PART I
Item 1-Business
VOXX International Corporation ("Voxx," "We," "Our," "Us," or the "Company") is a leading international manufacturer and distributor in the Automotive, Premium Audio and Consumer Accessories industries. The Company has widely diversified interests, with more than 30 global brands that it has acquired and grown throughout the years, achieving a powerful international corporate image and creating a vehicle for each of these respective brands to emerge with its own identity. We conduct our business through sixteen wholly-owned subsidiaries: Audiovox Atlanta Corp., VOXX Electronics Corporation, VOXX Accessories Corp., VOXX German Holdings GmbH ("Voxx Germany"), Audiovox Canada Limited, Voxx Hong Kong Ltd., Audiovox International Corp., Audiovox Mexico, S. de R.L. de C.V. ("Voxx Mexico"), Code Systems, Inc., Oehlbach Kabel GmbH ("Oehlbach"), Schwaiger GmbH ("Schwaiger"), Invision Automotive Systems, Inc. ("Invision"), Klipsch Holding LLC ("Klipsch"), Omega Research and Development, LLC ("Omega"), Voxx Automotive Corp., and Audiovox Websales LLC, as well as a majority owned subsidiary, EyeLock LLC ("EyeLock"). We market our products under the Audiovox® brand name and other brand names and licensed brands, such as 808®, AR for Her, Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energy®, Heco®, Incaar
™
, Invision®, Jamo®, Jensen®, Klipsch®, Mac Audio
™
, Magnat®, Mirage®, myris®, Oehlbach®, Omega®, Phase Linear®, Prestige®, Project Nursery®, Pursuit®, RCA®, RCA Accessories, Recoton®, Rosen®, Schwaiger®, Terk® and Voxx Automotive as well as private labels through a large domestic and international distribution network. We also function as an OEM ("Original Equipment Manufacturer") supplier to several customers, as well as market a number of products under exclusive distribution agreements, such as SiriusXM satellite radio products and 360 Fly
®
Action Cameras.
VOXX International Corporation was incorporated in Delaware on April 10, 1987 under its former name, Audiovox Corp., as successor to a business founded in 1960 by John J. Shalam, our Chairman and controlling stockholder. Our extensive distribution network and long-standing industry relationships have allowed us to benefit from growing market opportunities and emerging niches in the electronics business.
The Company operates in three segments based upon the Company's products and internal organizational structure. The operating segments consist of the Automotive, Premium Audio and Consumer Accessories segments. The 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. The 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. The Consumer Accessories segment designs, manufactures, markets and distributes remote controls; wireless and Bluetooth speakers; karaoke products; action cameras; iris identification and biometric security related products; personal sound amplifiers; smart-home security and safety products; infant and nursery products; and A/V connectivity, portable/home charging,
reception and digital consumer products. See Note 13 to the Company's Consolidated Financial Statements for segment and geographic area information.
We make available financial information, news releases and other information on our web site at www.voxxintl.com. There is a direct link from the web site to the Securities and Exchange Commission's ("SEC") filings web site, where our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after we file such reports and amendments with, or furnish them to, the SEC. In addition, we have adopted a Code of Business Conduct and Ethics which is available free of charge upon request. Any such request should be directed to the attention of the Company's Human Resources Department, 180 Marcus Boulevard, Hauppauge, New York 11788, (631) 231-7750.
Acquisitions and Dispositions
We have acquired and integrated the following acquisitions, discussed below, into our existing business structure:
Effective September 1, 2015 ("the Closing Date"), Voxx completed its acquisition of a majority voting interest in substantially all of the assets and certain specified liabilities of Eyelock, Inc. and Eyelock Corporation (collectively the “Seller”) through a newly-formed entity, Eyelock LLC, for a total purchase consideration of
$31,880
, which consisted of a cash payment of
$15,504
, assignment of the fair value of the indebtedness owed to the Company by the Seller of
$4,676
and the fair value of the non-controlling interest of
$12,900
, reduced by
$1,200
for amounts owed to the LLC by the selling shareholders. EyeLock develops and markets iris-based identity authentication solutions and this acquisition allows the Company to enter into the growing biometrics market. Refer to Note 2 "Business Acquisitions and Dispositions" of the Notes to Consolidated Financial Statements for additional information regarding the EyeLock acquisition in Fiscal 2016.
On April 18, 2017, Voxx acquired certain assets and assumed certain liabilities of Rosen Electronics LLC for cash consideration of
$1,814
. In addition, the Company agreed to pay a 2% fee related to future net sales of Rosen products for three years. 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. Details of the tangible and intangible assets acquired are outlined in Note 2 of this report. Refer to Note 2 "Business Acquisitions and Dispositions" of the Notes to Consolidated Financial Statements for additional information regarding the Rosen acquisition in Fiscal 2018.
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. 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. Refer to Note 2 "Business Acquisitions and Dispositions" of the Notes to Consolidated Financial Statements for additional information regarding the sale of Hirschmann in Fiscal 2018.
Strategy
Our objective is to grow our business both organically and through strategic acquisitions. We will drive the business organically by continued product development in new and emerging technologies that should increase gross margins and improve operating income. We are focused on expanding sales both domestically and internationally and broadening our customer and partner base as we bring these new products to our target markets. In addition, we plan to continue to acquire synergistic companies that would allow us to leverage our overhead, penetrate new markets and expand existing product categories. Notwithstanding the above, if the appropriate opportunity arises, the Company will explore the potential divestiture of a product line or business.
The key elements of our strategy are as follows:
Continue to build and capitalize on the VOXX family of brands.
We believe the "VOXX" portfolio of brands is one of our greatest strengths and offers us significant opportunity for increased market penetration. Today, VOXX International has over 30 global brands in its portfolio, which provides the Company with the ability to bring to market products under brands that consumers know to be quality. In addition, with such a wide brand portfolio, we can manage channels and sell into multiple outlets as well as leverage relationships with distributors, retailers, aftermarket car dealers and expeditors, and to global OEMs. Finally, we are open to opportunities to license some of the brands as an additional use of the brands and as a growth strategy.
Continue to maintain diversified, blue chip customer base.
Voxx distributes products through a wide range of specialty and mass merchandise channels and has arrangements with tier-1 and tier-2 auto OEMs. OEM products account for approximately
15%
of
Fiscal 2018
sales from continuing operations. The top-five customers of the Company represented
26%
of sales from continuing operations, and no single customer accounted for over 10% of Fiscal
2018
sales.
Capitalize on niche product and distribution opportunities in our target markets.
Throughout our history, we have used our extensive distribution and supply networks to capitalize on niche product and distribution opportunities in the automotive, premium audio and consumer accessories categories. We will continue that focus as we remain committed to innovation, developing products internally and through our outsourced technology and manufacturing partners to provide our customers with products that are in demand by consumers.
Combine new, internal manufacturing capabilities with our proven outsourced manufacturing with industry partners
. For years, VOXX International employed an outsourced manufacturing strategy that enabled the Company to deliver the latest technological advances without the fixed costs associated with manufacturing. Within the last decade, the Company has added manufacturing capabilities to produce select product lines, such as high-end speakers, rear-seat entertainment systems, and security related products. This blend of internal and outsourced manufacturing enables the Company to drive innovation, control product quality and speed time-to-market.
Use innovative technology generation capabilities to enable us to build a robust pipeline of new products.
Voxx has invested significantly in R&D. The Company uses a mix of internal and external R&D, internal and external manufacturing, and has a number of valuable trademarks, copyrights, patents, domain names and other intellectual property. Through Voxx's increased focus on R&D, the Company has built a pipeline of new products across all three segments.
Leverage our domestic and international distribution network.
VOXX International Corporation has a highly expansive distribution network. Our distribution network, which includes various types of retailers and chain stores, mass merchandisers, distributors, e-commerce platforms, system integrators, communication network providers, smart grid manufacturers, banks, cinema operators, cell phone providers, the U.S. military, car dealers and OEM's should allow us to increase our market penetration. We intend to capitalize on new and existing distribution outlets to further grow our business across our three operating segments, both domestically and abroad.
Grow our international presence.
We have expanded our international presence through our local subsidiaries in Europe, as well as operations in Canada and China. We also continue to export from our domestic operations in the United States. Our strategy remains to diversify our exposure to any particular geography, while expanding our product offerings and distribution touch points across the world.
Pursue strategic and complementary acquisitions.
We continue to monitor economic and industry conditions in order to evaluate potential strategic and synergistic business acquisitions that are expected to allow us to leverage overhead, penetrate new markets and expand our existing business distribution. Over the past several years, the Company has employed an M&A strategy to build its brand portfolio and enhance its product offering in higher margin product categories, while at the same time, exiting lower margin and commoditized product lines, resulting in improved bottom-line performance. The Company is focused on continuing to grow organically, but may pursue opportunistic acquisitions to augment our automotive (primarily with OEM accounts), consumer accessories and premium audio segments.
Maintain disciplined acquisition criteria.
Virtually all of our acquisitions over the past decade have been made to strengthen our product offerings, customer reach and growth potential across our operating business segments. Our strategy remains to acquire complimentary businesses, products and/or assets in our Automotive, Premium Audio and Consumer Accessories operating segments. Additionally, acquisitions should have a gross margin structure equal to or higher than our consolidated gross margins, and we will continue to look for acquisitions where we can leverage our corporate overhead and resources. Furthermore, it is important that management remains with Voxx as part of the acquisition, as their legacy expertise, knowledge of both the inner workings of their respective companies and the end-markets they serve are paramount to successfully running operations and achieving growth. We also pursue acquisitions that will be accretive for the Company and its shareholders in the first year such acquisitions are made.
Rapidly integrate acquired businesses.
One of the more compelling factors as to why acquired businesses choose VOXX International Corporation is that we are perceived as both a financial and strategic partner. We are operators, and companies view their association with us as a positive for the future of their businesses in that we can provide resources and support that others in our sector, or in the Private Equity community, cannot. Our strategy upon acquisition, and in the years that follow, is to leverage our corporate strengths and integrate acquisitions into our operations. We provide accounting, MIS, warehouse and logistics support, as well as a host of value-added services that enable acquired companies to lower their cost basis and improve profitability. In recent years, we have consolidated facilities in our German operations and in Indiana, where we brought our RCA® and Klipsch operating groups together.
Improve bottom-line performance and generate sustainable shareholder returns.
The Company has instituted an aggressive strategy in recent years to shift its product mix to higher-margin product categories, while controlling costs and strategically investing in its infrastructure. The Company remains focused on growing its business organically, continuing to enhance its gross profit margins and leveraging its fixed overhead structure to generate sustainable returns for its stockholders.
Industry
We participate in selected product categories in the automotive, premium audio and consumer accessories markets within the electronics industry. These markets are large and diverse, encompass a broad range of products and offer the ability to specialize in niche product groups. The introduction of new products and technological advancements are the major growth drivers in these markets. Based on this, we continue to introduce new products across all segments, with an increased focus on niche product offerings.
Products
The Company currently reports sales data for the following three operating segments:
Automotive products include:
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mobile multi-media video products, including in-dash, overhead and headrest systems,
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autosound products including radios and amplifiers,
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satellite radios including plug and play models and direct connect models,
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smart phone telematics applications,
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automotive security and remote start systems,
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automotive power accessories,
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rear observation and collision avoidance systems, and
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Premium Audio products include:
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architectural speakers,
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business music systems,
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streaming music systems,
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on-ear and in-ear headphones,
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wireless and Bluetooth headphones,
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soundbars and sound bases, and
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DLNA (Digital Living Network Alliance) compatible devices.
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Consumer Accessories products include:
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High-Definition Television ("HDTV") antennas,
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Wireless Fidelity ("WiFi") antennas,
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High-Definition Multimedia Interface ("HDMI") accessories,
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smart-home security and safety-related products,
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home electronic accessories such as cabling,
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other connectivity products,
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performance enhancing electronics,
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flat panel TV mounting systems,
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iPad/iPod specialized products,
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infant/nursery products,
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activity tracking bands,
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power supply systems and charging products,
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electronic equipment cleaning products,
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personal sound amplifiers,
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home and portable stereos,
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digital multi-media products, such as personal video recorders and MP3 products, and
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iris identification and biometric security related products.
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We believe our segments have expanding market opportunities with certain levels of volatility related to domestic and international markets, new car sales, increased competition by manufacturers, private labels, technological advancements, discretionary consumer spending and general economic conditions. Also, all of our products are subject to price fluctuations, which could affect the carrying value of inventories and gross margins in the future.
Net sales from continuing operations, by segment, gross profit and total assets are as follows:
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Fiscal
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Fiscal
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Fiscal
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2018
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2017
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2016
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Automotive
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$
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155,480
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$
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170,729
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$
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201,125
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Premium Audio
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172,406
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166,789
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140,508
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Consumer Accessories
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178,756
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176,216
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187,272
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Corporate/Eliminations
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450
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796
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1,301
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Total net sales
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$
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507,092
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$
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514,530
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$
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530,206
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Gross profit
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$
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132,297
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$
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144,030
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$
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143,536
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Gross margin percentage
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26.1
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%
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28.0
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%
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27.1
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%
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Total assets
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$
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575,644
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$
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668,486
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$
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667,190
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Patents, Trademarks/Tradenames, Licensing and Royalties
The Company regards its trademarks, copyrights, patents, domain names, and similar intellectual property as important to its operations. It relies on trademark, copyright and patent law, domain name regulations, and confidentiality or license agreements to protect its proprietary rights. The Company has registered, or applied for the registration of, a number of patents, trademarks, domain names and copyrights by U.S. and foreign governmental authorities. Additionally, the Company has filed U.S. and international patent applications covering certain of its proprietary technology. The Company renews its registrations, which vary in duration, as it deems appropriate from time to time.
The Company has licensed in the past, and expects that it may license in the future, certain of its proprietary rights to third parties. Some of the Company's products are designed to include intellectual property licensed or otherwise obtained from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of the Company's products, the Company believes, based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms; however, there is no guarantee such licenses could be obtained at all. We intend to operate in a way that does not result in willful infringement of the patents, trade secrets and other intellectual property rights of other parties. Nevertheless, there can be no assurance that a claim of infringement will not be asserted against us or that any such assertion will not result in a judgment or order requiring us to obtain a license in order to make, use, or sell our products.
License and royalty programs offered to our manufacturers, customers and other electronic suppliers are structured using a fixed amount per unit or a percentage of net sales, depending on the terms of the agreement. Current license and royalty agreements have duration periods which range from 1 to 12 years or continue in perpetuity. Certain agreements may be renewed at termination
of the agreement. The Company's license and royalty income is recorded upon sale and amounted to
$1,538
,
$1,669
and
$1,463
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
Distribution and Marketing
We sell our products to:
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premium department stores,
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specialty and internet retailers,
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independent 12-volt retailers,
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automotive and vehicle manufacturers,
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automotive, vehicle and transportation equipment manufacturers (OEM's),
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communication network providers,
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smart grid manufacturers,
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sporting goods equipment retailers,
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public safety sector, and
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private security providers.
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We sell our products under OEM arrangements with domestic and/or international subsidiaries of automobile manufacturers such as Ford, Chrysler, General Motors, Toyota, Kia, Mazda, Subaru and Nissan. These arrangements require a close partnership with the customer as we develop products to meet specific requirements. OEM products accounted for approximately
15%
of net sales from continuing operations for the year ended
February 28, 2018
,
17%
for the year ended
February 28, 2017
, and
19%
for the year ended
February 29, 2016
.
Our five largest customers represented
26%
of net sales from continuing operations for the year ended
February 28, 2018
,
28%
for the year ended
February 28, 2017
, and
29%
for the year ended
February 29, 2016
. No one customer accounted for more than 10% of the Company's sales for the years ended
February 28, 2018
,
February 28, 2017
or
February 29, 2016
.
We also provide value-added management services, which include:
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product design and development,
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engineering and testing,
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sales training and customer packaging,
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in-store display design,
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installation training and technical support,
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product repair services and warranty,
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specialized manufacturing.
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We have flexible shipping policies designed to meet customer needs. In the absence of specific customer instructions, we ship products within 24 to 48 hours from the receipt of an order from public warehouses, as well as owned and leased facilities throughout the United States, Canada, China, Hong Kong, Mexico, the Netherlands, and Germany. The Company also employs a direct ship model from our suppliers for select customers upon their request.
Product Development, Warranty and Customer Service
Our product development cycle includes:
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identifying consumer trends and potential demand,
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responding to those trends through product design and feature integration, which includes software design, electrical engineering, industrial design and pre-production testing. In the case of OEM customers, the product development cycle may also include product validation to customer quality standards, and
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evaluating and testing new products in our own facilities to ensure compliance with our design specifications and standards.
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Utilizing our company-owned and third-party facilities in the United States, Europe and Asia, we work closely with our suppliers throughout the product design, testing and development process in an effort to meet the expectations of consumer demand for technologically-advanced and high quality products. Our Troy, Michigan and Orlando, Florida facilities are ISO/TS 16949:2009, ISO 14001:2004 and/or ISO 9001:2008 certified, which requires the monitoring of quality standards in all facets of business.
We provide product warranties for all of our product lines, which primarily range from 30 days to three years. The Company also provides limited lifetime warranties for certain products, which limit the end-user's remedy to the repair or replacement of the defective product during it's lifetime, as well as warranties for certain vehicle security products for the life of the vehicle for the original owner. To support our warranties, we have independent warranty centers in the United States and Europe. Our customer service group, along with our Company websites, provides product information, answers questions and serves as a technical hotline for installation help for end-users and customers.
Suppliers
We work directly with our suppliers on industrial design, feature sets, product development and testing in order to ensure that our products and component parts meet our design specifications.
We purchase our products and component parts from manufacturers principally located in several Pacific Rim countries, including China, Hong Kong, Indonesia, Malaysia, Thailand, Vietnam, South Korea, Taiwan and Singapore, as well as the United States, Canada, Mexico and Europe. In selecting our manufacturers, we consider quality, price, service, reputation, financial stability, as well as labor practices, disruptions, or shortages. In order to provide coordination and supervision of supplier performance such as price negotiations, delivery and quality control, we maintain buying and inspection offices in China and Hong Kong. We consider relations with our suppliers to be good and alternative sources of supply are generally available within 120 days. We have few long-term contracts with our suppliers and we generally purchase our products under short-term purchase orders. Although we believe that alternative sources of supply are currently available, an unplanned shift to a new supplier could result in product delays and increased cost, which may have a material impact on our operations.
Competition
The electronics industry is highly competitive across all product categories, and we compete with a number of well-established companies that manufacture and sell similar products. Brand name, design, advancement of technology and features as well as price are the major competitive factors within the electronics industry. Our Automotive products compete against factory-supplied products, including those provided by, among others, General Motors, Ford and Chrysler, as well as against major companies in the automotive aftermarket, such as Sony, Panasonic, Kenwood, Directed Electronics, Autopage, Myron and Davis, Phillips, Insignia, and Pioneer. Our Premium Audio products compete against major companies such as Polk, Definitive, Bose, Sonos, Sonance, and Bowers and Wilkins. Our Consumer Accessories product lines compete against major companies such as Sony, Phillips, Emerson Radio, Jasco, Belkin and Private Label Brands.
Financial Information about Foreign and Domestic Operations
The amounts of net sales and long-lived assets, attributable to foreign and domestic operations for all periods presented are set forth in Note 13 of the Notes to Consolidated Financial Statements, included herein.
Equity Investment
We have a 50% non-controlling ownership interest in ASA Electronics, LLC ("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.
Employees
As of
February 28, 2018
, we employed 972 people worldwide, of which 38 were covered under collective bargaining agreements. We consider our relations with employees to be good as of
February 28, 2018
.
Item 1A-Risk Factors
We have identified certain risk factors that apply to us. Each of the following risk factors should be carefully considered, as well as all of the other information included or incorporated by reference in this Form 10-K. If any of these risks, or other risks not presently known to us or that we currently believe not to be significant, develop into actual events, then our business, financial condition, liquidity, or results of operations could be adversely affected. If that happens, the market price of our common stock would likely decline, and you may lose all or part of your investment.
The Automotive, Premium Audio and Consumer Accessories businesses are highly competitive and face significant competition from Original Equipment Manufacturers (OEMs) and direct imports by our retail customers.
The market for mobile electronics, premium audio products and consumer accessories is highly competitive across all product lines. We compete against many established companies, some of whom have substantially greater financial and engineering resources than we do. We compete directly with OEMs, including divisions of well-known automobile manufacturers, in the auto security, mobile video and accessories markets. We believe that OEMs have diversified and improved their product offerings and place increased sales pressure on new car dealers with whom they have close business relationships to purchase OEM-supplied equipment and accessories. To the extent that OEMs succeed in their efforts, this success would have a material adverse effect on our sales of automotive entertainment and security products to new car dealers. In addition, we compete with major retailers who may at any time choose to direct import products that we may currently supply.
OEM sales are dependent on the economic success of the automotive industry.
A portion of our OEM sales are to automobile manufacturers. In the past, some domestic OEM manufacturers have reorganized their operations as a result of general economic conditions. There is no guarantee that additional automobile manufacturers will not face similar reorganizations in the future. If additional reorganizations do take place and are not successful, it could have a material adverse effect on a portion of our OEM business.
Sales in our Automotive, Premium Audio and Consumer Accessories businesses are dependent on new products, product development and consumer acceptance.
Our Automotive, Premium Audio and Consumer Accessories businesses depend, to a large extent, on the introduction and availability of innovative products and technologies. If we are not able to continually introduce new products that achieve consumer acceptance, our sales and profit margins may decline.
The impact of future selling prices and technological advancements may cause price erosion and adversely impact our profitability and inventory value.
Since we do not manufacture all of our products and do not conduct a majority of our own research, we cannot assure you that we will be able to source technologically advanced products in order to remain competitive. Furthermore, the introduction or expected introduction of new products or technologies may depress sales of existing products and technologies. This may result in declining prices and inventory obsolescence. Since we maintain a substantial investment in product inventory, declining prices and inventory obsolescence could have a material adverse effect on our business and financial results.
Our estimates of excess and obsolete inventory may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be understated or overstated. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and operating results.
A commercial market for biometrics technology is still developing. There can be no assurance our iris-based identity authentication technology will be successful or achieve market acceptance.
A component of our strategy to grow revenue includes expansion of our iris-based identity authentication solutions into commercial markets. To date, biometrics technology has received only limited acceptance in such markets. Although the recent appearance of biometric readers on popular consumer products, such as smartphones, has increased interest in biometrics as a means of authenticating and/or identifying individuals, commercial markets for biometrics technology are in the process of developing and evolving. Biometrics-based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including:
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the cost, performance and reliability of our products and services and the products and services offered by our competitors;
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the continued growth in demand for biometrics solutions within the government and law enforcement markets as well as the development and growth of demand for biometric solutions in markets outside of government and law enforcement;
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customers’ perceptions regarding the benefits of biometrics solutions;
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public perceptions regarding the intrusiveness of these solutions and the manner in which organizations use the biometric information collected;
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public perceptions regarding the confidentiality of private information;
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proposed or enacted legislation related to privacy of information;
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customers’ satisfaction with biometrics solutions; and
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marketing efforts and publicity regarding biometrics solutions.
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We face intense competition from other biometrics solutions providers.
A significant number of established companies have developed or are developing and marketing software and hardware for biometrics products and applications, including facial recognition and fingerprint biometrics, that currently compete with or will compete directly with our iris-based identity authentication solutions. We believe that additional competitors will enter the biometrics market and become significant long-term competitors, and that, as a result, competition will increase. Companies competing with us may introduce solutions that are competitively priced, have increased performance or functionality or incorporate technological advances we have not yet developed or implemented.
There is no guarantee that patent/royalty rights will be renewed, or licensing agreements will be maintained.
Certain product development and revenues are dependent on the ownership and or use of various patents, licenses and license agreements. If the Company is not able to successfully renew or renegotiate these rights, we may suffer from a loss of product sales or royalty revenue associated with these rights or incur additional expense to pursue alternative arrangements.
A portion of our workforce is represented by labor unions. Collective bargaining agreements can increase our expenses. Labor disruptions could adversely affect our operations.
As of
February 28, 2018
, 38 of our full-time employees were covered by collective bargaining agreements. We cannot predict whether labor unions may be successful in organizing other portions of our workforce or what additional costs we could incur as a result.
We depend on our suppliers to provide us with adequate quantities of high quality competitive products and/or component parts on a timely basis.
We have few long-term contracts with our suppliers. Most of our products and component parts are imported from suppliers under short-term purchase orders. Accordingly, we can give no assurance that:
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our supplier relationships will continue as presently in effect;
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our suppliers will be able to obtain the components necessary to produce high-quality, technologically-advanced products for us;
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we will be able to obtain adequate alternatives to our supply sources, should they be interrupted;
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if obtained, alternatively sourced products of satisfactory quality would be delivered on a timely basis, competitively priced, comparably featured or acceptable to our customers;
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our suppliers have sufficient financial resources to fulfill their obligations;
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our suppliers will be able to obtain raw materials and labor necessary for production;
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shipments from our suppliers will not be affected by labor disputes within the shipping and transportation industries;
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our suppliers could be impacted by natural disasters directly or via their supply chains; and
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as it relates to products we do not manufacture, our suppliers will not become our competitors.
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On occasion, our suppliers have not been able to produce the quantities of products or component parts that we desire. Our inability to manufacture and/or supply sufficient quantities of products that are in demand could reduce our profitability and have a material adverse effect on our relationships with our customers. If any of our supplier relationships were terminated or interrupted, we could experience an immediate or long-term supply shortage, which could have a material adverse effect on our business.
We have few long-term sales contracts with our customers that contain guaranteed customer purchase commitments.
Sales of many of our products are made by purchase orders and are terminable at will by either party. We do have long-term sales contracts with certain customers; however, these contracts do not require the customers to guarantee specific levels of product purchases over the term of the contracts. The unexpected loss of all or a significant portion of sales to any one of our large customers could have a material adverse effect on our performance.
Our success will depend on a less diversified line of business.
Currently, we generate substantially all of our sales from the Automotive, Premium Audio and Consumer Accessories businesses. We cannot assure you that we can grow the revenues of our Automotive, Premium Audio and Consumer Accessories businesses or maintain profitability. As a result, the Company's revenues and profitability will depend on our ability to maintain and generate additional customers and develop new products. A reduction in demand for our existing products and services would have a material adverse effect on our business. The sustainability of current levels of our Automotive, Premium Audio and Consumer Accessories businesses and the future growth of such revenues, if any, will depend on, among other factors:
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the overall performance of the economy and discretionary consumer spending,
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competition within key markets,
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customer acceptance of newly developed products and services, and
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the demand for other products and services.
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We cannot assure you that we will maintain or increase our current level of revenues or profits from the Automotive, Premium Audio and Consumer Accessories businesses in future periods.
We depend on a small number of key customers for a large percentage of our sales.
The electronics industry is characterized by a number of key customers. Specifically,
26%
of our sales from continuing operations were to five customers in Fiscal
2018
,
28%
in Fiscal
2017
, and
29%
in Fiscal
2016
. The loss of one or more of these customers could have a material adverse impact on our business.
We plan to continue to expand the international marketing and distribution of our products, which will subject us to risks associated with international operations, including exposure to foreign currency fluctuations.
As part of our business strategy, we intend to continue to increase our international sales, although we cannot assure you that we will be able to do so. Approximately
12%
of our net sales from continuing operations currently originate in markets outside the U.S. While geographic diversity helps to reduce the Company's exposure to risk in any one country or part of the world, it also means that we are subject to the full range of risks associated with significant international operations, including, but not limited to:
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changes in exchange rates for foreign countries, which may reduce the U.S. dollar value of revenues, profits and cash flows we receive from non-U.S. markets or increase our supply costs, as measured in U.S. dollars, in those markets;
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exchange controls and other limits on our ability to import raw materials or finished product or to repatriate earnings from overseas;
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political and economic instability, social or labor unrest or changing macroeconomic conditions in our markets;
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foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources; and
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other foreign or domestic legal and regulatory requirements, including those resulting in potentially adverse tax consequences or other imposition of onerous trade restrictions, price controls or other government controls.
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These risks could have a significant impact on our ability to sell our products on a competitive basis in international markets and may have a material adverse effect on our results of operations, cash flows and financial condition.
In an effort to reduce the impact on earnings of foreign currency rate movements, we engage in a combination of cost-containment measures and selective hedging of foreign currency transactions. However, these measures may not succeed in offsetting any negative impact of foreign currency rate movements on our business and results of operations. For example, since 2010, Venezuela
has been designated as hyperinflationary and the resulting currency devaluations in Venezuela in that initial year affected our business and results of operations. The government of Venezuela has also devalued its currency several times since 2013, which has also affected our business and results of operations. Going forward, additional government actions, including further currency devaluations, foreign exchange price controls or political and social unrest in Venezuela could have further adverse impacts on the Company.
Substantial political and economic uncertainty in Venezuela puts our local assets at risk.
We have a subsidiary in Venezuela, whose operations are currently suspended due to the economic and political climate in that country. We hold fixed assets at this subsidiary and have incurred impairment charges related to our long-lived assets in Venezuela in the past. If conditions continue to deteriorate, we may be at risk of additional losses to our capital assets, including further declines in fair value or government confiscation of certain assets.
Conditions in the global economy, the geographic markets we serve, and the financial markets may adversely affect us.
Concerns persist regarding the lingering effects of the European debt crisis and the ability of certain Eurozone countries to meet future financial obligations; the overall stability of the Euro and the suitability of the Euro as a single currency, given the diverse economic and political circumstances within individual Eurozone countries; and the uncertainty relating to the British Pound Sterling, particularly in light of the United Kingdom's intended exit from the European Union and the uncertainties regarding the terms of such exit. There have also been concerns regarding slower growth in the Chinese economy and other Asian economies, as well as the economic effect of tensions in the relationship between China and surrounding Asian countries. These concerns or market perceptions regarding these and related issues could adversely affect the value of the Company's Euro-denominated assets and obligations. In addition, concerns over the effect of this financial crisis on financial institutions in Europe, China and globally could have an adverse impact on the economy generally, and more specifically on the consumers' demand for our products.
A decline in general economic conditions could lead to reduced consumer demand for the discretionary products we sell.
Consumer spending patterns, especially discretionary spending for products such as mobile, consumer and accessory electronics, are affected by, among other things, prevailing economic conditions, energy costs, raw material costs, wage rates, inflation, consumer confidence and consumer perception of economic conditions. A general slowdown in the U.S. and certain international economies or an uncertain economic outlook could have a material adverse effect on our sales and operating results.
Changes in the retail industry could have a material adverse effect on our business or financial condition.
In recent years, the retail industry has experienced consolidation, store closures, bankruptcies and other ownership changes. In the future, retailers in the United States and in foreign markets may further consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry our products. Changing shopping patterns, including the rapid expansion of online retail shopping, have adversely affected customer traffic in mall and outlet centers. We expect competition in the e-commerce market will intensify. As a greater portion of consumer expenditures with retailers occurs online and through mobile commerce applications, our brick-and-mortar wholesale customers who fail to successfully integrate their physical retail stores and digital retail may experience financial difficulties, including store closures, bankruptcies or liquidations. We cannot control the success of individual malls, and an increase in store closures by other retailers may lead to store vacancies and reduced foot traffic. A continuation or worsening of these trends could have a material adverse effect on our sales, results of operations, financial condition and cash flows.
We purchase a significant amount of our products from suppliers in Pacific Rim countries and we are subject to the economic risks associated with inherent changes in the social, political, regulatory and economic conditions not only in these countries, but also in other countries we do business in, including our own.
We import most of our products from suppliers in the Pacific Rim. Countries in the Pacific Rim have experienced significant social, political and economic upheaval over the past several years. Due to the large concentrations of our purchases in Pacific Rim countries, particularly China, Hong Kong, South Korea, Vietnam, Malaysia and Taiwan, any adverse changes in the social, political, regulatory and economic conditions in these countries may materially increase the cost of the products that we buy from our foreign suppliers or delay shipments of products, which could have a material adverse effect on our business. In addition, our dependence on foreign suppliers forces us to order products further in advance than we would if our products were manufactured domestically. This increases the risk that our products will become obsolete or face selling price reductions before we can sell our inventory.
President Donald J. Trump and his administration took office in the United States on January 20, 2017. President Trump has expressed apprehension toward existing trade agreements, suggesting renegotiation of The North American Free Trade Agreement and the implementation of tariffs, duties, border taxes or other similar assessments that could impact the level of trade between the U.S. and Mexico. The Trump Administration has also recently introduced tariffs on China, with China imposing retaliatory tariffs on certain products from the United States. President Trump has also publicly stated that he may seek to impose additional tariffs, duties, border taxes or other similar assessments on products imported from China and other countries. In addition, on January 23, 2017, President Trump signed a presidential memorandum to withdraw the U.S. from the Trans-Pacific Partnership. Such tariffs, duties, border taxes or other assessments imposed on the products we import into the United States will increase the total cost of these products and may decrease demand for such products. In addition, we may not be able to fully pass the added cost of such tariffs, taxes, duties or assessments on to our customers, which may adversely affect our business, financial condition and results of operations.
Our stock price could fluctuate significantly.
The market price of our common stock could fluctuate significantly in response to various factors and events, including:
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operating results being below market expectations,
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announcements of technological innovations or new products by us or our competitors,
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loss of a major customer or supplier,
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changes in, or our failure to meet, financial estimates by securities analysts,
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economic and other external factors,
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general downgrading of our industry sector by securities analysts,
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inventory write-downs, and
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ability to integrate acquisitions.
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In addition, the securities markets have experienced significant price and volume fluctuations over the past several years that have often been unrelated to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our common stock.
We invest in marketable securities and other investments as part of our investing activities and from time to time, provide additional funding in the form of loans. These investments fluctuate in value based on economic, operational, competitive, political and technological factors. These investments could be subject to loss or impairment based on their performance and loan balances may become uncollectible.
The Company has, in the past, incurred other-than-temporary impairments on its investments and continues to monitor its investments in non-controlled corporations for potential future impairments. In addition, there is no guarantee that the fair values recorded for other investments will be sustained in the future. From time to time, the Company may also provide additional funding to investees in the form of loans, which are collateralized. Should the borrowers default on the loans and should the collateral be insufficient to satisfy the total outstanding balance owed to Voxx, we may not be able to recover 100% of these loan balances.
We are subject to governmental regulations.
We always face the possibility of new governmental regulations which could have a substantial effect on our operations and profitability. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals,” originating from the Democratic Republic of Congo and adjoining countries. There are costs associated with complying with these disclosure requirements, including for due diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. These rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering "conflict free" conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act ("TCJA"). The TCJA contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%,
additional limitation on the tax deduction for interest expense and executive compensation, accelerates business asset expensing, eliminates net operating loss carrybacks, and makes significant changes to the taxation of foreign earnings including the imposition of a one-time repatriation tax on accumulated foreign earnings at reduced rates regardless of whether they are repatriated and imposes a minimum tax on global intangible low tax income (“GILTI”). At this stage, it is unclear how many U.S. states will incorporate these federal tax law changes or portions thereof into their tax codes. Further, our effective tax rate may fluctuate as a result of the TCJA in future reporting periods.
We continue to examine the impact these changes may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is uncertain, and our results of operations, cash flows and financial conditions, as well as the trading price of our Common Stock, could be adversely affected.
We are increasingly dependent on the continuous and reliable operation of our information technology systems, and a disruption of these systems, resulting from cyber security attacks or other events, could adversely affect our business.
We increasingly depend on our information technology, or IT, infrastructure in order to achieve our business objectives. If we experience a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of our IT systems by a third party, the resulting disruptions could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on our business in the ordinary course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to eliminate these problems and address related security concerns.
Computer viruses, malware, and other “hacking” programs and devices may cause significant damage, delays or interruptions to our systems and operations or to certain of the products we sell, resulting in damage to our reputation and brand names. They may also attack our infrastructure, industrial machinery, software or hardware causing significant damage, delays or other service interruptions to our systems and operations. “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions, loss or corruption of data, software, hardware or other computer equipment. In addition, increasingly sophisticated malware may target real-world infrastructure or product components, including certain of the products that we currently or may in the future sell by attacking, disrupting, reconfiguring and/or reprogramming industrial control software. We may incur significant costs to protect our systems and equipment against the threat of, and to repair any damage caused by, computer viruses and hacking. Moreover, if a computer virus or hacking affects our systems or products, our reputation and brand names could be materially damaged and use of our products may decrease.
A data privacy breach or failure to comply with data privacy laws could damage our reputation and customer relationships, expose us to litigation risk and potential fines and adversely affect our business.
As part of our normal operations, we collect, process, transmit and where appropriate, retain certain confidential employee and customer information, including credit card information. There is significant concern by consumers and employees over the security of personal information, consumer identity theft and user privacy. Despite the security measures we have in place, our facilities and systems, and those of our third party service providers, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. As a result of recent security breaches at a number of prominent companies, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become more uncertain. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our vendors, could result in significant legal and remediation expenses, severely damage our reputation and our customer relationships, harm sales, expose us to risks of litigation and liability and result in a material adverse effect on our business, financial condition and results of operations. Additionally, changing privacy laws in the United States, Europe and elsewhere, including the adoption by the European Union of the General Data Protection Regulation (“GDPR”), which becomes effective May 2018, creates new individual privacy rights and imposes increased obligations on companies handling personal data. Consequently, we may incur significant costs related to prevention and to comply with laws regarding the protection and unauthorized disclosure of personal information. A failure to comply with the stringent rules of the GDPR could result in fines of up to €20 million.
We are responsible for product warranties and defects.
Whether we outsource manufacturing or manufacture products directly for our customers, we provide warranties for all of our products for which we have provided an estimated liability. Therefore, we are highly dependent on the quality of our suppliers’ products.
If we experience an increase in warranty claims, or if our costs associated with such warranty claims increase significantly, we will begin to incur liabilities for potential warranty claims after the sale of our products at levels that we have not previously
incurred or anticipated. In addition, an increase in the frequency of our warranty claims or amount of warranty costs may harm our reputation and could have a material adverse effect on our financial condition and results of operations.
We must comply with restrictive covenants in our debt agreements.
Our existing debt agreements contain a number of covenants, which limit our ability to, among other things, borrow additional money, pay dividends, dispose of assets and acquire new businesses. These covenants also require us to maintain a specified fixed charge coverage ratio. If the Company is unable to comply with these covenants, there would be a default under these debt agreements, should we have debt outstanding. Changes in economic or business conditions, results of operations or other factors could cause the Company to default under its debt agreements. A default, if not waived by our lenders, could result in acceleration of our debt and possible bankruptcy.
We may be unable to collect amounts owed to us by our customers.
We typically grant our customers credit on a short-term basis. Related credit risks are inherent as we do not typically collateralize receivables due from customers. We provide estimates for uncollectible accounts based primarily on our judgment using historical losses, current economic conditions and individual evaluations of each customer as evidence supporting the receivables valuations stated on our financial statements. However, our receivables valuation estimates may not be accurate and receivables due from customers reflected in our financial statements may not be collectible. Our inability to perform under our contractual obligations, or our customers’ inability or unwillingness to fulfill their contractual commitments to us, may have a material adverse effect on our financial condition, results of operations and cash flows.
We provide financial support to one of our subsidiaries through an intercompany loan agreement and may need to secure additional financing for our own operations, but we cannot be sure that additional financing will be available.
We have entered into intercompany loan agreements with our majority owned subsidiary, EyeLock LLC, which is expected to continue to require additional funding beyond one year. In funding the loans to EyeLock LLC, we have less cash flow available to support our domestic operations and other activities. If we are unable to generate sufficient cash flows in the future to support our operations and service our debt as a result of funding EyeLock LLC, we may be required to refinance all or a portion of our existing debt, as applicable, or to obtain additional financing. There can be no assurance that any refinancing will be possible or that any additional financing could be obtained on acceptable terms. The inability to service or refinance our existing debt or to obtain additional financing would have a material adverse effect on our financial position, liquidity, and results of operations.
Our capital resources may not be sufficient to meet our future capital and liquidity requirements.
We believe our current funds and available credit lines would provide sufficient resources to fund our existing operations for the foreseeable future. However, we may need additional capital to operate our business if:
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market conditions change,
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our business plans or assumptions change,
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we make significant acquisitions,
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we need to make significant increases in capital expenditures or working capital,
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our restrictive covenants do not provide sufficient credit, or
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we need to continue to provide financial support to EyeLock LLC for an extended period of time.
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We have recorded, or may record in the future, goodwill and other intangible assets as a result of acquisitions, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income.
We evaluate the recoverability of recorded goodwill and other intangible asset amounts annually, or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Changes in our operating performance, business conditions, or restrictions on our field of use resulted in an impairment of certain intangible assets in Fiscal 2016, and could result in additional future impairments, which could be material to our results of operations.
Our cash and cash equivalents could be adversely affected if the financial institutions in which we hold our cash and cash equivalents fail.
Our cash and cash equivalents consist of demand deposits and highly liquid money market funds with original maturities of three months or less at the time of purchase. We maintain the cash and cash equivalents with major financial institutions. Some deposits with these banks exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limits or similar limits in foreign jurisdictions. While we monitor daily the cash balances in the operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial and credit markets.
If our sales during the holiday season fall below our expectations, our annual results could also fall below expectations.
Seasonal consumer shopping patterns significantly affect our business. We generally make a substantial amount of our sales and net income during September, October and November. We expect this trend to continue. December is also a key month for us, due largely to the increase in promotional activities by our customers during the holiday season. If the economy faltered in these periods, if our customers altered the timing or frequency of their promotional activities or if the effectiveness of these promotional activities declined, particularly around the holiday season, it could have a material adverse effect on our annual financial results.
Our business could be affected by weather-related factors.
Our results of operations may be adversely affected by weather-related factors. Severe winter weather conditions may deter or prevent patrons from reaching facilities where our products are sold. Although our budget assumes certain seasonal fluctuations in our revenues to ensure adequate cash flow during expected periods of lower revenues, we cannot ensure that weather-related factors will not have a material adverse effect on our operations.
Our products could infringe the intellectual property rights of others and we may be exposed to costly litigation.
The products we sell are continually changing as a result of improved technology. Although we and our suppliers attempt to avoid infringing known proprietary rights of third parties in our products, we may be subject to legal proceedings and claims for alleged infringement by us, our suppliers or our distributors, or of a third party’s patents, trade secrets, trademarks or copyrights.
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 us to either enter into royalty or license agreements which are not advantageous to us or pay material amounts of damages. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from selling our products. We may increasingly be subject to infringement claims as we expand our product offerings.
Acquisitions and strategic investments may divert our resources and management attention; results may fall short of expectations.
We intend to continue pursuing selected acquisitions of and investments in businesses, technologies and product lines as a key component of our growth strategy. Any future acquisition or investment may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, or the incurrence of debt and amortization expenses related to intangible assets. Acquisitions involve numerous risks, including:
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difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business;
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diversion of management’s attention from other business concerns;
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increased expenses associated with the acquisition, and
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potential loss of key employees or customers of any acquired business.
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We cannot assure you that our acquisitions will be successful and will not adversely affect our business, results of operations or financial condition.
We depend heavily on existing directors, management and key personnel and our ability to recruit and retain qualified personnel.
Our success depends on the continued efforts of our directors, executives and senior vice presidents, many of whom have worked with VOXX International Corporation for several decades, as well as our other executive officers and key employees. We have employment contracts with most of our executive officers. The loss or interruption of the continued full-time service of certain of our executive officers and key employees could have a material adverse effect on our business.
In addition, to support our continued growth, we must effectively recruit, develop and retain additional qualified personnel both domestically and internationally. Our inability to attract and retain necessary qualified personnel could have a material adverse effect on our business.
John J. Shalam, our Chairman, controls a significant portion of the voting power of our common stock and can exercise control over our affairs
.
Mr. Shalam beneficially owns approximately 52% of the combined voting power of both classes of common stock. This will allow him to elect the majority of our Board of Directors and, in general, determine the outcome of any other matter submitted to the stockholders for approval. Mr. Shalam's voting power may have the effect of delaying or preventing a change in control of the Company.
We have two classes of common stock: Class A common stock is traded on the Nasdaq Stock Market under the symbol VOXX and Class B common stock, which is not publicly traded and substantially all of which is beneficially owned by Mr. Shalam. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Class A shareholders vote separately for the election/removal of the Class A directors, while both classes vote together as a single class on all other matters and as otherwise may be required by Delaware law. Since our charter permits shareholder action by written consent, Mr. Shalam may be able to take significant corporate actions without prior notice and a shareholder meeting.
We exercise our option for the "controlled company" exemption under NASDAQ rules.
The Company has exercised its right to the "controlled company" exemption under NASDAQ rules which enables us to forego certain NASDAQ requirements which include: (i) maintaining a majority of independent directors; (ii) electing a nominating committee composed solely of independent directors; (iii) ensuring the compensation of our executive officers is determined by a majority of independent directors or a compensation committee composed solely of independent directors; and (iv) selecting, or recommending for the Board's selection, director nominees, either by a majority of the independent directors or a nominating committee composed solely of independent directors. Although we do not maintain a nominating committee and do not have a majority of independent directors, the Company notes that at the present time we do maintain a compensation committee comprised solely of independent directors who approve executive compensation, and the recommendations for director nominees are governed by a majority of independent directors. However, election of the "controlled company" exemption under NASDAQ rules allows us to modify our position at any time.
Other Risks
Other risks and uncertainties include:
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additional changes in U.S. federal, state and local law,
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our ability to implement operating cost structures that align with revenue growth,
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additional trade sanctions against or for foreign countries,
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successful integration of business acquisitions and new brands in our distribution network,
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compliance with the Sarbanes-Oxley Act, and
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compliance with complex financial accounting and tax standards, both foreign and domestic.
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Item 1B-Unresolved Staff Comments
As of the filing of this annual report on Form 10-K, there were no unresolved comments from the staff of the Securities and Exchange Commission.
Item 2-Properties
Our Corporate headquarters is located at 2351 J. Lawson Blvd. in Orlando, Florida. In addition, as of
February 28, 2018
, the Company leased a total of 14 operating facilities or offices located in 7 states as well as China, Canada, Mexico, and Hong Kong. The leases have been classified as operating leases. Within the United States, these facilities are located in Georgia, New York, Ohio, New Jersey, Texas, Arkansas and Michigan. The Company also owns 8 of its operating facilities or offices located in New York, Indiana, Florida, and Arkansas in the United States, as well as in Germany and Venezuela. These facilities serve as offices, warehouses, manufacturing facilities and distribution centers. Additionally, we utilize public warehouse facilities located in Virginia, Nevada, Indiana, Florida, Mexico, China, the Netherlands, Germany and Canada.
Item 3-Legal Proceedings
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 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 which are not advantageous to the Company, or pay material amounts of damages.
Item 4-Removed and Reserved
None
Notes to Consolidated Financial Statements
February 28, 2018
(Amounts in thousands, except share and per share data)
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1)
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Description of Business and Summary of Significant Accounting Policies
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a)
Description of Business
VOXX International Corporation ("Voxx," "We," "Our," "Us" or "the Company") is a leading international manufacturer and distributor in the Automotive, Premium Audio and Consumer Accessories industries. The Company has widely diversified interests, with more than 30 global brands that it has acquired and grown throughout the years, achieving a powerful international corporate image and creating a vehicle for each of these respective brands to emerge with its own identity. We conduct our business through sixteen wholly-owned subsidiaries: Audiovox Atlanta Corp., VOXX Electronics Corporation, VOXX Accessories Corp., VOXX German Holdings GmbH ("Voxx Germany"), Audiovox Canada Limited, Voxx Hong Kong Ltd., Audiovox International Corp., Audiovox Mexico, S. de R.L. de C.V. ("Voxx Mexico"), Code Systems, Inc., Oehlbach Kabel GmbH ("Oehlbach"), Schwaiger GmbH ("Schwaiger"), Invision Automotive Systems, Inc. ("Invision"), Klipsch Holding LLC ("Klipsch"), Omega Research and Development, LLC ("Omega"), Voxx Automotive Corp., and Audiovox Websales LLC, as well as one majority-owned subsidiary, EyeLock LLC ("EyeLock"). We market our products under the Audiovox® brand name, other brand names and licensed brands, such as 808®, AR for Her®, Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energy®, Heco®, Incaar
™
, Invision®, Jamo®, Klipsch®, Mac Audio
™
, Magnat®, Mirage®, myris®, Oehlbach®, Omega®, Phase Linear®, Prestige®, Project Nursery®, Pursuit®, RCA®, RCA Accessories®, Recoton®, Rosen®, Schwaiger®, Terk® and Voxx Automotive, as well as private labels through a large domestic and international distribution network. We also function as an OEM ("Original Equipment Manufacturer") supplier to several customers, as well as market a number of products under exclusive distribution agreements, such as SiriusXM satellite radio products and 360Fly™ Action Cameras.
On August 31, 2017, the Company completed its sale of Hirschmann Car Communication GmbH and its subsidiaries. See Note 2 for more details of this transaction.
b)
Principles of Consolidation, Reclassifications and Accounting Principles
The consolidated financial statements and accompanying notes include the financial statements of VOXX International Corporation and its wholly and majority-owned subsidiaries and 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. All significant intercompany balances and transactions have been eliminated in consolidation. The Company acquired a controlling interest in all of the assets and certain liabilities of EyeLock Inc. and EyeLock Corporation effective September 1, 2015, through a newly formed entity, EyeLock LLC ("EyeLock"). The consolidated financial statements include the operations of EyeLock beginning September 1, 2015.
The Company follows FASB Accounting Standards Codification 810-10-65-1 to report a non-controlling interest in the consolidated balance sheets within the equity section, separately from the Company’s retained earnings. Non-controlling interest represents the non-controlling interest holder’s proportionate share of the equity of the Company’s majority-owned subsidiary, EyeLock. Non-controlling interest is adjusted for the non-controlling interest holder’s proportionate share of the earnings or losses and other comprehensive income (loss), if any, and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.
Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. The Company's share of its equity method investee's earnings or losses is included in Other Income (Expense) in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). The Company eliminates its pro rata share of gross profit on sales to its equity method investee for inventory on hand at the investee at the end of the year. Investments in which the Company does not exercise significant influence over the investee are accounted for under the cost method.
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.
c)
Use of Estimates
The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect reported amounts of assets, liabilities, revenue and expenses. Such estimates include the allowance for doubtful accounts and inventory valuation, recoverability of deferred tax assets, reserve for uncertain tax positions, valuation of long-lived assets, accrued sales incentives, warranty reserves, stock-based compensation, valuation and impairment assessment of investment securities, goodwill, trademarks and other intangible assets, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
d)
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits with banks and highly liquid money market funds with original maturities of three months or less when purchased. Cash and cash equivalents amounted to
$51,740
and
$956
at
February 28, 2018
and
February 28, 2017
, respectively. Cash amounts held in foreign bank accounts amounted to
$303
and
$278
at
February 28, 2018
and
February 28, 2017
, respectively. Many of these amounts are in excess of government insurance. The Company places its cash and cash equivalents in institutions and funds of high credit quality. We perform periodic evaluations of these institutions and funds.
e)
Fair Value Measurements and Derivatives
The Company applies the authoritative guidance on "Fair Value Measurements," which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. This guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that market participants would use.
The following table presents assets and liabilities measured at fair value on a recurring basis at
February 28, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
51,740
|
|
|
$
|
51,740
|
|
|
$
|
—
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
(262
|
)
|
|
$
|
—
|
|
|
$
|
(262
|
)
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
3,620
|
|
|
$
|
3,620
|
|
|
$
|
—
|
|
Available-for-sale securities
|
—
|
|
|
—
|
|
|
—
|
|
Other investments at amortized cost (a)
|
547
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
4,167
|
|
|
$
|
3,620
|
|
|
$
|
—
|
|
The following table presents assets and liabilities measured at fair value on a recurring basis at
February 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash and money market funds
|
$
|
956
|
|
|
$
|
956
|
|
|
$
|
—
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Designated for hedging
|
$
|
335
|
|
|
$
|
—
|
|
|
$
|
335
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
4,094
|
|
|
$
|
4,094
|
|
|
$
|
—
|
|
Available-for-sale securities
|
6
|
|
|
6
|
|
|
—
|
|
Other investments at amortized cost (a)
|
6,288
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
10,388
|
|
|
$
|
4,100
|
|
|
$
|
—
|
|
|
|
(a)
|
Included in this balance is one investment in a non-controlled corporation at
February 28, 2018
and two investments in non-controlled corporations at
February 28, 2017
accounted for at cost (See Note 1(f)). The fair value of these investments would be based upon Level 3 inputs. At
February 28, 2018
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 than market rates.
Derivative Instruments
The Company's derivative instruments include forward foreign currency contracts utilized to hedge a portion of its foreign currency inventory purchases. The Company also has an interest rate swap agreement as of
February 28, 2018
that hedges interest rate exposure related to the forecasted outstanding balance of its Florida Mortgage with monthly payments due through March 2026. 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
-
12 months
and are classified in the balance sheet according to their terms. 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 non-current assets or non-current liabilities based on the fair value of the instruments at the end of the period.
Two interest rate swap agreements that hedged interest rate exposure related to the Company's Credit Facility expired on April 30, 2016 and February 28, 2017, respectively, each with a fair value of
$0
on the date of expiration. A third agreement, which hedged interest rate exposure related to the forecasted outstanding balance of one of its mortgage notes, was unwound during the first quarter of Fiscal 2017 when that mortgage was paid in full (see Note 7(e)). The fair value of this interest rate swap agreement on the date it was unwound was
$(114)
, which was charged to interest expense in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) during the year ended February 28, 2017. The swap agreement related to the Company's Florida Mortgage locks the interest rate on the debt at
3.48%
(inclusive of credit spread) through the maturity date of the mortgage.
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
$(48)
,
$130
and
$93
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
respectively.
Financial Statement Classification
The Company holds derivative instruments that are designated as hedging instruments. The following table discloses the fair value as of
February 28, 2018
and
February 28, 2017
for derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets and Liabilities
|
|
|
|
|
Fair Value
|
|
|
Account
|
|
February 28, 2018
|
|
February 28, 2017
|
Designated derivative instruments
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Accrued expenses and other current liabilities
|
|
$
|
(227
|
)
|
|
$
|
—
|
|
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
643
|
|
Interest rate swap
|
|
Other long-term liabilities
|
|
(35
|
)
|
|
(298
|
)
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
(262
|
)
|
|
$
|
345
|
|
Cash flow hedges
During Fiscal
2018
, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of
$9,600
at
February 28, 2018
and are designated as cash flow hedges. The current outstanding notional value of the Company's interest rate swap at
February 28, 2018
was
$8,613
. For cash flow hedges, the effective portion of the gain or loss is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
Activity related to cash flow hedges from continuing operations recorded during the twelve months ended
February 28, 2018
and
February 28, 2017
was as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
February 28, 2017
|
|
Gain (Loss) Recognized in Other Comprehensive Income
|
|
Gain (Loss) Reclassified into Cost of Sales
|
|
Gain (Loss) for Ineffectiveness in Other Income
|
|
Gain (Loss) Recognized in Other Comprehensive Income
|
|
Gain (Loss) Reclassified into Cost of Sales
|
|
Gain (Loss) for Ineffectiveness in Other Income
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
(1,635
|
)
|
|
$
|
(297
|
)
|
|
$
|
(48
|
)
|
|
$
|
442
|
|
|
$
|
589
|
|
|
$
|
130
|
|
Interest rate swaps
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(449
|
)
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
The net gain recognized in other comprehensive income for foreign currency contracts is expected to be recognized in cost of sales within the next
fifteen months
. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. During the year ended
February 28, 2018
,
no
contracts originally designated for hedge accounting were de-designated. During the year ended February 29, 2016,
seven
contracts originally designated for hedge accounting were de-designated, resulting in a gain of
$64
recorded in Other Income (Expense) for the year ended February 29, 2016 within the Company's Consolidated Statement of Operations and Comprehensive Income (Loss). These contracts have all been settled as of
February 28, 2018
. As of
February 28, 2018
, no contracts originally designated for hedge accounting were terminated. Refer to Note 1(v) for information regarding activity related to cash flow hedges pertaining to discontinued operations.
f)
Investment Securities
In accordance with the Company's investment policy, all long and short-term investment securities are invested in "investment grade" rated securities. As of
February 28, 2018
and
February 28, 2017
, the Company had the following investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
February 28, 2017
|
|
Cost
Basis
|
|
Unrealized
holding
gain/(loss)
|
|
Fair
Value
|
|
Cost
Basis
|
|
Unrealized
holding
gain/(loss)
|
|
Fair
Value
|
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation
|
$
|
3,620
|
|
|
$
|
—
|
|
|
$
|
3,620
|
|
|
$
|
4,094
|
|
|
$
|
—
|
|
|
$
|
4,094
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cellstar
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
Total Marketable Securities
|
3,620
|
|
|
—
|
|
|
3,620
|
|
|
4,094
|
|
|
6
|
|
|
4,100
|
|
Other Long-Term Investments
|
547
|
|
|
—
|
|
|
547
|
|
|
6,288
|
|
|
—
|
|
|
6,288
|
|
Total Investment Securities
|
$
|
4,167
|
|
|
$
|
—
|
|
|
$
|
4,167
|
|
|
$
|
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 (see Note 10). Unrealized holding gains and losses on trading securities offset those associated with 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 for the years ended
February 28, 2018
,
February 28, 2017
or
February 29, 2016
.
Other Long-Term Investments
Other long-term investments include an investment in a non-controlled corporation accounted for by the cost method. 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 year ended
February 28, 2018
. The cash proceeds were subject to a hold-back provision, which was not included in the calculation of the gain recognized. The Company's investment in Fathom totaled
$547
at
February 28, 2018
, and we held
8.1%
of the outstanding shares of this company as of
February 28, 2018
.
At
February 28, 2017
, the Company had an investment in 360fly, Inc., consisting of shares of the investee's preferred stock, totaling
$4,453
, or
4.7%
of the outstanding shares of 360fly, Inc. During Fiscal 2018, the Company issued a total of five senior secured notes to 360fly, Inc. A portion of the notes consists of various miscellaneous balances due to the Company that were consolidated into a senior secured note receivable during the third quarter of the fiscal year. Additionally, one of the notes issued to the investee on
February 28, 2018
was issued in the amount of, and in exchange for, the outstanding equity investment held by the Company on that date of
$4,453
. As a result of this loan, all of the preferred stock shares of 360fly, Inc. owned by Voxx were canceled and the Company has no remaining investment in the equity of 360fly, Inc. as of
February 28, 2018
. Total cash transferred to 360fly, Inc. for these senior secured loans during Fiscal 2018 was
$3,300
. Interest on all of the notes accrues at
8%
. The notes are due on August 31, 2019 and are convertible into equity at the option of the Company only. The total balance of the notes outstanding from 360fly, Inc. at
February 28, 2018
is
$10,888
and is included in Other assets on the Consolidated Balance Sheet.
g)
Revenue Recognition
The Company recognizes revenue from product sales at the time title and risk of loss passes to the customer either at FOB shipping point or FOB destination, based upon terms established with the customer. The Company's selling price to its customers is a fixed amount that is not subject to refund or adjustment or contingent upon additional rebates. Any customer acceptance provisions, which are related to product testing, are satisfied prior to revenue recognition. There are no further obligations on the part of the Company subsequent to revenue recognition except for product returns from the Company's customers. The Company does accept product returns, if properly requested, authorized, and approved by the Company. The Company records an estimate of product returns by its customers and records the provision for the estimated amount of such future returns at point of sale, based on historical experience.
The Company includes all costs incurred for shipping and handling as cost of sales and all amounts billed to customers as revenue. During the years ended
February 28, 2018
,
February 28, 2017
, and
February 29, 2016
, freight costs expensed through cost of sales from continuing operations amounted to
$14,948
,
$14,658
and
$14,523
, respectively and freight from continuing operations billed to customers amounted to
$861
,
$729
and
$796
, respectively.
h)
Accounts Receivable
The majority of the Company's accounts receivable are due from companies in the retail, mass merchant and OEM industries. Credit is extended based on an evaluation of a customer's financial condition. Accounts receivable are generally due within
30 days
-
60 days
and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the contracted payment terms are considered past due.
Accounts receivable is comprised of the following:
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
February 28,
2017
|
Trade accounts receivable and other
|
$
|
84,517
|
|
|
$
|
85,699
|
|
Less:
|
|
|
|
|
|
Allowance for doubtful accounts
|
2,196
|
|
|
4,495
|
|
Allowance for cash discounts
|
1,205
|
|
|
1,233
|
|
|
$
|
81,116
|
|
|
$
|
79,971
|
|
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers' current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within management's expectations and the provisions established, the Company cannot guarantee it will continue to experience the same credit loss rates that have been experienced in the past. The Company writes off uncollectible accounts receivable when collection efforts have been exhausted. Since the Company's accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of the Company's accounts receivable and future operating results.
The Company has three supply chain financing agreements and factoring agreements with certain financial institutions to accelerate receivable collection and better manage cash flow. Under the agreements, the Company has agreed to sell these institutions certain of its accounts receivable balances. For those accounts receivables tendered to the banks and that the banks choose to purchase, the banks have agreed to advance an amount equal to the net accounts receivable balances due, less a discount as set forth in the respective agreements. The balances under these agreements are sold without recourse and are accounted for as sales of accounts receivable. Cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the Company's Consolidated Statements of Cash Flows. Total balances from continuing operations sold under the agreements, net of discounts, for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
were approximately
$142,000
,
$141,000
and
$154,000
, respectively. Fees incurred in connection with the agreements totaled
$957
,
$877
and
$770
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively, and are recorded within Interest and Bank Charges in the Consolidated Statements of Operations.
i)
Inventory
The Company values its inventory at the lower of cost and net realizable value ("NRV") of the inventory. NRV is defined as estimated selling prices less costs of completion, disposal, and transportation. The cost of the inventory is determined primarily on an average basis with a portion valued at standard cost, which approximates actual costs on the first-in, first-out basis. The Company regularly reviews inventory quantities on-hand and records a provision for excess and obsolete inventory based primarily on selling prices, indications from customers based upon current price negotiations and purchase orders. The Company's industry is characterized
by rapid technological change and frequent new product introductions that could result in an increase in the amount of obsolete inventory quantities on-hand. In addition, and as necessary, specific reserves for future known or anticipated events may be established. The Company recorded inventory write-downs from continuing operations of
$2,733
,
$1,987
and
$1,008
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
Inventories by major category are as follows:
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
February 28,
2017
|
Raw materials
|
$
|
28,071
|
|
|
$
|
20,488
|
|
Work in process
|
2,485
|
|
|
2,270
|
|
Finished goods
|
87,436
|
|
|
99,594
|
|
Inventory, net
|
$
|
117,992
|
|
|
$
|
122,352
|
|
j)
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Property under a capital lease is stated at the present value of minimum lease payments. Major improvements and replacements that extend service lives of the assets are capitalized. Minor replacements, and routine maintenance and repairs are charged to expense as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the Consolidated Balance Sheets.
A summary of property, plant and equipment, net, is as follows:
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
February 28,
2017
|
Land
|
$
|
9,522
|
|
|
$
|
8,893
|
|
Buildings
|
51,375
|
|
|
45,426
|
|
Property under capital lease
|
1,578
|
|
|
1,441
|
|
Furniture and fixtures
|
4,262
|
|
|
3,430
|
|
Machinery and equipment
|
10,373
|
|
|
9,327
|
|
Construction-in-progress
|
148
|
|
|
4,705
|
|
Computer hardware and software
|
37,408
|
|
|
36,253
|
|
Automobiles
|
921
|
|
|
828
|
|
Leasehold improvements
|
2,713
|
|
|
2,561
|
|
|
118,300
|
|
|
112,864
|
|
Less accumulated depreciation and amortization
|
53,041
|
|
|
47,275
|
|
|
$
|
65,259
|
|
|
$
|
65,589
|
|
Depreciation is calculated on the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
|
|
|
Buildings and improvements
|
|
20
|
-
|
40 years
|
Furniture and fixtures
|
|
5
|
-
|
15 years
|
Machinery and equipment
|
|
5
|
-
|
10 years
|
Computer hardware and software
|
|
3
|
-
|
5 years
|
Automobiles
|
|
|
|
3 years
|
Leasehold improvements are depreciated over the shorter of the lease term or estimated useful life of the asset. Assets acquired under capital leases are amortized over the term of the respective lease. Accumulated amortization of assets under capital lease totaled
$669
and
$394
at
February 28, 2018
and
2017
, respectively.
Depreciation and amortization of property, plant and equipment from continuing operations amounted to
$5,658
,
$5,907
and
$4,702
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively. Included in depreciation and amortization expense is amortization of computer software costs of
$1,611
,
$1,473
and
$1,329
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively. Also included in depreciation and amortization expense is
$372
,
$153
and
$59
of amortization expense related to property under capital leases for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
k)
Goodwill and Intangible Assets
Goodwill and other intangible assets consist of the excess over the fair value of assets acquired (goodwill), and other intangible assets (patents, contracts, trademarks/tradenames, developed technology and customer relationships). Values assigned to the respective assets are determined in accordance with ASC 805 "Business Combinations" ("ASC 805") and ASC 350 "Intangibles – Goodwill and Other" ("ASC 350").
Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets. Generally, the primary valuation method used to determine the fair value ("FV") of acquired businesses is the Discounted Future Cash Flow Method ("DCF"). A five-year period is analyzed using a risk adjusted discount rate.
The value of potential intangible assets separate from goodwill are independently evaluated and assigned to the respective categories. The largest categories from our recently acquired businesses are Developed Technology, Trademarks, and Customer Relationships. The FV’s of trademarks acquired are determined using the Relief from Royalty Method based on projected sales of the trademarked products. The FV’s of customer relationships and developed technology are determined using the Multi-Period Excess Earnings Method which includes a DCF analysis, adjusted for a required return on tangible and intangible assets. The Company categorizes this fair value determination as Level 3 (unobservable) in the fair value hierarchy, as described in Note 1(e).
The guidance in ASC 350, including management’s business intent for its use; ongoing market demand for products relevant to the category and their ability to generate future cash flows; legal, regulatory or contractual provisions on its use or subsequent renewal, as applicable; and the cost to maintain or renew the rights to the assets, are considered in determining the useful life of all intangible assets. If the Company determines that there are no legal, regulatory, contractual, competitive, economic or other factors which limit the useful life of the asset, an indefinite life will be assigned and evaluated for impairment as indicated below. Goodwill and other intangible assets that have an indefinite useful life are not amortized. Intangible assets that have a definite useful life are amortized on a straight line basis over their estimated useful life.
ASC 350 requires that goodwill and intangible assets with indefinite useful lives be tested for impairment at least annually or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of a reporting unit below its carrying amount. Intangible assets with estimable useful lives are required to be amortized over their respective estimated useful lives and reviewed for impairment if indicators of impairment exist
.
To determine the fair value of goodwill and intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. Management has the ability to influence the outcome and ultimate results based on the assumptions and estimates chosen. If a significant change in these assumptions and/or estimates occurs, the Company could experience impairment charges, in addition to those noted below, in future periods.
Goodwill is tested using a two-step process. The first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is considered impaired if the carrying amount of the reporting unit's goodwill exceeds its estimated fair value. For intangible assets with indefinite lives, primarily trademarks, the Company compared the fair value of each intangible asset with its carrying amount. Intangible assets with indefinite lives are considered impaired if the carrying value exceeds the fair value.
Voxx's reporting units that carry goodwill are Invision, Rosen, and Klipsch. The Company has three operating segments based upon its products and internal organizational structure (see Note 13). These operating segments are the Automotive, Premium Audio and Consumer Accessories segments. The Invision and Rosen reporting units are located within the Automotive segment and the Klipsch reporting unit is located within the Premium Audio segment.
The Company performed its annual impairment test for goodwill as of
February 28, 2018
. The discount rates (developed using a weighted average cost of capital analysis) used in the goodwill test ranged from
13.6%
to
13.8%
. Based on the Company's goodwill impairment assessment, all reporting units with goodwill had estimated fair values as of
February 28, 2018
that exceeded their carrying values.
No
goodwill impairment charges were recorded during the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
. The goodwill balances of Invision, Klipsch and Rosen at
February 28, 2018
are
$7,372
,
$46,533
, and
$880
, respectively.
The Company also tested its indefinite-lived intangible assets as of
February 28, 2018
. The respective fair values were estimated using a Relief-from-Royalty Method, applying royalty rates of
0.5%
to
7.0%
for the trademarks after reviewing comparable market rates, the profitability of the products associated with relative intangible assets, and other qualitative factors. We determined that risk-adjusted discount rates ranging from
13.0%
to
35.0%
were appropriate as a result of weighted average cost of capital analyses. As a result of this analysis, it was determined that there was
no
impairment of the Company's indefinite-lived intangible assets at
February 28, 2018
. Additionally,
no
impairment charges were recorded related to definite or indefinite-lived intangible assets for the year ended February 28, 2017.
During the second quarter of Fiscal 2016, the Company re-evaluated its projections for its Klipsch reporting unit, based on lower than anticipated results due to certain marketing strategies and re-evaluation of its market position for certain product lines. Accordingly, this was considered an indicator of impairment requiring the Company to test the related indefinite-lived tradename for impairment and perform a step 1 impairment analysis on the goodwill for this reporting unit. The discount rates (developed using a weighted average cost of capital analysis) used in this goodwill and intangible analysis were
13.1%
and
13.8%
, respectively. The long-term growth rate was
2.0%
. As a result of this analysis, the Company determined that the tradename for this reporting unit was impaired and recorded an impairment charge of
$6,210
in the second quarter of Fiscal 2016. Further, as a result of the Company's Fiscal 2016 annual indefinite-lived testing procedures, it was determined that one of its Consumer Accessories tradenames was impaired at February 29, 2016 and recorded an impairment charge of
$2,860
in the fourth quarter of Fiscal 2016. This impairment charge was the result of a judgment received in the fourth quarter of Fiscal 2016 related to the field of use for this trademark, which restricted the Company's rights to use the tradename for select products. The Company determined that this indicator of impairment required the Company to evaluate the related long-lived assets at the lowest level for which there are separately identifiable cash flows. After further analysis,
no
additional impairments of long-lived assets were recorded for the year ended February 29, 2016.
Management has determined that the current lives of its long-lived assets are appropriate. Management has determined that there were no other indicators of impairment that would cause the carrying values related to intangible assets with definite lives to exceed their expected future cash flows at
February 28, 2018
.
Goodwill
The change in the carrying amount of goodwill is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
February 28, 2017
|
|
February 29, 2016
|
Beginning of period
|
$
|
53,905
|
|
|
$
|
53,905
|
|
|
$
|
53,905
|
|
Goodwill acquired (see Note 2)
|
880
|
|
|
—
|
|
|
—
|
|
End of period
|
$
|
54,785
|
|
|
$
|
53,905
|
|
|
$
|
53,905
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
86,948
|
|
|
$
|
86,068
|
|
|
$
|
86,068
|
|
Accumulated impairment losses
|
(32,163
|
)
|
|
(32,163
|
)
|
|
(32,163
|
)
|
Net carrying amount
|
$
|
54,785
|
|
|
$
|
53,905
|
|
|
$
|
53,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
February 28, 2017
|
|
February 29, 2016
|
Automotive
|
|
|
|
|
|
Beginning of period
|
$
|
7,372
|
|
|
$
|
7,372
|
|
|
$
|
7,372
|
|
Goodwill acquired (see Note 2)
|
880
|
|
|
—
|
|
|
—
|
|
End of period
|
$
|
8,252
|
|
|
$
|
7,372
|
|
|
$
|
7,372
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
8,252
|
|
|
$
|
7,372
|
|
|
$
|
7,372
|
|
Accumulated impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
Net carrying amount
|
$
|
8,252
|
|
|
$
|
7,372
|
|
|
$
|
7,372
|
|
|
|
|
|
|
|
Premium Audio
|
|
|
|
|
|
Beginning of period
|
$
|
46,533
|
|
|
$
|
46,533
|
|
|
$
|
46,533
|
|
Impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
End of period
|
$
|
46,533
|
|
|
$
|
46,533
|
|
|
$
|
46,533
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
78,696
|
|
|
$
|
78,696
|
|
|
$
|
78,696
|
|
Accumulated impairment charge
|
(32,163
|
)
|
|
(32,163
|
)
|
|
(32,163
|
)
|
Net carrying amount
|
$
|
46,533
|
|
|
$
|
46,533
|
|
|
$
|
46,533
|
|
|
|
|
|
|
|
Total goodwill, net
|
$
|
54,785
|
|
|
$
|
53,905
|
|
|
$
|
53,905
|
|
Note: The Company's Consumer Accessories segment did not carry a balance for goodwill at
February 28, 2018
,
February 28, 2017
, or
February 29, 2016
.
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
Customer relationships (4-20 years)
|
$
|
50,249
|
|
|
$
|
26,807
|
|
|
$
|
23,442
|
|
Trademarks/Tradenames (3-12 years)
|
415
|
|
|
400
|
|
|
15
|
|
Developed technology (11.5 years)
|
31,290
|
|
|
6,802
|
|
|
24,488
|
|
Patents (5-13 years)
|
2,830
|
|
|
2,138
|
|
|
692
|
|
License (5 years)
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contracts (5 years)
|
2,141
|
|
|
1,849
|
|
|
292
|
|
Total finite-lived intangible assets
|
$
|
88,325
|
|
|
$
|
39,396
|
|
|
48,929
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
Trademarks
|
|
|
|
|
101,391
|
|
Total net intangible assets
|
|
|
|
|
|
|
$
|
150,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Total Net
Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
Customer relationships (5-20 years)
|
$
|
49,005
|
|
|
$
|
22,615
|
|
|
$
|
26,390
|
|
Trademarks/Tradenames (3-12 years)
|
415
|
|
|
395
|
|
|
20
|
|
Developed technology (11.5 years)
|
31,290
|
|
|
4,081
|
|
|
27,209
|
|
Patents (5-10 years)
|
2,755
|
|
|
1,930
|
|
|
825
|
|
License (5 years)
|
1,400
|
|
|
1,400
|
|
|
—
|
|
Contracts (5 years)
|
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 weighted-average remaining amortization period for amortizing intangibles as of
February 28, 2018
is approximately
8
years. The Company expenses the renewal costs of patents as incurred. The weighted-average period before the next patent renewal is approximately
6
years.
Amortization expense for intangible assets amounted to
$6,516
,
$6,479
and
$4,953
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively. At
February 28, 2018
, the estimated aggregate amortization expense for all amortizable intangibles for each of the succeeding five fiscal years is as follows:
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2019
|
|
$
|
6,323
|
|
2020
|
|
6,310
|
|
2021
|
|
6,102
|
|
2022
|
|
5,974
|
|
2023
|
|
5,667
|
|
l)
Sales Incentives
The Company offers sales incentives to its customers in the form of (1) co-operative advertising allowances; (2) market development funds; (3) volume incentive rebates; and (4) other trade allowances. The Company accounts for sales incentives in accordance with ASC 605-50 "Customer Payments and Incentives" ("ASC 605-50"). Except for other trade allowances, all sales incentives require the customer to purchase the Company's products during a specified period of time. All sales incentives require customers to claim the sales incentive within a certain time period (referred to as the "claim period") and claims are settled either by the customer claiming a deduction against an outstanding account receivable or by the customer requesting a cash payout. All costs associated with sales incentives are classified as a reduction of net sales. The following is a summary of the various sales incentive programs:
Co-operative advertising allowances are offered to customers as reimbursement towards their costs for print or media advertising in which the Company’s product is featured on its own or in conjunction with other companies' products. The amount offered is either a fixed amount or is based upon a fixed percentage of sales revenue or a fixed amount per unit sold to the customer during a specified time period.
Market development funds are offered to customers in connection with new product launches or entrance into new markets. The amount offered for new product launches is based upon a fixed amount, or percentage of sales revenue to the customer or a fixed amount per unit sold to the customer during a specified time period.
Volume incentive rebates offered to customers require minimum quantities of product to be purchased during a specified period of time. The amount offered is either based upon a fixed percentage of sales revenue to the customer or a fixed amount per unit sold to the customer. The Company makes an estimate of the ultimate amount of the rebate their customers will earn based upon past history with the customers and other facts and circumstances. The Company has the ability to estimate these volume incentive rebates, as the period of time for a particular rebate to be claimed is relatively short. Any changes in the estimated amount of volume incentive rebates are recognized immediately using a cumulative catch-up adjustment. The Company accrues the cost of co-operative advertising allowances, volume incentive rebates and market development funds at the latter of when the customer purchases our products or when the sales incentive is offered to the customer.
Unearned sales incentives are volume incentive rebates where the customer did not purchase the required minimum quantities of product during the specified time. Volume incentive rebates are reversed into income in the period when the customer did not reach the required minimum purchases of product during the specified time. Unclaimed sales incentives are sales incentives earned by the customer, but the customer has not claimed payment within the claim period (period after program has ended). Unclaimed sales incentives are investigated in a timely manner after the end of the program and reversed if deemed appropriate. The Company believes the reversal of earned but unclaimed sales incentives upon the expiration of the claim period is a systematic, rational, consistent and conservative method of reversing unclaimed sales incentives.
Other trade allowances are additional sales incentives the Company provides to customers subsequent to the related revenue being recognized. The Company records the provision for these additional sales incentives at the latter of when the sales incentive is offered or when the related revenue is recognized. Such additional sales incentives are based upon a fixed percentage of the selling price to the customer, a fixed amount per unit, or a lump-sum amount.
The accrual balance for sales incentives at
February 28, 2018
and
February 28, 2017
was
$14,020
and
$13,154
, respectively. Although the Company makes its best estimate of its sales incentive liability, many factors, including significant unanticipated changes in the purchasing volume of its customers and the lack of claims made by customers, could have a significant impact on the sales incentives liability and reported operating results.
A summary of the activity with respect to accrued sales incentives is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
February 28,
2018
|
|
February 28,
2017
|
|
February 29,
2016
|
Opening balance
|
$
|
13,154
|
|
|
$
|
12,439
|
|
|
$
|
14,097
|
|
Accruals
|
42,722
|
|
|
36,413
|
|
|
28,428
|
|
Payments and credits
|
(41,811
|
)
|
|
(35,590
|
)
|
|
(30,009
|
)
|
Reversals for unearned sales incentives
|
(45
|
)
|
|
(108
|
)
|
|
(77
|
)
|
Reversals for unclaimed sales incentives
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
14,020
|
|
|
$
|
13,154
|
|
|
$
|
12,439
|
|
The majority of the reversals of previously established sales incentive liabilities pertain to sales recorded in prior periods.
m)
Advertising
Excluding co-operative advertising, the Company expensed the cost of advertising, as incurred, of
$11,753
,
$8,597
and
$8,600
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
n)
Research and Development
Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to
$10,954
,
$13,202
and
$7,234
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively, net of customer reimbursement, of
$106
,
$0
and
$44
, respectively, and are included within Engineering and Technical Support expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). Reimbursements from OEM customers for development services are reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company's operations.
o)
Product Warranties and Product Repair Costs
The Company generally warranties its products against certain manufacturing and other defects. The Company provides warranties for all of its products ranging primarily from 30 days to three years. Warranty expenses are accrued at the time of sale based on the Company's estimated cost to repair expected product returns for warranty matters. This liability is based primarily on historical experiences of actual warranty claims as well as current information on repair costs and contract terms with certain manufacturers. The warranty liability of
$4,261
and
$3,911
is recorded in Accrued Expenses in the accompanying Consolidated Balance Sheets as of
February 28, 2018
and
February 28, 2017
, respectively. In addition, the Company records a reserve for product repair costs which is based upon the quantities of defective inventory on hand and an estimate of the cost to repair such defective inventory. The reserve for product repair costs of
$1,972
and
$1,697
is recorded as a reduction to inventory in the accompanying Consolidated Balance Sheets as of
February 28, 2018
and
February 28, 2017
, respectively. Warranty claims and product repair costs expense relating to continuing operations for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
were
$7,928
,
$5,843
and
$8,028
, respectively.
Changes in the Company's accrued product warranties and product repair costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
February 28,
2018
|
|
February 28,
2017
|
|
February 29,
2016
|
Beginning balance
|
$
|
5,608
|
|
|
$
|
7,608
|
|
|
$
|
8,233
|
|
Liabilities acquired during acquisitions
|
500
|
|
|
—
|
|
|
100
|
|
Liabilities accrued for warranties issued during the year and repair cost
|
7,428
|
|
|
5,843
|
|
|
8,028
|
|
Warranty claims settled during the year
|
(7,303
|
)
|
|
(7,843
|
)
|
|
(8,753
|
)
|
Ending balance
|
$
|
6,233
|
|
|
$
|
5,608
|
|
|
$
|
7,608
|
|
p)
Foreign Currency
Assets and liabilities of subsidiaries located outside the United States whose cash flows are primarily in local currencies have been translated at rates of exchange at the end of the period or historical exchange rates, as appropriate in accordance with ASC 830, "Foreign Currency Matters" ("ASC 830"). Revenues and expenses have been translated at the weighted-average rates of exchange in effect during the period. Gains and losses resulting from translation are recorded in the cumulative foreign currency translation account in Accumulated Other Comprehensive Income (Loss). For the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, the Company recorded total net foreign currency transaction (losses)/gains in the amount of
$(8,769)
,
$(509)
and
$108
, respectively. Included within the losses recorded for the year ended
February 28, 2018
is the loss on forward contracts totaling
$(6,618)
incurred in conjunction with the sale of Hirschmann (see Note 2).
The Company has a subsidiary in Venezuela. Venezuela is currently experiencing significant political and civil unrest and economic instability and has been troubled with various foreign currency and price controls. The country has 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 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 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. The SIMADI rate was used by the Company at
February 29, 2016
and was
205
Bolivar Fuerte/$1. A net currency exchange loss of
$2
was recorded for the year ended February 29, 2016. In March 2016, the Venezuelan government enacted further changes to its foreign currency exchange mechanisms, including a devaluation of the official government exchange rate (re-named DIPRO) from
6.3
bolivars to
10.0
bolivars to the U.S. dollar. Additionally, the SIMADI exchange rate was replaced by the DICOM exchange rate, which the Venezuelan government reported would be allowed to float to meet market needs. The Company evaluated all of the facts and circumstances surrounding its Venezuelan operations and determined that as of
February 28, 2017
, the DICOM rate was the appropriate rate to use for remeasuring the subsidiary’s financial statements. As of
February 28, 2017
, the published DICOM rate offered was
700
Bolivar Fuerte/$1. A net currency exchange gain loss of
$8
was recorded for the year ended
February 28, 2017
. In January 2018, the Venezuelan government eliminated the DIPRO exchange rate, stating that all currency transactions would now be carried out at the DICOM rate. As of
February 28, 2018
, the published DICOM rate was
35,280
Bolivar Fuerte/$1. A net currency exchange rate loss of
$148
was recorded for the year
ended
February 28, 2018
. All currency exchange gains and losses are included in Other Income (Expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company holds certain long-lived assets in Venezuela, which includes an office location the subsidiary uses for its local personnel, as its automotive operations are currently suspended, as well as other rental properties. All of these properties are held for investment purposes as of
February 28, 2018
. The value of the Company's properties held for investment purposes in Venezuela was
$3,542
and
$3,679
as of
February 28, 2018
and
February 28, 2017
, respectively. No impairments were recorded for the years ended
February 28, 2018
,
February 28, 2017
, or
February 29, 2016
. 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 further impair the carrying value of these properties.
q)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all positive and negative evidence including the results of recent operations, scheduled reversal of deferred tax liabilities, future taxable income and tax planning strategies. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled (see Note 8). The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Uncertain Tax Positions
The Company adopted guidance included in ASC 740 "Income Taxes" ("ASC 740") as it relates to uncertain tax positions. The guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements.
Tax interest and penalties
The Company classifies interest and penalties associated with income taxes as a component of Income Tax Expense (Benefit) on the Consolidated Statement of Operations and Comprehensive Income (Loss).
r)
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 number of common shares outstanding during the period. Diluted net income (loss) per common share from continuing operations 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:
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
February 28, 2018
|
|
February 28, 2017
|
|
February 29, 2016
|
Weighted-average common shares outstanding (basic)
|
24,290,563
|
|
|
24,160,324
|
|
|
24,172,710
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options, warrants and restricted stock
|
256,683
|
|
|
—
|
|
|
—
|
|
Weighted-average common and potential common shares outstanding (diluted)
|
24,547,246
|
|
|
24,160,324
|
|
|
24,172,710
|
|
Restricted stock, stock options and warrants totaling
534,327
,
237,930
and
383,881
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively, were not included in the net income (loss) per common share calculation because the exercise price of these 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.
s)
Other (Expense) Income
Other (expense) income is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
February 28, 2018
|
|
February 28, 2017
|
|
February 29, 2016
|
Foreign currency (loss) gain
|
$
|
(8,769
|
)
|
|
$
|
(509
|
)
|
|
$
|
108
|
|
Interest income
|
210
|
|
|
137
|
|
|
805
|
|
Rental income
|
553
|
|
|
646
|
|
|
450
|
|
Miscellaneous
|
416
|
|
|
(728
|
)
|
|
(787
|
)
|
Total other, net
|
$
|
(7,590
|
)
|
|
$
|
(454
|
)
|
|
$
|
576
|
|
Included within the foreign currency loss for the year ended February 28, 2018 is a loss on forward contracts totaling
$(6,618)
incurred in conjunction with the sale of Hirschmann (see Note 2). Included in interest income for the year ended February 29, 2016 is income related to notes receivable from EyeLock, Inc. through the acquisition date of September 1, 2015 (see Note 2).
t)
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
Long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with ASC 360 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to their estimated fair market value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. There were
no
impairments of long-lived assets recorded during the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
.
u)
Accounting for Stock-Based Compensation
The Company has a stock-based compensation plan under which employees and non-employee directors may be granted incentive stock options ("ISO's") and non-qualified stock options ("NQSO's") to purchase shares of Class A common stock. Under the plan, the exercise price of the ISO's granted to a ten percent stockholder cannot be less than 110% of the fair market value of the Company's Class A common stock or greater than 110% of the market value of the Company's Class A common stock on the date of grant. The exercise price of all other
Options and Stock Appreciation Right ("SAR") awards may not be less than 100% of the fair market value of the Company's Class A common stock on the date of grant. If an option or SAR is granted pursuant to an assumption of, or substitution for, another option or SAR pursuant to a Corporate Transaction, and in a manner consistent with Section 409A of the Code, the exercise or strike price may be less than 100% of the fair market value on the date of grant. The plan permits for options to be exercised at various intervals as determined by the Board of Directors. However, the maximum expiration period is ten years from date of grant. The vesting requirements are determined by the Board of Directors at the time of grant. Exercised options are issued from authorized Class A common stock. As of
February 28, 2018
, approximately
1,301,000
shares were available for future grants under the terms of these plans.
Options are measured at the fair value of the award at the date of grant and are recognized as an expense over the requisite service period. Compensation expense related to stock-based awards with vesting terms are amortized using the straight-line attribution method.
The Company granted
125,000
options in October 2014, which vested on October 16, 2015, had an exercise price equal to
$7.76
,
$0.25
above the sales price of the Company’s stock on the day prior to the date of grant, a contractual term of
3.0
years and a grant date fair value of
$2.78
per share determined based upon a Black-Scholes valuation model. In addition, the Company issued
15,000
warrants in October 2014 to purchase the Company’s common stock with the same terms as those of the options above as consideration for future legal and professional services. All unexercised options and warrants from this grant expired on October 16, 2017.
There were
no
stock options granted during the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
.
The Company recognized stock-based compensation expense (before deferred income tax benefits) for awards granted under the Company’s stock option plans in the following line items in the Consolidated Statement of Operations and Comprehensive Income (Loss) during the year ended
February 29, 2016
:
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
February 29, 2016
|
Cost of sales
|
|
$
|
12
|
|
Selling expense
|
|
55
|
|
General and administrative expenses
|
|
143
|
|
Engineering and technical support
|
|
16
|
|
Stock-based compensation expense before income tax benefits
|
|
$
|
226
|
|
During the years ended
February 28, 2018
and
February 28, 2017
there were
no
stock-based compensation costs or professional fees recorded by the Company and the Company had
no
unrecognized compensation costs at
February 28, 2018
related to stock options and warrants. Net income was impacted by
$142
(after tax) in stock-based compensation expense or
$0.01
per diluted share for the year ended
February 29, 2016
.
Information regarding the Company's stock options and warrants are summarized below:
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted-
Average
Exercise
Price
|
Outstanding and exercisable at February 28, 2015
|
204,204
|
|
|
$
|
7.46
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(64,204
|
)
|
|
6.79
|
|
Forfeited/expired
|
(8,750
|
)
|
|
7.76
|
|
Outstanding and exercisable at February 29, 2016
|
131,250
|
|
|
7.76
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited/expired
|
(15,000
|
)
|
|
7.76
|
|
Outstanding and exercisable at February 28, 2017
|
116,250
|
|
|
7.76
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(38,750
|
)
|
|
7.76
|
|
Forfeited/expired
|
(77,500
|
)
|
|
7.76
|
|
Outstanding and exercisable at February 28, 2018
|
—
|
|
|
$
|
—
|
|
The aggregate pre-tax intrinsic value (the difference between the Company’s average closing stock price for the last quarter of Fiscal
2018
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on
February 28, 2018
was
$0
, as all options had been exercised or had expired by this date. The total intrinsic values of options exercised for the years ended
February 28, 2018
and
February 29, 2016
were
$108
and
$128
, respectively. There were
no
stock options exercised for the year ended
February 28, 2017
.
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. Shares under restricted stock grants are not issued to the grantees before they vest. In Fiscal 2014, the Company established the Supplemental Executive Retirement Plan ("SERP") (refer to Note 10(a)). During Fiscal 2016, Fiscal 2017, and Fiscal 2018 an additional
79,268
,
165,619
and
74,156
shares of restricted stock were granted under the SERP, respectively. These shares were 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 shares granted 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 grantees cannot transfer the rights to receive shares before the restricted shares vest. There are no market conditions inherent in the award, only an employee performance requirement, and the service requirement that the respective employee continues employment with the Company through the vesting date. The Company expenses the cost of the restricted stock awards on a straight-line basis over the requisite service period of each employee. For these purposes, the fair market value of the restricted stock awards,
$8.13
,
$2.69
and
$6.52
for Fiscal 2016, Fiscal 2017, and Fiscal 2018, respectively, were determined based on the mean of the high and low price of the Company's common stock on the grant dates.
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 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 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 year ended
February 28, 2018
:
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at February 28, 2015
|
202,646
|
|
|
$
|
10.21
|
|
Granted
|
79,268
|
|
|
8.13
|
|
Forfeited
|
(10,090
|
)
|
|
10.08
|
|
Outstanding at February 29, 2016
|
271,824
|
|
|
$
|
9.61
|
|
Granted
|
165,619
|
|
|
2.69
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at February 28, 2017
|
437,443
|
|
|
$
|
6.99
|
|
Granted
|
74,156
|
|
|
6.52
|
|
Vested and settled
|
(72,300
|
)
|
|
5.98
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at February 28, 2018
|
439,299
|
|
|
$
|
7.08
|
|
Vested and unissued at February 28, 2018
|
117,049
|
|
|
$
|
10.58
|
|
During the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
the Company recorded
$502
,
$669
and
$576
, respectively, in stock-based compensation related to restricted stock awards for continuing operations. As of
February 28, 2018
, unrecognized stock-based compensation expense related to unvested restricted stock awards was approximately
$1,050
and will be recognized over the requisite service period of each employee.
v)
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Losses
|
|
Unrealized losses on investments, net of tax
|
|
Pension plan adjustments, net of tax
|
|
Derivatives designated in a hedging relationship
|
|
Total
|
Balance at February 28, 2015
|
$
|
(32,935
|
)
|
|
$
|
(101
|
)
|
|
$
|
(2,742
|
)
|
|
$
|
2,543
|
|
|
$
|
(33,235
|
)
|
Other comprehensive (loss) income before reclassifications
|
(5,702
|
)
|
|
20
|
|
|
640
|
|
|
28
|
|
|
(5,014
|
)
|
Reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,468
|
)
|
|
(2,468
|
)
|
Net current-period other comprehensive (loss) income
|
(5,702
|
)
|
|
20
|
|
|
640
|
|
|
(2,440
|
)
|
|
(7,482
|
)
|
Balance at February 29, 2016
|
$
|
(38,637
|
)
|
|
$
|
(81
|
)
|
|
$
|
(2,102
|
)
|
|
$
|
103
|
|
|
$
|
(40,717
|
)
|
Other comprehensive (loss) income before reclassifications
|
(3,194
|
)
|
|
(17
|
)
|
|
(180
|
)
|
|
742
|
|
|
(2,649
|
)
|
Reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(532
|
)
|
|
(532
|
)
|
Net current-period other comprehensive (loss) income
|
(3,194
|
)
|
|
(17
|
)
|
|
(180
|
)
|
|
210
|
|
|
(3,181
|
)
|
Balance at February 28, 2017
|
$
|
(41,831
|
)
|
|
$
|
(98
|
)
|
|
$
|
(2,282
|
)
|
|
$
|
313
|
|
|
$
|
(43,898
|
)
|
Other comprehensive (loss) income before reclassifications
|
18,065
|
|
|
(15
|
)
|
|
(459
|
)
|
|
(1,358
|
)
|
|
16,233
|
|
Reclassified from accumulated other comprehensive loss
|
10,739
|
|
|
89
|
|
|
1,955
|
|
|
660
|
|
|
13,443
|
|
Net current-period other comprehensive (loss) income
|
28,804
|
|
|
74
|
|
|
1,496
|
|
|
(698
|
)
|
|
29,676
|
|
Balance at February 28, 2018
|
$
|
(13,027
|
)
|
|
$
|
(24
|
)
|
|
$
|
(786
|
)
|
|
$
|
(385
|
)
|
|
$
|
(14,222
|
)
|
In the above table, all reclassifications of other comprehensive income (loss) for the year ended
February 28, 2018
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 year ended
February 28, 2018
, 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 year ended
February 28, 2018
.
During the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, the Company recorded tax related to unrealized losses on investments of
$0
, pension plan adjustments of
$0
,
$(106)
and
$312
, respectively and derivatives designated in a hedging relationship of
$(645)
,
$(97)
and
$(636)
, respectively.
The other comprehensive income (loss) before reclassification of
18,065
,
(3,194)
,
(5,702)
, respectively, includes the remeasurement of intercompany transactions of a long term nature of
$12,488
,
$(2,320)
and
$(1,710)
, respectively, with certain subsidiaries whose functional currency is not the U.S. dollar, and
$5,577
,
$(874)
and
$(3,992)
, respectively, 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. Intercompany loans and transactions that are of a long-term investment nature are remeasured and resulting gains and losses shall be reported in the same manner as translation adjustments. Foreign currency translation losses reclassified from accumulated other comprehensive income (loss) of
$10,739
for the year ended February 28, 2018 included
$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. Within foreign exchange losses in other comprehensive (loss) income for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, the Company recorded total (losses) gains of
$17,559
,
$(3,200)
, and
$(4,177)
, respectively, related to the Euro;
$250
,
$176
, and
$(788)
, respectively, related to the Canadian Dollar;
$71
,
$(142)
and
$(692)
, respectively, for the Mexican Peso, as well as
$185
,
$(28)
and
$(45)
, respectively, for various other currencies. These adjustments were caused by the strengthening/(weakening) of the U.S. Dollar against the Euro, Canadian Dollar and the Mexican Peso between
(13)%
and
(3)%
in Fiscal 2018,
(2)%
and
10%
in Fiscal 2017, and
3%
and
21%
in Fiscal 2016.
w)
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenues from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements comprehensive information about the nature, amounts, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. ASU 2014-09 defines a five-step process to achieve this core principle and in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than are required under existing guidance, including identifying performance obligations in 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 has completed its implementation procedures with respect to the new revenue recognition standard. The Company's 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 utilized 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. In addition, as part of completing its quantitative assessment, the Company updated its internal controls over financial reporting and reviewed the tax impact the adoption of the new standard would have. Based on the reviews and procedures performed, the Company has concluded that its previously recorded and future revenue will not be materially impacted by the implementation of this guidance; however, it does 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 does not expect the adoption of ASU 2016-01 to have a material impact 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 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. 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. The Company does not expect the adoption of this ASU to have a material impact 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. 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 impact of the adoption of this pronouncement will not be material to the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates today's requirement to calculate goodwill impairment using Step 2, which calculates an impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual or any interim goodwill impairments tests in fiscal years beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The new standard requires that an employer disaggregate the service cost component of net benefit cost. Also, these amendments provide guidance on how to present the service cost component and the other components of net benefit costs in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The guidance is effective for fiscal years beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In 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. 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.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income due to the enactment of the Tax Cuts and Jobs Act ("TCJA") on December 22, 2017, which changed the Company's income tax rate from 35% to 21%. The amendments to the ASU changed US GAAP whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The amendments of the ASU may be adopted in total or in
part using a full retrospective or modified retrospective method. The amendments of the ASU are effective for periods beginning after December 15, 2018. Early adoption is permitted. The Company is assessing the effect of ASU 2018-02 on its consolidated financial statements.
2
)
Acquisitions and Dispositions
Acquisitions:
Rosen Electronics LLC
On April 18, 2017, Voxx acquired certain assets and assumed certain liabilities of Rosen Electronics LLC for cash consideration of
$1,814
. In addition, the Company agreed to pay a
2%
fee related to future net sales of Rosen products for three years, which resulted in a contingent consideration of
$530
.
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 allocation of the purchase price for the fair value of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 18, 2017 (as originally reported)
|
|
Measurement Period Adjustments
|
|
April 18, 2017 (as adjusted)
|
Assets acquired:
|
|
|
|
|
|
Inventory
|
$
|
2,314
|
|
|
(870
|
)
|
|
1,444
|
|
Goodwill
|
10
|
|
|
870
|
|
|
880
|
|
Intangible assets including trademarks and customer relationships
|
520
|
|
|
—
|
|
|
520
|
|
Total assets acquired
|
$
|
2,844
|
|
|
$
|
—
|
|
|
$
|
2,844
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Warranty accrual
|
500
|
|
|
—
|
|
|
500
|
|
Total
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
500
|
|
Total purchase price
|
$
|
2,344
|
|
|
$
|
—
|
|
|
$
|
2,344
|
|
EyeLock
Effective September 1, 2015 ("the Closing Date"), Voxx completed its acquisition of a
54%
voting equity interest in substantially all of the assets and certain specified liabilities of Eyelock, Inc. and Eyelock Corporation (collectively the “Seller”), a developer and marketer of iris-based identity authentication solutions, through a newly-formed entity Eyelock LLC. Eyelock LLC acquired substantially all of the assets and certain specified liabilities of the Seller for a total purchase consideration of
$31,880
, which consisted of a cash payment of
$15,504
, assignment of the fair value of the indebtedness owed to the Company by the Seller of
$4,676
and the fair value of the non-controlling interest of
$12,900
, reduced by
$1,200
for amounts owed to the LLC by the selling shareholders. Additionally, units in Eyelock LLC were issued to certain executives of EyeLock LLC. The fair value of these units is recorded as compensation expense over the requisite service period of two years. This acquisition allows the Company to enter into the growing biometrics market. The fair value of the non-controlling interest was determined, with the assistance of a third-party valuation expert, by grossing up the consideration transferred for the controlling interest by the voting equity interest percentage (adjusted for certain distribution thresholds required until a return of capital is achieved). The Company considered all the rights and preferences of the different classes of security holders and determined that there was no evidence of any disproportionate allocation of cash flow between the controlling and non-controlling interest at the date of acquisition. The adjusted controlling interest percentage in the fair value calculation amounted to
61%
. The non-controlling interest of
$12,900
, valued at
39%
,
did not contain any further discount for lack of control. The Company believes the bargain gain implied in the transaction would eliminate any further discount for lack of control.
In connection with the closing, 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
. During Fiscal 2017 and Fiscal 2018, 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. Amounts outstanding under the initial loan agreement were due on February 28, 2018, while the four convertible promissory notes executed during Fiscal 2017 and Fiscal 2018 were due on dates ranging from February 28, 2018 through September 1, 2018. On April 1, 2018, all outstanding promissory notes were amended and restated with Voxx issuing a consolidated convertible promissory note to EyeLock LLC to borrow up to
$39,000
. The promissory notes outstanding at February 28, 2018, as well as the amended and restated convertible promissory note issued on April 1, 2018 bear interest at
10%
and can be used to repay protective advances and to fund working capital requirements of the company. The amended and restated promissory note is due on February 28, 2019. The outstanding principal balance of this promissory note is convertible at the sole option of Voxx into units of EyeLock LLC. If Voxx chooses not to convert into equity, the outstanding loan principal of the amended and restated promissory note will be repaid at a multiple of
1.50
based on the repayment date. The agreement includes customary events of default and is collateralized by all of the property of EyeLock LLC. The total balance outstanding related to these notes at
February 28, 2018
was
$33,722
.
The following table summarizes the allocation of the purchase price over the fair values of the assets acquired and liabilities assumed, as of the Closing Date:
|
|
|
|
|
|
|
|
September 1, 2015
|
Assets acquired:
|
|
|
Accounts receivable
|
|
$
|
77
|
|
Inventory
|
|
304
|
|
Property, plant and equipment
|
|
259
|
|
Intangible assets
|
|
43,780
|
|
Total assets acquired
|
|
$
|
44,420
|
|
|
|
|
Liabilities assumed:
|
|
|
Accounts payable and accrued expenses
|
|
$
|
729
|
|
Deferred tax liability
|
|
2,756
|
|
Bridge loans payable to Voxx
|
|
3,176
|
|
Other long-term liabilities
|
|
1,200
|
|
Net assets acquired
|
|
36,559
|
|
Less: purchase price
|
|
31,880
|
|
Gain on bargain purchase
|
|
$
|
4,679
|
|
The acquisition of substantially all of the assets of Eyelock Inc. and Eyelock Corporation resulted in a bargain purchase gain of
$4,679
, which was recognized in the Company's Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended February 29, 2016. Prior to the recognition of the bargain purchase gain, the Company reassessed the fair value of the tangible and identifiable intangible assets acquired, and liabilities assumed in the acquisition. The Company believes it was able to acquire those assets of Eyelock Inc. and EyeLock Corporation for less than their fair value due to the distressed financial position of the company, its inability to secure additional financing to support its ongoing operations, and the lack of potential bidders for the entity prior to Voxx's acquisition.
The fair values assigned to the intangible assets acquired and their related amortization periods are as follows:
|
|
|
|
|
|
|
|
|
|
September 1, 2015
|
|
|
|
Amortization Period (Years)
|
Developed technology
|
$
|
31,290
|
|
|
|
|
11.5 years
|
Tradename
|
8,435
|
|
|
|
|
Indefinite
|
Customer relationships
|
3,470
|
|
|
|
|
15.5 years
|
Non-compete agreement
|
585
|
|
|
|
|
5.0 years
|
|
$
|
43,780
|
|
|
|
|
|
The fair values of the intangible assets acquired are measured using Level 3 inputs and are determined using variations of the income approach such as the discounted cash flows, multi-period excess earnings and relief from royalty valuation methods. Significant inputs and assumptions used in determining the fair values of the intangible assets acquired include management’s projections of future revenues, earnings and cash flows from Eyelock LLC, a weighted average cost of capital and distributor rates, customer attrition rates, royalty rates and technological obsolescence rates.
Acquisition related costs relating to this transaction of
$800
were expensed as incurred during the year ended February 29, 2016 and are included in acquisition-related costs on the Consolidated Statements of Operations and Comprehensive Income (Loss). Net sales attributable to EyeLock LLC in the Company's consolidated statements of operations for the year ended
February 28, 2018
were
$335
.
Pro-forma Financial Information
The following unaudited pro-forma financial information for the year ended February 29, 2016 represents the results of the Company's operations as if EyeLock LLC was included for the entire year of Fiscal 2016. The results of EyeLock LLC are included in the Company's continuing operations. The unaudited pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the Company constituted a single entity during such periods (amounts in thousands, except per share data).
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 29, 2016
|
Net sales from continuing operations:
|
|
|
As reported
|
|
$
|
530,206
|
|
Pro forma
|
|
531,321
|
|
Net loss attributable to VOXX International Corporation:
|
|
|
As reported
|
|
$
|
(2,682
|
)
|
Pro forma
|
|
(12,098
|
)
|
Basic loss per share attributable to VOXX International Corporation:
|
|
|
As reported
|
|
$
|
(0.11
|
)
|
Pro forma
|
|
(0.50
|
)
|
Diluted loss per share attributable to VOXX International Corporation:
|
|
|
As reported
|
|
$
|
(0.11
|
)
|
Pro forma
|
|
$
|
(0.50
|
)
|
Average shares - basic
|
|
24,172,710
|
|
Average shares - diluted
|
|
24,172,710
|
|
The above pro-forma results include certain adjustments for the periods presented to adjust the financial results and give consideration to the assumption that the acquisition occurred on the first day of Fiscal 2015. These adjustments include costs such as an estimate for amortization associated with intangible assets acquired, the removal of interest expense, as well as rent and utility expenses on debt and property leases not assumed, and the movement of expenses and gains specific to the acquisition from Fiscal 2016 to Fiscal 2015. These pro-forma results of operations have been estimated
for comparative purposes only and may not reflect the actual results of operations that would have been achieved had the transaction occurred on the date presented or be indicative of results to be achieved in the future.
Dispositions:
Hirschmann Car Communication GmbH
On August 31, 2017 (the "Closing Date"), the Company completed its sale of Hirschmann Car Communication GmbH and its subsidiaries (collectively, “Hirschmann”) to a subsidiary of TE Connectivity Ltd ("TE"). The consideration received by the Company was €
148,500
. The purchase price, at the exchange rate as of the close of business on the Closing Date approximated
$177,000
and is subject to adjustment based upon the final working capital. VOXX International (Germany) GmbH, the Company's German wholly-owned subsidiary, was the selling entity in this transaction.
The Hirschmann subsidiary group, which was included within the Automotive segment, qualified to be presented as a discontinued operation in accordance with ASC 205-20 beginning in the Company's second quarter ending August 31, 2017. Voxx will not have any continuing involvement in the Hirschmann business subsequent to the Closing Date. Hirschmann and TE will not be related parties of the Company after the deconsolidation of Hirschmann.
In order to hedge the fluctuation in the exchange rate before closing, the Company entered into forward contracts totaling €
148,500
, which could be settled on dates ranging from August 31, 2017 through September 6, 2017. As the sale of Hirschmann closed on August 31, 2017, the Company settled all of the forward contracts on this date. The forward contracts were not designated for hedging and a total foreign currency loss of
$(6,618)
was recorded when the contracts were settled, within continuing operations for the year ended February 28, 2018.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended February 28, 2018
|
|
Year ended February 28, 2017
|
|
Year ended February 29, 2016
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
91,824
|
|
|
$
|
166,512
|
|
|
$
|
150,540
|
|
Cost of sales
|
|
63,610
|
|
|
109,027
|
|
|
98,391
|
|
Gross profit
|
|
28,214
|
|
|
57,485
|
|
|
52,149
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Selling
|
|
2,778
|
|
|
5,097
|
|
|
4,937
|
|
General and administrative
|
|
14,699
|
|
|
28,309
|
|
|
27,148
|
|
Engineering and technical support
|
|
7,920
|
|
|
16,083
|
|
|
14,567
|
|
Total operating expenses
|
|
25,397
|
|
|
49,489
|
|
|
46,652
|
|
Operating income from discontinued operations
|
|
2,817
|
|
|
7,996
|
|
|
5,497
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
Interest and bank charges (a)
|
|
(279
|
)
|
|
(383
|
)
|
|
(177
|
)
|
Other, net
|
|
145
|
|
|
(126
|
)
|
|
54
|
|
Total other expense of discontinued operations, net
|
|
(134
|
)
|
|
(509
|
)
|
|
(123
|
)
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations before taxes
|
|
36,118
|
|
|
—
|
|
|
—
|
|
Total income from discontinued operations before taxes
|
|
38,801
|
|
|
7,487
|
|
|
5,374
|
|
Income tax expense on discontinued operations (b)
|
|
4,183
|
|
|
1,421
|
|
|
616
|
|
Income from discontinued operations, net of taxes
|
|
$
|
34,618
|
|
|
$
|
6,066
|
|
|
$
|
4,758
|
|
Income per share - basic
|
|
$
|
1.43
|
|
|
$
|
0.25
|
|
|
$
|
0.20
|
|
Income per share - diluted
|
|
$
|
1.41
|
|
|
$
|
0.25
|
|
|
$
|
0.20
|
|
(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 year ended February 28, 2018 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended February 28, 2018
|
|
Year ended February 28, 2017
|
|
Year ended February 29, 2016
|
Operating activities:
|
|
|
|
|
|
Depreciation and amortization expense
|
$
|
2,939
|
|
|
$
|
5,908
|
|
|
$
|
6,183
|
|
Stock-based compensation expense
|
50
|
|
|
84
|
|
|
57
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Capital expenditures
|
2,652
|
|
|
5,122
|
|
|
4,065
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Capital expenditures funded by long-term obligations
|
1,916
|
|
|
—
|
|
|
1,074
|
|
|
|
3)
|
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.
Effective 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 (See Note 2). We have 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
•
a loan agreement with EyeLock LLC, executed in conjunction with the acquisition, as well as during Fiscal 2017 and Fiscal 2018, in which the subsidiary may borrow funds from Voxx for working capital purposes. The total outstanding balance of these loans as of
February 28, 2018
was
$33,722
. See Note 2 for discussion of the original notes, as well as the amendment and restatement of all of the notes outstanding, which was executed on April 1, 2018.
We concluded that we became the primary beneficiary of EyeLock LLC on September 1, 2015 in conjunction with the acquisition. This was the first date that we had the power to direct the activities of EyeLock LLC 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, as a result of 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 in our consolidated financial statements beginning on September 1, 2015. Prior to September 1, 2015, EyeLock Inc. and EyeLock Corporation were not required to be consolidated in our consolidated financial statements, as we concluded that we were not the primary beneficiary of these entities prior to that time.
Assets and Liabilities of EyeLock LLC
In accordance with ASC 810, the consolidation of EyeLock LLC was treated as an acquisition of assets and liabilities and, therefore, the assets and liabilities of EyeLock LLC were included in our consolidated financial statements at their fair value as of September 1, 2015. Refer to Note 2 for the fair value of the assets and liabilities of EyeLock LLC on the acquisition date and the discussion of purchase accounting procedures performed.
The following table sets forth the carrying values of assets and liabilities of EyeLock LLC that were included on our Consolidated Balance Sheet as of
February 28, 2018
and
February 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
February 28, 2017
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
(101
|
)
|
|
$
|
11
|
|
Accounts receivable, net
|
|
128
|
|
|
295
|
|
Inventory, net
|
|
(119
|
)
|
|
135
|
|
Prepaid expenses and other current assets
|
|
117
|
|
|
189
|
|
Total current assets
|
|
25
|
|
|
630
|
|
Property, plant and equipment, net
|
|
186
|
|
|
276
|
|
Intangible assets, net
|
|
36,126
|
|
|
39,187
|
|
Other assets
|
|
119
|
|
|
96
|
|
Total assets
|
|
$
|
36,456
|
|
|
$
|
40,189
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
4,610
|
|
|
$
|
710
|
|
Accrued expenses and other current liabilities
|
|
2,557
|
|
|
3,506
|
|
Total current liabilities
|
|
7,167
|
|
|
4,216
|
|
Long-term debt
|
|
33,722
|
|
|
22,098
|
|
Other long-term liabilities
|
|
1,200
|
|
|
1,200
|
|
Total liabilities
|
|
42,089
|
|
|
27,514
|
|
Commitments and contingencies
|
|
|
|
|
Partners' equity:
|
|
|
|
|
Capital
|
|
41,416
|
|
|
40,891
|
|
Retained earnings
|
|
(47,049
|
)
|
|
(28,216
|
)
|
Total partners' equity
|
|
(5,633
|
)
|
|
12,675
|
|
Total liabilities and partners' equity
|
|
$
|
36,456
|
|
|
$
|
40,189
|
|
The assets of EyeLock LLC can only be used to satisfy the obligations of EyeLock LLC.
Revenue and Expenses of EyeLock LLC
The following table sets forth the revenue and expenses of EyeLock LLC that were included in our Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended
February 28, 2018
,
February 28, 2017
, and
February 29, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended February 28, 2018
|
|
Year ended February 28, 2017
|
|
Year ended February 29, 2016
|
Net sales
|
|
$
|
335
|
|
|
$
|
243
|
|
|
$
|
143
|
|
Cost of sales
|
|
455
|
|
|
301
|
|
|
11
|
|
Gross profit
|
|
(120
|
)
|
|
(58
|
)
|
|
132
|
|
Operating expenses:
|
|
|
|
|
|
|
Selling
|
|
1,893
|
|
|
2,227
|
|
|
877
|
|
General and administrative
|
|
6,792
|
|
|
6,956
|
|
|
3,239
|
|
Engineering and technical support
|
|
7,159
|
|
|
8,698
|
|
|
4,393
|
|
Total operating expenses
|
|
15,844
|
|
|
17,881
|
|
|
8,509
|
|
Operating loss
|
|
(15,964
|
)
|
|
(17,939
|
)
|
|
(8,377
|
)
|
Interest and bank charges
|
|
(2,869
|
)
|
|
(1,609
|
)
|
|
(294
|
)
|
Other, net
|
|
—
|
|
|
—
|
|
|
3
|
|
Loss before income taxes
|
|
(18,833
|
)
|
|
(19,548
|
)
|
|
(8,668
|
)
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss
|
|
$
|
(18,833
|
)
|
|
$
|
(19,548
|
)
|
|
$
|
(8,668
|
)
|
|
|
4)
|
Receivables from Vendors
|
The Company has recorded receivables from vendors in the amount of
$493
and
$634
as of
February 28, 2018
and
February 28, 2017
, respectively. Receivables from vendors primarily represent prepayments on product shipments and product reimbursements.
The Company has 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. ASC 810 requires the Company to evaluate non-consolidated entities periodically, and as circumstances change, to determine if an implied controlling interest exists. During Fiscal
2018
, the Company evaluated this equity investment and concluded that this is still a variable interest entity and the Company is not the primary beneficiary. ASA’s fiscal year end is
November 30, 2017
; however, the results of ASA as of and through
February 28, 2018
have been recorded in the consolidated financial statements.
The Company's share of income from ASA for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
was
$7,178
,
$6,797
and
$6,538
, respectively. In addition, the Company received cash distributions from ASA totaling
$7,247
,
$6,820
and
$6,237
during the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
Undistributed earnings from equity investments amounted to
$16,531
and
$16,600
at
February 28, 2018
and
February 28, 2017
, respectively.
Net sales transactions between the Company and ASA were
$315
,
$611
and
$1,608
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively. Accounts receivable balances from ASA were
$65
and
$51
as of
February 28, 2018
and
February 28, 2017
, respectively.
|
|
6)
|
Accrued Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
February 28,
2017
|
Commissions
|
$
|
711
|
|
|
$
|
598
|
|
Employee compensation
|
17,173
|
|
|
14,713
|
|
Professional fees and accrued settlements
|
1,427
|
|
|
1,616
|
|
Future warranty
|
4,261
|
|
|
3,911
|
|
Freight and duty
|
1,880
|
|
|
2,651
|
|
Payroll and other taxes
|
256
|
|
|
414
|
|
Royalties, advertising and other
|
10,642
|
|
|
8,207
|
|
Total accrued expenses and other current liabilities
|
$
|
36,350
|
|
|
$
|
32,110
|
|
The Company has a call/put option agreement with certain employees of Voxx Germany, whereby these employees may acquire up to a maximum of
20%
of the Company's stated share capital in Voxx Germany at a call price equal to the same proportion of the actual price paid by the Company for Voxx Germany. The put and call prices are fixed at
€3,000
and
€0
, respectively, with the put subject only to downward adjustments for losses incurred by Voxx Germany. The put options become immediately exercisable upon (i) the sale of Voxx Germany or (ii) the termination of employment or death of the employee. For each fiscal year, the employees also receive a dividend equal to 20% of Voxx Germany's net after tax profits. Accordingly, the Company recognizes compensation expense based on
20%
of the after tax net profits of Voxx Germany, subject to certain tax treatment adjustments as defined in the agreement, representing the annual dividend. The balance of the call/put option included in Accrued Expenses and Other Current Liabilities on the Consolidated Balance Sheets at
February 28, 2018
and
February 28, 2017
was
$3,966
and
$3,586
, respectively, and is included within employee compensation in the table above. Compensation expense for these options amounted to
$285
,
$405
and
$357
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
|
|
7)
|
Financing Arrangements
|
The Company has the following financing arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
February 28,
2017
|
Domestic credit facility (a)
|
|
$
|
—
|
|
|
$
|
92,793
|
|
Florida mortgage (b)
|
|
8,613
|
|
|
9,113
|
|
Euro asset-based lending obligation (c)
|
|
6,119
|
|
|
3,905
|
|
Schwaiger mortgage (d)
|
|
468
|
|
|
644
|
|
Klipsch note (e)
|
|
—
|
|
|
113
|
|
VOXX Germany mortgage (f)
|
|
3,665
|
|
|
3,875
|
|
Total debt
|
|
18,865
|
|
|
110,443
|
|
Less: current portion of long-term debt
|
|
7,730
|
|
|
9,215
|
|
Long-term debt before debt issuance costs
|
|
11,135
|
|
|
101,228
|
|
Debt issuance costs
|
|
2,659
|
|
|
3,481
|
|
Total long-term debt
|
|
$
|
8,476
|
|
|
$
|
97,747
|
|
a)
Domestic Bank Obligations
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 7(b)). In conjunction with the sale of Hirschmann on August 31, 2017 (see Note 2), the Company paid down substantially all of the outstanding balance of the revolving credit facility, as well as the entire outstanding balance of the term loan, which is not renewable. As of
February 28, 2018
, there was
no
balance outstanding under the revolving credit facility. The remaining availability under the revolving credit line of the Credit Facility was
$95,796
as of
February 28, 2018
.
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 under the Credit Facility designated as LIBOR Rate Loans shall bear interest at a rate equal to the then-applicable LIBOR Rate plus a range of
1.75%
-
2.25%
. Loans under the Credit Facility designated as Base Rate Loans shall 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
February 28, 2018
, the weighted average interest rate on the Credit Facility was
5.25%
.
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
February 28, 2018
, the Company was in compliance with all covenants included within the Credit Facility.
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 Facility.
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 Fiscal 2016, the Company made an amendment to the Credit Facility, which was also accounted for as a modification of debt; however, as the Company reduced the available credit in conjunction with this amendment, unamortized deferred financing costs of
$1,309
were written off and charged to Interest and bank charges in the Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended February 29, 2016. During the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, the Company amortized
$791
,
$789
and
$1,074
of these costs, respectively.
Charges incurred on the unused portion of the Credit Facility and its predecessor revolving credit facility during the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
totaled
$404
,
$241
and
$321
, respectively, and are included within Interest and Bank Charges on the Consolidated Statement of Operations and Comprehensive Income (Loss).
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 (the “Construction Loan”). 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%
(
3.14%
at
February 28, 2018
) and is secured by a first mortgage on the property, a collateral assignment of leases and rents and a guaranty by the Company. The Company is in compliance with the financial covenants of the Florida Mortgage, which 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 Consolidated Statements of Operations and Comprehensive Income (Loss) over the ten-year term of the Florida Mortgage. The Company amortized
$31
of these costs during both of the years ended
February 28, 2018
and
February 28, 2017
, and
$21
during the year ended
February 29, 2016
.
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 1 e)).
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 1(h)) and 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 factoring agreement is the three-month Euribor plus
1.6%
(
1.3%
at
February 28, 2018
) and the rate of interest for the ABL is the three-month Euribor plus
2.3%
(
2.0%
at
February 28, 2018
). As of
February 28, 2018
, the amounts outstanding under these facilities, which are payable on demand, do not exceed their respective credit limits.
d)
Schwaiger Mortgage
In January 2012, the Company's Schwaiger subsidiary purchased a building, entering into a mortgage note payable. The mortgage note bears interest at
3.75%
and will be fully paid by December 2019.
e)
Klipsch Notes
This balance represents a mortgage on a facility included in the assets acquired in connection with the Klipsch acquisition on March 1, 2011 and assumed by Voxx. The remaining balance of this note was paid in full during the third quarter of Fiscal 2018.
f)
VOXX Germany Mortgage
Included in this balance is 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.
The following is a maturity table for debt and bank obligations outstanding at
February 28, 2018
for each of the following fiscal years:
|
|
|
|
|
2019
|
$
|
7,730
|
|
2020
|
2,011
|
|
2021
|
2,011
|
|
2022
|
499
|
|
2023
|
499
|
|
Thereafter
|
6,115
|
|
Total
|
$
|
18,865
|
|
The weighted-average interest rate on short-term debt was
2.25%
for Fiscal
2018
and
2.33%
for Fiscal
2017
. Interest expense related to the Company's financing arrangements for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
was
$3,473
,
$3,879
and
$3,142
, respectively, of which
$1,708
,
$2,723
and
$2,126
was related to the Credit Facility for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
8)
Income Taxes
The components of income before the (benefit) provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
February 28,
2018
|
|
February 28,
2017
|
|
February 29,
2016
|
Domestic Operations
|
$
|
(27,214
|
)
|
|
$
|
(12,834
|
)
|
|
$
|
(14,069
|
)
|
Foreign Operations
|
3,110
|
|
|
3,904
|
|
|
897
|
|
|
$
|
(24,104
|
)
|
|
$
|
(8,930
|
)
|
|
$
|
(13,172
|
)
|
The provision (benefit) for income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
February 28,
2018
|
|
February 28,
2017
|
|
February 29,
2016
|
Current provision (benefit)
|
|
|
|
|
|
Federal
|
$
|
(1,451
|
)
|
|
$
|
(2,118
|
)
|
|
$
|
(415
|
)
|
State
|
150
|
|
|
238
|
|
|
10
|
|
Foreign
|
1,814
|
|
|
1,580
|
|
|
1,588
|
|
Total current provision (benefit)
|
$
|
513
|
|
|
$
|
(300
|
)
|
|
$
|
1,183
|
|
Deferred (benefit) provision
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(17,198
|
)
|
|
$
|
658
|
|
|
$
|
(5,540
|
)
|
State
|
(827
|
)
|
|
279
|
|
|
1,395
|
|
Foreign
|
67
|
|
|
(299
|
)
|
|
611
|
|
Total deferred (benefit) provision
|
$
|
(17,958
|
)
|
|
$
|
638
|
|
|
$
|
(3,534
|
)
|
Total (benefit) provision
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(18,649
|
)
|
|
$
|
(1,460
|
)
|
|
$
|
(5,955
|
)
|
State
|
(677
|
)
|
|
517
|
|
|
1,405
|
|
Foreign
|
1,881
|
|
|
1,281
|
|
|
2,199
|
|
Total (benefit) provision
|
$
|
(17,445
|
)
|
|
$
|
338
|
|
|
$
|
(2,351
|
)
|
The effective tax rate before income taxes varies from the current statutory U.S. federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
February 28,
2018
|
|
February 28,
2017
|
|
February 29,
2016
|
Tax benefit at Federal statutory rates
|
$
|
(7,891
|
)
|
|
32.7
|
%
|
|
$
|
(3,123
|
)
|
|
35.0
|
%
|
|
$
|
(4,611
|
)
|
|
35.0
|
%
|
State income taxes, net of Federal benefit
|
(249
|
)
|
|
1.0
|
|
|
(788
|
)
|
|
8.8
|
|
|
1,100
|
|
|
(8.3
|
)
|
Change in valuation allowance
|
(2,546
|
)
|
|
10.6
|
|
|
6,588
|
|
|
(73.8
|
)
|
|
2,820
|
|
|
(21.4
|
)
|
Change in tax reserves
|
(2,443
|
)
|
|
10.1
|
|
|
(5,974
|
)
|
|
66.9
|
|
|
101
|
|
|
(0.8
|
)
|
Non-controlling interest
|
2,404
|
|
|
(10.0
|
)
|
|
2,668
|
|
|
(29.9
|
)
|
|
1,183
|
|
|
(9.0
|
)
|
Bargain purchase gain
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,638
|
)
|
|
12.4
|
|
US effects of foreign operations
|
614
|
|
|
(2.5
|
)
|
|
556
|
|
|
(6.2
|
)
|
|
(474
|
)
|
|
3.6
|
|
Permanent differences and other
|
1,190
|
|
|
(4.9
|
)
|
|
589
|
|
|
(6.6
|
)
|
|
(488
|
)
|
|
3.7
|
|
Foreign exchange loss
|
(3,376
|
)
|
|
14.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
NOL carryback
|
—
|
|
|
—
|
|
|
1,413
|
|
|
(15.8
|
)
|
|
—
|
|
|
—
|
|
Change in tax rate
|
(2,462
|
)
|
|
10.2
|
|
|
(110
|
)
|
|
1.2
|
|
|
172
|
|
|
(1.3
|
)
|
Research & development credits
|
(524
|
)
|
|
2.2
|
|
|
(625
|
)
|
|
7.0
|
|
|
(452
|
)
|
|
3.4
|
|
Tax credits
|
(2,162
|
)
|
|
9.0
|
|
|
(856
|
)
|
|
9.6
|
|
|
(64
|
)
|
|
0.5
|
|
Effective tax rate
|
$
|
(17,445
|
)
|
|
72.4
|
%
|
|
$
|
338
|
|
|
(3.8
|
)%
|
|
$
|
(2,351
|
)
|
|
17.8
|
%
|
The U.S. effects of foreign operations include differences in the statutory tax rate of the foreign countries as compared to the statutory tax rate in the U.S.
On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under Accounting Standards Codification (“ASC”) 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from
35%
to
21%
; (2) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) accelerated expensing on certain qualified property; (4) creating a new limitation on deductible interest expense to 30% of tax adjusted EBITDA through 2021 and then 30% of tax adjusted EBIT thereafter; (5) eliminating the corporate alternative minimum tax; (6) further limitations on the deductibility of executive compensation under IRC §162(m) for tax years beginning after December 31, 2017 ; (7) a one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system; and (8) additional changes to the U.S. international tax rules including imposing a minimum tax on global intangible low taxed income (“GILTI”) and other base erosion anti-abuse provisions.
In response to the TCJA, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.
In connection with the Company’s initial analysis of the impact of the TCJA, the Company has recorded a provisional decrease in its deferred tax assets and liabilities of
$4,706
related to the remeasurement of the deferred tax assets and liabilities at the reduced U.S. federal tax rate of
21%
. The Company is subject to a one-time transition tax based on the total post-1986 earnings and profits that were previously deferred from U.S. income and profits. The Company recorded a liability in connection with the one-time transition tax of
$2,696
, which was principally offset by the Company’s tax attributes.
Pursuant to SAB 118, the Company is in the process of assessing the impact of the TCJA on its indefinite reinvestment assertion and any associated impact on its financial statements. This assessment includes, but is not limited to, assessing how the TCJA will impact the consequence of indefinitely reinvesting the Company’s foreign earnings and evaluating how the Company, having a minimal tax liability for the transition tax, will be impacted by future repatriations. Therefore, no adjustments have been made in the Company’s financial statements with respect to its indefinite reinvestment criteria.
The Company has not made a policy election with respect to the income tax effects of the new GILTI provisions. Companies can either account for taxes on GILTI as a current period expense or recognize deferred taxes when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal. Due to the complexity of these new tax rules, the Company is continuing to evaluate the expected impact. In accordance with SAB 118, the Company has not included an estimate of the tax expense or benefit related to GILTI for the fiscal year ended February 28, 2018.
While the Company is able to make a reasonable estimate of the impact of the reduction in the corporate rate and transition tax, the provisional amounts may change due to a variety of factors, including, among other things, (i) anticipated guidance from the U.S. Department of Treasury about implementing the TCJA, (ii) potential additional guidance from the SEC or the FASB related to the TCJA, and (iii) the Company’s further assessment of the TCJA and related regulatory guidance. The Company is not complete in its assessment of the impact of the TCJA on its income tax accounts and financial statements.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
February 28,
2018
|
|
February 28,
2017
|
Deferred tax assets:
|
|
|
|
Accounts receivable
|
$
|
52
|
|
|
$
|
642
|
|
Inventory
|
2,011
|
|
|
2,177
|
|
Property, plant and equipment
|
479
|
|
|
—
|
|
Accruals and reserves
|
2,375
|
|
|
4,794
|
|
Deferred compensation
|
806
|
|
|
1,460
|
|
Warranty reserves
|
976
|
|
|
1,421
|
|
Unrealized gains and losses
|
1,335
|
|
|
1,764
|
|
Net operating losses
|
13,191
|
|
|
9,557
|
|
Foreign tax credits
|
4,501
|
|
|
2,616
|
|
Other tax credits
|
3,530
|
|
|
2,937
|
|
Deferred tax assets before valuation allowance
|
29,256
|
|
|
27,368
|
|
Less: valuation allowance
|
(15,881
|
)
|
|
(18,199
|
)
|
Total deferred tax assets
|
13,375
|
|
|
9,169
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property, plant and equipment
|
—
|
|
|
(445
|
)
|
Intangible assets
|
(23,157
|
)
|
|
(32,721
|
)
|
Partnership investments
|
(100
|
)
|
|
(588
|
)
|
Prepaid expenses
|
(1,995
|
)
|
|
(2,353
|
)
|
Deferred financing fees
|
(316
|
)
|
|
(666
|
)
|
Total deferred tax liabilities
|
(25,568
|
)
|
|
(36,773
|
)
|
Net deferred tax liability
|
$
|
(12,193
|
)
|
|
$
|
(27,604
|
)
|
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We consider the level of historical taxable income, scheduled reversal of temporary differences, tax planning strategies and projected future taxable income in determining whether a valuation allowance is warranted.
During Fiscal 2018, the Company maintained a valuation allowance against its U.S. deferred tax assets and certain foreign jurisdictions. The Company's valuation allowance decreased by
$2,318
during the year ended
February 28, 2018
. Any further decline in the valuation allowance could have a favorable impact on our income tax provision and net income in the period in which such determination is made.
Pursuant to SAB 118, the Company is evaluating its assertion with respect to undistributed earnings of its foreign subsidiaries in light of the changes made by the TCJA. As of
February 28, 2018
, the Company has not provided for U.S. federal and foreign withholding taxes with respect to VOXX International (Germany) GmbH. The cumulative undistributed earnings have been subjected to U.S. taxation in connection with the one-time transition tax enacted with the TCJA. If these future earnings are repatriated to the United States, or if the Company determines that such earnings will be remitted in the foreseeable future, additional tax provisions may be required. Due to the complexities of the tax laws and the assumptions that would have to be made, it is not practicable to estimate the amounts of income tax provisions that may be required. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in undistributed earnings is not practicable to determine at this time.
The Company has U.S. federal net operating losses of
$42,376
, of which
$17,703
expire in Fiscal 2035 through 2037 if not utilized, and
$24,673
have an indefinite carryforward period. The Company has foreign tax credits of
$3,231
which expire in tax year 2025 through 2028. The Company has research and development tax credits of
$1,795
, which expire in tax years 2034 through 2038. The Company has various foreign net operating loss carryforwards, state net operating loss carryforwards, and state tax credits that expire in various years and amounts through tax year 2038.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:
|
|
|
|
|
Balance at February 28, 2015
|
$
|
14,575
|
|
Additions based on tax positions taken in the current and prior years
|
1,366
|
|
Settlements
|
—
|
|
Decreases based on tax positions taken in the prior years
|
(915
|
)
|
Other
|
(554
|
)
|
Balance at February 29, 2016
|
$
|
14,472
|
|
Additions based on tax positions taken in the current and prior years
|
3,147
|
|
Settlements
|
—
|
|
Decreases based on tax positions taken in the prior years
|
(6,470
|
)
|
Other
|
(305
|
)
|
Balance at February 28, 2017
|
$
|
10,844
|
|
Additions based on tax positions taken in the current and prior years
|
630
|
|
Settlements
|
—
|
|
Decreases based on tax positions taken in prior years
|
(2,945
|
)
|
Other
|
578
|
|
Balance at February 28, 2018
|
$
|
9,107
|
|
Of the amounts reflected in the table above at
February 28, 2018
,
$9,107
, if recognized, would reduce our effective tax rate. If recognized,
$7,517
of the unrecognized tax benefits are likely to attract a full valuation allowance, thereby offsetting the favorable impact to the effective tax rate. Our unrecognized tax benefit non-current consolidated balance sheet liability, including interest and penalties, is
$2,191
. The Company records accrued interest and penalties related to income tax matters in the provision for income taxes in the accompanying Consolidated Statement of Operations and Comprehensive Income (Loss). For the years ended
February 28, 2018
,
February 28, 2017
and February 29, 2016, interest and penalties on unrecognized tax benefits were
$(145)
,
$98
and
$23
, respectively. The balance as of
February 28, 2018
and
February 28, 2017
was
$602
and
$746
, respectively. The Company does not expect a significant change to its unrecognized tax benefits within the next 12 months.
The Company, or one of its subsidiaries, files its tax returns in the U.S. and certain state and foreign income tax jurisdictions with varying statutes of limitations. The earliest years' tax returns filed by the Company that are still subject to examination by the tax authorities in the major jurisdictions are as follows:
|
|
|
|
Jurisdiction
|
|
Tax Year
|
|
|
|
U.S.
|
|
2014
|
Netherlands
|
|
2014
|
Germany
|
|
2014
|
The Company's capital structure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Outstanding
|
|
|
|
|
Security
|
|
Par
Value
|
|
February 28,
2018
|
|
February 28,
2017
|
|
February 28,
2018
|
|
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
|
|
|
one
|
|
Ratably with Class B
|
Class B Common Stock
|
|
$
|
0.01
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
2,260,954
|
|
|
2,260,954
|
|
|
ten
|
|
Ratably with Class A
|
The holders of Class A and Class B common stock are entitled to receive cash or property dividends declared by the Board of Directors. The Board of Directors can declare cash dividends for Class A common stock in amounts equal to or greater than the cash dividends for Class B common stock. Dividends other than cash must be declared equally for both classes. Each share of Class B common stock may, at any time, be converted into one share of Class A common stock.
Stock held in treasury by the Company is accounted for using the cost method which treats stock held in treasury as a reduction to total stockholders' equity and amounted to
2,168,094
and
2,168,074
shares at
February 28, 2018
and
February 28, 2017
, respectively. The cost basis for subsequent sales of treasury shares is determined using an average cost method. During the year ended February 29, 2016, the Company repurchased
39,529
shares for an aggregate cost of
$227
. During the years ended
February 28, 2017
and
February 28, 2018
, the Company repurchased
no
shares. As of
February 28, 2018
,
1,383,271
shares of the Company's Class A common stock are authorized to be repurchased in the open market.
|
|
10)
|
Other Stock and Retirement Plans
|
a)
Supplemental Executive Retirement Plan
During Fiscal 2014, the Company established a Supplemental Executive Retirement Plan ("SERP") to provide additional retirement income to its Chairman and select executive officers. Subject to certain performance criteria, service requirements and age restrictions, employees who participate in the SERP will receive restricted stock awards. The restricted stock awards 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 shares granted in Fiscal 2014), or the grantee reaching the age of 65 years (refer to Note 1(u)).
As of
February 28, 2018
, approximately
1,301,000
shares of the Company's Class A common stock are reserved for issuance under the Company's Restricted and Stock Option Plans.
b)
Profit Sharing Plans
The Company has established two non-contributory employee profit sharing plans for the benefit of its eligible employees in the United States and Canada. The plans are administered by trustees appointed by the Company.
No
discretionary contributions were made during the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
. Contributions required by law to be made for eligible employees in Canada were not material for all periods presented.
c)
401(k) Plans
The VOXX International Corporation 401(k) plan is for all eligible domestic employees. The Company matches a portion of the participant's contributions after three months of service under a predetermined formula based on the participant's contribution level. Shares of the Company's Common Stock are not an investment option in the Savings Plan and the Company does not use such shares to match participants' contributions. During the
years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, the Company contributed, net of forfeitures,
$388
,
$408
and
$623
to the 401(k) Plan.
d)
Cash Bonus Profit Sharing Plan
During Fiscal 2009, the Board of Directors authorized a Cash Bonus Profit Sharing Plan that allows the Company to make profit sharing contributions for the benefit of eligible employees, for any fiscal year based on a pre-determined formula on the Company's pre-tax profits. The size of the contribution is dependent upon the performance of the Company. A participant’s share of the contribution is determined pursuant to the participant’s eligible wages for the fiscal year as a percentage of total eligible wages for all participants. There were
no
contributions made to the plan for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
.
e)
Deferred Compensation Plan
Effective December 1, 1999, the Company adopted a Deferred Compensation Plan (the Plan) for Vice Presidents and above. The Plan is intended to provide certain executives with supplemental retirement benefits as well as to permit the deferral of more of their compensation than they are permitted to defer under the Profit Sharing and 401(k) Plans. The Plan provides for a matching contribution equal to
25%
of the employee deferrals up to
$20
. On February 1, 2008, the Company suspended all matching contributions to contain operating expenses. The matching contributions have remained suspended for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
. The Plan is not intended to be a qualified plan under the provisions of the Internal Revenue Code. All compensation deferred under the Plan is held by the Company in an investment trust which is considered an asset of the Company. The Company has the option of amending or terminating the Plan at any time.
The investments, which amounted to
$3,620
and
$4,094
at
February 28, 2018
and
February 28, 2017
, respectively, have been classified as long-term marketable securities and are included in investment securities on the accompanying Consolidated Balance Sheets and a corresponding liability is recorded with
$250
recorded in Accrued expenses and the balance in deferred compensation which is classified as a long-term liability. Unrealized gains and losses on the marketable securities and corresponding deferred compensation liability net to zero in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).
At
February 28, 2018
, the Company was obligated under non-cancellable operating leases for equipment and warehouse facilities related to continuing operations for minimum annual rental payments for each of the succeeding fiscal years:
|
|
|
|
|
|
|
|
Operating
Leases
|
2019
|
|
$
|
1,341
|
|
2020
|
|
609
|
|
2021
|
|
303
|
|
2022
|
|
257
|
|
2023
|
|
209
|
|
Thereafter
|
|
204
|
|
Total minimum lease payments
|
|
$
|
2,923
|
|
Rental expense for the above-mentioned operating lease agreements and other rental agreements on a month-to-month basis was
$1,163
,
$1,898
and
$2,087
for the years ended
February 28, 2018
,
February 28, 2017
and
February 29, 2016
, respectively.
The Company leased a facility from its principal shareholder and current chairman, which was accounted for as an operating lease, and had an expiration date of November 30, 2016. This facility was sold to an unrelated third party during the second quarter of Fiscal 2017. The Company has
no
related party leases as of
February 28, 2018
.
The Company has capital leases with a total lease liability of
$1,011
at
February 28, 2018
. These leases have maturities through Fiscal 2022.
|
|
12)
|
Financial Instruments
|
a)
Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during the ordinary course of business through major domestic banks as requested by certain suppliers. The Company also issues standby letters of credit principally to secure certain bank obligations and insurance policies. The Company had
no
open commercial letters of credit at
February 28, 2018
and
February 28, 2017
. Standby letters of credit amounted to
$1,161
and
$1,306
at
February 28, 2018
and
February 28, 2017
, respectively. The terms of these letters of credit are all less than one year. No material loss is anticipated due to nonperformance by the counter parties to these agreements. The fair value of the standby letters of credit is estimated to be the same as the contract values based on the short-term nature of the fee arrangements with the issuing banks.
At
February 28, 2018
, the Company had unconditional purchase obligations for inventory commitments of
$61,869
. These obligations are not recorded in the consolidated financial statements until commitments are fulfilled and such obligations are subject to change based on negotiations with manufacturers.
b)
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables. The Company's customers are located principally in the United States, Canada, Europe and Asia Pacific and consist of, among others, distributors, mass merchandisers, warehouse clubs, major automobile manufacturers, and independent retailers. The Company generally grants credit based upon analyses of customers' financial conditions and previously established buying and payment patterns. For certain customers, the Company establishes collateral rights in accounts receivable and inventory and obtains personal guarantees from certain customers based upon management's credit evaluation. Certain customers in Europe and Latin America have credit insurance equaling their credit limits.
At
February 28, 2018
and
February 28, 2017
, the Company's largest customer balance accounted for approximately
5.4%
and
4.8%
of accounts receivable, respectively.
No
customer accounted for more than
10%
of net sales from continuing operations during the years ended
February 28, 2018
,
February 28, 2017
or
February 29, 2016
. The Company's five largest customers represented
26%
,
28%
, and
29%
of net sales from continuing operations during the years ended
February 28, 2018
,
February 28, 2017
, and
February 29, 2016
, respectively.
A portion of the Company's customer base may be susceptible to downturns in the retail economy, particularly in the consumer electronics industry. Additionally, customers specializing in certain automotive sound, security and accessory products may be impacted by fluctuations in automotive sales.
|
|
13)
|
Financial and Product Information About Foreign and Domestic Operations
|
Segment
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 application, collision avoidance systems and location-based services.
Our Premium Audio segment designs, manufactures, distributes
and markets home theater systems, high-end
loudspeakers, outdoor speakers, iPod/iPad and computer speakers, business music systems, cinema speakers, flat panel speakers, Bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance) compatible devices.
Our Consumer Accessories segment designs, markets and distributes remote controls; wireless and Bluetooth speakers; karaoke products; action cameras; iris identification and biometric security related products; personal sound amplifiers; infant/nursery products; activity tracking bands; smart-home security and safety products; infant and nursery products; and A/V connectivity, portable/home charging, reception and digital consumer products.
Each operating segment is individually reviewed and evaluated by our Chief Operating Decision Maker (CODM), who allocates resources and assesses performance of each segment individually. The Company's Chief Executive Officer has been identified as the CODM. The CODM evaluates performance and allocates resources based upon a number of factors, the primary profit measure being income before income taxes
of each segment. Certain costs and royalty income are not allocated to the segments and are reported as Corporate/Eliminations. Costs not allocated to the segments include professional fees, public relations costs, acquisition costs and costs associated with executive and corporate management departments including salaries, benefits, depreciation, rent and insurance.
The segments share many common resources, infrastructures and assets in the normal course of business. Thus, the Company does not report assets or capital expenditures by segment to the CODM.
The accounting principles applied at the consolidated financial statement level are generally the same as those applied at the operating segment level and there are no material intersegment sales. The segments are allocated interest expense, based upon a pre-determined formula, which utilizes a percentage of each operating segment's intercompany balance, which is offset in corporate/eliminations.
Segment data from continuing operations for each of the Company's segments are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Premium Audio
|
|
Consumer Accessories
|
|
Corporate/ Eliminations
|
|
Total
|
Fiscal Year Ended February 28, 2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
155,480
|
|
|
$
|
172,406
|
|
|
$
|
178,756
|
|
|
$
|
450
|
|
|
$
|
507,092
|
|
Equity in income of equity investees
|
7,178
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,178
|
|
Interest expense and bank charges
|
967
|
|
|
7,979
|
|
|
7,113
|
|
|
(10,050
|
)
|
|
6,009
|
|
Depreciation and amortization expense
|
1,027
|
|
|
3,492
|
|
|
4,663
|
|
|
2,992
|
|
|
12,174
|
|
Income (loss) before income taxes
|
13,922
|
|
|
1,137
|
|
|
(23,841
|
)
|
|
(15,322
|
)
|
|
(24,104
|
)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 28, 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
170,729
|
|
|
$
|
166,789
|
|
|
$
|
176,216
|
|
|
$
|
796
|
|
|
$
|
514,530
|
|
Equity in income of equity investees
|
6,797
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,797
|
|
Interest expense and bank charges
|
3,109
|
|
|
5,295
|
|
|
4,716
|
|
|
(6,015
|
)
|
|
7,105
|
|
Depreciation and amortization expense
|
1,322
|
|
|
3,688
|
|
|
4,702
|
|
|
2,674
|
|
|
12,386
|
|
Income (loss) before income taxes
|
13,871
|
|
|
8,316
|
|
|
(20,300
|
)
|
|
(10,817
|
)
|
|
(8,930
|
)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 29, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
201,125
|
|
|
$
|
140,508
|
|
|
$
|
187,272
|
|
|
$
|
1,301
|
|
|
$
|
530,206
|
|
Equity in income of equity investees
|
6,538
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,538
|
|
Interest expense and bank charges
|
5,634
|
|
|
8,979
|
|
|
5,766
|
|
|
(12,481
|
)
|
|
7,898
|
|
Depreciation and amortization expense
|
1,144
|
|
|
3,477
|
|
|
2,904
|
|
|
2,130
|
|
|
9,655
|
|
Income (loss) before income taxes (a)
|
12,483
|
|
|
(8,945
|
)
|
|
(17,044
|
)
|
|
334
|
|
|
(13,172
|
)
|
|
|
(a)
|
Included in the loss before taxes for the year ended February 29, 2016 within the Consumer Accessories segment is the
$4,679
gain on bargain purchase recognized in conjunction with the EyeLock transaction, as well as an impairment loss
|
on intangible assets totaling
$2,860
. Included in the loss before taxes for the year ended February 29, 2016 within the Premium Audio segment is an impairment loss on intangible assets totaling
$6,210
.
No
customer accounted for more than
10%
of consolidated net sales from continuing operations during the years ended
February 28, 2018
,
February 28, 2017
or
February 29, 2016
.
Geographic net sales information from continuing operations in the table below is based on the location of the selling entity. Long-lived assets, primarily fixed assets, are reported below based on the location of the asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Germany
|
|
Other
|
|
Total
|
Fiscal Year Ended February 28, 2018
|
|
|
|
|
|
|
|
Net sales
|
$
|
446,262
|
|
|
$
|
57,447
|
|
|
$
|
3,383
|
|
|
$
|
507,092
|
|
Long-lived assets
|
48,571
|
|
|
12,979
|
|
|
3,709
|
|
|
65,259
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 28, 2017
|
|
|
|
|
|
|
|
Net sales
|
$
|
449,865
|
|
|
$
|
59,856
|
|
|
$
|
4,809
|
|
|
$
|
514,530
|
|
Long-lived assets
|
49,937
|
|
|
11,688
|
|
|
3,964
|
|
|
65,589
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 29, 2016
|
|
|
|
|
|
|
|
Net sales
|
$
|
461,606
|
|
|
$
|
61,161
|
|
|
$
|
7,439
|
|
|
$
|
530,206
|
|
Long-lived assets
|
47,092
|
|
|
12,450
|
|
|
3,989
|
|
|
63,531
|
|
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 which are not advantageous to the Company, or pay material amounts of damages.
|
|
15)
|
Unaudited Quarterly Financial Data
|
Selected unaudited, quarterly financial data of the Company for the years ended
February 28, 2018
and
February 28, 2017
appear below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Feb 28, 2018
|
|
Nov 30, 2017
|
|
Aug 31, 2017
|
|
May 31, 2017
|
2018
|
|
|
|
|
|
|
|
|
Net sales from continuing operations
|
|
$
|
122,236
|
|
|
$
|
156,563
|
|
|
$
|
113,470
|
|
|
$
|
114,823
|
|
Gross profit from continuing operations
|
|
32,213
|
|
|
41,519
|
|
|
28,421
|
|
|
30,144
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
8,396
|
|
|
$
|
7,477
|
|
|
$
|
(19,848
|
)
|
|
$
|
(2,684
|
)
|
Net income (loss) from discontinued operations
|
|
2,276
|
|
|
(368
|
)
|
|
34,931
|
|
|
(2,221
|
)
|
Net income (loss) attributable to Voxx International Corporation
|
|
12,585
|
|
|
8,644
|
|
|
17,106
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
$
|
(0.74
|
)
|
|
$
|
(0.03
|
)
|
Discontinued operations
|
|
0.09
|
|
|
(0.02
|
)
|
|
1.45
|
|
|
(0.09
|
)
|
Attributable to VOXX International Corporation
|
|
0.52
|
|
|
0.36
|
|
|
0.71
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
$
|
(0.74
|
)
|
|
$
|
(0.03
|
)
|
Discontinued operations
|
|
0.09
|
|
|
(0.02
|
)
|
|
1.45
|
|
|
(0.09
|
)
|
Attributable to VOXX International Corporation
|
|
0.51
|
|
|
0.35
|
|
|
0.71
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Feb 28, 2017
|
|
Nov 30, 2016
|
|
Aug 31, 2016
|
|
May 31, 2016
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from continuing operations
|
|
$
|
124,894
|
|
|
$
|
157,411
|
|
|
$
|
118,325
|
|
|
$
|
113,900
|
|
Gross profit from continuing operations
|
|
35,966
|
|
|
43,648
|
|
|
32,443
|
|
|
31,973
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
$
|
(7,945
|
)
|
|
$
|
1,627
|
|
|
$
|
3,471
|
|
|
$
|
(6,421
|
)
|
Net income (loss) from discontinued operations
|
|
5,649
|
|
|
2,283
|
|
|
(2,167
|
)
|
|
301
|
|
Net (loss) income attributable to Voxx International Corporation
|
|
(90
|
)
|
|
5,800
|
|
|
3,020
|
|
|
(4,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.24
|
)
|
|
$
|
0.15
|
|
|
$
|
0.21
|
|
|
$
|
(0.19
|
)
|
Discontinued operations
|
|
0.23
|
|
|
0.09
|
|
|
(0.09
|
)
|
|
0.01
|
|
Attributable to VOXX International Corporation
|
|
0.00
|
|
|
0.24
|
|
|
0.12
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - diluted:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.24
|
)
|
|
$
|
0.14
|
|
|
$
|
0.21
|
|
|
$
|
(0.19
|
)
|
Discontinued operations
|
|
0.23
|
|
|
0.09
|
|
|
(0.09
|
)
|
|
0.01
|
|
Attributable to VOXX International Corporation
|
|
0.00
|
|
|
0.24
|
|
|
0.12
|
|
|
(0.18
|
)
|
Net income per common share is computed separately for each quarter. Therefore, the sum of such quarterly per share amounts may differ from the total for the years.