Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
(1)
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of VOXX International Corporation and Subsidiaries ("Voxx" or the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America and include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year or any interim period. These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto contained in the Company's Form 10-K for the fiscal year ended
February 28, 2017
. The Company's financial statements for the prior periods presented herein have been recast to reflect a certain business that was classified as discontinued operations during the second quarter of Fiscal 2018. See Note 2 for additional information. Net income (loss) per share amounts for continuing and discontinued operations are computed independently. As a result, the sum of the per share amounts may not equal the total.
We operate in
three
reportable segments, Automotive, Premium Audio and Consumer Accessories. See Note 21 for the Company's segment reporting disclosures.
(2)
Acquisitions and Dispositions
Rosen Electronics LLC
On April 18, 2017, Voxx acquired certain assets and assumed certain liabilities of Rosen Electronics LLC. As consideration for the Rosen net asset purchase, the Company paid
$1,814
. In addition, the Company agreed to pay a
2%
fee related to future net sales of Rosen products for three years.
Rosen's results of operations have been included in the consolidated financial statements from the date of acquisition. The purpose of this acquisition was to increase the Company's market share and strengthen its intellectual property related to the rear seat entertainment market.
The following summarizes the preliminary allocation of the purchase price for the fair value of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
Assets acquired:
|
|
Inventory
|
$
|
1,590
|
|
Goodwill
|
734
|
|
Intangible assets including trademarks and customer relationships
|
520
|
|
Total assets acquired
|
$
|
2,844
|
|
|
|
Liabilities assumed:
|
|
Warranty accrual
|
$
|
500
|
|
Other liabilities acquired
|
530
|
|
Total
|
$
|
1,030
|
|
Total purchase price
|
$
|
1,814
|
|
Hirschmann Car Communication GmbH
On August 31, 2017 (the "Closing Date"), the Company completed its sale of Hirschmann Car Communication GmbH and its subsidiaries (collectively, “Hirschmann”) to a subsidiary of TE Connectivity Ltd ("TE"). The consideration received by the Company was €
148,500
. The purchase price, at the exchange rate as of the close of business on the Closing Date approximated
$177,000
, and is subject to adjustment based upon the final working capital. VOXX International (Germany) GmbH, the Company's German wholly-owned subsidiary, was the selling entity in this transaction.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Hirschmann subsidiary group, which was included within the Automotive segment, qualified to be presented as a discontinued operation in accordance with ASC 205-20 beginning in the Company's second quarter ending August 31, 2017. Voxx will not have any continuing involvement in the Hirschmann business subsequent to the Closing Date.
In order to hedge the fluctuation in the exchange rate before closing, the Company entered into forward contracts totaling
€148,500
, which could be settled on dates ranging from August 31, 2017 through September 6, 2017. As the sale of Hirschmann closed on August 31, 2017, the Company settled all of the forward contracts on this date. The forward contracts were not designated for hedging and a total foreign currency loss of
$(6,618)
was recorded when the contracts were settled, within continuing operations for the nine months ended
November 30, 2017
.
The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operation to the amounts presented separately in the Company's Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
February 28, 2017
|
Cash and cash equivalents
|
|
$
|
6,844
|
|
Accounts receivable, net
|
|
10,670
|
|
Inventory, net
|
|
30,701
|
|
Receivables from vendors
|
|
31
|
|
Prepaid expenses and other current assets
|
|
7,261
|
|
Assets held for sale, current
|
|
$
|
55,507
|
|
Property, plant and equipment, net
|
|
16,012
|
|
Goodwill
|
|
49,307
|
|
Intangible assets, net
|
|
21,350
|
|
Assets held for sale, non-current
|
|
$
|
86,669
|
|
Accounts payable
|
|
14,899
|
|
Accrued expenses and other current liabilities
|
|
10,366
|
|
Income taxes payable
|
|
2,374
|
|
Current portion of long-term debt
|
|
1,002
|
|
Liabilities held for sale, current
|
|
$
|
28,641
|
|
Capital lease obligation
|
|
474
|
|
Deferred compensation
|
|
380
|
|
Deferred income tax liabilities
|
|
2,528
|
|
Other long-term liabilities
|
|
8,259
|
|
Liabilities held for sale, non-current
|
|
$
|
11,641
|
|
Net assets held for sale
|
|
$
|
101,894
|
|
The following table presents a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net income from discontinued operations, net of tax, presented separately in the Consolidated Statements of Operations and Comprehensive Income (Loss):
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
—
|
|
|
$
|
41,526
|
|
|
$
|
91,824
|
|
|
$
|
124,018
|
|
Cost of sales
|
|
—
|
|
|
26,961
|
|
|
63,610
|
|
|
81,275
|
|
Gross profit
|
|
—
|
|
|
14,565
|
|
|
28,214
|
|
|
42,743
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
—
|
|
|
1,340
|
|
|
2,778
|
|
|
3,813
|
|
General and administrative
|
|
12
|
|
|
7,141
|
|
|
14,688
|
|
|
20,967
|
|
Engineering and technical support
|
|
—
|
|
|
4,007
|
|
|
7,920
|
|
|
14,122
|
|
Total operating expenses
|
|
12
|
|
|
12,488
|
|
|
25,386
|
|
|
38,902
|
|
Operating (loss) income of discontinued operations
|
|
(12
|
)
|
|
2,077
|
|
|
2,828
|
|
|
3,841
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest and bank charges (a)
|
|
—
|
|
|
(95
|
)
|
|
(279
|
)
|
|
(366
|
)
|
Other, net
|
|
7
|
|
|
(19
|
)
|
|
145
|
|
|
(92
|
)
|
Total other income (expense) of discontinued operations, net
|
|
7
|
|
|
(114
|
)
|
|
(134
|
)
|
|
(458
|
)
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations before taxes
|
|
—
|
|
|
—
|
|
|
36,118
|
|
|
—
|
|
Total (loss) income from discontinued operations before taxes
|
|
(5
|
)
|
|
1,963
|
|
|
38,812
|
|
|
3,383
|
|
Income tax expense (benefit) on discontinued operations (b)
|
|
363
|
|
|
(320
|
)
|
|
6,470
|
|
|
2,966
|
|
(Loss) income from discontinued operations, net of taxes
|
|
$
|
(368
|
)
|
|
$
|
2,283
|
|
|
$
|
32,342
|
|
|
$
|
417
|
|
(Loss) income per share - basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.09
|
|
|
$
|
1.34
|
|
|
$
|
0.02
|
|
(Loss) income per share - diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.09
|
|
|
$
|
1.34
|
|
|
$
|
0.02
|
|
(a) Includes an allocation of consolidated interest expense and interest expense directly related to debt assumed by the buyer. The allocation of consolidated interest expense was based upon the ratio of net assets of the discontinued operations to that of the Consolidated Company.
(b) The income tax expense on discontinued operations for the
three and nine months ended
November 30, 2017
was positively impacted by an income tax benefit related to the partial reversal of the Company’s valuation allowance as the Company utilized a significant portion of its tax attributes to offset the U.S. tax gain related to the sale of Hirschmann.
The following table presents supplemental cash flow information of the discontinued operations:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
2,939
|
|
|
$
|
4,506
|
|
Stock-based compensation expense
|
|
50
|
|
|
60
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
Capital expenditures
|
|
$
|
2,652
|
|
|
$
|
4,130
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Capital expenditures funded by long-term obligations
|
|
$
|
1,916
|
|
|
$
|
—
|
|
(3)
Net Income (Loss) Per Common Share
Basic net income (loss) per common share from continuing operations, net of non-controlling interest, is based upon the weighted-average common shares outstanding during the period. Diluted net income (loss) per common share from continuing operations, net of non-controlling interest reflects the potential dilution that would occur if common stock equivalent securities or other contracts to issue common stock were exercised or converted into common stock.
There are
no
reconciling items which impact the numerator of basic and diluted net income (loss) per common share. A reconciliation between the denominator of basic and diluted net income (loss) per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted-average common shares outstanding
|
|
24,238,493
|
|
|
24,160,324
|
|
|
24,222,973
|
|
|
24,160,324
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, warrants and restricted stock
|
|
259,651
|
|
|
127,107
|
|
|
—
|
|
|
77,033
|
|
Weighted-average common shares and potential common shares outstanding
|
|
24,498,144
|
|
|
24,287,431
|
|
|
24,222,973
|
|
|
24,237,357
|
|
Restricted stock, stock options and warrants totaling
55,918
and
121,250
for the
three months ended
November 30, 2017
and
2016
, respectively, and
545,102
and
252,067
for the
nine months ended
November 30, 2017
and
2016
, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these stock options and warrants was greater than the average market price of the Company’s common stock during these periods, or the inclusion of these components would have been anti-dilutive.
(4)
Fair Value Measurements and Derivatives
The Company applies the authoritative guidance on “Fair Value Measurements," which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. This guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.
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 assets measured at fair value on a recurring basis at
November 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
37,514
|
|
|
$
|
37,514
|
|
|
$
|
—
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
(633
|
)
|
|
$
|
—
|
|
|
$
|
(633
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
4,043
|
|
|
$
|
4,043
|
|
|
$
|
—
|
|
Available-for-sale securities
|
—
|
|
|
—
|
|
|
—
|
|
Other investments at cost (a)
|
4,997
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
9,040
|
|
|
$
|
4,043
|
|
|
$
|
—
|
|
The following table presents assets measured at fair value on a recurring basis at
February 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
956
|
|
|
$
|
956
|
|
|
$
|
—
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
345
|
|
|
$
|
—
|
|
|
$
|
345
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
4,094
|
|
|
$
|
4,094
|
|
|
$
|
—
|
|
Available-for-sale securities
|
6
|
|
|
6
|
|
|
—
|
|
Other investments at cost (a)
|
6,288
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
10,388
|
|
|
$
|
4,100
|
|
|
$
|
—
|
|
|
|
(a)
|
Included in this balance are investments in two non-controlled corporations accounted for at cost (see Note 5). The fair values of these investments would be based upon Level 3 inputs. At
November 30, 2017
and
February 28, 2017
, it is not practicable to estimate the fair values of these items.
|
The carrying amount of the Company's accounts receivable, short-term debt, accounts payable, accrued expenses, bank obligations and long-term debt approximates fair value because of (i) the short-term nature of the financial instrument; (ii) the interest rate on the financial instrument being reset every quarter to reflect current market rates, 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
-
15 months
and are classified in the balance sheet according to their terms. The Company also has an interest rate swap agreement as of
November 30, 2017
that hedges interest rate exposure related to the forecasted outstanding balance of its Florida Mortgage, with monthly payments due through March 2026. The swap agreement locks the interest rate on the debt at
3.48%
(inclusive of credit spread) through the maturity date of the loan. During the first quarter of Fiscal 2017, the Company unwound an interest rate swap agreement that hedged interest rate exposure related to one of its mortgage notes when that mortgage was paid in full. The fair value of that interest
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
rate swap agreement on the date it was unwound was
$(114)
, and was charged to interest expense in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) during the
nine months ended
November 30, 2016
. Interest rate swap agreements qualifying for hedge accounting are designated as cash flow hedges and valued based on a comparison of the change in fair value of the actual swap contracts designated as the hedging instruments and the change in fair value of a hypothetical swap contract (Level 2). We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Interest rate swaps are classified in the balance sheet as either assets or liabilities based on the fair value of the instruments at the end of the period.
It is the Company's policy to enter into derivative instrument contracts with terms that coincide with the underlying exposure being hedged. As such, the Company's derivative instruments are expected to be highly effective. Hedge ineffectiveness, if any, is recognized as incurred through Other Income (Expense) in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) and amounted to
$46
and
$(49)
for the
three and nine months ended
November 30, 2017
, respectively, and
$166
and
$146
for the
three and nine months ended
November 30, 2016
, respectively.
Financial Statement Classification
The following table discloses the fair value as of
November 30, 2017
and
February 28, 2017
of derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets and Liabilities
|
|
|
|
|
Fair Value
|
|
|
Account
|
|
November 30, 2017
|
|
February 28, 2017
|
Designated derivative instruments
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
643
|
|
|
|
Accrued expenses and other current liabilities
|
|
(414
|
)
|
|
—
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other long-term liabilities
|
|
(219
|
)
|
|
(298
|
)
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
(633
|
)
|
|
$
|
345
|
|
In connection with the sale of Hirschmann on August 31, 2017 (see Note 2), the Company entered into forward contracts totaling
€148,500
, which could be settled on dates ranging from August 31, 2017 through September 6, 2017. As the sale of Hirschmann closed on August 31, 2017, the Company settled all of the forward contracts on this date. The forward contracts were not designated for hedging and a total foreign currency loss of
$(6,618)
was recorded when the contracts were settled, within continuing operations, for the nine months ended
November 30, 2017
.
Cash flow hedges
During Fiscal 2017 and Fiscal 2018, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of
$14,500
and are designated as cash flow hedges at
November 30, 2017
. The current outstanding notional value of the Company's interest rate swap at
November 30, 2017
is
$8,738
. For cash flow hedges, the effective portion of the gain or loss is reported as a component of Other Comprehensive Income (Loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
Activity related to cash flow hedges pertaining to continuing operations recorded during the
three and nine months ended
November 30, 2017
and
2016
was as follows:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
November 30, 2017
|
|
November 30, 2017
|
|
Pretax Gain(Loss) Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
Gain (Loss)for Ineffectiveness in Other Income
|
|
Pretax Gain (Loss) Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
Gain (Loss) for Ineffectiveness in Other Income
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
(103
|
)
|
|
$
|
(218
|
)
|
|
$
|
46
|
|
|
$
|
(1,369
|
)
|
|
$
|
99
|
|
|
$
|
(49
|
)
|
Interest rate swaps
|
148
|
|
|
—
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
November 30, 2016
|
|
November 30, 2016
|
|
Pretax Gain(Loss) Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
Gain (Loss)for Ineffectiveness in Other Income
|
|
Pretax Gain (Loss) Recognized in Other Comprehensive Income
|
|
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
|
|
Gain (Loss) for Ineffectiveness in Other Income
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
911
|
|
|
$
|
85
|
|
|
$
|
166
|
|
|
$
|
1,663
|
|
|
$
|
343
|
|
|
$
|
146
|
|
Interest rate swaps
|
313
|
|
|
—
|
|
|
—
|
|
|
386
|
|
|
(114
|
)
|
|
—
|
|
The net income (loss) recognized in Other Comprehensive Income (Loss) for foreign currency contracts is expected to be recognized in cost of sales within the next
eighteen months
. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of
November 30, 2017
,
no
foreign currency contracts originally designated for hedge accounting were de-designated or terminated. Refer to Note 6 for information regarding activity related to cash flow hedges pertaining to discontinued operations.
(5)
Investment Securities
As of
November 30, 2017
, and
February 28, 2017
, the Company had the following investments:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
February 28, 2017
|
|
Cost
Basis
|
|
Unrealized
Holding
Gain/(Loss)
|
|
Fair
Value
|
|
Cost
Basis
|
|
Unrealized
Holding
Gain/(Loss)
|
|
Fair
Value
|
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation
|
$
|
4,043
|
|
|
$
|
—
|
|
|
$
|
4,043
|
|
|
$
|
4,094
|
|
|
$
|
—
|
|
|
$
|
4,094
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cellstar
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
Total Marketable Securities
|
4,043
|
|
|
—
|
|
|
4,043
|
|
|
4,094
|
|
|
6
|
|
|
4,100
|
|
Other Long-Term Investments
|
4,997
|
|
|
—
|
|
|
4,997
|
|
|
6,288
|
|
|
—
|
|
|
6,288
|
|
Total Investment Securities
|
$
|
9,040
|
|
|
$
|
—
|
|
|
$
|
9,040
|
|
|
$
|
10,382
|
|
|
$
|
6
|
|
|
$
|
10,388
|
|
Long-Term Investments
Trading Securities
The Company’s trading securities consist of mutual funds, which are held in connection with the Company’s deferred compensation plan. Unrealized holding gains and losses on trading securities are offset by changes in the corresponding deferred compensation liability.
Available-For-Sale Securities
The Company’s available-for-sale marketable securities include a less than
20%
equity ownership in CLST Holdings, Inc. (“Cellstar").
Unrealized holding gains and losses, net of the related tax effect (if applicable), on available-for-sale securities are reported as a component of Accumulated Other Comprehensive Income (Loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis and reported in Other Income (Expense).
A decline in the market value of any available-for-sale security below cost that is deemed other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.
No
other-than-temporary losses were incurred by the Company during the
three and nine months ended
November 30, 2017
or
2016
.
Other Long-Term Investments
Other long-term investments include investments in two non-controlled corporations accounted for by the cost method. As of
November 30, 2017
, the Company's investments in 360fly, Inc. totaled
$4,453
and we held
5.0%
of the outstanding shares of this company. The Company did not make additional investments in 360fly, Inc. during the
three and nine months ended
November 30, 2017
. During the second and third quarters of Fiscal 2018, the Company issued senior secured notes to 360fly, Inc. totaling
$3,000
. These notes bear interest at
8%
and are due on August 31, 2019.
On
July 31, 2017
, RxNetworks, a Canadian company in which Voxx held a cost method investment consisting of shares of the investee's preferred stock, was sold to a third party. In consideration for its holdings in RxNetworks on July 31, 2017, Voxx received cash, as well as a proportionate share of the value (consisting of preferred stock) in a newly formed subsidiary of RxNetworks, called Fathom Systems Inc. ("Fathom"). As a result of this transaction, Voxx recognized a gain of
$1,416
for the
nine months ended
November 30, 2017
. The cash proceeds were subject to a hold-back provision, which was not included in the calculation of the gain recognized. As of
November 30, 2017
, the Company's investment
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
in Fathom is being accounted for by the cost method and totaled
$544
and we held
8.2%
of the outstanding shares of this company. Voxx's total cost method investment balance for 360fly, Inc. and Fathom was
$4,997
as of
November 30, 2017
.
(6)
Accumulated Other Comprehensive (Loss) Income
The Company’s accumulated other comprehensive (losses) income consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Gains (Losses)
|
|
Unrealized gains (losses) on investments, net of tax
|
|
Pension plan adjustments, net of tax
|
|
Derivatives designated in a hedging relationship, net of tax
|
|
Total
|
Balance at February 28, 2017
|
|
$
|
(41,831
|
)
|
|
$
|
(98
|
)
|
|
$
|
(2,282
|
)
|
|
$
|
313
|
|
|
$
|
(43,898
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
16,930
|
|
|
(15
|
)
|
|
(267
|
)
|
|
(1,347
|
)
|
|
15,301
|
|
Reclassified from accumulated other comprehensive income (loss)
|
|
10,739
|
|
|
89
|
|
|
1,955
|
|
|
387
|
|
|
13,170
|
|
Net current-period other comprehensive income (loss)
|
|
27,669
|
|
|
74
|
|
|
1,688
|
|
|
(960
|
)
|
|
28,471
|
|
Balance at November 30, 2017
|
|
$
|
(14,162
|
)
|
|
$
|
(24
|
)
|
|
$
|
(594
|
)
|
|
$
|
(647
|
)
|
|
$
|
(15,427
|
)
|
In the above table, all reclassifications of other comprehensive income (loss) for the
nine months ended
November 30, 2017
for foreign currency translation, investments and pension plan adjustments are related to the sale of Hirschmann on August 31, 2017 (see Note 2). Within reclassifications for derivatives designated in a hedging relationship, gains totaling
$71
are related to cash flow hedge activity of discontinued operations for the
nine months ended
November 30, 2017
, and
$384
is related to the sale of Hirschmann on August 31, 2017. Within other comprehensive income (loss) before reclassifications for derivatives designated in a hedging relationship,
$(501)
is related to cash flow hedge activity of discontinued operations for the
nine months ended
November 30, 2017
.
During the
three and nine months ended
November 30, 2017
, the Company recorded tax expense (benefit) related to derivatives designated in a hedging relationship of
$36
and
$(667)
, respectively, unrealized losses on investments of
$0
and pension plan adjustments of
$0
.
The other comprehensive income (loss) before reclassification of
$16,930
includes the remeasurement of intercompany transactions of a long-term nature of
$12,131
with certain subsidiaries whose functional currency is not the U.S. dollar, and
$4,799
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. Foreign currency translation gains (losses) reclassified from accumulated other comprehensive income (loss) of
$10,739
include
$9,911
due to the settlement of a euro based loan and the recognition of the cumulative translation adjustment of
$828
due to the sale of Hirschmann.
(7)
Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated statements of cash flows, including continuing and discontinued operations:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2016
|
Non-cash investing and financing activities:
|
|
|
|
|
Capital expenditures funded by long-term obligations
|
|
$
|
1,993
|
|
|
$
|
—
|
|
Mortgage settlement funded by long-term obligations
|
|
—
|
|
|
5,590
|
|
Deferred financing costs funded by long-term obligations
|
|
—
|
|
|
1,779
|
|
Cash paid during the period:
|
|
|
|
|
Interest (excluding bank charges)
|
|
$
|
2,675
|
|
|
$
|
3,321
|
|
Income taxes (net of refunds)
|
|
2,359
|
|
|
3,610
|
|
See Note 2 for additional supplemental cash flow information pertaining to discontinued operations.
(8)
Accounting for Stock-Based Compensation
The Company has various stock-based compensation plans, which are more fully described in Note 1 of the Company’s Form 10-K for the fiscal year ended
February 28, 2017
.
Information regarding the Company's stock options and warrants is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
Outstanding at February 28, 2017
|
|
116,250
|
|
|
$
|
7.76
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
Exercised
|
|
38,750
|
|
|
7.76
|
|
|
|
Forfeited/expired
|
|
77,500
|
|
|
7.76
|
|
|
|
Outstanding and exercisable at November 30, 2017
|
|
—
|
|
|
$
|
—
|
|
|
0.00
|
A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are subject to forfeiture if employment terminates for a reason other than death, disability or retirement, prior to the release of the restrictions. The Company has a Supplemental Executive Retirement Plan (SERP), which was established in Fiscal 2014. Shares are granted based on certain performance criteria and vest on the later of three years from the date of grant (or three years from the date of participation in the SERP with respect to grants made when the plan was established in Fiscal 2014), or the grantee reaching the age of 65 years. The shares will also vest upon termination of the grantee's employment by the Company without cause, provided that the grantee, at the time of termination, has been employed by the Company for at least 10 years, 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 2017, the Company granted
74,156
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 during July 2017 was
$6.52
.
In conjunction with the sale of Hirschmann on August 31, 2017 (see Note 2), all restricted shares granted to the CEO and President of Hirschmann, totaling
72,300
shares became immediately vested in accordance with the SERP and were settled in cash in the amount of
$582
. The remaining unrecognized stock-based compensation expense related to this
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
individual's restricted stock awards was recognized as a reduction of the gain on sale of discontinued operations in the amount of
$373
.
The following table presents a summary of the Company's restricted stock activity for the
nine months ended
November 30, 2017
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Balance at February 28, 2017
|
437,443
|
|
$
|
6.99
|
|
Granted
|
74,156
|
|
|
6.52
|
|
Vested and settled
|
72,300
|
|
|
5.98
|
|
Forfeited
|
—
|
|
|
—
|
|
Balance at November 30, 2017
|
439,299
|
|
|
$
|
7.08
|
|
Vested and unissued at November 30, 2017
|
56,181
|
|
|
$
|
13.62
|
|
During the
three and nine months ended
November 30, 2017
, the Company recorded
$146
and
$396
in stock-based compensation related to restricted stock awards for continuing operations, respectively. As of
November 30, 2017
, there was
$1,007
of unrecognized stock-based compensation expense related to unvested restricted stock awards.
(9)
Supply Chain Financing
The Company has supply chain financing agreements and factoring agreements that were entered into for the purpose of accelerating receivable collection and better managing cash flow. The balances under the agreements are sold without recourse and are accounted for as sales of accounts receivable. Total receivable balances sold for the
three and nine months ended
November 30, 2017
, net of discounts, were
$46,309
and
$110,024
, respectively, compared to
$45,411
and
$105,410
for the
three and nine months ended
November 30, 2016
, respectively.
(10)
Research and Development
Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to
$2,340
and
$8,526
for the
three and nine months ended
November 30, 2017
, respectively, compared to
$3,193
and
$9,745
for the
three and nine months ended
November 30, 2016
, respectively, net of customer reimbursements, and are included in continuing operations within Engineering and Technical Support Expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
(11)
Goodwill and Intangible Assets
The change in goodwill pertaining to continuing operations by segment is as follows:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
Automotive:
|
Amount
|
Beginning balance at March 1, 2017
|
$
|
7,372
|
|
Goodwill acquired (see Note2)
|
734
|
|
Balance at November 30, 2017
|
$
|
8,106
|
|
|
|
Gross carrying amount at November 30, 2017
|
$
|
8,106
|
|
Accumulated impairment charge
|
—
|
|
Net carrying amount at November 30, 2017
|
$
|
8,106
|
|
|
|
Premium Audio:
|
|
Beginning balance at March 1, 2017
|
$
|
46,533
|
|
Activity during the period
|
—
|
|
Balance at November 30, 2017
|
$
|
46,533
|
|
|
|
Gross carrying amount at November 30, 2017
|
$
|
78,696
|
|
Accumulated impairment charge
|
(32,163
|
)
|
Net carrying amount at November 30, 2017
|
$
|
46,533
|
|
|
|
Total Goodwill, net
|
$
|
54,639
|
|
Note: The Company's Consumer Accessories segment did not carry a goodwill balance at
November 30, 2017
or
February 28, 2017
.
At
November 30, 2017
, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
50,054
|
|
|
$
|
25,764
|
|
|
$
|
24,290
|
|
Trademarks/Tradenames
|
|
415
|
|
|
398
|
|
|
17
|
|
Developed technology
|
|
31,290
|
|
|
6,122
|
|
|
25,168
|
|
Patents
|
|
2,814
|
|
|
2,088
|
|
|
726
|
|
License
|
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contract
|
|
2,141
|
|
|
1,820
|
|
|
321
|
|
Total finite-lived intangible assets
|
|
$
|
88,114
|
|
|
$
|
37,592
|
|
|
50,522
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
101,181
|
|
Total net intangible assets
|
|
|
|
|
|
$
|
151,703
|
|
At
February 28, 2017
, intangible assets consisted of the following:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
49,005
|
|
|
$
|
22,615
|
|
|
$
|
26,390
|
|
Trademarks/Tradenames
|
|
415
|
|
|
395
|
|
|
20
|
|
Developed technology
|
|
31,290
|
|
|
4,081
|
|
|
27,209
|
|
Patents
|
|
2,755
|
|
|
1,930
|
|
|
825
|
|
License
|
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contract
|
|
2,141
|
|
|
1,732
|
|
|
409
|
|
Total finite-lived intangible assets
|
|
$
|
87,006
|
|
|
$
|
32,153
|
|
|
54,853
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
100,086
|
|
Total net intangible assets
|
|
|
|
|
|
$
|
154,939
|
|
The Company recorded amortization expense for continuing operations of
$1,612
and
$4,867
, respectively for the
three and nine months ended
November 30, 2017
, and
$1,618
and
$4,858
for the
three and nine months ended
November 30, 2016
, respectively. The estimated aggregate amortization expense for continuing operations for all amortizable intangibles for
November 30
of each of the succeeding years is as follows:
|
|
|
|
|
|
Year
|
|
Amount
|
2018
|
|
$
|
6,379
|
|
2019
|
|
6,311
|
|
2020
|
|
6,217
|
|
2021
|
|
5,985
|
|
2022
|
|
5,831
|
|
(12)
Equity Investment
As of
November 30, 2017
and
February 28, 2017
, the Company had a
50%
non-controlling ownership interest in ASA Electronics, LLC and Subsidiary (“ASA") which acts as a distributor of mobile electronics specifically designed for niche 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.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
2017
|
|
February 28,
2017
|
Current assets
|
|
$
|
44,575
|
|
|
$
|
43,643
|
|
Non-current assets
|
|
6,809
|
|
|
6,207
|
|
Current liabilities
|
|
6,552
|
|
|
5,998
|
|
Members' equity
|
|
44,832
|
|
|
43,852
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
72,434
|
|
|
$
|
70,982
|
|
Gross profit
|
|
24,397
|
|
|
22,936
|
|
Operating income
|
|
11,359
|
|
|
10,527
|
|
Net income
|
|
11,467
|
|
|
10,567
|
|
The Company's share of income from ASA was
$2,004
and
$5,734
, respectively, for the
three and nine months ended
November 30, 2017
and
$1,931
and
$5,284
for the
three and nine months ended
November 30, 2016
, respectively.
(13)
Income Taxes
For the
nine months ended
November 30, 2017
, the Company recorded an income tax benefit from continuing operations of
$4,531
, which includes a discrete income tax benefit of
$1,244
related primarily to the reduction of unrecognized tax benefits resulting from a lapse of the applicable statute of limitations. The income tax benefit relates primarily to foreign taxes offset by an income tax benefit for domestic losses incurred during Fiscal 2018, as the U.S. taxable income from discontinued operations is treated as a source of income under the intra-period allocation guidance. For the
nine months ended
November 30, 2016
, the Company recorded an income tax benefit from continuing operations of
$3,184
, which includes a discrete income tax provision of
$264
related to the accrual of interest for unrecognized tax benefits.
The effective tax rates for the
nine months ended
November 30, 2017
and
November 30, 2016
were an income tax benefit from continuing operations of
23.1%
and
70.6%
, respectively. The effective tax rate for the
nine months ended
November 30, 2017
differs from the U.S. statutory rate of
35%
primarily due to the ability to provide an income tax benefit for domestic losses, as the U.S. taxable income from discontinued operations is treated as a source of income under the intra-period allocation guidance, coupled with the mix of domestic and foreign earnings, the non-controlling interest related to EyeLock LLC, and an income tax benefit related to various federal tax credits.
For the
three months ended
November 30, 2017
, the Company recorded an income tax benefit from continuing operations of
$568
, which includes a discrete income tax benefit of
$1,309
primarily related to the reduction of unrecognized tax benefits resulting from a lapse of the applicable statute of limitations. For the
three months ended
November 30, 2016
, the Company recorded an income tax provision from continuing operations of
$3,756
, which includes a discrete income tax provision of
$98
related to the accrual of interest for unrecognized tax benefits.
The effective tax rates for the
three months ended
November 30, 2017
and
November 30, 2016
were an income tax benefit from continuing operations of
8.2%
and an income tax provision of
69.8%
, respectively. The effective tax rate for the
three months ended
November 30, 2017
differs from the U.S. statutory rate of
35%
primarily due to the ability to provide an income tax benefit for domestic losses as the U.S. taxable income from discontinued operations is treated as a source of income under the intra-period allocation guidance, coupled with the mix of domestic and foreign earnings, the non-controlling interest related to EyeLock LLC, and an income tax benefit related to various federal tax credits.
At
November 30, 2017
, the Company had an uncertain tax position liability from continuing operations of
$1,798
, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local and foreign tax issues.
(14)
Inventory
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Inventories by major category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
2017
|
|
February 28,
2017
|
Raw materials
|
|
$
|
28,410
|
|
|
$
|
20,488
|
|
Work in process
|
|
2,808
|
|
|
2,270
|
|
Finished goods
|
|
94,171
|
|
|
99,594
|
|
Inventory, net
|
|
$
|
125,389
|
|
|
$
|
122,352
|
|
(15)
Financing Arrangements
The Company has the following financing arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
2017
|
|
February 28,
2017
|
Debt
|
|
|
|
|
Domestic credit facility (a)
|
|
$
|
—
|
|
|
$
|
92,793
|
|
Florida mortgage (b)
|
|
8,738
|
|
|
9,113
|
|
Euro asset-based lending obligation (c)
|
|
6,092
|
|
|
3,905
|
|
Schwaiger mortgage (d)
|
|
524
|
|
|
644
|
|
Klipsch note (e)
|
|
—
|
|
|
113
|
|
Voxx Germany mortgage (f)
|
|
3,768
|
|
|
3,875
|
|
Total debt
|
|
19,122
|
|
|
110,443
|
|
Less: current portion of long-term debt
|
|
7,675
|
|
|
9,215
|
|
Long-term debt
|
|
11,447
|
|
|
101,228
|
|
Debt issuance costs
|
|
2,864
|
|
|
3,481
|
|
Total long-term debt, net of debt issuance costs
|
|
$
|
8,583
|
|
|
$
|
97,747
|
|
(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 15(b)). In conjunction with the sale of Hirschmann on August 31, 2017 (see Note 2), the Company paid down substantially all of the outstanding balance of the revolving credit facility, as well as the entire outstanding balance of the term loan. As of
November 30, 2017
,
$0
was outstanding under the revolving credit facility. The remaining availability under the revolving credit line of the Credit Facility was
$99,097
as of
November 30, 2017
.
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.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Generally, the Company may designate specific borrowings under the Credit Facility as either Base Rate Loans or LIBOR Rate Loans, except that swingline loans may only be designated as Base Rate Loans. Loans designated as LIBOR Rate Loans bear interest at a rate equal to the then applicable LIBOR rate plus a range of
1.75
-
2.25%
. Loans designated as Base Rate loans bear interest at a rate equal to the applicable margin for Base Rate Loans of
0.75
-
1.25%
as defined in the agreement. As of
November 30, 2017
, the weighted average interest rate on the facility was
5.50%
.
The Credit Facility requires compliance with a financial covenant calculated as of the last day of each month, consisting of a Fixed Charge Coverage Ratio. The Credit Facility also contains covenants that limit the ability of the loan parties and certain of their subsidiaries which are not loan parties to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or dispose of a substantial portion of their business; (iv) transfer or dispose of assets; (v) change their name, organizational identification number, state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any change of control; (ix) make any Restricted Junior Payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transaction with an affiliate of any borrower or any of their subsidiaries; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the Credit Facility were to fall below certain specified levels, as defined in the agreement, the lenders would have the right to assume dominion and control over the Company's cash. As of
November 30, 2017
, the Company was in compliance with all debt covenants, including cash dominion.
The obligations under the loan documents are secured by a general lien on and security interest in substantially all of the assets of the borrowers and certain of the guarantors, including accounts receivable, equipment, real estate, general intangibles and inventory. The Company has guaranteed the obligations of the borrowers under the Credit Agreement.
Charges incurred on the unused portion of the Credit Facility during the
three and nine months ended
November 30, 2017
totaled
$123
and
$241
, respectively, compared to
$62
and
$184
during the
three and nine months ended
November 30, 2016
, respectively. These charges are included within Interest and Bank Charges on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company has deferred financing costs related to the Credit Facility and a previous amendment and modification of the Credit Facility. These deferred financing costs are included in Long-term debt on the accompanying Consolidated Balance Sheets as a contra-liability balance, and are amortized through Interest and bank charges in the Consolidated Statements of Operations and Comprehensive Income (Loss) over the five-year term of the Credit Facility. During the
three and nine months ended
November 30, 2017
, the Company amortized
$198
and
$593
of these costs, respectively, compared to
$198
and
$591
for the
three and nine months ended
November 30, 2016
, respectively. The net unamortized balance of these deferred financing costs as of
November 30, 2017
was
$2,608
.
(b)
Florida Mortgage
On July 6, 2015, VOXX HQ LLC, the Company’s wholly owned subsidiary, closed on a
$9,995
industrial development revenue tax exempt bond under a loan agreement in favor of the Orange County Industrial Development Authority (the “Authority”) to finance the construction of the Company's manufacturing facility and executive offices in Lake Nona, Florida. Wells Fargo Bank, N.A. ("Wells Fargo") was the purchaser of the bond and U.S. Bank National Association is the trustee under an Indenture of Trust with the Authority. Voxx borrowed the proceeds of the bond purchase from the Authority during construction as a revolving loan, which converted to a permanent mortgage upon completion of the facility in January 2016 (the "Florida Mortgage"). The Company makes principal and interest payments to Wells Fargo, which began March 1, 2016 and will continue through March of 2026. The Florida Mortgage bears interest at
70%
of 1-month LIBOR plus
1.54%
(
2.44%
at
November 30, 2017
) and is secured by a first mortgage on the property, a collateral assignment of leases and rents and a guaranty by the Company. The financial covenants of the Florida Mortgage are as defined in the Company’s Credit Facility with Wells Fargo dated April 26, 2016.
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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 Consolidated Statements of Operations and Comprehensive Income (Loss) over the ten-year term of the Florida Mortgage. The Company amortized
$7
and
$23
of these costs during both of the
three and nine months ended
November 30, 2017
and 2016, respectively.
On July 20, 2015, the Company entered into an interest rate swap agreement in order to hedge interest rate exposure related to the Florida Mortgage and pays a fixed rate of
3.48%
under the swap agreement (See Note 4).
(c)
Euro Asset-Based Lending Obligation
Foreign bank obligations include a Euro accounts receivable factoring arrangement, which has a credit limit of up to
60%
of eligible non-factored accounts receivable (see Note 9), and a Euro Asset-Based Lending ("ABL") credit facility, which has a credit limit of
€8,000
and expires on
July 31, 2020
for the Company's subsidiary, VOXX Germany. The rate of interest for the factoring arrangement is the three-month Euribor plus
1.6%
(
1.27%
at
November 30, 2017
) and the rate of interest for the ABL is the three-month Euribor plus
2.3%
(
1.97%
at
November 30, 2017
). As of
November 30, 2017
, the amounts outstanding under these credit facilities, which are payable on demand, do not exceed their respective credit limits.
(d)
Schwaiger Mortgage
In January 2012, the Company's Schwaiger subsidiary purchased a building, entering into a mortgage note payable. The mortgage note bears interest at
3.75%
and will be fully paid by December 2019.
(e)
Klipsch Note
This balance represents a mortgage on a facility included in the assets acquired in connection with the Klipsch acquisition on March 1, 2011 and assumed by Voxx. The remaining balance of this note was paid in full during the third quarter of Fiscal 2018.
(f)
Voxx Germany Mortgage
This balance represents a mortgage on the land and building housing Voxx Germany's headquarters in Pulheim, Germany, which was entered into in January 2013. The mortgage bears interest at
2.85%
, payable in twenty-six quarterly installments through June 2019.
(16)
Other Income (Expense)
Other income (expense) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency (loss) gain
|
|
$
|
(77
|
)
|
|
$
|
314
|
|
|
$
|
(8,296
|
)
|
|
$
|
(459
|
)
|
Interest income
|
|
51
|
|
|
22
|
|
|
82
|
|
|
122
|
|
Rental income
|
|
140
|
|
|
149
|
|
|
415
|
|
|
498
|
|
Miscellaneous
|
|
363
|
|
|
(364
|
)
|
|
27
|
|
|
(297
|
)
|
Total other, net
|
|
$
|
477
|
|
|
$
|
121
|
|
|
$
|
(7,772
|
)
|
|
$
|
(136
|
)
|
Included within the foreign currency loss for the
nine months ended
November 30, 2017
is a loss on forward contracts totaling
$(6,618)
incurred in conjunction with the sale of Hirschmann (see Note 2).
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(17)
Foreign Currency
The Company has a subsidiary in Venezuela. Venezuela is currently experiencing significant political and civil unrest and economic instability and has implemented various foreign currency and price controls. The country has also experienced high rates of inflation over the last several years. The President of Venezuela has the authority to legislate certain areas by decree, which allows the government to nationalize certain industries or expropriate certain companies and property. These factors have had a negative impact on our business and our financial condition. In 2003, Venezuela created the Commission of Administration of Foreign Currency ("CADIVI") which establishes and administers currency controls and their associated rules and regulations. These controls include creating a fixed exchange rate between the Bolivar Fuerte and the U.S. Dollar, and the ability to restrict the exchange of Bolivar Fuertes for U.S. Dollars and vice versa. On March 1, 2010, the Company transitioned to hyper-inflationary accounting for Venezuela in accordance with the guidelines in ASC 830, "Foreign Currency." A hyper-inflationary economy designation occurs when a country has experienced cumulative inflation of approximately 100 percent or more over a 3-year period. The hyper-inflationary designation requires the local subsidiary in Venezuela to record all transactions as if they were denominated in U.S. dollars.
Since January 2014, the Venezuelan government has created multiple alternative exchange rates designated to be used for the purchase of goods and services deemed non-essential. In February 2015, the Venezuelan government introduced a new currency system, referred to as the Marginal Currency System, or SIMADI rate. This market-based exchange system consisted of a mechanism from which both businesses and individuals were allowed to purchase and sell foreign currency at the price set by the market. In March 2016, the Venezuelan government enacted further changes to its foreign currency exchange mechanisms, including a devaluation of the official government exchange rate (DIPRO) from
6.3
bolivars to
10.0
bolivars to the U.S. dollar. Additionally, the SIMADI exchange rate was replaced by the DICOM, a new floating exchange rate for non-essential imports. The Venezuelan government reported that the DICOM exchange rate would be allowed to float to meet market needs. As of
November 30, 2017
, the DICOM rate continues to be the appropriate rate to use for remeasuring its Venezuelan subsidiary’s financial statements. In May 2017, the Venezuelan government significantly devalued this currency further and as of
November 30, 2017
, the DICOM rate offered was
3,345
bolivars to the U.S. dollar, respectively. Total net currency exchange gains (losses) for Venezuela of
$(1)
and
$(106)
were recorded for the
three and nine months ended
November 30, 2017
, respectively, as compared to
$(2)
and
$63
, respectively, for the
three and nine months ended
November 30, 2016
, and are included in Other Income (Expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Our investment in Venezuela mainly consists of
$3,576
of properties that are currently being held for investment purposes. No impairments were recorded related to these properties during the
three and nine months ended
November 30, 2017
. The Company continues to monitor closely the continued economic instability, increasing inflation and currency restrictions imposed by the government and will continue to evaluate its local properties. Further devaluations or regulatory actions could impair the carrying value of these properties.
(18)
Lease Obligations
At
November 30, 2017
, the Company was obligated under non-cancelable operating leases for equipment, as well as warehouse and office facilities for minimum annual rental payments for continuing operations, as follows:
|
|
|
|
|
|
Operating
Leases
|
2018
|
$
|
1,336
|
|
2019
|
663
|
|
2020
|
298
|
|
2021
|
257
|
|
2022
|
199
|
|
Thereafter
|
387
|
|
Total minimum lease payments
|
$
|
3,140
|
|
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Company has capital leases with a total lease liability of
$1,081
at
November 30, 2017
. These leases have maturities through Fiscal 2021.
(19)
Capital Structure
The Company's capital structure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Outstanding
|
|
|
|
|
Security
|
|
Par
Value
|
|
November 30,
2017
|
|
February 28,
2017
|
|
November 30,
2017
|
|
February 28,
2017
|
|
Voting
Rights per
Share
|
|
Liquidation
Rights
|
Preferred Stock
|
|
$
|
50.00
|
|
|
50,000
|
|
|
50,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$50 per share
|
Series Preferred Stock
|
|
$
|
0.01
|
|
|
1,500,000
|
|
|
1,500,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Class A Common Stock
|
|
$
|
0.01
|
|
|
60,000,000
|
|
|
60,000,000
|
|
|
21,938,100
|
|
|
21,899,370
|
|
|
1
|
|
Ratably with Class B
|
Class B Common Stock
|
|
$
|
0.01
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
2,260,954
|
|
|
2,260,954
|
|
|
10
|
|
Ratably with Class A
|
Treasury Stock at cost
|
|
at cost
|
|
|
2,168,094
|
|
|
2,168,074
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
(20)
Variable Interest Entities
A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:
•
the power to direct the activities that most significantly impact the economic performance of the VIE; and
•
the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.
On September 1, 2015, Voxx acquired a majority voting interest in substantially all of the assets and certain specified liabilities of EyeLock, Inc. and EyeLock Corporation, a market leader of iris-based identity authentication solutions, through a newly-formed entity, EyeLock LLC. In connection with the acquisition, the Company entered into a Loan Agreement with EyeLock LLC. The terms of the Loan Agreement allowed EyeLock LLC to borrow up to
$12,000
, at an interest rate of
10%
. During Fiscal 2017, and during the three and nine months ended November 30, 2017, the Company issued four convertible promissory notes to EyeLock LLC, allowing the entity to borrow up to a total of
$21,000
in additional funds. The outstanding principal balance of these promissory notes are convertible at the sole option of Voxx into units of EyeLock LLC. The convertible promissory notes bear interest at
10%
and can be used only for working capital purposes related to new business opportunities. If Voxx chooses not to convert into equity, the outstanding loan principal will be repaid at a multiple ranging from
1.35
to
1.50
based on the repayment date. Amounts outstanding under the initial loan agreement are due on February 28, 2018, while the four convertible promissory notes executed during Fiscal 2017 and Fiscal 2018 are due on dates ranging from February 28, 2018 through September 1, 2018. All four agreements include customary events of default and are collateralized by all of the property of EyeLock LLC.
We determined that we hold a variable interest in EyeLock LLC as a result of:
•
our majority voting interest and ownership of substantially all of the assets and certain liabilities of the entity; and
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
•
the loan agreements with EyeLock LLC, executed in conjunction with the acquisition, as well as during Fiscal 2017 and Fiscal 2018. The total outstanding balance of these loans as of
November 30, 2017
was
$30,895
.
We concluded that we became the primary beneficiary of EyeLock LLC on September 1, 2015 in conjunction with the acquisition. This was the first date on which we had the power to direct the activities that most significantly impact the economic performance of the entity because we acquired a majority interest in substantially all of the assets and certain liabilities of EyeLock, Inc. and EyeLock Corporation on this date, as well as obtained a majority voting interest as a result of this transaction. Although we are considered to have control over EyeLock LLC under ASC 810, due to our majority ownership interest, the assets of EyeLock LLC can only be used to satisfy the obligations of EyeLock LLC. As a result of our majority ownership interest in the entity and our primary beneficiary conclusion, we consolidated EyeLock LLC within our consolidated financial statements beginning on September 1, 2015.
Assets and Liabilities of EyeLock LLC
The following table sets forth the carrying values of assets and liabilities of EyeLock LLC that were included on our Consolidated Balance Sheets as of
November 30, 2017
and
February 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
February 28, 2017
|
|
Assets
|
|
(
unaudited
)
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
70
|
|
|
$
|
11
|
|
Accounts receivable, net
|
|
103
|
|
|
295
|
|
Inventory, net
|
|
149
|
|
|
135
|
|
Receivables from vendors
|
|
22
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
46
|
|
|
189
|
|
Total current assets
|
|
390
|
|
|
630
|
|
Property, plant and equipment, net
|
|
207
|
|
|
276
|
|
Intangible assets, net
|
|
36,891
|
|
|
39,187
|
|
Other assets
|
|
90
|
|
|
96
|
|
Total assets
|
|
$
|
37,578
|
|
|
$
|
40,189
|
|
Liabilities and Partners' Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
4,376
|
|
|
$
|
710
|
|
Accrued expenses and other current liabilities
|
|
1,837
|
|
|
3,506
|
|
Current portion of debt
|
|
30,895
|
|
|
22,098
|
|
Total current liabilities
|
|
37,108
|
|
|
26,314
|
|
Long-term debt
|
|
—
|
|
|
—
|
|
Other long-term liabilities
|
|
1,200
|
|
|
1,200
|
|
Total liabilities
|
|
38,308
|
|
|
27,514
|
|
Commitments and contingencies
|
|
|
|
|
Partners' equity:
|
|
|
|
|
Capital
|
|
41,415
|
|
|
40,891
|
|
Retained earnings
|
|
(42,145
|
)
|
|
(28,216
|
)
|
Total partners' equity
|
|
(730
|
)
|
|
12,675
|
|
Total liabilities and partners' equity
|
|
$
|
37,578
|
|
|
$
|
40,189
|
|
Revenue and Expenses of EyeLock LLC
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The following table sets forth the revenues and expenses of EyeLock LLC that were included in our Consolidated Statements of Operations for the
three and nine months ended
November 30, 2017
and 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
63
|
|
|
$
|
100
|
|
|
$
|
277
|
|
|
$
|
211
|
|
Cost of sales
|
|
33
|
|
|
37
|
|
|
90
|
|
|
67
|
|
Gross profit
|
|
30
|
|
|
63
|
|
|
187
|
|
|
144
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
281
|
|
|
553
|
|
|
1,636
|
|
|
1,639
|
|
General and administrative
|
|
1,437
|
|
|
1,759
|
|
|
5,114
|
|
|
5,056
|
|
Engineering and technical support
|
|
1,492
|
|
|
2,154
|
|
|
5,310
|
|
|
6,248
|
|
Total operating expenses
|
|
3,210
|
|
|
4,466
|
|
|
12,060
|
|
|
12,943
|
|
Operating loss
|
|
(3,180
|
)
|
|
(4,403
|
)
|
|
(11,873
|
)
|
|
(12,799
|
)
|
Interest and bank charges
|
|
(753
|
)
|
|
(441
|
)
|
|
(2,056
|
)
|
|
(1,092
|
)
|
Loss before income taxes
|
|
(3,933
|
)
|
|
(4,844
|
)
|
|
(13,929
|
)
|
|
(13,891
|
)
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss
|
|
$
|
(3,933
|
)
|
|
$
|
(4,844
|
)
|
|
$
|
(13,929
|
)
|
|
$
|
(13,891
|
)
|
(21)
Segment Reporting
The Company operates in
three
distinct segments based upon our products and our internal organizational structure. The
three
operating segments, which are also the Company's reportable segments, are Automotive, Premium Audio and Consumer Accessories.
Our Automotive segment designs, manufactures, distributes
and markets rear-seat entertainment devices, satellite radio products, automotive security, remote start systems, mobile multimedia devices, aftermarket/OE-styled radios, car link-smartphone telematics applications, collision avoidance systems and location-based services.
Our Premium Audio segment designs, manufactures, distributes
and markets home theater systems, high-end loudspeakers, outdoor speakers, iPad/iPod and computer speakers, business music systems, cinema speakers, flat panel speakers, Bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance) compatible devices.
Our Consumer Accessories segment designs, markets and distributes remote controls; wireless and Bluetooth speakers; karaoke products; action cameras; iris identification and security related products; personal sound amplifiers; infant/nursery products; activity tracking bands; home security and safety products; and A/V connectivity, portable/home charging, reception, and digital consumer products.
The accounting principles applied at the consolidated financial statement level are generally the same as those applied at the operating segment level and there are
no
material intersegment sales. The segments are allocated interest expense, based upon a pre-determined formula, which utilizes a percentage of each operating segment's intercompany balance, which is offset in Corporate/Eliminations.
Segment data for each of the Company's segments are presented below:
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Premium Audio
|
|
Consumer Accessories
|
|
Corporate/ Eliminations
|
|
Total
|
Three Months Ended November 30, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
40,634
|
|
|
$
|
57,386
|
|
|
$
|
58,461
|
|
|
$
|
82
|
|
|
$
|
156,563
|
|
Equity in income of equity investees
|
2,004
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,004
|
|
Interest expense and bank charges
|
336
|
|
|
2,120
|
|
|
1,857
|
|
|
(3,098
|
)
|
|
1,215
|
|
Depreciation and amortization expense
|
216
|
|
|
862
|
|
|
1,159
|
|
|
756
|
|
|
2,993
|
|
Income (loss) before income taxes
|
3,486
|
|
|
6,262
|
|
|
(2,013
|
)
|
|
(826
|
)
|
|
6,909
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
48,817
|
|
|
$
|
56,752
|
|
|
$
|
51,417
|
|
|
$
|
425
|
|
|
$
|
157,411
|
|
Equity in income of equity investees
|
1,931
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,931
|
|
Interest expense and bank charges
|
119
|
|
|
1,398
|
|
|
1,272
|
|
|
(888
|
)
|
|
1,901
|
|
Depreciation and amortization expense
|
314
|
|
|
898
|
|
|
1,191
|
|
|
645
|
|
|
3,048
|
|
Income (loss) before income taxes
|
5,547
|
|
|
6,760
|
|
|
(3,464
|
)
|
|
(3,460
|
)
|
|
5,383
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
110,342
|
|
|
$
|
135,055
|
|
|
$
|
138,976
|
|
|
$
|
483
|
|
|
$
|
384,856
|
|
Equity in income of equity investees
|
5,734
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,734
|
|
Interest expense and bank charges
|
624
|
|
|
6,056
|
|
|
5,303
|
|
|
(7,133
|
)
|
|
4,850
|
|
Depreciation and amortization expense
|
768
|
|
|
2,655
|
|
|
3,496
|
|
|
2,229
|
|
|
9,148
|
|
Income (loss) before income taxes
|
8,910
|
|
|
1,547
|
|
|
(17,412
|
)
|
|
(12,631
|
)
|
|
(19,586
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
127,614
|
|
|
$
|
123,787
|
|
|
$
|
137,374
|
|
|
$
|
861
|
|
|
$
|
389,636
|
|
Equity in income of equity investees
|
5,284
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,284
|
|
Interest expense and bank charges
|
421
|
|
|
3,885
|
|
|
3,444
|
|
|
(2,556
|
)
|
|
5,194
|
|
Depreciation and amortization expense
|
1,002
|
|
|
2,628
|
|
|
3,513
|
|
|
1,989
|
|
|
9,132
|
|
Income (loss) before income taxes
|
11,263
|
|
|
7,459
|
|
|
(13,823
|
)
|
|
(9,406
|
)
|
|
(4,507
|
)
|
(22)
Contingencies
The Company is currently, and has in the past been a party to various routine legal proceedings incident to the ordinary course of business. If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for. The Company does not believe that any of its current outstanding litigation matters will have a material adverse effect on the Company's financial statements, individually, or in the aggregate.
The products the Company sells are continually changing as a result of improved technology. As a result, although the Company and its suppliers attempt to avoid infringing known proprietary rights, the Company may be subject to legal proceedings and claims for alleged infringement by patent, trademark or other intellectual property owners. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require the Company to either enter into royalty or license agreements that are not advantageous to the Company, or pay material amounts of damages.
(23)
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenues from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements comprehensive information about the nature, amounts, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. ASU 2014-09 defines a five-step process to achieve this core principle and in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than are required under existing guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations, among others. The new standard will be effective for the Company beginning March 1, 2018. The FASB issued four subsequent standards in 2016 containing implementation guidance related to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing, and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical expedients as well as technical corrections and improvements.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard using the modified retrospective method effective March 1, 2018.
The Company expects to complete our implementation procedures with respect to the new revenue recognition standard during the fourth quarter of fiscal year 2018. While we continue to assess the impact of the new standard, it should be noted that our revenues are primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer. The timing of revenue recognition for these product sales are not materially impacted by the new standard. However, we are utilizing a comprehensive approach to assess the impact of the guidance on our current contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts, including evaluation of performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts. While certain differences may arise specifically related to variable consideration and consideration payable to a customer, we do not expect these differences to materially impact our consolidated financial statements. In addition, the Company is currently analyzing our internal control over financial reporting framework to determine if controls should be added or modified as a result of adopting this standard, and reviewing the tax impact, if any, the adoption of the new standard may have. We also expect that the adoption of the new standard will result in expanded and disaggregated disclosure requirements.
In January 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities," which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This amendment will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The standard significantly changes how entities will measure credit losses for most
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments," which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact of the future adoption of this standard on its consolidated financial statements.
In November 2016, the FASB issued
ASU No. 2016-18
,
"Statement of Cash Flows (Topic 230)"
to reduce
diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. The revised guidance requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be applied on a retrospective basis beginning with the earliest period presented. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business," with the objective to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The amendments in ASU 2017-01 provide a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen is expected to reduce the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (i) require that to be considered a business, a set of assets and liabilities acquired must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output; and (ii) remove the evaluation of whether a market participant could replace missing elements. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date of ASU 2017-01, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company is currently assessing the impact of the adoption of this pronouncement on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates today's requirement to calculate goodwill impairment
VOXX International Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
using Step 2, which calculates an impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual or any interim goodwill impairments tests in fiscal years beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The new standard requires that an employer disaggregate the service cost component of net benefit cost. Also, these amendments provide guidance on how to present the service cost component and the other components of net benefit costs in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The guidance is effective for fiscal years beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements. The standard provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The new standard is effective for annual periods beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated financial statements.
(24)
Subsequent Event
On December 22, 2017, the Tax Cuts and Jobs Acts was enacted into law. The new tax legislation represents a fundamental and dramatic shift in U.S. taxation. The new legislation contains several key tax provisions that will impact the Company, including the reduction of the corporate income tax rate to
21%
effective January 1, 2018. The new legislation also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. The lower corporate income tax rate will require the Company to remeasure its U.S. deferred tax assets and liabilities as well as reassess the realizability of its deferred tax assets and liabilities. ASC 740 requires the Company to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff has issued SAB 118 which will allow the Company to record provisional amounts during a measurement period which is similar to the measurement period used when accounting for business combinations. The Company will continue to assess the impact of the recently enacted tax law on its business and consolidated financial statements and will reflect the provisional impact of the tax law change in the fourth quarter of Fiscal 2018.