax loss of $11,066 and an income tax provision of 40.5% on a pre-tax loss of $17,829, respectively. The effective tax rate for the six months ended August 31, 2019 differs from the U.S. statutory rate of 21% primarily due to the calculation of the U.S. tax provision on a discrete basis, nondeductible permanent differences, non-controlling interest related to EyeLock LLC, an increase in the valuation allowance primarily for capital assets, state and local income
17
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
taxes, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the six months ended August 31, 2018 differed from the 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.
At August 31, 2019, the Company had an uncertain tax position liability of $1,128, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local, and foreign tax issues.
Inventories by major category are as follows:
|
|
August 31,
2019
|
|
|
February 28,
2019
|
|
Raw materials
|
|
$
|
29,056
|
|
|
$
|
27,518
|
|
Work in process
|
|
|
2,620
|
|
|
|
2,622
|
|
Finished goods
|
|
|
82,892
|
|
|
|
72,239
|
|
Inventory, net
|
|
$
|
114,568
|
|
|
$
|
102,379
|
|
(14)
|
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.
|
|
Three months ended
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Opening balance
|
|
$
|
4,151
|
|
|
$
|
4,925
|
|
|
$
|
4,469
|
|
|
$
|
6,233
|
|
Liabilities for warranties accrued during the period
|
|
|
1,147
|
|
|
|
1,366
|
|
|
|
2,434
|
|
|
|
2,866
|
|
Balances transferred (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(832
|
)
|
Warranties paid during the period
|
|
|
(1,236
|
)
|
|
|
(1,436
|
)
|
|
|
(2,841
|
)
|
|
|
(3,412
|
)
|
Ending balance
|
|
$
|
4,062
|
|
|
$
|
4,855
|
|
|
$
|
4,062
|
|
|
$
|
4,855
|
|
|
(a)
|
In conjunction with the implementation of ASC Topic 606 in Fiscal 2019, 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 August 31, 2019 and February 28, 2019. The balance above represents amounts that would reduce the value of inventory returned to the Company and was reclassified to the return asset in order to properly reflect the value of the inventory the Company expects to receive back from customers.
|
(15)
|
Accrued Restructuring Expense
|
During the year ended February 28, 2019, the Company realigned certain businesses within the organization to lower and contain overhead costs, as well as conducted an aggressive SKU rationalization program to streamline certain product offerings, which resulted in total restructuring expenses of $4,588 for the year ended February 28, 2019, consisting primarily of employee severance. $3,883 of these restructuring charges were not yet settled as of February 28, 2019 and were included in Accrued expenses and other current liabilities. During the three and six months ended August 31, 2019, an additional $497 and $1,440, respectively, of the accrual was settled and no additional restructuring expenses were incurred. At August 31, 2019, the remaining restructuring accrual in Accrued expenses and other current liabilities is $2,443.
18
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(16)
|
Financing Arrangements
|
The Company has the following financing arrangements:
|
|
August 31,
2019
|
|
|
February 28,
2019
|
|
Debt
|
|
|
|
|
|
|
|
|
Domestic credit facility (a)
|
|
$
|
—
|
|
|
$
|
—
|
|
Florida mortgage (b)
|
|
|
7,883
|
|
|
|
8,112
|
|
Euro asset-based lending obligation (c)
|
|
|
3,922
|
|
|
|
6,699
|
|
Schwaiger mortgage (d)
|
|
|
130
|
|
|
|
235
|
|
Voxx Germany mortgage (e)
|
|
|
2,114
|
|
|
|
2,588
|
|
Total debt
|
|
|
14,049
|
|
|
|
17,634
|
|
Less: current portion of long-term debt
|
|
|
6,665
|
|
|
|
10,021
|
|
Long-term debt
|
|
|
7,384
|
|
|
|
7,613
|
|
Less: debt issuance costs
|
|
|
1,426
|
|
|
|
1,837
|
|
Total long-term debt, net of debt issuance costs
|
|
$
|
5,958
|
|
|
$
|
5,776
|
|
|
(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)). The entire outstanding balance of the term loan, which is not renewable, was repaid in Fiscal 2018. As of August 31, 2019, there was no balance outstanding under the revolving credit facility. The availability under the revolving credit line of the Credit Facility was $91,935 as of August 31, 2019.
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 August 31, 2019, the weighted average interest rate on the facility was 6.00%.
19
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Provided that the Company is in a Compliance Period (the period commencing on that day in which Excess Availability is less than 12.5% of the Maximum Revolver Amount and ending on a day in which Excess Availability is equal to or greater than 12.5% for any consecutive 30 day period thereafter), 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, subject to defined carveouts, 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 August 31, 2019, the Company was not in a Compliance Period.
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 six months ended August 31, 2019 totaled $126 and $252, respectively, compared to $125 and $272 during the three and six months ended August 31, 2018, respectively. These charges are included within Interest and bank charges on the Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income.
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 (Loss) Income over the five-year term of the Credit Facility. During both of the three and six months ended August 31, 2019 and 2018, the Company amortized $197 and $395 of these costs, respectively. The net unamortized balance of these deferred financing costs as of August 31, 2019 is $1,224.
On July 6, 2015, VOXX HQ LLC, the Company’s wholly owned subsidiary, closed on a $9,995 industrial development revenue tax exempt bond under a loan agreement in favor of the Orange County Industrial Development Authority (the “Authority”) to finance the construction of the Company's manufacturing facility and executive offices in Lake Nona, Florida. Wells Fargo Bank, N.A. ("Wells Fargo") was the purchaser of the bond and U.S. Bank National Association is the trustee under an Indenture of Trust with the Authority. Voxx borrowed the proceeds of the bond purchase from the Authority during construction as a revolving loan, which converted to a permanent mortgage upon completion of the facility in January 2016 (the "Florida Mortgage"). The Company makes principal and interest payments to Wells Fargo, which began March 1, 2016 and will continue through March of 2026. The Florida Mortgage bears interest at 70% of 1-month LIBOR plus 1.54% (3.71% at August 31, 2019) 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 (Loss) Income over the ten-year term of the Florida Mortgage. The Company amortized $8 and $16 of these costs during both of the three and six months ended August 31, 2019 and 2018, respectively. The net unamortized balance of these deferred financing costs as of August 31, 2019 is $202.
20
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 Asset-Based Lending ("ABL") credit facility, which has a credit limit of €8,000 for the Company's subsidiary, VOXX Germany, which expires on July 31, 2020. The rate of interest for the ABL is the three-month Euribor plus 2.3% (1.87% at August 31, 2019). As of August 31, 2019, the amount outstanding under this credit facility, which is payable on demand, does not exceed the credit limit.
In January 2012, Voxx German Holdings, GmbH purchased a building for the Schwaiger business, 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, with a final payment due in September 2019. The note was fully paid on September 30, 2019 in conjunction with the sale of the building (see Note 26).
(17)
|
Other Income (Expense)
|
Other income (expense) is comprised of the following:
|
|
Three months ended
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Foreign currency gain (loss)
|
|
$
|
130
|
|
|
$
|
(131
|
)
|
|
$
|
236
|
|
|
$
|
204
|
|
Interest income
|
|
|
225
|
|
|
|
269
|
|
|
|
615
|
|
|
|
475
|
|
Rental income
|
|
|
142
|
|
|
|
132
|
|
|
|
284
|
|
|
|
253
|
|
Miscellaneous
|
|
|
50
|
|
|
|
(18
|
)
|
|
|
1,056
|
|
|
|
(19
|
)
|
Total other, net
|
|
$
|
547
|
|
|
$
|
252
|
|
|
$
|
2,191
|
|
|
$
|
913
|
|
Included within miscellaneous for the six months ended August 31, 2019 are the proceeds from a key man life insurance policy in the amount of $1,000 related to a former employee of Klipsch Group, Inc. that Voxx became the beneficiary of in conjunction with the acquisition of Klipsch in Fiscal 2012. At the time of acquisition, the individual was no longer employed by Klipsch and was never an employee of Voxx; however, Voxx has remained the beneficiary of the policy until the individual’s death.
The Company has a subsidiary in Venezuela. Venezuela has experienced significant political and civil unrest, as well as economic instability for several years, 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. The Company accounts for its Venezuela subsidiary as hyper-inflationary 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. On August 20, 2018, the government devalued the Bolivar Fuerte in an attempt to address continuing hyperinflation, also renaming it the Sovereign Bolivar. As of August 31, 2019, the DICOM rate for the Sovereign Bolivar was approximately 20,460 bolivars to the U.S. dollar compared to 61 at August 31, 2018. Total net currency exchange losses for Venezuela of ($2) were recorded for the three and six months ended August 31, 2019, respectively,
21
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
as compared to ($2) and ($5) for the three and six months ended August 31, 2018, respectively, and are included in Other income (expense) on the Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income.
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 three and six months ended August 31, 2018. The non-cash impairment charge is included in Other Income (Expense) on the Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income.
On March 1, 2019, ASU No. 2016-02, "Leases (Topic 842)," was adopted by the Company using the modified retrospective approach. The Company adopted the package of practical expedients that allows companies to not reassess historical conclusions related to contracts that contain leases, existing lease classification, and initial direct costs. It did not adopt the hindsight practical expedient. Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities, which totaled $2,227 and $2,243, respectively, on March 1, 2019. The standard did not materially affect the Company's consolidated financial position, results of operations, or cash flows, and did not have an impact on the Company's debt-covenant compliance. The new guidance was applied to all operating and capital leases at the date of initial application. Leases historically referred to as capital leases are now referred to as finance leases under the new guidance.
We determine whether an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration. Control of an underlying asset is conveyed if we obtain the rights to direct the use of, and to obtain substantially all of the economic benefit from, the use of the underlying asset. Some of our leases include both lease and non-lease components which are accounted for as a single lease component, as we have elected the practical expedient in ASU 842-10-15-37. Some of our operating lease agreements include variable lease costs, including taxes, common area maintenance or increases in rental costs related to inflation. Such variable payments, other than those dependent upon a market index or rate, are expensed when the obligation for those payments is incurred. Lease expense is recorded in operating expenses in the Consolidated Statement of Operations and Comprehensive (Loss) Income. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leases with an initial term of 12 months or less which do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise are considered short term leases and are not recorded on the balance sheet. The Company had no short term leases during the three and six months ended August 31, 2019.
Right-of-use assets and lease liabilities are recognized at each lease’s commencement date based on the preset value of its lease payments over its respective lease term. When a borrowing rate is not explicitly available for a lease, our incremental borrowing rate is used based on information available at the lease’s commencement date to determine the present value of its lease payments. Operating lease payments are recognized on a straight-line basis over the lease term.
We have operating leases for office equipment, as well as offices, warehouses, and other facilities used for our operations. We also have finance leases comprised primarily of computer hardware and machinery and equipment. Our leases have remaining lease terms of less than 1 year to 7 years, some of which include renewal options. We consider these renewal options in determining the lease term used to establish our right-of-use assets and lease liabilities when it is determined that it is reasonably certain that the renewal option will be exercised.
22
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The components of lease cost for the three and six months ended August 31, 2019 were as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
August 31, 2019
|
|
|
August 31, 2019
|
|
Operating lease cost (a) (c)
|
|
$
|
233
|
|
|
$
|
459
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of right of use assets (a)
|
|
|
117
|
|
|
|
349
|
|
Interest on lease liabilities (b)
|
|
|
12
|
|
|
|
24
|
|
Total finance lease cost
|
|
$
|
129
|
|
|
$
|
373
|
|
|
(a)
|
Recorded within Selling, General and administrative, Engineering and technical support, and Cost of sales on the Consolidated Statement of Operations and Comprehensive (Loss) Income.
|
|
(b)
|
Recorded within Interest and bank charges on the Consolidated Statement of Operations and Comprehensive (Loss) Income.
|
|
(c)
|
Includes immaterial amounts related to variable rent expense.
|
Supplemental cash flow information related to leases is as follows:
|
|
Six months ended
|
|
|
|
August 31, 2019
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Right of use assets obtained in exchange for operating lease obligations
|
|
$
|
534
|
|
Right of use assets obtained in exchange for finance lease obligations
|
|
|
1,024
|
|
Upon the adoption of ASC 842:
|
|
|
|
|
Right of use assets recorded in exchange for operating lease obligations
|
|
$
|
2,227
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
434
|
|
Operating cash flows from finance leases
|
|
24
|
|
Finance cash flows from finance leases
|
|
310
|
|
23
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Supplemental balance sheet information related to leases is as follows:
|
|
August 31, 2019
|
|
Operating Leases
|
|
|
|
|
Operating lease, right of use assets
|
|
$
|
2,301
|
|
Total operating lease right of use assets
|
|
$
|
2,301
|
|
Accrued expenses and other current liabilities
|
|
$
|
560
|
|
Operating lease liabilities, less current portion
|
|
|
1,762
|
|
Total operating lease liabilities
|
|
$
|
2,322
|
|
Finance Leases
|
|
|
|
|
Property, plant and equipment, gross
|
|
$
|
2,918
|
|
Accumulated depreciation
|
|
|
(1,130
|
)
|
Total finance lease right of use assets
|
|
$
|
1,788
|
|
Accrued expenses and other current liabilities
|
|
$
|
672
|
|
Finance lease liabilities, less current portion
|
|
|
974
|
|
Total finance lease liabilities
|
|
$
|
1,646
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
4.5 years
|
|
Finance leases
|
|
3.9 years
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
6.24
|
%
|
Finance leases
|
|
|
3.87
|
%
|
At August 31, 2019, maturities of lease liabilities for each of the succeeding years were as follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2020
|
|
$
|
684
|
|
|
|
711
|
|
2021
|
|
|
670
|
|
|
|
525
|
|
2022
|
|
|
547
|
|
|
|
318
|
|
2023
|
|
|
273
|
|
|
|
158
|
|
2024
|
|
|
228
|
|
|
|
—
|
|
Thereafter
|
|
|
271
|
|
|
|
—
|
|
Total lease payments
|
|
|
2,673
|
|
|
|
1,712
|
|
Less imputed interest
|
|
|
351
|
|
|
|
66
|
|
Total
|
|
$
|
2,322
|
|
|
|
1,646
|
|
As of August 31, 2019, the Company has not entered into any lease agreements that have not yet commenced.
At February 28, 2019, the Company was obligated under non-cancelable operating leases for equipment, as well as warehouse and office facilities for minimum annual rental payments, for each of the succeeding years, as follows:
|
|
Operating Leases
|
|
2019
|
|
$
|
946
|
|
2020
|
|
|
604
|
|
2021
|
|
|
391
|
|
2022
|
|
|
154
|
|
2023
|
|
|
10
|
|
Thereafter
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
2,105
|
|
24
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Company owns and occupies buildings as part of its operations. Certain space within these buildings may, from time to time, be leased to third parties from which the Company earns rental income as lessor. This leased space is recorded within property, plant and equipment and was not material to the Company's Consolidated Balance Sheet at August 31, 2019. Rental income earned by the Company for the three and six months ended August 31, 2019 was $142 and $284, respectively, which is recorded within Other income (expense).
The Company's capital structure is as follows:
|
|
|
|
|
|
Shares Authorized
|
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
Security
|
|
Par
Value
|
|
|
August 31, 2019
|
|
|
February 28, 2019
|
|
|
August 31, 2019
|
|
|
February 28, 2019
|
|
|
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
|
|
|
|
21,929,788
|
|
|
|
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
|
|
|
|
2,376,406
|
|
|
|
2,168,094
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
In April 2019, the Company was authorized by the Board of Directors to increase the number of Class A Common Stock available for repurchase in the open market to 3,000,000. During the three and six months ended August 31, 2019, the Company repurchased 208,312 shares for an aggregate cost of $983. At August 31, 2019, the Company's remaining authorized share repurchase for its Class A Common Stock was 2,791,688 shares.
(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 - Consolidation, 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. The Company issued EyeLock LLC a promissory note for the purposes of repaying protective advances and funding working capital requirements of the entity. On August 21, 2019, this promissory note was amended and restated to allow EyeLock LLC to borrow up to $55,000. Through March 1, 2019, interest on the outstanding principal of the loan accrued at 10%. From March 1, 2019 forward, interest will accrue at 2.5%. The amended and restated promissory note is due on August 31, 2020. 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:
|
•
|
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 $49,996 as of August 31, 2019.
|
25
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 August 31, 2019 and February 28, 2019:
|
|
August 31,
2019
|
|
|
February 28,
2019
|
|
Assets
|
|
(unaudited)
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
81
|
|
|
$
|
3
|
|
Accounts receivable, net
|
|
|
183
|
|
|
|
363
|
|
Inventory, net
|
|
|
303
|
|
|
|
(27
|
)
|
Receivables from vendors
|
|
|
16
|
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
242
|
|
|
|
322
|
|
Total current assets
|
|
|
825
|
|
|
|
661
|
|
Property, plant and equipment, net
|
|
|
90
|
|
|
|
120
|
|
Intangible assets, net
|
|
|
31,533
|
|
|
|
33,064
|
|
Other assets
|
|
|
166
|
|
|
|
253
|
|
Total assets
|
|
$
|
32,614
|
|
|
$
|
34,098
|
|
Liabilities and Partners' Deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
350
|
|
|
$
|
1,122
|
|
Interest payable to VOXX
|
|
|
9,337
|
|
|
|
8,729
|
|
Accrued expenses and other current liabilities
|
|
|
864
|
|
|
|
1,030
|
|
Due to VOXX
|
|
|
49,996
|
|
|
|
44,937
|
|
Total current liabilities
|
|
|
60,547
|
|
|
|
55,818
|
|
Other long-term liabilities
|
|
|
1,200
|
|
|
|
1,200
|
|
Total liabilities
|
|
|
61,747
|
|
|
|
57,018
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Partners' deficit:
|
|
|
|
|
|
|
|
|
Capital
|
|
|
41,416
|
|
|
|
41,416
|
|
Retained losses
|
|
|
(70,549
|
)
|
|
|
(64,336
|
)
|
Total partners' deficit
|
|
|
(29,133
|
)
|
|
|
(22,920
|
)
|
Total liabilities and partners' deficit
|
|
$
|
32,614
|
|
|
$
|
34,098
|
|
26
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 (Loss) Income for the three and six months ended August 31, 2019, respectively:
|
|
For the three months
ended August 31,
|
|
|
For the six months
ended August 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
253
|
|
|
$
|
93
|
|
|
$
|
274
|
|
|
$
|
216
|
|
Cost of sales
|
|
|
343
|
|
|
|
26
|
|
|
|
414
|
|
|
|
36
|
|
Gross profit
|
|
|
(90
|
)
|
|
|
67
|
|
|
|
(140
|
)
|
|
|
180
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
161
|
|
|
|
296
|
|
|
|
362
|
|
|
|
624
|
|
General and administrative
|
|
|
1,157
|
|
|
|
1,317
|
|
|
|
2,377
|
|
|
|
2,543
|
|
Engineering and technical support
|
|
|
1,354
|
|
|
|
1,828
|
|
|
|
2,719
|
|
|
|
3,618
|
|
Total operating expenses
|
|
|
2,672
|
|
|
|
3,441
|
|
|
|
5,458
|
|
|
|
6,785
|
|
Operating loss
|
|
|
(2,762
|
)
|
|
|
(3,374
|
)
|
|
|
(5,598
|
)
|
|
|
(6,605
|
)
|
Interest and bank charges
|
|
|
(315
|
)
|
|
|
(982
|
)
|
|
|
(615
|
)
|
|
|
(1,887
|
)
|
Loss before income taxes
|
|
|
(3,077
|
)
|
|
|
(4,356
|
)
|
|
|
(6,213
|
)
|
|
|
(8,492
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(3,077
|
)
|
|
$
|
(4,356
|
)
|
|
$
|
(6,213
|
)
|
|
$
|
(8,492
|
)
|
Effective March 1, 2019, the Company revised its reportable segments as a result of efforts made by management to re-align businesses, streamline operations, and better leverage resources. To reflect management's revised perspective, the Company now classifies its operations in the following three reportable segments: Automotive Electronics, Consumer Electronics, and Biometrics. The Consumer Electronics segment is comprised of the Company's former Consumer Accessories and Premium Audio segments, with the exception of EyeLock LLC. The Biometrics segment consists of the Company's majority owned subsidiary, EyeLock LLC, which was previously included in the Consumer Accessories segment. This new segment has been created in order to provide greater visibility regarding the operational and financial performance of EyeLock LLC and of the Company as a whole. The Company’s Automotive Electronics segment has remained unchanged. The Company operates in these three distinct segments based upon our products and our internal organizational structure. The three operating segments are also the Company's reportable segments. Prior year segment amounts have been reclassified to conform to the current presentation.
Our Automotive Electronics segment designs, manufactures, markets and distributes 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 Consumer Electronics segment designs, manufactures, markets and distributes home theater systems, high-end loudspeakers, outdoor speakers, business music systems, cinema speakers, flat panel speakers, wireless and Bluetooth speakers, soundbars, headphones, DLNA (Digital Living Network Alliance) compatible devices, remote controls, karaoke products, personal sound amplifiers, infant/nursery products, activity tracking bands, smart-home security and safety products, as well as A/V connectivity, portable/home charging, reception, and digital consumer products.
Our Biometrics segment designs, manufactures, markets and distributes iris identification and biometric security related 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.
27
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Segment data for each of the Company's segments is presented below:
|
|
Automotive
Electronics
|
|
|
Consumer
Electronics
|
|
|
Biometrics
|
|
|
Corporate/
Eliminations
|
|
|
Total
|
|
Three Months Ended August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
26,845
|
|
|
$
|
63,034
|
|
|
$
|
254
|
|
|
$
|
113
|
|
|
$
|
90,246
|
|
Equity in income of equity investees
|
|
|
1,265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,265
|
|
Interest expense and bank charges
|
|
|
118
|
|
|
|
2,469
|
|
|
|
313
|
|
|
|
(2,013
|
)
|
|
|
887
|
|
Depreciation and amortization expense
|
|
|
193
|
|
|
|
1,122
|
|
|
|
784
|
|
|
|
1,196
|
|
|
|
3,295
|
|
Income (loss) before income taxes
|
|
|
316
|
|
|
|
(1,067
|
)
|
|
|
(3,042
|
)
|
|
|
(2,256
|
)
|
|
|
(6,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
40,006
|
|
|
$
|
68,328
|
|
|
$
|
184
|
|
|
$
|
349
|
|
|
$
|
108,867
|
|
Equity in income of equity investees
|
|
|
1,637
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,637
|
|
Interest expense and bank charges
|
|
|
239
|
|
|
|
2,722
|
|
|
|
982
|
|
|
|
(2,826
|
)
|
|
|
1,117
|
|
Depreciation and amortization expense
|
|
|
224
|
|
|
|
1,157
|
|
|
|
792
|
|
|
|
790
|
|
|
|
2,963
|
|
Income (loss) before income taxes (a)
|
|
|
1,010
|
|
|
|
(10,432
|
)
|
|
|
(4,335
|
)
|
|
|
(407
|
)
|
|
|
(14,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
56,487
|
|
|
$
|
126,687
|
|
|
$
|
260
|
|
|
$
|
266
|
|
|
$
|
183,700
|
|
Equity in income of equity investees
|
|
|
2,705
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,705
|
|
Interest expense and bank charges
|
|
|
217
|
|
|
|
4,867
|
|
|
|
615
|
|
|
|
(3,815
|
)
|
|
|
1,884
|
|
Depreciation and amortization expense
|
|
|
380
|
|
|
|
2,263
|
|
|
|
1,569
|
|
|
|
2,375
|
|
|
|
6,587
|
|
Income (loss) before income taxes
|
|
|
777
|
|
|
|
(607
|
)
|
|
|
(6,022
|
)
|
|
|
(5,214
|
)
|
|
|
(11,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
79,652
|
|
|
$
|
129,232
|
|
|
$
|
412
|
|
|
$
|
426
|
|
|
$
|
209,722
|
|
Equity in income of equity investees
|
|
|
3,451
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,451
|
|
Interest expense and bank charges
|
|
|
484
|
|
|
|
5,398
|
|
|
|
1,887
|
|
|
|
(5,552
|
)
|
|
|
2,217
|
|
Depreciation and amortization expense
|
|
|
463
|
|
|
|
2,314
|
|
|
|
1,584
|
|
|
|
1,564
|
|
|
|
5,925
|
|
Income (loss) before income taxes (a)
|
|
|
5,524
|
|
|
|
(12,131
|
)
|
|
|
(8,458
|
)
|
|
|
(2,764
|
)
|
|
|
(17,829
|
)
|
|
(a)
|
Included in Income (loss) before taxes for the three and six months ended August 31, 2018 are intangible asset impairment charges totaling $9,814 ($9,654 within the Consume Electronics segment and $160 within the Automotive Electronics segment) (see Note 10), as well as the impairment charge of $3,473 related to investment properties in Venezuela within the Automotive Electronics segment (see Note 18).
|
(23)
|
Revenue from Contracts 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 Consolidated Balance Sheet. Therefore, while we made adjustments to certain opening balances on our March 1, 2018 Consolidated Balance Sheet, we made no adjustment to opening Retained Earnings. The impact of the adoption of ASC Topic 606 has not had a material effect on our net income; however, adoption did increase the level of disclosures concerning our net sales.
Revenue from Contracts with Customers
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)
28
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 August 31, 2019 or August 31, 2018. Within our Automotive Electronics 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 consumer electronic, automotive electronic, and biometric products. Our consumer electronics products primarily consist of finished goods sold to retail and consumer customers, consisting of premium audio products and other consumer electronic products. Our automotive electronic products are sold both to OEM and aftermarket customers. Our biometrics products are primarily sold to commercial customers. 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 six months ended August 31, 2019. 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 Consolidated Balance Sheets. 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
29
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are presented within Accrued sales incentives on the Consolidated Balance Sheets. 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.
Under ASC Topic 606, we are required to present a refund liability and a return asset within the Consolidated Balance Sheets. 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 (Loss) Income. As of August 31, 2019 and February 28, 2019, the balance of the return asset was $1,121 and $1,962, respectively, and the balance of the refund liability was $2,990 and $4,415, respectively, and are presented within Prepaid expenses and other current assets and Accrued expenses and other current liabilities, respectively, on the Consolidated Balance Sheets.
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 asset or contract liability balances at August 31, 2019 or February 28, 2019.
Disaggregation of Revenue
The Company operates in three reportable segments: Automotive Electronics, Consumer Electronics, and Biometrics. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales are disaggregated by segment and product type for the three and six months ended August 31, 2019 and 2018:
|
|
Three months ended
August 31,
|
|
|
Six months ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Automotive Electronics Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OEM Products
|
|
$
|
11,810
|
|
|
$
|
23,225
|
|
|
$
|
26,763
|
|
|
$
|
46,310
|
|
Aftermarket Products
|
|
|
15,035
|
|
|
|
16,781
|
|
|
|
29,724
|
|
|
|
33,342
|
|
Total Automotive Segment
|
|
|
26,845
|
|
|
|
40,006
|
|
|
|
56,487
|
|
|
|
79,652
|
|
Consumer Electronics Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Audio Products
|
|
|
38,108
|
|
|
|
39,652
|
|
|
|
74,806
|
|
|
|
72,041
|
|
Other Consumer Electronic Products
|
|
|
24,926
|
|
|
|
28,676
|
|
|
|
51,881
|
|
|
|
57,191
|
|
Total Consumer Electronics Segment
|
|
|
63,034
|
|
|
|
68,328
|
|
|
|
126,687
|
|
|
|
129,232
|
|
Biometrics Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biometric Products
|
|
|
254
|
|
|
|
184
|
|
|
|
260
|
|
|
|
412
|
|
Total Biometrics Segment
|
|
|
254
|
|
|
|
184
|
|
|
|
260
|
|
|
|
412
|
|
Corporate/Eliminations
|
|
|
113
|
|
|
|
349
|
|
|
|
266
|
|
|
|
426
|
|
Total Net Sales
|
|
$
|
90,246
|
|
|
$
|
108,867
|
|
|
$
|
183,700
|
|
|
$
|
209,722
|
|
30
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Company is currently, and has in the past, been a party to various routine legal proceedings incident to the ordinary course of business. If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for. The Company does not believe that any of its current outstanding litigation matters will have a material adverse effect on the Company's financial statements, individually, or in the aggregate.
The products the Company sells are continually changing as a result of improved technology. As a result, although the Company and its suppliers attempt to avoid infringing known proprietary rights, the Company may be subject to legal proceedings and claims for alleged infringement by patent, trademark or other intellectual property owners. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require the Company to either enter into royalty or license agreements that are not advantageous to the Company, or pay material amounts of damages.
(25)
|
New Accounting Pronouncements
|
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendments to the guidance, ASU 2018-19 in November 2018, ASU 2019-04 in April 2019, and ASU 2019-05 in May 2019. The standard 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. ASU 2019-04 clarifies that equity instruments without readily determinable fair values for which an entity has elected the measurement alternative should be remeasured to fair value as of the date that an observable transaction occurred. ASU 2019-05 provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. 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 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
31
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 2018-17 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 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.
In July 2019, the FASB issued ASU No. 2019-07, “Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update).” ASU 2019-07 clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations, thereby eliminating redundancies and making the codification easier to apply. This ASU is effective upon issuance and did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
Pulheim Property
On September 30, 2019, the Company, through its subsidiary Voxx German Holdings GmbH (the “Seller”), completed a transaction to sell its real property in Pulheim, Germany to CLM S.A. RL (“the Purchaser”). Net proceeds received from the transaction were approximately $9,700 after transactional costs and repayment of the outstanding mortgage, which was $2,114 on September 30, 2019. At closing, the Seller entered into a business rent agreement (“lease”) with the Purchaser for a portion of the real property to continue to operate the combined Magnat/Klipsch sales office in Germany.
Voxx German Accessories Holdings GmbH
On September 30, 2019, HF Company (“HF”) notified VOXX International Corporation (the “Company”) that it was rescinding the Stock Purchase Agreement (the “Agreement”) entered into on June 7, 2019 for the Company’s subsidiary, Voxx German Accessories Holdings GmbH (“VGAH”) as a result of the non-fulfillment of certain conditions precedent to closing, including HF Company’s inability to obtain financing for the transaction purchase price. The rescission of the Agreement also caused the rescission of an option with respect to VGAH’s real property in Langenzenn, which had granted HF the right to purchase the property subject to certain contingencies.
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