VOXX INTERNATIONAL CORPORATION Forward-Looking Statements
Certain information in this Quarterly Report on Form 10-Q would constitute
forward-looking statements, including, but not limited to, information relating
to the future performance and financial condition of the Company, the plans and
objectives of the Company's management and the Company's assumptions regarding
such performance and plans that are forward-looking in nature and involve
certain risks and uncertainties. Actual results could differ materially from
such forward-looking information.
We begin Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") with an overview of the business. This is followed by a
discussion of the Critical Accounting Policies and Estimates that we believe are
important to understanding the assumptions and judgments incorporated in our
reported financial results. In the next section, we discuss our results of
operations for the three and nine months ended November 30, 2019 compared to the
three and nine months ended November 30, 2018 . Next, we present EBITDA, Adjusted
EBITDA and Diluted Adjusted EBITDA per common share attributable to Voxx for the
three and nine months ended November 30, 2019 compared to the three and nine
months ended November 30, 2018 in order to provide a useful and appropriate
supplemental measure of our performance. We then provide an analysis of changes
in our balance sheets and cash flows, and discuss our financial commitments in
the sections entitled "Liquidity and Capital Resources." We conclude this MD&A
with a discussion of "Related Party Transactions" and "Recent Accounting
Pronouncements."
Unless specifically indicated otherwise, all amounts presented in our MD&A below are in thousands, except share and per share data.
Business Overview
VOXX International Corporation ("Voxx," "We," "Our," "Us" or the "Company") is a leading international manufacturer and distributor operating in theAutomotive Electronics , Consumer Electronics, and Biometrics 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. , AudiovoxMexico ,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. , andAudiovox 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®, Acoustic Research®, Advent®, Car Link®, Chapman®, Code-Alarm®, Crimestopper™ Discwasher®, Energy®, Heco®, Invision®, Jamo®, Klipsch®, Mac Audio™, Magnat®, Mirage®, myris®, Oehlbach®, Omega®, Prestige®, Project Nursery®, RCA®, RCA Accessories, Rosen®, Schwaiger®, Terk® andVoxx 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 asSiriusXM satellite radio products. Reportable Segments EffectiveMarch 1, 2019 , the Company revised its reportable segments to better reflect the way the Company now manages its business. To reflect management's revised perspective, the Company now classifies its operations in the following three reportable segments:Automotive Electronics , Consumer Electronics, and Biometrics. Prior year segment amounts have been reclassified to conform to the current presentation. See Note 22 to the Company's Consolidated Financial Statements for segment information.
Products included in these segments are as follows:
? mobile multi-media video products, including in-dash, overhead and headrest
systems,
? autosound products including radios and amplifiers,
? satellite radios including plug and play models and direct connect models,
? smart phone telematics applications,
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? automotive security, vehicle access and remote start systems, ? automotive power accessories, ? rear observation and collision avoidance systems, ? driver distraction products, and ? power lift gates.
Consumer Electronics products include:
? premium loudspeakers, ? architectural speakers, ? commercial speakers, ? outdoor speakers, ? flat panel speakers, ? wireless speakers, ? Bluetooth speakers, ? home theater systems, ? business music systems, ? streaming music systems, ? on-ear and in-ear headphones, ? wireless and Bluetooth headphones, ? soundbars and sound bases, ? DLNA (Digital Living Network Alliance ) compatible devices, ? High-Definition Television ("HDTV") antennas, ? Wireless Fidelity ("WiFi") antennas, ? High-Definition Multimedia Interface ("HDMI") accessories, ? smart-home security and safety related products,
? home electronic accessories such as cabling and other connectivity products,
? power cords,
? performance enhancing electronics,
? TV universal remotes,
? flat panel TV mounting systems,
? karaoke products,
? infant/nursery products,
? activity tracking bands,
? healthcare wearables,
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? power supply systems and charging products,
? electronic equipment cleaning products,
? personal sound amplifiers,
? set-top boxes,
? home and portable stereos, and
? digital multi-media products, such as personal video recorders and MP3
products.
Biometrics products include:
? iris identification products, and ? biometric security related products. We believe our segments may 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. Our objective is to continue to grow our business by acquiring new brands, embracing new technologies, expanding product development and applying this to a continued stream of new products that should increase gross margins and improve operating income. In addition, it is our intention to continue to acquire synergistic companies that would allow us to leverage our overhead, penetrate new markets and expand existing product categories through our business channels. Notwithstanding the above, if the appropriate opportunity arises, the Company will explore the potential divestiture of a product line or business.
Acquisitions and Dispositions
There were no acquisitions or dispositions during the three and nine months
ended
Critical Accounting Policies and Estimates
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; accrued sales incentives; accounts receivable reserves; inventory valuation; valuation of long-lived assets; valuation and impairment assessment of goodwill, trademarks, and other intangible assets; warranties; stock-based compensation; recoverability of deferred tax assets; and the reserve for uncertain tax positions at the date of the consolidated financial statements. A summary of the Company's critical accounting policies is identified in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the fiscal year endedFebruary 28, 2019 . SinceFebruary 28, 2019 , there have been no changes in our critical accounting policies or changes to the assumptions and estimates related to them, with the exception of the Company's use of the discrete method of estimating itsU.S. tax provision (benefit) beginning in the second quarter of Fiscal 2020 (see Note 12). Results of Operations As you read this discussion and analysis, refer to the accompanying Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss), which present the results of our operations for the three and nine months endedNovember 30, 2019 and 2018.
The following tables set forth, for the periods indicated, certain statements of
operations data for the three and nine months ended
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Net Sales
November 30,
2019 2018 $ Change % Change
Three Months Ended
Automotive Electronics $ 29,985 $ 45,053 $ (15,068 ) (33.4 )%
Consumer Electronics 79,914 83,927 (4,013 ) (4.8 )%
Biometrics 138 400 (262 ) (65.5 )%
Corporate 75 257 (182 ) (70.8 )%
Total net sales $ 110,112 $ 129,637 $ (19,525 ) (15.1 )%
Nine Months Ended
Automotive Electronics $ 86,472 $ 124,705 $ (38,233 ) (30.7 )%
Consumer Electronics 206,601 213,159 (6,558 ) (3.1 )%
Biometrics 398 812 (414 ) (51.0 )%
Corporate 341 683 (342 ) (50.1 )%
Total net sales $ 293,812 $ 339,359 $ (45,547 ) (13.4 )%
Automotive sales represented 27.2% and 29.4% of the net sales for the three and
nine months ended November 30, 2019 , respectively, compared to 34.8% and 36.7%
in the respective prior year periods. Sales in this segment decreased during the
three and nine months ended November 30, 2019 as compared to the prior year due
to various factors, including a decline in sales of the Company's EVO rear seat
entertainment product line, which was due in part to launch delays for certain
vehicle models, as well as slower sales for certain programs that began in the
prior year and the deletion of one planned program, which is attributable to a
softening of global automotive industry sales in both periods. The Company's OEM
security and remote start sales also declined during the three and nine months
ended November 30, 2019 as a result of competition, as well as the
discontinuation of passive entry programs with one of the Company's customers.
Sales of aftermarket satellite radio and headrest products have declined in the
three and nine months ended November 30, 2019 , as compared to the prior year, as
a result of an increase in standard factory equipped vehicles with these
options, as well as due to price competition for aftermarket headrest products.
Additionally, during the three and nine months ended November 30, 2019 , the
Company made a non-refundable up-front payment to one of its customers in
anticipation of a future OEM program contract, which resulted in a reduction of
revenue. Offsetting the sales declines in this segment for the three and nine
months ended November 30, 2019 were increases in sales of certain aftermarket
safety and security products as compared to the prior year periods.
Consumer Electronics sales represented 72.6% and 70.3% of our net sales for the
three and nine months ended November 30, 2019 , respectively, compared to 64.7%
and 62.8% in the comparable prior year periods. Sales decreased for the three
and nine months ended November 30, 2019 as compared to the prior year due to
several factors. The Company experienced decreases in sales of certain products,
such as in the Project Nursery line, as a result of the elimination of baby
video monitors; in wireless and bluetooth speakers, due a reduction in product
placement with one of the Company's larger customers; and in karaoke products,
due to a one time holiday sale to one of the Company's customers in the prior
year that did not repeat in the current fiscal year. The Company also continued
to see a decline in sales of certain hook-up and power products, as well as
headphones and remotes, as a result of changes in customer demand and
technology, and due to the Company's continuing rationalization of SKU's with
the goal of limiting sales of lower margin products, and a decrease in sales of
smart home products as the Company is exiting this category. Within Europe , the
Company experienced decreases in sales across all product lines, as well as in
the DIY business during the three and nine months ended November 30, 2019 as a
result of a slowdown in the European market. For the three months ended
November 30, 2019 , there was also a decrease in sales of the Company's premium
home separate speaker products, as a result of prior year load-in sales of two
new product lines that launched during the second quarter of Fiscal 2019 that
did not repeat in the current year period. Offsetting these decreases, the
Company had an increase in sales within both of its premium mobility and premium
wireless and bluetooth speaker categories as a result of the launch of new lines
of soundbars and wireless earbuds, as well as stronger sales of several existing
products. Additional distribution partners for the Company's premium commercial
speaker products have also had a favorable impact on sales for the three and
nine months ended November 30, 2019 . Reception product sales were up for the
three and nine months ended November 30, 2019 as a result of expanded SKU
offerings with certain customers and stronger market share, and sales of the
Company's activity bands have increased year over year as a result of increased
motion program participants, as well as additional product offerings for
participants, including the Apple watch and Fitbit. For the nine months ended
November 30, 2019 , the Company's premium home separate speaker product sales
increased as a result of the continued success of its new domestic product lines
that launched during the second quarter of Fiscal 2019, as well as due to a new
distribution partnership.
Biometrics sales represented 0.1% of our net sales for both the three and nine
months ended November 30, 2019 , compared to 0.3% and 0.2% in the respective
prior year periods. This segment experienced a decrease in product sales for the
three and nine
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-------------------------------------------------------------------------------- months endedNovember 30, 2019 as a result of its product mix, as the Company was selling more of its higher dollar Hbox products during the three and nine months endedNovember 30, 2018 . During the three and nine months endedNovember 30, 2019 , the Company began selling its EXT outdoor perimeter access product, as well as an updated version of its Nano NXT perimeter access product, which are both at a lower price point and have not yet achieved the sales volumes to surpass prior year sales dollars.
Gross Profit and Gross Margin Percentage
November 30,
2019 2018 $ Change % Change
Three Months Ended (47.5 )%
20.1 % 25.5 %
Consumer Electronics 25,627 26,662 (1,035 ) (3.9 )%
32.1 % 31.8 %
Biometrics (39 ) 322 (361 ) (112.1 )%
(28.3 )% 80.5 %
Corporate (147 ) 472 (619 ) (131.1 )%
$ 31,464 $ 38,923 $ (7,459 ) (19.2 )%
28.6 % 30.0 %
Nine Months Ended (42.2 )%
21.1 % 25.3 %
Consumer Electronics 63,040 64,654 (1,614 ) (2.5 )%
30.5 % 30.3 %
Biometrics 13 562 (549 ) (97.7 )%
3.3 % 69.2 %
Corporate (39 ) 910 (949 ) (104.3 )%
$ 81,242 $ 97,663 $ (16,421 ) (16.8 )%
27.7 % 28.8 %
Gross margin percentages for the Company have decreased 140 and 110 basis points
for the three and nine months ended November 30, 2019 as compared to the three
and nine months ended November 30, 2018 , respectively.
Gross margin percentages in the Automotive Electronics segment decreased 540 and
420 basis points for the three and nine months ended November 30, 2019 , as
compared to the respective prior year periods. The decrease in margins was
driven primarily by the declines in higher margin OEM security, remote start,
and rear seat entertainment sales, which also resulted in lower absorption of
fixed overhead costs in the current year periods, further decreasing margins for
the segment. In addition, there was a decline in aftermarket headrest product
sales, which typically generate higher margins for the segment. Margins have
also been negatively affected during the three and nine months ended
November 30, 2019 by tariff increases, as certain of the Company's products are
manufactured in China , while production of certain other products were relocated
to other countries with higher labor costs. During the three and nine months
ended November 30, 2019 , the Company also made a non-refundable up-front payment
to a customer in anticipation of a future OEM program contract, which negatively
impacted margins. As an offset to these margin declines during the three and
nine months ended November 30, 2019 , the Automotive Electronics segment
experienced declines in satellite radio sales, which contribute lower margins to
the group, while increased sales of certain aftermarket security products
contributed favorably to margins for the three and nine month periods.
Gross margin percentages in the Consumer Electronics segment increased 30 and 20
basis points for the three and nine months ended November 30, 2019 ,
respectively, as compared to the prior year periods. Margin increases during the
three and nine months ended November 30, 2019 were driven in part by increased
sales of the Company's high margin premium wireless and bluetooth speakers,
mobility products, and commercial speakers. For the nine months ended
November 30, 2019 , margins were also positively impacted by the Company's
premium mobility products as a result of heavy discounts offered on older
product in the prior year, such as wired headphones and neckbands, that did not
repeat in the current year. Margins have been negatively affected during the
three and nine months ended November 30, 2019 by tariff increases, as certain of
the Company's products are manufactured in China , while production of certain
other products were relocated to other countries with higher labor costs. The
Company offset some of the effects of these tariff increases, where possible,
with price increases. Margin declines were also driven by declining sales of
products with typically higher margins, such as hook-up products, karaoke
products, and the Company's Project Nursery product line, as well by sales
declines within the European market and higher
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warehousing costs incurred related to the use of a third party for warehousing
services in
Gross margin percentages in the Biometrics segment decreased for the three and nine months endedNovember 30, 2019 , as compared to the prior year periods. These decreases were primarily due to the sale of certain inventory during the three and nine months endedNovember 30, 2018 that had been previously written off, and contributed to higher margins in the prior year periods, as well as higher sales of licensing fees in the prior year, which earned higher margins for the segment. During the three and nine months endedNovember 30, 2019 , the Company also incurred certain tooling and defective repair costs, as well as provided beta samples to certain customers and prospects at no charge, which negatively impacted margins for the periods. Operating Expenses November 30, 2019 2018 $ Change % Change Three Months Ended Operating expenses: Selling$ 9,580 $ 10,363 $ (783 ) (7.6 )% General and administrative 16,689 16,482 207 1.3 % Engineering and technical support 5,059 6,368 (1,309 ) (20.6 )% Total operating expenses$ 31,328 $ 33,213 $ (1,885 ) (5.7 )% Nine Months Ended Operating expenses: Selling$ 28,162 $ 30,661 $ (2,499 ) (8.2 )% General and administrative 51,896 49,632 2,264 4.6 %
Engineering and technical support 15,901 18,349 (2,448 ) (13.3 )%
Intangible asset impairment charges - 9,814 (9,814 ) (100.0 )% Total operating expenses$ 95,959 $ 108,456 $ (12,497 ) (11.5 )%
Total operating expenses have decreased for the three and nine months ended
Selling expenses decreased for the three and nine months endedNovember 30, 2019 due to various factors, including headcount reductions related to Fiscal 2019 restructuring activities, lower commissions as a result of the decline in sales for the three and nine month periods, and lower advertising costs and display amortization expense, as many displays and fixtures are fully amortized or have been removed. These expense decreases were offset by salary increases within selling resulting from transfers of certain employees from general and administrative to selling in conjunction with restructuring activities taking place in Fiscal 2019, as well as additional hires at the Company'sKlipsch , Oehlbach and Schwaiger subsidiaries. General and administrative expenses increased during the three and nine months endedNovember 30, 2019 . During the nine months endedNovember 30, 2019 , the Company granted 200,000 fully vested common shares to the Company's Chief Executive Officer, as well as granted additional shares which vest on future dates in accordance with his employment agreement signed inJuly 2019 , resulting in an increase in compensation expense of approximately$300 and$1,300 for the three and nine months endedNovember 30, 2019 , respectively. Additionally, during the three and nine months endedNovember 30, 2018 , the Company received reimbursements of approximately$1,000 and$3,000 , respectively, for certain professional fees and disbursements resulting from the favorable outcome of a lawsuit, which did not occur during the three and nine months endedNovember 30, 2019 . Disregarding these specific items, general and administrative expenses would have decreased for both the three and nine months endedNovember 30, 2019 . General and administrative expenses were also higher during the three and nine months endedNovember 30, 2019 due to higher payroll expenses resulting from increased medical claims as compared to the prior year. Offsetting the increases to general and administrative expenses discussed above were decreases in salary expense during the three and nine months endedNovember 30, 2019 due to reductions in headcount and the transfer of certain employees to selling in conjunction with Fiscal 2019 restructuring activities, lower executive salaries due to salary and bonus structures under new employment agreements, as well as lower office and equipment rental expenses as a result of cost containment measures. Engineering and technical support expenses for the three and nine months endedNovember 30, 2019 decreased as compared to the prior year periods. For the three and nine months endedNovember 30, 2019 , expenses were down primarily due to headcount reduction at certain of the Company's subsidiaries, decreased research and development spending related to projects that were completed during the current year periods, as well as due to the movement of work related to certain projects utilizing 37
-------------------------------------------------------------------------------- outside contractors to in-house employees at bothEyeLock and Invision. These declines were partially offset by an increase in research and development expenses related to the start of new projects and higher certification fees for certain products under development, as well as salary and related expenses resulting from new hires at one of the Company's subsidiaries. During the second quarter of Fiscal 2019, the Company re-evaluated its projections for several brands in its former Consumer Accessory and Automotive segments based on lower than anticipated results due to lower product load-ins, increased competition for certain product lines, a streamlining of SKU's, and its marketing strategy for one of its brands. As a result of this evaluation, the Company determined that several of its trademarks were impaired, resulting in a total charge of$9,814 for the nine months endedNovember 30, 2018 . Such charges did not recur in the current year period. The value of our intangible assets, including goodwill, are dependent upon the timing and extent of demand for our product offerings, acceptance of new products, product placements, competition, future selling prices, general economic conditions and other uncertainties. The ultimate outcome of and changes in the Company's previous assessment of these uncertainties could trigger a future impairment of our intangible assets. Other Income (Expense) November 30, 2019 2018 $ Change % Change Three Months Ended Interest and bank charges$ (751 ) $ (1,174 ) $ 423 36.0 % Equity in income of equity investee 967 1,695 (728 ) (42.9 )% Gain on sale of real property 4,057 - 4,057 100.0 % Other, net (322 ) 260 (582 ) (223.8 )% Total other income (expense)$ 3,951 $ 781 $ 3,170 405.9 % Nine Months Ended Interest and bank charges$ (2,635 ) $ (3,391 ) $ 756 22.3 % Equity in income of equity investee 3,672 5,146 (1,474 ) (28.6 )% Gain on sale of real property 4,057 - 4,057 100.0 % Investment gain 775 - 775 100.0 % Impairment of Venezuela investment properties - (3,473 ) 3,473 100.0 % Other, net 1,869 1,173 696 59.3 % Total other income (expense)$ 7,738 $ (545 ) $ 8,283 1519.8 % Interest and bank charges represent interest expense and fees related to the Company's bank obligations, supply chain financing agreements and factoring agreements, interest related to finance leases, amortization of debt issuance costs, and credit card fees. During the second quarter of Fiscal 2020, the Company suspended its domestic supply chain financing, thus resulting in a reduction of the related fees. Equity in income of equity investee represents the Company's share of income from its 50% non-controlling ownership interest inASA Electronics LLC and Subsidiaries ("ASA"). The decrease in income for the three and nine months endedNovember 30, 2019 is primarily a result of the impact of tariffs, an increase in warranty costs, as well as due to certain product recall expenses incurred during the three and nine months endedNovember 30, 2019 that were not present in the prior year. OnSeptember 30, 2019 , the Company, through its subsidiaryVoxx German Holdings Gmbh ("the Seller"), sold its real property in Pulheim,Germany toCLM S.A. RL ("the Purchaser") for €10,920. Net proceeds received from the transaction were approximately$9,500 after transactional costs and repayment of the outstanding mortgage. Concurrently with the sale, the Seller entered into an operating lease arrangement ("lease") with the Purchaser for a small portion of the real property to continue to operate its sales office inGermany . The transaction qualified for sale leaseback accounting in accordance with ASC 842 and the Company recognized a gain on the execution of the sale transaction for the three and nine months endedNovember 30, 2019 . During Fiscal 2018, the Company sold its investment in RxNetworks, a non-controlled corporation, consisting of shares of the investee's preferred stock. Voxx recognized a gain during Fiscal 2018 for the sale of this investment; however, a portion of the cash proceeds were subject to a hold-back provision, which was not included in the gain recognized in Fiscal 2018. During the second quarter of Fiscal 2020, the hold-back provision expired, and the Company received the remaining proceeds from the sale, recording an investment gain for the nine months endedNovember 30, 2019 . 38 -------------------------------------------------------------------------------- The Company has certain long-lived assets inVenezuela , which are held for investment purposes. During the second quarter of Fiscal 2019, the Company made an assessment of the recoverability of these properties as a result of the country's continued economic deterioration, which included a significant currency devaluation in August of 2018. The Company recorded an impairment charge for the nine months endedNovember 30, 2018 representing the remaining balance of these properties. Other, net includes net foreign currency gains or losses, interest income, rental income, and other miscellaneous income and expense. Other, net decreased for the three months endedNovember 30, 2019 and increased for the nine months endedNovember 30, 2019 . During the three and nine months endedNovember 30, 2019 , the Company incurred a charge of$804 for a payment made to TE Connectivity Ltd. in final settlement of the working capital calculation related to the Fiscal 2018 sale ofHirschmann Car Communication GmbH . During the nine months endedNovember 30, 2019 , the Company received the proceeds from a key man life insurance policy in the amount of$1,000 , related to a former employee ofKlipsch Group, Inc. that Voxx became the beneficiary of in conjunction with the acquisition ofKlipsch in Fiscal 2012.
Income Tax Provision
The Company's provision for income taxes consists of federal, foreign and state taxes necessary to align the Company's year-to-date tax provision with the annual effective rate that it expects to achieve for the full year. At each interim period, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. The authoritative guidance for accounting for income taxes allows use of the year-to-date (the "discrete method") when a reliable estimate of the estimated annual effective tax rate cannot be made. During the interim period endedAugust 31, 2019 , the Company determined the use of the discrete method forU.S. operations is more appropriate than the annual effective tax rate method due to sensitivity to small changes to projected pre-tax earnings, which resulted in significant variations in the customary relationship between income tax expense and pretax income. As such, the Company has estimated a foreign effective tax rate and applied that to its foreign year to date results and has calculated theU.S. tax provision (benefit) based on pre-tax results through the three and nine months endedNovember 30, 2019 . The effective tax rates for the three months endedNovember 30, 2019 and 2018 were an income tax provision of 66.6% on pre-tax income of$4,087 and an income tax benefit of 62.8% on a pre-tax income of$6,491 , respectively. The effective tax rate for the three months endedNovember 30, 2019 differs from theU.S. statutory rate of 21% primarily due to the calculation of theU.S. tax provision on a discrete basis, theU.S. taxation of foreign earnings, nondeductible permanent differences, non-controlling interest related toEyeLock LLC , an increase in the valuation allowance, state and local income taxes, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the three months endedNovember 30, 2018 differed from the statutory rate of 21% primarily due to the non-controlling interest related toEyeLock LLC , state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates. In addition, the valuation allowance increased for tax credits and loss jurisdictions for which a limited tax benefit can be recognized. The effective tax rates for the nine months endedNovember 30, 2019 and 2018 were an income tax provision of 17.1% on a pre-tax loss of$6,979 and an income tax provision of 27.8% on a pre-tax loss of$11,338 , respectively. The effective tax rate for the nine months endedNovember 30, 2019 differs from theU.S. statutory rate of 21% primarily due to the calculation of theU.S. tax provision on a discrete basis, theU.S. taxation of foreign earnings, nondeductible permanent differences, non-controlling interest related toEyeLock LLC , an increase in the valuation allowance, state and local income taxes, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the nine months endedNovember 30, 2018 differed from the statutory rate of 21% primarily due to the non-controlling interest related toEyeLock LLC , state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates.
EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per Common Share
EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per common share are not financial measures recognized by GAAP. EBITDA represents net (loss) income attributable toVOXX International Corporation , computed in accordance with GAAP, before interest expense and bank charges, taxes, and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted for stock-based compensation expense, certain settlements, gains, life insurance proceeds, as well tangible and intangible asset impairment charges. Depreciation, amortization, stock-based compensation, and tangible and intangible asset impairment charges are non-cash items. Diluted Adjusted EBITDA per common share represents the Company's diluted earnings per common share based on Adjusted EBITDA. We present EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per common share in this Form 10-Q because we consider them to be useful and appropriate supplemental measures of our performance. Adjusted EBITDA and Diluted Adjusted EBITDA per common share help us to evaluate our performance without the effects of certain GAAP calculations that may not have a direct cash impact on our current operating performance. In addition, the exclusion of certain costs or gains relating to certain events allows for a more meaningful comparison of our results from period-to-period. These non-GAAP measures, as we define them, are not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per common share should not be assessed in isolation from, are not intended to represent, and should not be 39 --------------------------------------------------------------------------------
considered to be more meaningful measures than, or alternatives to, measures of operating performance as determined in accordance with GAAP.
Reconciliation of GAAP Net Income Attributable to
to EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per Common Share
Three months ended Nine months ended
November 30, November 30,
2019 2018 2019 2018
Net income (loss) attributable to VOXX
International Corporation $ 2,464 $ 12,211 $ (4,648 ) $ (9,531 )
Adjustments:
Interest expense and bank charges (1) 625 771 2,269 2,252
Depreciation and amortization (1) 3,005 2,580 8,981 7,886
Income tax expense (benefit) 2,720 (4,078 ) 1,190 3,147
EBITDA 8,814 11,484 7,792 3,754
Stock-based compensation 471 159 1,816 393
Gain on sale of real property (4,057 ) - (4,057 ) -
Settlement of Hirschmann working capital 804 - 804 -
Investment gain - - (775 ) -
Life insurance proceeds - - (1,000 ) -
Intangible asset impairment charges - - - 9,814
Impairment of Venezuela investment
properties - - - 3,473
Adjusted EBITDA $ 6,032 $ 11,643 $ 4,580 $ 17,434
Diluted income (loss) per common share
attributable to VOXX International
Corporation $ 0.10 $ 0.50 $ (0.19 ) $ (0.39 )
Diluted Adjusted EBITDA per common share
attributable to VOXX International
Corporation $ 0.24 $ 0.47 $ 0.19 $ 0.72 (1) For purposes of calculating Adjusted EBITDA for the Company, interest expense
and bank charges, as well as depreciation and amortization, have been
adjusted in order to exclude the non-controlling interest portion of these
expenses attributable to
Liquidity and Capital Resources
Cash Flows, Commitments and Obligations
As ofNovember 30, 2019 , we had working capital of$156,513 which includes cash and cash equivalents of$32,156 , compared with working capital of$151,169 atFebruary 28, 2019 , which included cash and cash equivalents of$58,236 . We plan to utilize our current cash position as well as collections from accounts receivable, the cash generated from our operations, when applicable, and the income on our investments to fund the current operations of the business. However, we may utilize all or a portion of current capital resources to pursue other business opportunities, including acquisitions, or to further pay down our debt. As ofNovember 30, 2019 , we had cash amounts totaling$5,368 held in foreign bank accounts, none of which would be subject toUnited States federal income taxes if made available for use inthe United States . The Tax Cuts and Jobs Act provides a 100% participation exemption on dividends received from foreign corporations afterJanuary 1, 2018 asthe United States has moved away from a worldwide tax system and closer to a territorial system for earnings of foreign corporations. Operating activities used cash of$23,887 for the nine months endedNovember 30, 2019 , due to factors including sales declines and losses incurred byEyeLock LLC , as well as increases in accounts receivable due in part to the suspension of the Company's domestic supply chain financing arrangements, increases in inventory, and decreases in accrued expenses. These operating cash usages were offset primarily by decreases in receivables from vendors and increases in accrued sales incentives. For the nine months endedNovember 30, 2018 , operating activities provided cash of$10,105 primarily due to improved collections on accounts receivable, which were more than offset by expected holiday season sales activity, and increases in accrued sales incentives and accounts payable, which were offset by an increase inventory and a decrease in accrued expenses. Investing activities provided cash of$9,759 during the nine months endedNovember 30, 2019 primarily due to the proceeds received from the sale of the Company's real property in Pulheim,Germany , offset by capital expenditures. For the nine months endedNovember 30, 2018 , investing activities used cash of$8,968 primarily as a result of the issuance of notes receivable and capital expenditures. 40
-------------------------------------------------------------------------------- Financing activities used cash of$11,563 during the nine months endedNovember 30, 2019 primarily due to the repayment of bank obligations, including the entire outstanding balance of Voxx Germany's Euro asset-based loan facility, and the repurchase of shares of the Company's Class A common stock. During the nine months endedNovember 30, 2018 , financing activities used cash of$191 primarily due to the borrowing of bank obligations, net of repayments. The Company has a senior secured credit facility (the "Credit Facility") that provides for a revolving credit facility with committed availability of up to$140,000 , which may be increased, at the option of the Company, up to a maximum of$175,000 , and a term loan in the amount of$15,000 . The Credit Facility also includes a$15,000 sublimit for letters of credit and a$15,000 sublimit for swingline loans. The availability under the revolving credit line within the Credit Facility is subject to a borrowing base, which is based on eligible accounts receivable, eligible inventory and certain real estate, subject to reserves as determined by the lender, and is also limited by amounts outstanding under the Florida Mortgage (see Note 16(b)). The entire outstanding balance of the term loan, which is not renewable, was repaid in Fiscal 2018. As ofNovember 30, 2019 , there was no balance outstanding under the revolving credit facility. The availability under the revolving credit line of the Credit Facility was$102,454 as ofNovember 30, 2019 . All amounts outstanding under the Credit Facility will mature and become due onApril 26, 2021 ; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement). The Company may prepay any amounts outstanding at any time, subject to payment of certain breakage and redeployment costs relating to LIBOR Rate Loans. The commitments under the Credit Facility may be irrevocably reduced at any time, without premium or penalty as set forth in the agreement. Generally, the Company may designate specific borrowings under the Credit Facility as either Base Rate Loans or LIBOR Rate Loans, except that Swingline Loans may only be designated as Base Rate Loans. Loans designated as LIBOR Rate Loans shall bear interest at a rate equal to the then applicable LIBOR rate plus a range of 1.75 - 2.25%. Loans designated as Base Rate loans 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. Provided that the Company is in a Compliance Period (the period commencing on that day in which Excess Availability is less than 12.5% of the Maximum Revolver Amount and ending on a day in which Excess Availability is equal to or greater than 12.5% for any consecutive 30 day period thereafter), the Credit Facility requires compliance with a financial covenant calculated as of the last day of each month, consisting of a Fixed Charge Coverage Ratio. The Credit Facility also contains covenants, subject to defined carveouts, that limit the ability of the loan parties and certain of their subsidiaries which are not loan parties to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or dispose of a substantial portion of their business; (iv) transfer or dispose of assets; (v) change their name, organizational identification number, state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any change of control; (ix) make any restricted junior payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transaction with an affiliate of any borrower or any of their subsidiaries; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; or (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the Credit Facility were to fall below certain specified levels, as defined in the agreement, the lenders would have the right to assume dominion and control over the Company's cash.
The obligations under the loan documents are secured by a general lien on and security interest in substantially all of the assets of the borrowers and certain of the guarantors, including accounts receivable, equipment, real estate, general intangibles and inventory. The Company has guaranteed the obligations of the borrowers under the Credit Agreement.
The Company has a Euro asset-based loan facility inGermany with a credit limit of €8,000 that expires onJuly 31, 2020 . The Company's subsidiariesVoxx German Holdings GmbH ,Oehlbach Kabel GmbH , andSchwaiger GmbH are authorized to borrow funds under this facility for working capital purposes. The Company also utilizes supply chain financing arrangements and factoring agreements as a component of our financing for working capital, which accelerates receivable collection and helps to better manage cash flow. Under the agreements, the Company has agreed to sell certain of its accounts receivable balances to banking institutions who have agreed to advance amounts equal to the net accounts receivable balances due, less a discount as set forth in the respective agreements (see Note 8). The balances under these agreements are accounted for as sales of accounts receivable, as they are sold without recourse. 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. Fees incurred in connection with the agreements are recorded as interest expense by the Company. During the second quarter of Fiscal 2020, the Company suspended its domestic supply chain financing activities. 41 --------------------------------------------------------------------------------
Certain contractual cash obligations and other commercial commitments will
impact our short and long-term liquidity. At
Amount of Commitment Expiration per Period
Less than 2-3 4-5 After
Contractual Cash Obligations Total 1 Year Years Years 5 Years
Finance lease obligation (1) $ 1,502 $ 647 $ 738 $ 117 $ -
Operating leases (1) 2,807 680 1,245 671 211
Total contractual cash obligations $ 4,309 $ 1,327 $ 1,983 $ 788 $ 211
Other Commitments
Bank obligations (2) $ 609 $ 609 $ - $ - $ -
Stand-by and commercial letters of
credit (3) 68 68 - - -
Other (4) 7,795 556 1,000 1,000 5,239
Contingent earn-out payments and
other (5) 109 109 - - -
Pension obligation (6) 541 - - - 541
Unconditional purchase obligations
(7) 44,483 44,483 - - -
Total other commitments 53,605 45,825 1,000 1,000 5,780
Total commitments $ 57,914 $ 47,152 $ 2,983 $ 1,788 $ 5,991 1. Represents total principal payments due under operating and finance lease
obligations. Total current balances (included in other current liabilities)
due under finance and operating lease obligations are
respectively, at
and operating leases are
2. Represents amounts outstanding under the VOXX Germany and Magnat Euro
asset-based lending facilities at
3. We issue standby and commercial letters of credit to secure certain purchases
and insurance requirements.
4. This amount includes balances outstanding under loans and mortgages for our
manufacturing facility in
Schwaiger mortgage was fully paid in
5. Represents contingent consideration payments due in connection with the
Company's Rosen acquisition.
6. Represents the liability for an employer defined benefit pension plan covering
certain eligible current and former employees of Voxx Germany.
7. Open purchase obligations represent inventory commitments. These obligations
are not recorded in the consolidated financial statements until commitments
are fulfilled given that such obligations are subject to change based on
negotiations with manufacturers.
We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and possible future public or private debt and/or equity offerings. At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows, credit arrangements, and access to equity capital markets, taken together, provide adequate resources to fund ongoing operating expenditures, including the intercompany loan funding we provide to our majority owned subsidiary,EyeLock LLC . In the event they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity and/or debt financings as well as from other sources. No assurance can be given that additional financing will be available in the future or that if available, such financing will be obtainable on terms favorable when required.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations
or other relationships with unconsolidated entities that would be expected to
have a material current or future effect upon our financial condition or results
of operations.
Related Party Transactions
None noted.
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New Accounting Pronouncements
We are required to adopt certain new accounting pronouncements. See Note 25 to our consolidated financial statements included herein.
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