Q3 2015 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2014
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-28839
VOXX International Corporation
(Exact name of registrant as specified in its charter)
|
| |
Delaware (State or other jurisdiction of incorporation or organization) | 13-1964841 (IRS Employer Identification No.) |
180 Marcus Blvd., Hauppauge, New York (Address of principal executive offices) | 11788 (Zip Code) |
(631) 231-7750 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Number of shares of each class of the issuer's common stock outstanding as of the latest practicable date.
|
| | | |
Class | As of January 7, 2015 |
Class A Common Stock | 21,863,785 |
| Shares |
Class B Common Stock | 2,260,954 |
| Shares |
VOXX International Corporation and Subsidiaries
|
| | |
Table of Contents |
| | Page |
PART I | FINANCIAL INFORMATION | |
| | |
Item 1 | FINANCIAL STATEMENTS (unaudited) | |
| Consolidated Balance Sheets at November 30, 2014 and February 28, 2014 | |
| Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended November 30, 2014 and 2013 | |
| Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2014 and 2013 | |
| Notes to Consolidated Financial Statements | |
Item 2 | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
Item 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
Item 4 | CONTROLS AND PROCEDURES | |
| | |
PART II | OTHER INFORMATION | |
| | |
Item 1 | LEGAL PROCEEDINGS | |
Item 1A | RISK FACTORS | |
Item 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
Item 6 | EXHIBITS | |
SIGNATURES | | |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VOXX International Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
|
| | | | | | | | |
| | November 30, 2014 | | February 28, 2014 |
Assets | | (unaudited) | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 11,056 |
| | $ | 10,603 |
|
Accounts receivable, net | | 140,952 |
| | 147,054 |
|
Inventory, net | | 153,325 |
| | 144,339 |
|
Receivables from vendors | | 3,471 |
| | 2,443 |
|
Investment securities, current | | 968 |
| | — |
|
Prepaid expenses and other current assets | | 19,747 |
| | 15,897 |
|
Income tax receivable | | 4,388 |
| | 2,463 |
|
Deferred income taxes | | 2,527 |
| | 3,058 |
|
Total current assets | | 336,434 |
| | 325,857 |
|
Investment securities | | 12,477 |
| | 14,102 |
|
Equity investments | | 21,347 |
| | 20,628 |
|
Property, plant and equipment, net | | 81,500 |
| | 83,222 |
|
Goodwill | | 111,946 |
| | 117,938 |
|
Intangible assets, net | | 165,767 |
| | 174,312 |
|
Deferred income taxes | | 750 |
| | 760 |
|
Other assets | | 8,435 |
| | 10,331 |
|
Total assets | | $ | 738,656 |
| | $ | 747,150 |
|
Liabilities and Stockholders' Equity | | |
| | |
|
Current liabilities: | | |
| | |
|
Accounts payable | | $ | 73,971 |
| | $ | 55,373 |
|
Accrued expenses and other current liabilities | | 58,461 |
| | 64,403 |
|
Income taxes payable | | 6,856 |
| | 3,634 |
|
Accrued sales incentives | | 18,415 |
| | 17,401 |
|
Deferred income taxes | | 77 |
| | 9 |
|
Current portion of long-term debt | | 2,068 |
| | 5,960 |
|
Total current liabilities | | 159,848 |
| | 146,780 |
|
Long-term debt | | 95,146 |
| | 103,222 |
|
Capital lease obligation | | 5,612 |
| | 6,114 |
|
Deferred compensation | | 4,615 |
| | 5,807 |
|
Other tax liabilities | | 4,625 |
| | 11,060 |
|
Deferred tax liabilities | | 33,534 |
| | 34,963 |
|
Other long-term liabilities | | 8,670 |
| | 9,620 |
|
Total liabilities | | 312,050 |
| | 317,566 |
|
Commitments and contingencies | |
|
| |
|
|
Stockholders' equity: | | |
| | |
|
Preferred stock: | | | | |
No shares issued or outstanding (see Note 18) | | — |
| | — |
|
Common stock: | | | | |
Class A, $.01 par value; 60,000,000 shares authorized, 23,993,240 and 23,988,240 shares issued, 21,863,785 and 22,172,968 shares outstanding at November 30, 2014 and February 28, 2014, respectively | | 255 |
| | 255 |
|
|
| | | | | | | | |
Class B Convertible, $.01 par value, 10,000,000 authorized, 2,260,954 shares issued and outstanding | | 22 |
| | 22 |
|
Paid-in capital | | 291,283 |
| | 290,960 |
|
Retained earnings | | 172,000 |
| | 158,571 |
|
Accumulated other comprehensive loss | | (15,996 | ) | | (1,873 | ) |
Treasury stock, at cost, 2,129,455 and 1,815,272 shares of Class A Common Stock at November 30, 2014 and February 28, 2014, respectively | | (20,958 | ) | | (18,351 | ) |
Total stockholders' equity | | 426,606 |
| | 429,584 |
|
Total liabilities and stockholders' equity | | $ | 738,656 |
| | $ | 747,150 |
|
See accompanying notes to consolidated financial statements.
VOXX International Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except share and per share data)
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Net sales | | $ | 223,356 |
| | $ | 245,814 |
| | $ | 587,598 |
| | $ | 622,604 |
|
Cost of sales | | 154,399 |
| | 177,016 |
| | 413,184 |
| | 445,191 |
|
Gross profit | | 68,957 |
| | 68,798 |
| | 174,414 |
| | 177,413 |
|
Operating expenses: | | |
| | |
| | | | |
Selling | | 13,623 |
| | 15,026 |
| | 41,229 |
| | 40,751 |
|
General and administrative | | 29,587 |
| | 31,422 |
| | 88,290 |
| | 89,403 |
|
Engineering and technical support | | 9,103 |
| | 5,740 |
| | 27,579 |
| | 23,701 |
|
Restructuring expense | | — |
| | 32 |
| | — |
| | 1,324 |
|
Total operating expenses | | 52,313 |
| | 52,220 |
| | 157,098 |
| | 155,179 |
|
Operating income | | 16,644 |
| | 16,578 |
| | 17,316 |
| | 22,234 |
|
Other (expense) income: | | |
| | |
| | | | |
Interest and bank charges | | (1,825 | ) | | (1,830 | ) | | (5,010 | ) | | (5,609 | ) |
Equity in income of equity investees | | 1,245 |
| | 1,520 |
| | 4,631 |
| | 4,772 |
|
Venezuela currency devaluation, net | | — |
| | — |
| | (6,232 | ) | | — |
|
Other, net | | 142 |
| | 5,565 |
| | 1,416 |
| | 11,293 |
|
Total other (expense) income, net | | (438 | ) | | 5,255 |
| | (5,195 | ) | | 10,456 |
|
Income before income taxes | | 16,206 |
| | 21,833 |
| | 12,121 |
| | 32,690 |
|
Income tax expense (benefit) | | 584 |
| | 6,409 |
| | (1,308 | ) | | 10,261 |
|
Net income | | $ | 15,622 |
| | $ | 15,424 |
| | $ | 13,429 |
| | $ | 22,429 |
|
Other comprehensive (loss) income: | | | | | | | | |
Foreign currency translation adjustments | | (8,342 | ) | | 4,658 |
| | (15,783 | ) | | 4,096 |
|
Derivatives designated for hedging | | 578 |
| | (744 | ) | | 1,529 |
| | (430 | ) |
Pension plan adjustments | | 64 |
| | (29 | ) | | 124 |
| | (41 | ) |
Unrealized holding gain on available-for-sale investment securities arising during the period, net of tax | | 5 |
| | — |
| | 7 |
| | — |
|
Other comprehensive (loss) income, net of tax | | (7,695 | ) | | 3,885 |
| | (14,123 | ) | | 3,625 |
|
Comprehensive income (loss) | | $ | 7,927 |
| | $ | 19,309 |
| | $ | (694 | ) | | $ | 26,054 |
|
| | | | | | | | |
Net income per common share (basic) | | $ | 0.64 |
| | $ | 0.63 |
| | $ | 0.55 |
| | $ | 0.93 |
|
Net income per common share (diluted) | | $ | 0.64 |
| | $ | 0.63 |
| | $ | 0.55 |
| | $ | 0.93 |
|
Weighted-average common shares outstanding (basic) | | 24,322,307 |
| | 24,341,897 |
| | 24,396,987 |
| | 24,060,492 |
|
Weighted-average common shares outstanding (diluted) | | 24,340,534 |
| | 24,424,956 |
| | 24,418,298 |
| | 24,209,611 |
|
See accompanying notes to consolidated financial statements.
VOXX International Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
| | | | | | | | |
| | Nine Months Ended November 30, |
| | 2014 | | 2013 |
Cash flows from operating activities: | | | | |
Net income | | $ | 13,429 |
| | $ | 22,429 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
Depreciation and amortization | | 12,189 |
| | 12,000 |
|
Amortization of debt discount | | 838 |
| | 1,033 |
|
Bad debt expense | | 371 |
| | 632 |
|
Loss on forward contracts | | 40 |
| | 67 |
|
Equity in income of equity investees | | (4,631 | ) | | (4,772 | ) |
Distribution of income from equity investees | | 3,912 |
| | 2,201 |
|
Deferred income tax expense | | (450 | ) | | (58 | ) |
Non-cash compensation adjustment | | 598 |
| | 431 |
|
Non-cash stock based compensation expense | | 291 |
| | 552 |
|
Venezuela currency devaluation on investment securities | | 6,702 |
| | — |
|
Loss on sale of property, plant and equipment | | 255 |
| | 12 |
|
Changes in operating assets and liabilities: | | |
| | |
|
Accounts receivable | | 979 |
| | (28,212 | ) |
Inventory | | (13,654 | ) | | (483 | ) |
Receivables from vendors | | (1,053 | ) | | 3,549 |
|
Prepaid expenses and other | | (1,568 | ) | | (953 | ) |
Investment securities-trading | | (253 | ) | | (592 | ) |
Accounts payable, accrued expenses, accrued sales incentives and other liabilities | | 17,390 |
| | 32,087 |
|
Income taxes payable | | (4,988 | ) | | 2,410 |
|
Net cash provided by operating activities | | 30,397 |
| | 42,333 |
|
Cash flows from investing activities: | | |
| | |
|
Purchases of property, plant and equipment | | (9,862 | ) | | (9,585 | ) |
Proceeds from sale of property, plant and equipment | | 55 |
| | — |
|
Increase in notes receivable | | — |
| | 83 |
|
Purchase of long-term investments | | (6,000 | ) | | — |
|
Proceeds from long-term note | | 227 |
| | — |
|
Net cash used in investing activities | | (15,580 | ) | | (9,502 | ) |
Cash flows from financing activities: | | |
| | |
|
Principal payments on capital lease obligation | | (387 | ) | | (270 | ) |
Repayment of bank obligations | | (10,764 | ) | | (48,249 | ) |
Borrowings on bank obligations | | — |
| | 7,800 |
|
Proceeds from exercise of stock options | | 32 |
| | 5,275 |
|
Repurchase of common stock | | (2,620 | ) | | — |
|
Net cash used in financing activities | | (13,739 | ) | | (35,444 | ) |
Effect of exchange rate changes on cash | | (625 | ) | | (836 | ) |
Net increase (decrease) in cash and cash equivalents | | 453 |
| | (3,449 | ) |
Cash and cash equivalents at beginning of period | | 10,603 |
| | 19,777 |
|
Cash and cash equivalents at end of period | | $ | 11,056 |
| | $ | 16,328 |
|
See accompanying notes to consolidated financial statements.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
(1) Basis of Presentation
The accompanying unaudited interim consolidated financial statements of VOXX International Corporation and subsidiaries ("Voxx" or the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America and include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year or any interim period. These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto contained in the Company's Form 10-K for the fiscal year ended February 28, 2014. Certain amounts in the prior year have been reclassified to conform to the current year presentation.
We have determined that we operate in three reportable segments, Automotive, Premium Audio and Consumer Accessories. See Note 19 for the Company's segment reporting disclosures.
(2) Net Income Per Common Share
Basic net income per common share is based upon the weighted-average common shares outstanding during the period. Diluted net income per common share 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 per common share. A reconciliation between the denominator of basic and diluted net income per common share is as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Weighted-average common shares outstanding | | 24,322,307 |
| | 24,341,897 |
| | 24,396,987 |
| | 24,060,492 |
|
Effect of dilutive securities: | | |
| | |
| | |
| | |
|
Stock options and warrants | | 18,227 |
| | 83,059 |
| | 21,311 |
| | 149,119 |
|
Weighted-average common shares and potential common shares outstanding | | 24,340,534 |
| | 24,424,956 |
| | 24,418,298 |
| | 24,209,611 |
|
Restricted stock, stock options and warrants of 156,291 and 0 for the three months ended November 30, 2014 and 2013 and 108,489 and 0 for the nine months ended November 30, 2014 and 2013, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these restricted stock, stock options and warrants was greater than the average market price of the Company’s common stock during these periods or their inclusion would have been anti-dilutive.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(3) 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 measured at fair value on a recurring basis at November 30, 2014:
|
| | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| Total | | Level 1 | | Level 2 |
Cash and cash equivalents: | | | | | |
Cash and money market funds | $ | 11,056 |
| | $ | 11,056 |
| | $ | — |
|
Derivatives | |
| | |
| | |
|
Designated for hedging | $ | 892 |
| | $ | — |
| | $ | 892 |
|
Total derivatives | $ | 892 |
| | $ | — |
| | $ | 892 |
|
Investment securities: | |
| | |
| | |
|
Trading securities | $ | 4,489 |
| | $ | 4,489 |
| | $ | — |
|
Available-for-sale securities | 3 |
| | 3 |
| | — |
|
Other investments at amortized cost (a) | 8,953 |
| | — |
| | — |
|
Total investment securities | $ | 13,445 |
| | $ | 4,492 |
| | $ | — |
|
The following table presents assets measured at fair value on a recurring basis at February 28, 2014:
|
| | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| Total | | Level 1 | | Level 2 |
Cash and cash equivalents: | | | | | |
Cash and money market funds | $ | 10,603 |
| | $ | 10,603 |
| | $ | — |
|
Derivatives | |
| | |
| | |
|
Designated for hedging | $ | (963 | ) | | $ | — |
| | $ | (963 | ) |
Total derivatives | $ | (963 | ) | | $ | — |
| | $ | (963 | ) |
Long-term investment securities: | |
| | |
| | |
|
Trading securities | $ | 4,234 |
| | $ | 4,234 |
| | $ | — |
|
Available-for-sale securities | 3 |
| | 3 |
| | — |
|
Other investments at amortized cost (a) | 9,865 |
| | — |
| | — |
|
Total long-term investment securities | $ | 14,102 |
| | $ | 4,237 |
| | $ | — |
|
| |
(a) | Included in this balance is the Company's held-to-maturity investment in bonds issued by the Venezuela government, which are recorded at amortized cost taking into consideration the currency devaluation in Venezuela (see Note 4). Additionally, this amount includes investments in three non-controlled corporations accounted for by the cost method |
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
(see Note 4). The fair values of these investments would be based upon Level 3 inputs. At November 30, 2014 and February 28, 2014, it is not practicable to estimate the fair values of these bonds and cost method investments.
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, and (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 and local operating expenses. The Company also has three interest rate swap agreements, two of which hedge interest rate exposure related to the forecasted outstanding borrowings on a portion of its amended credit facility ("Amended Facility"), and the third hedges interest rate exposure related to the forecasted outstanding balance of one of its mortgage notes, with monthly payments due through May 2023. The two swap agreements related to the Amended Facility lock the Company's LIBOR rates at 0.515% and 0.518% (exclusive of credit spread) for the respective agreements through the swaps' maturities of February 28, 2017 and April 29, 2016, respectively. The swap agreement related to the Company's mortgage locks the interest rate on the debt at 3.92% (inclusive of credit spread) through the end of the mortgage. 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 range from 1 - 15 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.
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 $85 and $121 for the three and nine months ended November 30, 2014, respectively and $(84) and $(114) for the three and nine months ended November 30, 2013, respectively.
Financial Statement Classification
The Company holds derivative instruments that are designated as hedging instruments. The following table discloses the fair value as of November 30, 2014 and February 28, 2014 of derivative instruments:
|
| | | | | | | | | | |
| | Derivative Assets and Liabilities |
| | | | Fair Value |
| | Account | | November 30, 2014 | | February 28, 2014 |
Designated derivative instruments | | | | | | |
Foreign currency contracts | | Accrued expenses and other current liabilities | | $ | — |
| | $ | (784 | ) |
| | Prepaid expenses and other current assets | | 1,006 |
| | — |
|
Interest rate swap agreements | | Other liabilities | | (114 | ) | | (179 | ) |
| | | | | | |
Total derivatives | | | | $ | 892 |
| | $ | (963 | ) |
Cash flow hedges
During Fiscal 2014 and during the third quarter of Fiscal 2015, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $29,060 and are designated as cash flow hedges at November 30, 2014.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The current outstanding notional value of the Company's three interest rate swaps at November 30, 2014 is $6,695, $33,750 and $25,000. For cash flow hedges, the effective portion of the gain or loss is reported as a component of Other Comprehensive Income (Loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
Activity related to cash flow hedges recorded during the three and nine months ended November 30, 2014 and 2013 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| November 30, 2014 | | November 30, 2014 |
| Pretax Gain (Loss) Recognized in Other Comprehensive Income | | Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a) | | Gain (Loss) for Ineffectiveness in Other Income | | Pretax Gain (Loss) Recognized in Other Comprehensive Income | | Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income | | Gain (Loss) for Ineffectiveness in Other Income |
Cash flow hedges | | | | | | | | | | | |
Foreign currency contracts | $ | 1,181 |
| | $ | 213 |
| | $ | 85 |
| | $ | 2,012 |
| | $ | (59 | ) | | $ | 121 |
|
Interest rate swaps | $ | (99 | ) | | $ | — |
| | $ | — |
| | $ | 65 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| November 30, 2013 | | November 30, 2013 |
| Pretax Gain (Loss) Recognized in Other Comprehensive Income | | Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (a) | | Gain (Loss) for Ineffectiveness in Other Income | | Pretax Gain (Loss) Recognized in Other Comprehensive Income | | Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income | | Gain (Loss) for Ineffectiveness in Other Income |
Cash flow hedges | | | | | | | | | | | |
Foreign currency contracts | $ | (455 | ) | | $ | (129 | ) | | $ | (84 | ) | | $ | (470 | ) | | $ | (67 | ) | | $ | (114 | ) |
Interest rate swaps | $ | (510 | ) | | $ | — |
| | $ | — |
| | $ | 146 |
| | $ | — |
| | $ | — |
|
(a) Gains and losses related to foreign currency contracts are reclassified to cost of sales. Gains and losses related to interest rate swaps are reclassified to interest expense.
The net loss recognized in Other Comprehensive Income for foreign currency contracts is expected to be recognized in cost of sales within the next eighteen months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of November 30, 2014, no contracts originally designated for hedge accounting were de-designated or terminated.
(4) Investment Securities
As of November 30, 2014 and February 28, 2014, the Company had the following investments:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| November 30, 2014 | | February 28, 2014 |
| Cost Basis | | Unrealized Holding Gain/(Loss) | | Fair Value | | Cost Basis | | Unrealized Holding Gain/(Loss) | | Fair Value |
Investment Securities | |
| | |
| | |
| | |
| | |
| | |
|
Marketable Securities | |
| | |
| | |
| | |
| | |
| | |
|
Trading | |
| | |
| | |
| | |
| | |
| | |
|
Deferred Compensation | $ | 4,489 |
| | $ | — |
| | $ | 4,489 |
| | $ | 4,234 |
| | $ | — |
| | $ | 4,234 |
|
Available-for-sale | |
| | |
| | |
| | |
| | |
| | |
|
Cellstar | — |
| | 3 |
| | 3 |
| | — |
| | 3 |
| | 3 |
|
Held-to-maturity Investment | 968 |
| | — |
| | 968 |
| | 7,640 |
| | — |
| | 7,640 |
|
Total Marketable Securities | 5,457 |
| | 3 |
| | 5,460 |
| | 11,874 |
| | 3 |
| | 11,877 |
|
Other Long-Term Investments | 7,985 |
| | — |
| | 7,985 |
| | 2,225 |
| | — |
| | 2,225 |
|
Total Investment Securities | $ | 13,442 |
| | $ | 3 |
| | $ | 13,445 |
| | $ | 14,099 |
| | $ | 3 |
| | $ | 14,102 |
|
Current Investments
Held-to-Maturity Investment
Current investments include an investment in sovereign bonds issued by the Venezuelan government, which is classified as held-to-maturity and accounted for under the amortized cost method. These bonds mature in March 2015 and are classified as current assets at November 30, 2014.
The Company recorded a remeasurement loss during the nine months ended November 30, 2014 of $6,702 in Other Income (Expense). The remeasurement loss was based on a change in the exchange rate anticipated upon redemption of the bonds. In September 2014, the Company received information, in addition to receipt of its semi-annual interest payment, that this redemption rate would be the official exchange rate of 6.3 Bolivars/$1 which differed from the SICAD 2 (See Note 16 for definition) rate previously used to remeasure the bonds.
Long-Term Investments
Trading Securities
The Company’s trading securities consist of mutual funds, which are held in connection with the Company’s deferred compensation plan. Unrealized holding gains and losses on trading securities 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") and Bliss-tel Public Company Limited (“Bliss-tel").
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. The Company considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other-than-temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
the near-term prospects of the issuer of the investment; and (iii) whether the Company's intent to retain the investment for the period of time is sufficient to allow for any anticipated recovery in market value. No other-than-temporary losses were incurred by the Company during the three and nine months ended November 30, 2014 or 2013. As of November 30, 2014, the Company owns 72,500,000 shares in its Bliss-tel investment, which carries a value of $0 at November 30, 2014 as a result of other-than-temporary impairment charges incurred in prior fiscal years. Management continues to monitor the performance of Bliss-tel and determined the estimated value of the investment to remain $0 at November 30, 2014.
Other Long-Term Investments
Other long-term investments include investments in three non-controlled corporations accounted for by the cost method. As of November 30, 2014, the Company's investment in Rx Networks totaled $1,985 and we held 15.3% of the outstanding shares of this company. During the three months ended November 30, 2014 the Company received a payment of $250 from Rx Networks as a repayment of funds loaned to the company in Fiscal 2013. No additional investment was made in Rx Networks during the three and nine months ended November 30, 2014. During the nine months ended November 30, 2014, the Company invested $3,000 each in EyeLock, Inc. and EyeSee360, Inc. The Company holds 3.5% and 6.5% of the outstanding shares, or their convertible equivalent, of these two companies, respectively, as of November 30, 2014. No additional investment was made in EyeLock, Inc. or EyeSee360, Inc. during the three and nine months ended November 30, 2014 in excess of the initial investment. The total balance of these three investments at November 30, 2014 was $7,985.
(5) Accumulated Other Comprehensive Income (Loss)
The Company’s accumulated other comprehensive losses consist of the following:
|
| | | | | | | | | | | | | | | | | | | | |
| | Foreign Exchange Losses | | Unrealized losses on investments, net of tax | | Pension plan adjustments, net of tax | | Derivatives designated in a hedging relationship, net of tax | | Total |
Balance at February 28, 2014 | | $ | 235 |
| | $ | (74 | ) | | $ | (1,319 | ) | | $ | (715 | ) | | $ | (1,873 | ) |
Other comprehensive (loss) income before reclassifications | | (15,783 | ) | | 7 |
| | 124 |
| | 1,483 |
| | (14,169 | ) |
Reclassified from accumulated other comprehensive income (loss) | | — |
| | — |
| | — |
| | 46 |
| | 46 |
|
Net current-period other comprehensive (loss) income | | (15,783 | ) | | 7 |
| | 124 |
| | 1,529 |
| | (14,123 | ) |
Balance at November 30, 2014 | | $ | (15,548 | ) | | $ | (67 | ) | | $ | (1,195 | ) | | $ | 814 |
| | $ | (15,996 | ) |
During the three and nine months ended November 30, 2014, the Company recorded taxes related to unrealized losses on investments of $0 in both periods, pension plan adjustments of $0 in both periods and derivatives designated in a hedging relationship of $278 and $598, respectfully.
(6) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated statements of cash flows:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
| | | | | | | | |
| | Nine Months Ended November 30, |
| | 2014 | | 2013 |
Non-cash investing and financing activities: | | | | |
Capital expenditures funded by long-term obligations | | $ | — |
| | $ | 420 |
|
Cash paid during the period: | | | | |
Interest (excluding bank charges) | | $ | 3,342 |
| | $ | 4,029 |
|
Income taxes (net of refunds) | | $ | 2,906 |
| | $ | 7,425 |
|
(7) Accounting for Stock-Based Compensation
The Company has various stock-based compensation plans, which are more fully described in Note 1 of the Company’s Form 10-K for the fiscal year ended February 28, 2014.
The Company granted 125,000 options in October 2014, which vest on October 16, 2015, expire two years from date of vesting (October 15, 2017), have 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, have 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. These warrants are included in the outstanding options and warrants table below and are not yet exercisable at November 30, 2014.
The Company granted 256,250 options in December of 2012, which vested on July 1, 2013, expire two years from date of vesting (June 30, 2015), have an exercise price equal to $6.79, $0.25 above the sales price of the Company’s stock on the day prior to the date of grant, have a contractual term of 2.5 years and a grant date fair value of $1.99 per share determined based upon a Black-Scholes valuation model.
In addition, the Company issued 17,500 warrants in December of 2012 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 of these warrants have been exercised as of November 30, 2014.
During the three and nine months ended November 30, 2014, the Company recorded $65 in stock-based compensation and professional fees related to stock options and warrants. As of November 30, 2014, the Company had $324 of unrecognized compensation costs and professional fees related to non-vested stock options and warrants.
Information regarding the Company's stock options and warrants is summarized below:
|
| | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life |
Outstanding at February 28, 2014 | | 79,204 |
| | $ | 6.79 |
| | |
Granted | | 140,000 |
| | 7.76 |
| | |
Exercised | | 5,000 |
| | 6.79 |
| | |
Forfeited/expired | | — |
| | — |
| | |
Outstanding at November 30, 2014 | | 214,204 |
| | $ | 7.42 |
| | 2.08 |
Options exercisable at November 30, 2014 | | 74,204 |
| | $ | 6.79 |
| | |
On January 30, 2014, the Company granted 84,588 shares of restricted stock in accordance with a newly established Supplemental Executive Retirement Plan (SERP). 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 prior to the release of the restrictions. Shares under the above plan were granted
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
based on certain performance criteria and vest on the later of three years from the date of participation in the SERP, or the grantee reaching the age of 65 years. Upon vesting, the shares will be issued to the grantee or settled in cash, at the Company's sole option. The grantee cannot transfer the rights to receive shares before the restricted shares vest. There are no market conditions inherent in the award, only an employee performance requirement, and the service requirement that the respective employee continues employment with the Company through the vesting date. The Company expenses the cost of the restricted stock awards on a straight-line basis over the requisite service period of each employee or a maximum of 12.75 years. For these purposes, the fair market value of the restricted stock, $13.62, was determined based on the closing price of the Company's common stock on the grant date.
The following table presents a summary of the Company's restricted stock activity for the nine months ended November 30, 2014:
|
| | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Balance at February 28, 2014 | 84,588 | | $ | 13.62 |
|
Granted | — |
| | — |
|
Vested | — |
| | — |
|
Forfeited | — |
| | — |
|
Balance at November 30, 2014 | 84,588 | | $ | 13.62 |
|
During the three and nine months ended November 30, 2014, the Company recorded $75 and $226, respectively, in stock-based compensation related to restricted stock awards. As of November 30, 2014, there was $901 of unrecognized stock-based compensation expense related to unvested restricted stock awards.
(8) Supply Chain Financing
The Company has three supply chain financing agreements ("factoring agreements") that were entered into for the purpose of accelerating receivable collection and better managing cash flow. The factored balances for all three agreements are sold without recourse and are accounted for as sales of accounts receivable. Total receivable balances sold for the three and nine months ended November 30, 2014 were approximately $51,117 and $135,613, respectively, compared to $34,552 and $76,921 for the three and nine months ended November 30, 2013, respectively.
(9) Research and Development
Expenditures for research and development are charged to expense as incurred. Such expenditures amount to $4,915 and $2,353 for the three months ended November 30, 2014 and 2013, respectively, and $16,198 and $13,676 for the nine months ended November 30, 2014 and 2013, respectively, net of customer reimbursement, and are included within Engineering and Technical Support Expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company enters into development and long-term supply agreements with certain of its OEM ("Original Equipment Manufacturer") customers. Revenues earned from the development services are recorded based upon the milestone method of revenue recognition provided certain criteria are met. Amounts due from OEM customers for development services are reflected as a reduction of research and development expense. For the three months ended November 30, 2014 and 2013, the Company recorded $2,029 and $5,077, respectively, and for the nine months ended November 30, 2014 and 2013, the Company recorded $6,825 and $6,432, respectively, of development service revenue as a reduction of research and development expense based upon the achievement of milestones.
(10) Goodwill and Intangible Assets
The change in goodwill by segment is as follows:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
| | | |
Automotive: | Amount |
Beginning balance at March 1, 2014 | $ | 71,405 |
|
Currency translation | (5,992 | ) |
Balance at November 30, 2014 | $ | 65,413 |
|
| |
Gross carrying amount at November 30, 2014 | $ | 65,413 |
|
Accumulated impairment charge | — |
|
Net carrying amount at November 30, 2014 | $ | 65,413 |
|
| |
Premium Audio: | |
Beginning balance at March 1, 2014 | $ | 46,533 |
|
Activity during the period | — |
|
Balance at November 30, 2014 | $ | 46,533 |
|
| |
Gross carrying amount at November 30, 2014 | $ | 78,696 |
|
Accumulated impairment charge | (32,163 | ) |
Net carrying amount at November 30, 2014 | $ | 46,533 |
|
| |
Total Goodwill, net | $ | 111,946 |
|
Note: The Company's Consumer Accessories segment did not carry a goodwill balance at November 30, 2014 or February 28, 2014.
At November 30, 2014, intangible assets consisted of the following:
|
| | | | | | | | | | | | |
| | Gross Carrying Value | | Accumulated Amortization | | Total Net Book Value |
Finite-lived intangible assets: | |
|
| | | | |
Customer relationships (5-20 years) | | $ | 65,541 |
| | $ | 19,123 |
| | $ | 46,418 |
|
Trademarks/Tradenames (3-12 years) | | 415 |
| | 382 |
| | 33 |
|
Patents (5-10 years) | | 9,599 |
| | 3,381 |
| | 6,218 |
|
License (5 years) | | 1,400 |
| | 1,400 |
| | — |
|
Contract (5 years) | | 1,556 |
| | 1,541 |
| | 15 |
|
Total finite-lived intangible assets | | $ | 78,511 |
| | $ | 25,827 |
| | 52,684 |
|
Indefinite-lived intangible assets | | | | | | |
Trademarks | | | | | | 113,083 |
|
Total net intangible assets | | | | | | $ | 165,767 |
|
At February 28, 2014, intangible assets consisted of the following:
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
| | | | | | | | | | | | |
| | Gross Carrying Value | | Accumulated Amortization | | Total Net Book Value |
Finite-lived intangible assets: | | | | | | |
Customer relationships (5-20 years) | | $ | 68,231 |
| | $ | 16,381 |
| | $ | 51,850 |
|
Trademarks/Tradenames (3-12 years) | | 415 |
| | 377 |
| | 38 |
|
Patents (5-10 years) | | 10,357 |
| | 2,879 |
| | 7,478 |
|
License (5 years) | | 1,400 |
| | 1,400 |
| | — |
|
Contract (5 years) | | 1,556 |
| | 1,474 |
| | 82 |
|
Total finite-lived intangible assets | | $ | 81,959 |
| | $ | 22,511 |
| | 59,448 |
|
Indefinite-lived intangible assets | | | | | | |
Trademarks | | | | | | 114,864 |
|
Total net intangible assets | | | | | | $ | 174,312 |
|
The Company recorded amortization expense of $1,373 and $1,453 for the three months ended November 30, 2014 and 2013, respectively, and $4,194 and $4,329 for the nine months ended November 30, 2014 and 2013, respectively. The estimated aggregate amortization expense for all amortizable intangibles for each of the succeeding years ending November 30, 2019 is as follows:
|
| | | |
Fiscal Year | | Amount |
2016 | | 5,625 |
|
2017 | | 5,598 |
|
2018 | | 5,567 |
|
2019 | | 5,383 |
|
2020 | | 5,367 |
|
We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flows from such assets are less than their carrying value. In that event, a loss is recognized equal to the amount by which the carrying value exceeds the fair value of the long-lived assets. Fair value is determined by primarily using a discounted cash flow methodology that requires considerable management judgment and long-term assumptions. During the third quarter of Fiscal 2015, the Company re-evaluated its projections for certain tradenames with a carrying value of $15,336. Accordingly, this action was deemed to be a triggering event for an evaluation of the recoverability of these tradenames as of November 30, 2014. The Company performed an interim impairment test for these tradenames, and determined that there was no impairment as of November 30, 2014. Our estimate of net future cash flows is based on historical experience and assumptions of future trends, which may be different from actual results. We periodically review the appropriateness of the estimated useful lives of our long-lived assets.
(11) Equity Investment
As of November 30, 2014 and February 28, 2014, the Company had a 50% non-controlling ownership interest in ASA Electronics, LLC and Subsidiary (“ASA") which acts as a distributor of mobile electronics specifically designed for niche markets within the automotive industry, including RV's; buses; and commercial, heavy duty, agricultural, construction, powersport, and marine vehicles.
The following presents summary financial information for ASA. Such summary financial information has been provided herein based upon the individual significance of ASA to the consolidated financial information of the Company.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
|
| | | | | | | | |
| | November 30, 2014 | | February 28, 2014 |
Current assets | | $ | 45,441 |
| | $ | 41,820 |
|
Non-current assets | | 5,338 |
| | 5,171 |
|
Current liabilities | | 8,085 |
| | 5,735 |
|
Members' equity | | 42,694 |
| | 41,256 |
|
| | Nine Months Ended November 30, |
| | 2014 | | 2013 |
Net sales | | $ | 71,974 |
| | $ | 71,504 |
|
Gross profit | | 21,187 |
| | 21,942 |
|
Operating income | | 8,834 |
| | 9,503 |
|
Net income | | 9,262 |
| | 9,544 |
|
The Company's share of income from ASA was $1,245 and $1,520 for the three months ended November 30, 2014 and 2013, respectively, and $4,631 and $4,772 for the nine months ended November 30, 2014 and 2013, respectively.
(12) Income Taxes
The Company’s provision for income taxes consists of U.S. and foreign taxes in amounts necessary to align the Company’s year-to-date provision for income taxes with the effective tax rate that the Company expects to achieve for the full year. The Company’s annual effective tax rate for Fiscal 2015 excluding discrete items is estimated to be 46.1% (which includes U.S., state and local and foreign taxes) based upon the Company’s anticipated earnings both in the U.S. and in its foreign subsidiaries. The Company's projected annual effective tax rate (excluding discrete items) is higher than the statutory rate of 35% primarily related to the devaluation of the Venezuelan bonds, for which the Company will not realize a tax benefit.
For the three months ended November 30, 2014, the Company recorded a provision for income taxes of $584, which consisted of U.S., state and local and foreign taxes, including a discrete benefit of $6,831. The discrete benefit relates primarily to the reversal of uncertain tax positions under ASC 740 related to a favorable settlement of an income tax examination during the quarter ended November 30, 2014. For the three months ended November 30, 2013, the Company recorded a provision for income taxes of $6,409.
The effective tax rate for the nine months ended November 30, 2014 was a benefit for income taxes of 10.8% compared to a provision for income taxes of 31.4% in the comparable prior period. The effective tax rate for the nine months ended November 30, 2014 is different than the statutory rate primarily due to the reversal of uncertain tax positions under ASC 740 related to a favorable settlement of an income tax examination during the quarter ended November 30, 2014 and the devaluation of the Company's Venezuelan bonds for which the Company will not receive a tax benefit.
(13) Inventory
Inventories by major category are as follows:
|
| | | | | | | | |
| | November 30, 2014 | | February 28, 2014 |
Raw materials | | $ | 37,414 |
| | $ | 32,193 |
|
Work in process | | 5,403 |
| | 4,664 |
|
Finished goods | | 110,508 |
| | 107,482 |
|
Inventory, net | | $ | 153,325 |
| | $ | 144,339 |
|
(14) Financing Arrangements
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
The Company has the following financing arrangements:
|
| | | | | | | | |
| | November 30, 2014 | | February 28, 2014 |
Debt | | | | |
Domestic bank obligations (a) | | $ | 76,600 |
| | $ | 87,950 |
|
Euro asset-based lending obligation (b) | | 5,600 |
| | 3,762 |
|
Schwaiger mortgage (c) | | 1,351 |
| | 1,706 |
|
Klipsch notes (d) | | 7,154 |
| | 7,855 |
|
Audiovox Germany loans (e) | | 6,509 |
| | 7,909 |
|
Hirschmann line of credit (f) | | — |
| | — |
|
Total debt | | 97,214 |
| | 109,182 |
|
Less: current portion of long-term debt | | 2,068 |
| | 5,960 |
|
Total long-term debt | | $ | 95,146 |
| | $ | 103,222 |
|
(a) Domestic Bank Obligations
From March 1, 2013 through January 8, 2014, the Company had a revolving credit facility (the "Credit Facility"). The Credit Facility had an aggregated committed availability of up to $205,000, consisting of a revolving credit facility of $80,000; a $50,000 multicurrency revolving facility, of which up to the equivalent of $50,000 was available only to VOXX International (Germany) GmbH in euros; and a five year term loan facility in the aggregate principal amount of $75,000. $110,000 of the U. S. revolving credit facility was available on a revolving basis for five years from the closing date. An additional $20,000 was available during the periods from September 1, 2012 through January 31, 2013 and from September 1, 2013 through November 30, 2013. The Credit Facility included a $25,000 sublimit for issuers of letters of credit for domestic borrowings and a $10,000 sublimit for Swing Loans.
On January 9, 2014, the Company amended and restated the Credit Facility (the "Amended Facility"). The Amended Facility provides for senior secured credit facilities in an aggregate amount of $200,000, consisting of a revolving credit facility of $200,000, with a $30,000 multicurrency revolving credit facility sublimit, a $25,000 sublimit for Letters of Credit and a $10,000 sublimit for Swingline Loans. The Amended Facility is due on January 9, 2019; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement).
Generally, the Company may designate specific borrowings under the Amended Facility as either Alternate Base Rate Loans or LIBOR Rate Loans, except that Swingline Loans may only be designated as Alternate Base Rate Loans. VOXX International (Germany) GmbH may only borrow euros, and only as LIBOR 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 1.00 - 2.00% based upon leverage, as defined in the agreement. Loans designated as Alternate Base Rate loans shall bear interest at a rate equal to the base rate plus an applicable margin ranging from 0.00 - 1.00% based on excess availability in the borrowing base. As of November 30, 2014, the interest rate on the facility was 2.31%.
The Amended Facility requires compliance with non-financial and financial covenants. As of November 30, 2014, the Company was in compliance with all debt covenants.
The Obligations under the Amended Facility are secured by valid and perfected first priority security interests in liens on all of the following: (a)(i) 100% of the capital stock or other membership or partnership equity ownership of profit interests of each domestic Credit Party (other than the Company), and (ii) 65% of the voting equity interests and 100% of the non-voting equity interests of all present and future first-tier foreign subsidiaries of any Credit Party (or such greater percentage as would not result in material adverse federal income tax consequences for the Company); (b) all of (i) the tangible and intangible personal property/assets of the Credit
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Parties and (ii) the fee-owned real property of the Company located in Hauppauge, New York; and (c) all products, profits, rents and proceeds of the foregoing.
As of November 30, 2014, approximately $76,600 was outstanding under the line. Charges incurred on the unused portion of the Credit Facility and Amended Credit Facility during the three and nine months ended November 30, 2014 totaled $73 and $212, respectively, compared to $47 and $112 during the three and nine months ended November 30, 2013, respectively. These charges are included within interest and bank charges on the Consolidated Statement of Operations and Comprehensive Income (Loss).
As a result of the amendment to the Credit Facility, the Company incurred additional debt financing costs of $1,455, which are recorded as deferred financing costs. The Company accounted for the amendment as a modification of debt and added these costs to the remaining financing costs related to the original Credit Facility and its amended predecessor of approximately $6,700. These deferred financing costs are included in Other Assets on the accompanying consolidated balance sheets and are being amortized through interest and bank charges over the five year term of the Amended Facility. During the three and nine months ended November 30, 2014, the Company amortized $279 and $838 of these costs, respectively, compared to $344 and $1,033 during the three and nine months ended November 30, 2013.
(b) Euro Asset-Based Lending Obligation
Foreign bank obligations include a financing arrangement totaling €20,000 and consisting of a Euro accounts receivable factoring arrangement and a Euro Asset-Based Lending ("ABL") (up to 60% of eligible non-factored accounts receivable) credit facility for the Company's subsidiary, Audiovox Germany, which expires on October 31, 2016. The rate of interest is the three month Euribor plus 1.6% (1.7% at November 30, 2014), and the Company pays 0.22% of its gross sales as a fee for the accounts receivable factoring arrangement. As of November 30, 2014, the amount of non-factored accounts receivable exceeded the amounts outstanding under this obligation.
(c) 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.
(d) Klipsch Mortgages
Included in this balance is a mortgage on a facility included in the assets acquired in connection with the Klipsch transaction on March 1, 2011 and assumed by Voxx. The balance at November 30, 2014 is $459 and will be fully paid by the end of Fiscal 2018.
Also included in this balance is a mortgage on the building which houses Klipsch's headquarters in Indianapolis, IN. On June 3, 2013, the Company refinanced this mortgage with Wells Fargo for an amount totaling $7,800. The new mortgage is due in May 2023 and the interest rate is equal to the 1-month LIBOR plus 2.25%. Simultaneously on June 3, 2013, the Company entered into an interest rate swap agreement in order to hedge interest rate exposure and pays a fixed rate of 3.92% under the swap agreement (see Note 3). The balance of the mortgage at November 30, 2014 was $6,695.
(e) Audiovox Germany Loans
Included in this balance is a mortgage on the land and building housing Audiovox 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.
(f) Hirschmann Line of Credit
On July 15, 2012, Hirschmann entered into an agreement for a €6,000 working capital line of credit with a financial institution. The agreement is payable on demand and is mutually cancelable. The rate of interest is the
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
three month Euribor plus 2% (2.1% at November 30, 2014) and the line of credit is guaranteed by VOXX International Corporation.
(15) Other Income (Expense)
Other income (expense) is comprised of the following:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Net settlement gains | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,025 |
|
Foreign currency gain (loss) | | 111 |
| | (335 | ) | | 476 |
| | (504 | ) |
Interest income | | 144 |
| | 252 |
| | 282 |
| | 524 |
|
Rental income | | 305 |
| | 417 |
| | 896 |
| | 1,138 |
|
Miscellaneous | | (418 | ) | | 5,231 |
| | (238 | ) | | 6,110 |
|
Total other, net | | $ | 142 |
| | $ | 5,565 |
| | $ | 1,416 |
| | $ | 11,293 |
|
Included in Miscellaneous for the three and nine months ended November 30, 2013 is income of approximately $4,300 related to an unanticipated settlement payment that a customer offered to pay subsequent to the expiration of a contract. Also included in Miscellaneous for the nine months ended November 30, 2013 is income related to the recovery of funds from Circuit City of approximately $900 that was owed to Klipsch and written off prior to Voxx's acquisition of this subsidiary.
(16) Foreign Currency
The Company has certain operations 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 may have a negative impact on our business and our financial condition. In 2003, Venezuela created the Commission of Administration of Foreign Currency ("CADIVI") which establishes and administers currency controls and their associated rules and regulations. These controls include creating a fixed exchange rate between the Bolivar Fuerte and the U.S. Dollar, and the ability to restrict the exchange of Bolivar Fuertes for U.S. Dollars and vice versa.
Effective January 1, 2010, according to the guidelines in ASC 830, "Foreign Currency," Venezuela was designated as a hyper-inflationary economy. 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. The Company transitioned to hyper-inflationary accounting on March 1, 2010 and continues to account for its operation in Venezuela under this method.
In February 2013, the Venezuelan government announced the devaluation of the Bolivar Fuerte, moving the official exchange rate from 4.3 to 6.3 per U.S. dollar. Concurrent with this action, the Venezuelan government established a new auction-based exchange rate market program, referred to as Complementary System for the Administration of Foreign Currency (“SICAD”). The amount of transactions that have run through the SICAD and restrictions around participation have limited our access to any foreign exchange rate other than the official rate to pay for imported goods and manage our local monetary asset balances. Although the official exchange rate has remained at 6.3, the government announced in January 2014 that the exchange rate for goods and services deemed non-essential would move to the rate available on the expanded SICAD currency market, which was 11.7 at February 28, 2014 (referred to as SICAD 1). In March 2014, a new exchange control mechanism was opened by the government, referred to as SICAD 2, which is not restricted by auction and is available for all types of transactions. The SICAD 2 rate does not supersede the SICAD 1 rate of 11.7 or the country's official exchange rate of 6.3 Venezuelan Bolivar Fuertes. The use of the SICAD 1 rate, however, is dependent upon the availability of auctions, and is not indicative of a free market exchange, as only designated industries may bid
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
into individual auctions and the highest bids are not always recognized by the Venezuelan government. The Company, therefore, has used the SICAD 2 rate for its Venezuelan subsidiary for the three and nine months ended November 30, 2014, which was approximately 50 Bolivar Fuerte/$1 at November 30, 2014, with the exception of the Company's investment in Venezuelan government issued sovereign bonds (See Note 4). The SICAD 2 exchange rate is intended to more closely resemble a market driven exchange rate than the rates provided by Venezuela's other regulated exchange mechanisms. A net currency exchange loss of $(6,232) was recorded for the nine months ended November 30, 2014, which includes the remeasurement loss on the Company's Venezuelan bonds of $(6,702), as described in Note 4, and is included in Other Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income (Loss).
Our investment in Venezuela includes approximately $13,080 of rental properties that are currently being held for investment purposes. As of November 30, 2014, the Company made an assessment of the recoverability of its investment properties in Venezuela as a result of the existence of certain indicators of impairment. In testing the recoverability of its investment properties, the Company considered the undiscounted cash flows expected to be received from these properties, the length of time the properties have been held, the volatile market conditions, the Company’s financial condition, and the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. Based on our assessment, none of our rental properties were impaired as of November 30, 2014.
Our automotive business in Venezuela and our ability to obtain U.S. dollars are impacted by the continued economic instability, increasing inflation and currency restrictions imposed by the government. The Company is monitoring this situation closely and continues to evaluate its local properties. However, further devaluations or regulatory actions could impair the carrying value of these properties.
(17) Lease Obligations
During 1996, the Company entered into a 30-year capital lease for a building with its principal stockholder and current chairman. This lease was restructured in December 2006 and expires on November 30, 2026. The Company currently subleases the building to Reliance Communications LLC for monthly payments of $60 for a term of three years, terminating on October 15, 2015. In December 2014, subsequent to the end of the Company's third quarter, Myra Properties LLC, an affiliate of Reliance Communications LLC, purchased the building from Voxx's principal stockholder, causing the lease between Voxx and the stockholder to be terminated. The Company also leases another facility from its principal stockholder which expires on November 30, 2016.
Total lease payments required under all related party leases for the five-year period ending May 31, 2019 are $4,709.
At November 30, 2014, the Company was obligated under non-cancelable capital and operating leases for equipment and warehouse facilities for minimum annual rental payments as follows:
|
| | | | | | | |
| Capital Lease | | Operating Leases |
2015 | $ | 574 |
| | $ | 3,912 |
|
2016 | 574 |
| | 6,631 |
|
2017 | 631 |
| | 1,405 |
|
2018 | 1,104 |
| | 856 |
|
2019 | 1,105 |
| | 233 |
|
Thereafter | 4,733 |
| | 617 |
|
Total minimum lease payments | 8,721 |
| | $ | 13,654 |
|
Less: minimum sublease income | 660 |
| | |
|
Net | 8,061 |
| | |
|
Less: amount representing interest | 2,212 |
| | |
|
Present value of net minimum lease payments | 5,849 |
| | |
|
Less: current installments included in accrued expenses and other current liabilities | 237 |
| | |
|
Long-term capital obligation | $ | 5,612 |
| | |
|
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
At November 30, 2014, minimum annual rental payments on related party leases with its principal stockholder, including the capital lease payments, which are included in the above table, are as follows:
|
| | | |
2015 | $ | 1,396 |
|
2016 | 1,420 |
|
2017 | 631 |
|
2018 | 631 |
|
2019 | 631 |
|
Thereafter | 4,733 |
|
Total | $ | 9,442 |
|
(18) Capital Structure
The Company's capital structure is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | Shares Authorized | | Shares Outstanding | | | | |
Security | | Par Value | | November 30, 2014 | | February 28, 2014 | | November 30, 2014 | | February 28, 2014 | | 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 |
| | 21,863,785 |
| | 22,172,968 |
| | 1 | | Ratably with Class B |
Class B Common Stock | | $ | 0.01 |
| | 10,000,000 |
| | 10,000,000 |
| | 2,260,954 |
| | 2,260,954 |
| | 10 | | Ratably with Class A |
Treasury Stock at cost | | at cost |
| | 2,129,455 |
| | 1,815,272 |
| | N/A | | N/A | | N/A | | |
(19) Segment Reporting
The Company operates in three distinct segments based upon our products and our internal organizational structure. The three operating segments, which are also the Company's reportable segments, are Automotive, Premium Audio and Consumer Accessories.
Our Automotive segment designs, manufactures, distributes and markets rear-seat entertainment devices, satellite radio products, automotive security, remote start systems, digital TV tuners, mobile antennas, 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/computer speakers, business music systems, cinema speakers, flat panel speakers, bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance).
Our Consumer Accessories segment designs and markets remote controls; rechargeable battery packs; wireless and bluetooth speakers; personal sound amplifiers; and iPod docks/iPod sound, A/V connectivity, portable/home charging, reception, and digital consumer products.
The accounting principles applied at the consolidated financial statement level are generally the same as those applied at the operating segment level and there are no material intersegment sales. The segments are allocated interest expense, based upon a pre-determined formula, which utilizes a percentage of each operating segment's intercompany balance, which is offset in Corporate/Eliminations.
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
Segment data for each of the Company's segments are presented below:
|
| | | | | | | | | | | | | | | | | | | |
| Automotive | | Premium Audio | | Consumer Accessories | | Corporate/ Eliminations | | Total |
Three Months Ended November 30, 2014 | | | | | | | | | |
Net sales | $ | 110,237 |
| | $ | 54,353 |
| | $ | 58,202 |
| | $ | 564 |
| | $ | 223,356 |
|
Equity in income of equity investees | 1,245 |
| | — |
| | — |
| | — |
| | 1,245 |
|
Interest expense and bank charges | 1,654 |
| | 2,372 |
| | 1,460 |
| | (3,661 | ) | | 1,825 |
|
Depreciation and amortization expense | 2,394 |
| | 946 |
| | 331 |
| | 518 |
| | 4,189 |
|
Income (loss) before income taxes | 8,686 |
| | 5,985 |
| | 2,500 |
| | (965 | ) | | 16,206 |
|
| | | | | | | | | |
Three Months Ended November 30, 2013 | | | | | | | | | |
Net sales | $ | 117,567 |
| | $ | 65,562 |
| | $ | 62,231 |
| | $ | 454 |
| | $ | 245,814 |
|
Equity in income of equity investees | 1,520 |
| | — |
| | — |
| | — |
| | 1,520 |
|
Interest expense and bank charges | 1,718 |
| | 2,050 |
| | 2,511 |
| | (4,449 | ) | | 1,830 |
|
Depreciation and amortization expense | 2,137 |
| | 978 |
| | 543 |
| | 382 |
| | 4,040 |
|
Income (loss) before income taxes | 15,618 |
| | 5,688 |
| | 1,392 |
| | (865 | ) | | 21,833 |
|
| | | | | | | | | |
Nine Months Ended November 30, 2014 | | | | | | | | | |
Net sales | $ | 305,564 |
| | $ | 128,517 |
| | $ | 152,567 |
| | $ | 950 |
| | $ | 587,598 |
|
Equity in income of equity investees | 4,631 |
| | — |
| | — |
| | — |
| | 4,631 |
|
Interest expense and bank charges | 4,623 |
| | 6,892 |
| | 5,000 |
| | (11,505 | ) | | 5,010 |
|
Depreciation and amortization expense | 6,861 |
| | 2,743 |
| | 1,005 |
| | 1,580 |
| | 12,189 |
|
Income (loss) before income taxes | 11,685 |
| | 2,582 |
| | (1,989 | ) | | (157 | ) | | 12,121 |
|
| | | | | | | | | |
Nine Months Ended November 30, 2013 | | | | | | | | | |
Net sales | $ | 318,633 |
| | $ | 146,533 |
| | $ | 156,165 |
| | $ | 1,273 |
| | $ | 622,604 |
|
Equity in income of equity investees | 4,772 |
| | — |
| | — |
| | — |
| | 4,772 |
|
Interest expense and bank charges | 5,568 |
| | 5,753 |
| | 7,508 |
| | (13,220 | ) | | 5,609 |
|
Depreciation and amortization expense | 6,330 |
| | 2,726 |
| | 1,716 |
| | 1,228 |
| | 12,000 |
|
Income (loss) before income taxes | 26,025 |
| | 8,294 |
| | (1,279 | ) | | (350 | ) | | 32,690 |
|
(a) Included in the income (loss) before taxes for the nine months ended November 30, 2014 within the Automotive segment is the $6,702 remeasurement loss related to the Company's Venezuela government issued sovereign bonds.
(20) Contingencies
The Company is currently, and has in the past been a party to various routine legal proceedings incident to the ordinary course of business. If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for. The Company believes its outstanding litigation matters disclosed below will not have a material adverse effect on the Company's financial statements, individually or in the aggregate; however, due to the uncertain outcome of these matters, the Company disclosed specific matters as outlined below.
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
VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Amounts in thousands, except share and per share data)
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.
Securities and Derivative Proceedings:
As described in our Report on Form 10-Q for the fiscal quarter ended May 31, 2014, on July 8, 2014, a purported class action suit, styled Brian Ford vs. VOXX International Corporation, et al., was filed against us and two of our present executive officers in the U.S. District Court for the Eastern District of New York. The suit alleges that defendants violated the federal securities laws by making false or misleading statements between May 15, 2013 and May 14, 2014 regarding our earnings guidance for fiscal 2014 and the anticipated future performance of our business. Plaintiff claims that these statements artificially inflated the price of our stock and that purchasers of our stock during the relevant period were damaged when the stock price later declined. Plaintiff seeks the award of unspecified amount of damages on behalf of the alleged class, counsel fees and costs. We believe we have meritorious legal positions and defenses and will continue to represent our interests vigorously in this matter. On September 8, 2014, three members of the alleged class moved to be appointed the lead plaintiff in the action. To date, the Court has not entered an order appointing a lead plaintiff.
(21) New Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The amendments in ASU 2013-11 provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The Company adopted these amendments in the first quarter of Fiscal 2015 and there has not been a material impact on the Company's financial position, results of operations or cash flows as a result of this change.
In May 2014, the FASB issued 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 is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Retrospective or modified retrospective application of the accounting standard is required. The Company is currently evaluating the impact of ASU 2014-09 on the Company's Consolidated Financial Statements and disclosures.
(22) Subsequent Events
In December of 2014, the Company granted 118,058 shares of restricted stock to employees participating in the SERP, which vest in accordance with the guidelines of this plan (see Note 7). The shares have an exercise price of $7.77, as determined based on the closing price of the Company's stock on the grant date.
Refer to Note 17 for discussion of the termination of the Company's capital lease with a related party subsequent to November 30, 2014.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2014 compared to the three and nine months ended November 30, 2013. Next, we present adjusted EBITDA and diluted adjusted EBITDA per common share for the three and nine months ended November 30, 2014 compared to the three and nine months ended November 30, 2013 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 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 eighteen wholly-owned subsidiaries: Audiovox Atlanta Corp., VOXX Electronics Corporation, VOXX Accessories Corp., Audiovox Consumer Electronics, Inc. ("ACE"), Audiovox German Holdings GmbH ("Audiovox Germany"), Audiovox Venezuela, C.A., Audiovox Canada Limited, Audiovox Hong Kong Ltd., Audiovox International Corp., Audiovox Mexico, S. de R.L. de C.V. ("Audiovox Mexico"), Code Systems, Inc., Oehlbach Kabel GmbH ("Oehlbach"), Schwaiger GmbH ("Schwaiger"), Invision Automotive Systems, Inc. ("Invision"), Klipsch Holding LLC ("Klipsch"), Car Communication Holding GmbH ("Hirschmann"), Omega Research and Development, LLC ("Omega") and Audiovox Websales LLC. 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®, Energy®, Heco®, Hirschmann Car Communication®, Incaar™, Invision®, Jamo®, Jensen®, Klipsch®, Mac Audio™, Magnat®, Mirage®, Oehlbach®, Omega®, Phase Linear®, Prestige®, Pursuit®, RCA®, RCA Accessories®, Schwaiger®, Spikemaster®, Recoton®, Road Gear®, and Terk®, 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.
Reportable Segments
The Company operates in three segments based upon our 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, digital TV tuners, mobile antennas, mobile multimedia devices, aftermarket/OE-styled radios, car-link smartphone telematics application, collision avoidance systems and location-based services. The Premium Audio segment designs, manufactures, distributes and markets home theater systems, high-end loudspeakers, outdoor speakers, iPod/computer speakers, business music systems, cinema speakers, flat panel speakers, bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance). The Consumer Accessories segment designs and markets remote controls; rechargeable battery packs; wireless and bluetooth speakers; personal sound amplifiers; and iPod docks/iPod sound, A/V connectivity, portable/home charging, reception and digital consumer products. See Note 19 to the Company's Consolidated Financial Statements for segment information.
Products included in these segments are as follows:
Automotive products include:
| |
▪ | mobile multi-media video products, including in-dash, overhead and headrest systems, |
| |
▪ | autosound products including radios, amplifiers and CD changers, |
| |
▪ | satellite radios including plug and play models and direct connect models, |
| |
▪ | smart phone telematics applications, |
| |
▪ | automotive security and remote start systems, |
| |
▪ | automotive power accessories, |
| |
▪ | rear observation and collision avoidance systems, |
| |
▪ | TV tuners and antennas, and |
| |
▪ | location based services. |
Premium Audio products include:
| |
▪ | streaming music systems, |
| |
▪ | on-ear and in-ear headphones, |
| |
▪ | soundbars and sound bases, and |
| |
▪ | DLNA (Digital Living Network Alliance). |
Accessories products include:
| |
▪ | High-Definition Television ("HDTV") antennas, |
| |
▪ | Wireless Fidelity ("WiFi") antennas, |
| |
▪ | High-Definition Multimedia Interface ("HDMI") accessories, |
| |
▪ | home electronic accessories such as cabling, |
| |
▪ | other connectivity products, |
| |
▪ | performance enhancing electronics, |
| |
▪ | flat panel TV mounting systems, |
| |
▪ | iPod specialized products, |
| |
▪ | rechargeable battery backups (UPS) for camcorders, cordless phones and portable video (DVD) batteries and accessories, |
| |
▪ | power supply systems and charging products, |
| |
▪ | electronic equipment cleaning products, |
| |
▪ | personal sound amplifiers, |
| |
▪ | home and portable stereos, |
| |
▪ | digital multi-media products, such as personal video recorders and MP3 products, |
| |
▪ | digital voice recorders, and |
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.
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.
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; sales incentives; accounts receivable reserves; inventory reserves; goodwill and other intangible assets; warranties; stock-based compensation; income taxes; and the fair value measurements of financial assets and liabilities.
Goodwill and Other Intangible Assets
Approximately 41.6% ($46.5 million) and 51.8% ($58.0 million) of our goodwill as of November 30, 2014 is allocated to our Klipsch and Hirschmann reporting units, respectively. The fair values of the Klipsch and Hirschmann reporting units were greater than their carrying values by approximately 50.2% ($9.3 million) and 100% ($9.8 million), respectively, as of February 28, 2014. The Company uses a discounted cash flow model to value the reporting unit as part of its impairment test. This impairment test involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. The critical assumptions in the discounted cash flow model are revenues, operating margins, working capital and a discount rate (developed using a weighted average cost of capital analysis). Management exercises judgment in developing these assumptions. Certain of these assumptions are based upon industry projections, facts specific to the reporting unit, market participant assumptions and data, and consideration of our long-term view for the reporting unit and the markets we operate in. If the Klipsch reporting unit were to experience sales declines, sustained pricing pressures, unfavorable operating margins, lack of new product acceptance by consumers, changes in consumer trends and preferred shopping channels, less than anticipated results for the holiday season, an increase to the discount rate, and/or a decrease in our projected long-term growth rates used in the discounted cash flow model, there would be an increased risk of goodwill impairment for the Klipsch reporting unit. If the Hirschmann reporting unit experienced an increase to the discount rate and/or a significant change in contract based projections used in the discounted cash flow model, there would be an increased risk of goodwill impairment for the Hirschmann reporting unit.
Approximately 55.5% percent of our indefinite-lived trademarks ($62.8 million) as of November 30, 2014 are at risk of impairment. As a result of the impairment charges recorded in the fiscal year 2014, the carrying values of certain indefinite-lived trademarks were adjusted to their respective fair values as of February 28, 2014. The Company uses an income approach, based on the relief from royalty method, to value the indefinite-lived trademarks as part of its impairment test. This impairment test involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. The critical assumptions in the discounted cash flow model include revenues, long-term growth rates, royalty rates, and discount rates. Management exercises judgment in developing these assumptions. Certain of these assumptions are based upon industry projections, facts specific to the trademarks and consideration of our long-term view for the trademark and the markets we operate in. If we were to experience sales declines, a significant change in operating margins which may impact estimated royalty rates, an increase in our discount rates, and/or a decrease in our projected long-term growth rates, there would be an increased risk of impairment of these indefinite-lived trademarks.
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 ended February 28, 2014. Since February 28, 2014, there have been no changes in our critical accounting policies or changes to the assumptions and estimates related to them.
Results of Operations
As you read this discussion and analysis, refer to the accompanying consolidated statements of operations and comprehensive income, which present the results of our operations for the three and nine months ended November 30, 2014 and 2013.
The following tables set forth, for the periods indicated, certain statements of operations data for the three and nine months ended November 30, 2014 and 2013.
Net Sales
|
| | | | | | | | | | | | | | | |
| | November 30, | | | | |
| | 2014 | | 2013 | | $ Change | | % Change |
Three Months Ended: | | | | | | | | |
Automotive | | $ | 110,237 |
| | $ | 117,567 |
| | $ | (7,330 | ) | | (6.2 | )% |
Premium Audio | | 54,353 |
| | 65,562 |
| | (11,209 | ) | | (17.1 | ) |
Consumer Accessories | | 58,202 |
| | 62,231 |
| | (4,029 | ) | | (6.5 | ) |
Corporate | | 564 |
| | 454 |
| | 110 |
| | 24.2 |
|
Total net sales | | $ | 223,356 |
| | $ | 245,814 |
| | $ | (22,458 | ) | | (9.1 | )% |
Nine Months Ended: | | | | | | | | |
Automotive | | $ | 305,564 |
| | $ | 318,633 |
| | $ | (13,069 | ) | | (4.1 | )% |
Premium Audio | | 128,517 |
| | 146,533 |
| | (18,016 | ) | | (12.3 | ) |
Consumer Accessories | | 152,567 |
| | 156,165 |
| | (3,598 | ) | | (2.3 | ) |
Corporate | | 950 |
| | 1,273 |
| | (323 | ) | | (25.4 | ) |
Total net sales | | $ | 587,598 |
| | $ | 622,604 |
| | $ | (35,006 | ) | | (5.6 | )% |
Automotive sales represented 49.4% and 52.0% of the net sales for the three and nine months ended November 30, 2014 compared to 47.8% and 51.2% in the respective prior year periods. The Automotive group experienced decreases in its OEM manufacturing lines during the three and nine months ended November 30, 2014 primarily due to the temporary suspension of one of its programs as requested by one of the Company’s customers while they address their safety issues. This was completed in the third quarter and relaunched in November 2014. In addition, the Company experienced load in sales from its Bentley project in the prior year, which leveled out in the first quarter of Fiscal 2015, affecting both the three and nine months ended November 30, 2014, and saw decreases in satellite radio fulfillment sales for the three and nine months ended November 30, 2014, as more cars are being manufactured with satellite radio. The Company also continues to experience significantly lower sales in Venezuela due to current economic and political conditions. As an offset to these decreases, the Company saw an increase in remote start sales for both the three and nine months ended November 30, 2014. For the nine months ended November 30, 2014, the Company also experienced an increase in sales of devices for the new Car Connection program to retailers, as well as increases in European sales due to improved tuner and antenna sales at Hirschmann.
Premium Audio sales represented 24.3% and 21.9% of our net sales for the three and nine months ended November 30, 2014 compared to 26.7% and 23.5% in the respective prior year periods. Sales in Premium Audio decreased 17.1% and 12.3% for the three and nine months ended November 30, 2014, respectively, as a result of lower sales for soundbars, music centers and Bluetooth speakers due to lower selling prices and lower sales of headphones due to competition. These decreases were offset by increases in sales of high end separates, as well as commercial and custom installations.
Consumer Accessory sales represented 26.1% and 26.0% of our net sales for the three and nine months ended November 30, 2014 compared to 25.3% and 25.1% in the respective prior year periods. The Consumer Accessories group experienced decreases in sales for the three and nine months ended November 30, 2014 as a result of the continued decrease in sales of digital voice recorders and clock radios, as well as hook-up and power products, such as cables and surge protectors, as a result of competition, changes in demand and changes in technology. The group has also experienced decreases in sales as a result of the transition of our Mexican subsidiary from a distributor model to a representative office during the first quarter of Fiscal 2015, which positively impacted sales during the first half of the year due to an upfront sale of inventory on hand, but has slowed in the third quarter as a result of a slower than expected transition and lower sales, which are now based on commissions. These decreases were offset by significant increases in the sale of wireless and Bluetooth speakers, as well as improved sales in Europe.
Gross Profit and Gross Margin Percentage
|
| | | | | | | | | | | | | | | |
| | November 30, | | | | |
| | 2014 | | 2013 | | $ Change | | % Change |
Three Months Ended: | | | | | | | | |
Automotive | | $ | 34,499 |
| | $ | 33,596 |
| | $ | 903 |
| | 2.7 | % |
| | 31.3 | % | | 28.6 | % | | |
| | |
|
Premium Audio | | 18,317 |
| | 20,217 |
| | (1,900 | ) | | (9.4 | ) |
| | 33.7 | % | | 30.8 | % | | | | |
Consumer Accessories | | 15,529 |
| | 14,625 |
| | 904 |
| | 6.2 |
|
| | 26.7 | % | | 23.5 | % | | | | |
Corporate | | 612 |
| | 360 |
| | 252 |
| | 70.0 |
|
| | $ | 68,957 |
| | $ | 68,798 |
| | $ | 159 |
| | 0.2 | % |
| | 30.9 | % | | 28.0 | % | | | | |
Nine Months Ended: | | | | | | | | |
Automotive | | $ | 94,889 |
| | $ | 91,177 |
| | $ | 3,712 |
| | 4.1 | % |
| | 31.5 | % | | 28.6 | % | | |
| | |
|
Premium Audio | | 40,352 |
| | 46,920 |
| | (6,568 | ) | | (14.0 | ) |
| | 31.4 | % | | 32.0 | % | | | | |
Consumer Accessories | | 38,236 |
| | 38,231 |
| | 5 |
| | — |
|
| | 25.1 | % | | 24.5 | % | | | | |
Corporate | | 937 |
| | 1,085 |
| | (148 | ) | | (13.6 | ) |
| | $ | 174,414 |
| | $ | 177,413 |
| | $ | (2,999 | ) | | (1.7 | )% |
| | 29.7 | % | | 28.5 | % | | | | |
Gross margins in the Automotive segment increased 270 and 290 basis points for the three and nine months ended November 30, 2014, respectively, primarily as a result of improved margins related to tuners and antennas during the three and nine months ended November 30, 2014, as well as a one time duty refund received in the first quarter of Fiscal 2015, impacting margins for the nine months ended November 30, 2014. This was offset by decreases in sales in the OEM manufacturing line due to a temporary program suspension due to a customer's safety issues, and continued decreases in sales in Venezuela as a result of economic and political conditions during the three and nine months ended November 30, 2014.
Gross margins in the Premium Audio segment increased 290 basis points for the three months ended November 30, 2014 and decreased 60 basis points for the nine months ended November 30, 2014. The segment experienced increases in margins due to improved sales of high end separates and commercial and custom installations, as well as a decrease in warranty claims and an increase in vendor rebates received as compared to the comparable prior year periods. Margin decreases were primarily a result of lower sales prices for products such as soundbars, music centers and Bluetooth speakers, as well as the discounting of certain Klipsch products earlier in the fiscal year ahead of the launch of new product at the end of the second quarter.
Gross margins in the Consumer Accessories segment increased 320 and 60 basis points for the three and nine months ended November 30, 2014 primarily as a result of an increase in sales of higher margin products, such as wireless and bluetooth speakers, improved sales and product mix in Europe, and the continued decrease in lower margin products, such as clock radios and digital voice recorders for the three and nine months ended November 30, 2014. This was partially offset by a decrease in margins due to the sale of all of the Company's inventory, followed by commission based sales in Mexico as the subsidiary moved from a distributor to a representative office during the first quarter of Fiscal 2015, yielding lower margins for the three and nine months ended November 30, 2014 than those that had been realized in prior periods.
Operating Expenses and Operating Income
|
| | | | | | | | | | | | | | | |
| | November 30, | | | | |
| | 2014 | | 2013 | | $ Change | | % Change |
Three Months Ended: | | | | | | | | |
Operating expenses: | | | | | | | | |
Selling | | $ | 13,623 |
| | $ | 15,026 |
| | $ | (1,403 | ) | | (9.3 | )% |
General and administrative | | 29,587 |
| | 31,422 |
| | (1,835 | ) | | (5.8 | ) |
Engineering and technical support | | 9,103 |
| | 5,740 |
| | 3,363 |
| | 58.6 |
|
Restructuring expense | | — |
| | 32 |
| | (32 | ) | | (100.0 | ) |
Total operating expenses | | $ | 52,313 |
| | $ | 52,220 |
| | $ | 93 |
| | 0.2 | % |
| | | | | | | | |
Operating income | | $ | 16,644 |
| | $ | 16,578 |
| | $ | 66 |
| | 0.4 | % |
Nine Months Ended: | | | | | | | | |
Operating expenses: | | | | | | | | |
Selling | | $ | 41,229 |
| | $ | 40,751 |
| | $ | 478 |
| | 1.2 | % |
General and administrative | | 88,290 |
| | 89,403 |
| | (1,113 | ) | | (1.2 | ) |
Engineering and technical support | | 27,579 |
| | 23,701 |
| | 3,878 |
| | 16.4 |
|
Restructuring expense | | — |
| | 1,324 |
| | (1,324 | ) | | (100.0 | ) |
Total operating expenses | | $ | 157,098 |
| | $ | 155,179 |
| | $ | 1,919 |
| | 1.2 | % |
| | | | | | | | |
Operating income | | $ | 17,316 |
| | $ | 22,234 |
| | $ | (4,918 | ) | | (22.1 | )% |
Total operating expenses for the three and nine months ended November 30, 2014 had increases primarily due to additional hirings of temporary and permanent employees, including several engineers, at Hirschmann, and an increase in Hirschmann's R&D expense. In addition, the Company had increases in expenses as a result of employee salary increases, and an increase in trade show expense as a result of increased spending. Offsetting these increases for the three and nine months ended November 30, 2014 were decreases in sales commissions and other profit based compensation, as a result of decreased net sales during the third quarter of Fiscal 2015 and year to date as compared to the prior year periods, as well as a decrease in taxes and licensing fees due to the insourcing of certain IT functions. The Company also experienced a decrease in advertising expense due to the timing of program launches and sponsorships for the three months ended November 30, 2014, and a decrease in stock option expense during the nine months ended November 30, 2014.
Other (Expense) Income
|
| | | | | | | | | | | | | | | |
| | November 30, | | | | |
| | 2014 | | 2013 | | $ Change | | % Change |
Three Months Ended: | | | | | | | | |
Interest and bank charges | | $ | (1,825 | ) | | $ | (1,830 | ) | | $ | 5 |
| | (0.3 | )% |
Equity in income of equity investees | | 1,245 |
| | 1,520 |
| | (275 | ) | | (18.1 | ) |
Venezuela currency devaluation, net | | — |
| | — |
| | — |
| | — |
|
Other, net | | 142 |
| | 5,565 |
| | (5,423 | ) | | (97.4 | ) |
Total other (expense) income | | $ | (438 | ) | | $ | 5,255 |
| | $ | (5,693 | ) | | (108.3 | )% |
Nine Months Ended: | | | | | | | | |
Interest and bank charges | | $ | (5,010 | ) | | $ | (5,609 | ) | | $ | 599 |
| | (10.7 | )% |
Equity in income of equity investees | | 4,631 |
| | 4,772 |
| | (141 | ) | | (3.0 | ) |
Venezuela currency devaluation, net | | (6,232 | ) | | — |
| | (6,232 | ) | | 100.0 |
|
Other, net | | 1,416 |
| | 11,293 |
| | (9,877 | ) | | (87.5 | ) |
Total other (expense) income | | $ | (5,195 | ) | | $ | 10,456 |
| | $ | (15,651 | ) | | (149.7 | )% |
Interest and bank charges represent expenses for the Company's bank obligations, interest for capital leases and amortization of the debt discount on our credit facility. The decrease in the expense for the three and nine months ended November 30, 2014 as
compared to the comparable prior year period is attributable primarily to a decrease in the outstanding balance of the Company's Amended Facility.
Equity in income of equity investees represents the Company's share of income from its 50% non-controlling ownership interest in ASA Electronics LLC and Subsidiaries. The decrease in income for the three and nine months ended November 30, 2014 was a result of a slight deterioration in the company's gross margins for the periods.
Venezuela currency devaluation, net, for the nine months ended November 30, 2014 includes a charge of $6,702 representing the remeasurement loss related to the Company's Venezuelan bonds that were remeasured at August 31, 2014 using a rate of 6.3 Bolivar Fuerte/$1. This came as a result of the Company obtaining new information in conjunction with the bonds semi-annual interest payment that the bond redemption rate would be at the official exchange rate of 6.3 Bolivars/$1, which differed from the SICAD 2 rate previously used to remeasure the bonds.
Other, net, during both the three and nine months ended November 30, 2014, primarily included net foreign currency gains of $111 and $476, respectively, interest income of $144 and $282, respectively, and rental income of $305 and $896, respectively. Other, net, during both the three and nine months ended November 30, 2013, primarily included approximately $4,300, representing an unanticipated settlement payment that a customer offered to pay subsequent to the expiration of a contract. For the nine months ended November 30, 2013, Other, net also included approximately $5,200 received in a class action settlement and approximately $900 related to the recovery of funds from Circuit City that had been previously written off by Klipsch prior to Voxx's acquisition of the subsidiary. This was offset by an accrual of $1,200 made during the nine months ended November 30, 2013 for estimated patent settlements with certain third parties.
Income Tax Provision
The effective tax rate for the three and nine months ended November 30, 2014 was a provision for income taxes of 3.6% and a benefit for income taxes of 10.8% compared to a provision of 29.4% and 31.4%, repsectively, in the comparable prior period. The effective tax rate for the three and nine months ended November 30, 2014 is different than the statutory rate primarily due to the reversal of uncertain tax positions under ASC 740 related to a favorable settlement of an income tax examination during the quarter ended November 30, 2014, and the devaluation of the Company's Venezuelan bonds, for which the Company will not receive a tax benefit.
Net Income
The following table sets forth, for the periods indicated, selected statement of operations data beginning with net income and basic and diluted net income per common share.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Net income | | $ | 15,622 |
| | $ | 15,424 |
| | $ | 13,429 |
| | $ | 22,429 |
|
Net income per common share: | | |
| | |
| | | | |
Basic | | $ | 0.64 |
| | $ | 0.63 |
| | $ | 0.55 |
| | $ | 0.93 |
|
Diluted | | $ | 0.64 |
| | $ | 0.63 |
| | $ | 0.55 |
| | $ | 0.93 |
|
Net income for the three and nine months ended November 30, 2014 was unfavorably impacted primarily by lower net sales during the periods. Net income was also unfavorably impacted by a devaluation charge affecting the Company's Venezuelan sovereign bonds during the nine months ended November 30, 2014. This was offset by lower income tax expense during the three months and an income tax benefit during the nine months ended November 30, 2014, as well as lower restructuring charges due to the decrease in related activities and lower cost of sales, which resulted in improved gross margins, for the three and nine months ended November 30, 2014. Net income for the three and nine months ended November 30, 2013 was favorably impacted by the positive performance of the Company's equity investment, as well as an unanticipated settlement payment due from a customer, the settlement of a class action lawsuit in favor of the Company, and recoveries from Circuit City of accounts previously written off by Klipsch, pre-acquisition.
Adjusted EBITDA
Adjusted EBITDA and diluted adjusted EBITDA per common share are not financial measures recognized by GAAP. Adjusted EBITDA represents net income, computed in accordance with GAAP, before interest and bank charges, taxes, depreciation and amortization, stock-based compensation expense, restructuring charges, litigation settlements and certain remeasurement losses related to our Venezuela subsidiary. Depreciation, amortization, stock-based compensation, and the Venezuela bond remeasurement expenses 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 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 relating to our Venezuela subsidiary, restructuring, litigation settlements and unanticipated payments 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 appropriate measures for performance relative to other companies. Adjusted EBITDA should not be assessed in isolation from or construed as a substitute for EBITDA prepared in accordance with GAAP. Adjusted EBITDA and diluted adjusted EBITDA per common share are not intended to represent, and should not be considered to be more meaningful measures than, or alternatives to, measures of operating performance as determined in accordance with GAAP.
Reconciliation of GAAP Net (Loss) Income to Adjusted EBITDA
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Net income | | $ | 15,622 |
| | $ | 15,424 |
| | $ | 13,429 |
| | $ | 22,429 |
|
Adjustments: | | | | | | | | |
Interest expense and bank charges | | 1,825 |
| | 1,830 |
| | 5,010 |
| | 5,609 |
|
Depreciation and amortization | | 4,189 |
| | 4,040 |
| | 12,189 |
| | 12,000 |
|
Income tax expense | | 584 |
| | 6,409 |
| | (1,308 | ) | | 10,261 |
|
EBITDA | | 22,220 |
| | 27,703 |
| | 29,320 |
| | 50,299 |
|
Stock-based compensation | | 140 |
| | 63 |
| | 291 |
| | 552 |
|
Venezuela bond remeasurement | | — |
| | — |
| | 6,702 |
| | — |
|
Circuit City recovery | | — |
| | — |
| | — |
| | (940 | ) |
Net settlements | | — |
| | — |
| | — |
| | (4,025 | ) |
Unanticipated settlement from customer | | — |
| | (4,313 | ) | | — |
| | (4,313 | ) |
Asia warehouse relocation | | — |
| | — |
| | — |
| | (208 | ) |
Restructuring charges | | — |
| | 32 |
| | — |
| | 1,324 |
|
Adjusted EBITDA | | $ | 22,360 |
| | $ | 23,485 |
| | $ | 36,313 |
| | $ | 42,689 |
|
Diluted earnings per common share | | $ | 0.64 |
| | $ | 0.63 |
| | $ | 0.55 |
| | $ | 0.93 |
|
Diluted adjusted EBITDA per common share | | $ | 0.92 |
| | $ | 0.96 |
| | $ | 1.49 |
| | $ | 1.76 |
|
Liquidity and Capital Resources
Cash Flows, Commitments and Obligations
As of November 30, 2014, we had working capital of $176,586 which includes cash and short-term investments of $11,056, compared with working capital of $179,077 at February 28, 2014, which included cash and short-term investments of $10,603. We plan to utilize our current cash position as well as collections from accounts receivable, the cash generated from our operations 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.
Operating activities provided cash of $30,397 for the nine months ended November 30, 2014 principally due to an increase in accounts payable and a decrease in accounts receivable, offset by an increase in inventory.
| |
• | The Company experienced increased annual accounts receivable turnover of 5.6 during the nine months ended November 30, 2014 compared to 4.6 during the nine months ended November 30, 2013. |
| |
• | Annual inventory turnover decreased slightly to 3.2 during the nine months ended November 30, 2014 as compared to 3.3 during the nine months ended November 30, 2013. |
Investing activities used cash of $15,580 during the nine months ended November 30, 2014, primarily due to capital additions and the Company's investments in EyeLock, Inc. and EyeSee360, Inc.
Financing activities used cash of $13,739 during the nine months ended November 30, 2014, primarily due to repayments of bank obligations net of borrowings, offset by the repurchase of treasury shares by the Company.
From March 1, 2013 through January 8, 2014, the Company had a revolving credit facility ("the Credit Facility") with an aggregated committed availability of up to $205,000. The Credit Facility provided for senior secured credit facilities consisting of a revolving credit facility of $80,000; a $50,000 multicurrency revolving facility, of which up to the equivalent of $50,000 was available only to VOXX International (Germany) GmbH in euros; and a five year term loan facility in the aggregate principal amount of $75,000. $110,000 of the U. S. revolving credit facility was available on a revolving basis for five years from the closing date. An additional $20,000 was available during the periods from September 1, 2012 through January 31, 2013 and from September 1, 2013 through November 30, 2013. The Credit Facility included a $25,000 sublimit for issuers of letters of credit for domestic borrowings and a $10,000 sublimit for Swing Loans.
On January 9, 2014, the Company amended and restated its Credit Facility (the "Amended Facility"). The Amended Facility provides for senior secured credit facilities in an aggregate amount of $200,000, consisting of a revolving credit facility of $200,000,
with a $30,000 multicurrency revolving credit facility sublimit, a $25,000 sublimit for Letters of Credit and a $10,000 sublimit for Swingline Loans. The Amended Facility is due on January 9, 2019; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement).
Generally, the Company may designate specific borrowings under the Amended Facility as either Alternate Base Rate Loans or LIBOR Rate Loans, except that Swingline Loans may only be designated as Alternate Base Rate Loans. VOXX International (Germany) GmbH may only borrow euros, and only as LIBOR 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 1.00 - 2.00% based upon leverage, as defined in the agreement. Loans designated as Alternate Base Rate loans shall bear interest at a rate equal to the base rate plus an applicable margin ranging from 0.00 - 1.00% based on leverage.
The Amended Facility requires compliance with financial covenants calculated as of the last day of each fiscal quarter, consisting of a Total Leverage Ratio and a Consolidated EBIT to Consolidated Interest Expense Ratio.
The Amended Facility contains covenants that limit the ability of certain entities of the Company to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or exit a substantial portion of their respective businesses; (iv) make any material change in the nature of their business; (v) prepay or otherwise acquire indebtedness; (vi) cause any Change of Control; (vii) make any Restricted Payments; (viii) change their fiscal year or method of accounting; (ix) make advances, loans or investments; (x) enter into or permit any transaction with an Affiliate of certain entities of the Company; or (xi) use proceeds for certain items. As of November 30, 2014, the Company was in compliance with all debt covenants.
The Obligations under the Amended Facility are secured by valid and perfected first priority security interests in liens on all of the following: (a)(i) 100% of the Capital Stock or other membership or partnership equity ownership of profit interests of each domestic Credit Party (other than the Company), and (ii) 65% of the voting equity interests and 100% of the non-voting equity interests of all present and future first-tier foreign subsidiaries of any Credit Party (or such greater percentage as would not result in material adverse federal income tax consequences for the Company); (b) all of (i) the tangible and intangible personal property/assets of the Credit Parties and (ii) the fee-owned real property of the Company located in Hauppauge, New York; and (c) all products, profits, rents and proceeds of the foregoing.
No additional funds were borrowed on January 9, 2014 in conjunction with the amendment to the credit facility.
Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity. At November 30, 2014, such obligations and commitments are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Amount of Commitment Expiration per Period (9) |
| | | | Less than | | 1-3 | | 4-5 | | After |
Contractual Cash Obligations | | Total | | 1 Year | | Years | | Years | | 5 Years |
Capital lease obligation (1) | | $ | 8,721 |
| | $ | 574 |
| | $ | 1,205 |
| | $ | 2,209 |
| | $ | 4,733 |
|
Operating leases (2) | | 13,654 |
| | 3,912 |
| | 8,036 |
| | 1,089 |
| | 617 |
|
Total contractual cash obligations | | $ | 22,375 |
| | $ | 4,486 |
| | $ | 9,241 |
| | $ | 3,298 |
| | $ | 5,350 |
|
| | | | | | | | | | |
Other Commitments | | | | | | | | | | |
Bank obligations (3) | | $ | 82,200 |
| | $ | — |
| | $ | 5,600 |
| | $ | 76,600 |
| | $ | — |
|
Stand-by and commercial letters of credit (4) | | 827 |
| | 827 |
| | — |
| | — |
| | — |
|
Other (5) | | 15,014 |
| | 2,069 |
| | 2,560 |
| | 10,385 |
| | — |
|
Contingent earn-out payments (6) | | 1,665 |
| | 1,665 |
| | — |
| | — |
| | — |
|
Pension obligation (7) | | 8,286 |
| | 410 |
| | 922 |
| | 518 |
| | 6,436 |
|
Unconditional purchase obligations (8) | | 106,253 |
| | 106,253 |
| | — |
| | — |
| | — |
|
Total other commitments | | 214,245 |
| | 111,224 |
| | 9,082 |
| | 87,503 |
| | 6,436 |
|
Total commitments | | $ | 236,620 |
| | $ | 115,710 |
| | $ | 18,323 |
| | $ | 90,801 |
| | $ | 11,786 |
|
| |
1. | Represents total payments (interest and principal) due under a capital lease obligation which has a current (included in other current liabilities) and long term principal balance of $237 and $5,612, respectively at November 30, 2014. |
| |
2. | We enter into operating leases in the normal course of business. |
| |
3. | Represents amounts outstanding under the Company's Amended Credit Facility, the Audiovox Germany Euro asset-based lending facility and Hirschmann's line of credit at November 30, 2014. |
| |
4. | We issue standby and commercial letters of credit to secure certain purchases and insurance requirements. |
| |
5. | This amount includes amounts due under an assumed mortgage on a facility in connection with our Klipsch acquisition and amounts outstanding under mortgages for facilities purchased at Schwaiger, Audiovox Germany and Klipsch. |
| |
6. | Represents contingent payments in connection with the Thomson Audio/Video and Invision acquisitions. |
| |
7. | Represents the liability for an employer defined benefit pension plan covering certain eligible Hirschmann employees, as well as a retirement incentive accrual for certain Hirschmann employees. |
| |
8. | 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. |
| |
9. | At November 30, 2014, the Company had an uncertain tax position liability of $4,625, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S federal, state and local and foreign tax issues. |
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. In the event that 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.
Acquisitions
There were no acquisitions during Fiscal 2015 or Fiscal 2014.
Related Party Transactions
During 1996, we entered into a 30-year capital lease for a building with our principal stockholder and chairman. Payments on the capital lease were based upon the construction costs of the building and the then-current interest rates. This capital lease was refinanced in December 2006 and the lease expires on November 30, 2026. The effective interest rate on the capital lease obligation is 8%. The Company subleases the building to Reliance Communications LLC for monthly payments of $60 for a term of three years, which expires October 15, 2015. In December 2014, subsequent to the end of the Company's third quarter, Myra Properties LLC, an affiliate of Reliance Communications LLC, purchased the building from Voxx's principal stockholder, causing the lease between Voxx and the stockholder to be terminated. We also lease another facility from our principal stockholder which expires on November 30, 2016.
Total lease payments required under all related party leases for the five-year period ending May 31, 2019 are $4,709.
New Accounting Pronouncements
We are required to adopt certain new accounting pronouncements. See Note 21 to our consolidated financial statements included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Voxx conducts business in various non-U.S. countries, including Germany, Hungary, Canada, Mexico, Denmark, the Netherlands, France and Venezuela and thus is exposed to market risk for changes in foreign currency exchange rates. For the three and nine months ended November 30, 2014, a uniform 10% strengthening of the U.S. dollar relative to the local currency of our foreign operations would have resulted in a decrease in sales and net income of approximately $7,745 and $459, and $22,021 and $661, respectively. The effects of foreign currency exchange rates on future results would also be impacted by changes in sales levels or local currency prices.
The Company continues to monitor the political and economic climate in Venezuela. Venezuela represented 0.002% of quarterly sales and 0.02% of year to date sales. Approximately $1,100 of assets invested in Venezuela are cash related and are subject to government foreign exchange controls including its investment in Venezuelan government bonds. See Note 4 to the consolidated financial statements included herein. The Company also maintains $13,080 in real estate property in Venezuela that could be subject to government foreign exchange controls upon their ultimate sale.
In connection with the Amended Facility and the mortgage related to the Klipsch headquarters, we have debt in the amount of $76,600 and $6,695, respectively, at November 30, 2014. Interest on the Amended Facility is charged at LIBOR plus 0.00 - 2.00%. Interest on the Klipsch mortgage is charged at LIBOR plus 2.25%. We have entered into two interest rate swaps for two portions of the Amended Facility, with notional amounts of $33,750 and $25,000 at November 30, 2014 and one interest rate swap for the Klipsch mortgage with a notional amount of $6,695 at November 30, 2014. These swaps protect against LIBOR interest rates rising above 0.515% and 0.518% (exclusive of credit spread) on the two Amended Facility balances, respectively, through April 29, 2016 and February 28, 2017, respectively, and fixes the interest rate on the Klipsch mortgage at 3.92% (inclusive of credit spread) through the mortgage end date of May 2023.
As of November 30, 2014, the fair value of our interest rate swaps recorded in Other Liabilities on our Consolidated Balance Sheet was $(114), which represents the amount that would be received upon unwinding the interest rate swap agreements based on market conditions at that time. Changes in the fair value of these interest rate swap agreements are reflected as an adjustment to other assets or liabilities with an offsetting adjustment to Accumulated Other Comprehensive Income since the hedge is deemed fully effective.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, these disclosure controls and procedures are effective as of November 30, 2014 in order to provide reasonable assurance that information required to be disclosed by the Company in its filing under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There were no material changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three and six month period ended November 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
On May 14, 2013 the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued an updated version of its Internal Control - Integrated Framework (“2013 Framework”). Originally issued in 1992, (“1992 Framework”), the framework helps organizations design, implement, and evaluate the effectiveness of internal control concepts and simplify their use and application. The 1992 Framework will remain effective during the transition, which extends to December 15, 2014, after which time COSO will consider it as superseded by the 2013 Framework. As of November 30, 2014, the Company is using the 1992 Framework. The Company does not expect that its transition to the 2013 Framework will have a significant impact on its underlying compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002, including internal control over financial reporting and disclosure controls and procedures.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 20 of the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and Note 14 of the Form 10-K for the fiscal year ended February 28, 2014 for information regarding legal proceedings.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended February 28, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have an ongoing authorization from our Board of Directors to repurchase shares of the Company's Class A Common Stock. As of February 28, 2014, the remaining authorized share repurchase balance pursuant to our existing authorized programs was 1,738,243 shares. On October 21, 2014, the Company announced plans to repurchase up to $4,500 of the Company's Class A Common stock within six months, as authorized by the Board under the existing programs. As of November 30, 2014, we have repurchased 315,443 shares for an aggregate cost of $2,620, as follows:
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| | | | | | | | | |
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
10/21/2014 - 10/31/2014 | 207,897 |
| $ | 8.16 |
| 207,897 |
| 1,530,346 |
|
11/1/2014 - 11/30/2014 | 107,546 |
| $ | 8.51 |
| 107,546 |
| 1,422,800 |
|
| 315,443 |
| | | |
(1) No shares were purchased outside of publicly announced plans or programs.
ITEM 6. EXHIBITS
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| | |
Exhibit Number | | Description |
| | |
10.1 | | Fourth Amendment to the Amended and Restated Credit Agreement, dated as of November 24, 2014, by and among VOXX International Corporation, the other Borrowers, the Guarantors, the Lenders and Wells Fargo Bank, National Association, as administrative agent on behalf of the Lenders.
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| | |
31.1 | | Certification of Patrick M. Lavelle Pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith). |
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31.2 | | Certification of Charles M. Stoehr Pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith). |
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32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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101 | | The following materials from VOXX International Corporation's Quarterly Report on Form 10-Q for the period ended November 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets , (ii), the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VOXX INTERNATIONAL CORPORATION
January 8, 2015
By: /s/ Patrick M. Lavelle
Patrick M. Lavelle,
President and Chief Executive Officer
By: /s/ Charles M. Stoehr
Charles M. Stoehr,
Senior Vice President and Chief Financial Officer