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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 May 31, 2012
 
 
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

Number of shares of each class of the issuer's common stock outstanding as of the latest practicable date.

Class
As of July 9, 2012
Class A Common Stock
21,136,795

Shares
Class B Common Stock
2,260,954

Shares
 


1




VOXX International Corporation
 

 
Table of Contents
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
FINANCIAL STATEMENTS (unaudited)
 
 
Consolidated Balance Sheets at May 31, 2012 and February 29, 2012
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended May 31, 2012 and 2011
 
Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2012 and 2011
 
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
 


2



PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

VOXX International Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

3



 
 
May 31, 2012
 
February 29, 2012
Assets
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
21,277

 
$
13,606

Accounts receivable, net
 
139,174

 
142,585

Inventory, net
 
152,781

 
129,514

Receivables from vendors
 
3,840

 
4,011

Prepaid expenses and other current assets
 
12,524

 
13,549

Income tax receivable
 

 
698

Deferred income taxes
 
5,033

 
3,149

Total current assets
 
334,629

 
307,112

Investment securities
 
13,004

 
13,102

Equity investments
 
15,860

 
14,893

Property, plant and equipment, net
 
60,841

 
31,779

Goodwill
 
158,230

 
87,366

Intangible assets, net
 
196,431

 
175,349

Deferred income taxes
 
756

 
796

Other assets
 
8,457

 
3,782

Total assets
 
$
788,208

 
$
634,179

Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
59,448

 
$
43,755

Accrued expenses and other current liabilities
 
63,750

 
52,679

Income taxes payable
 
5,139

 
5,432

Accrued sales incentives
 
18,075

 
18,154

Deferred income taxes
 
301

 
515

Current portion of long-term debt
 
18,201

 
3,592

Total current liabilities
 
164,914

 
124,127

Long-term debt
 
145,505

 
34,860

Capital lease obligation
 
5,984

 
5,196

Deferred compensation
 
3,593

 
3,196

Other tax liabilities
 
2,921

 
2,943

Deferred tax liabilities
 
39,237

 
34,220

Other long-term liabilities
 
11,741

 
7,840

Total liabilities
 
373,895

 
212,382

Commitments and contingencies
 


 


Stockholders' equity:
 
 

 
 

Preferred stock
 

 

Common stock
 
252

 
250

Paid-in capital
 
282,753

 
281,213

Retained earnings
 
157,976

 
162,676

Accumulated other comprehensive loss
 
(8,299
)
 
(3,973
)
Treasury stock
 
(18,369
)
 
(18,369
)
Total stockholders' equity
 
414,313

 
421,797

Total liabilities and stockholders' equity
 
$
788,208

 
$
634,179


See accompanying notes to consolidated financial statements.

4



VOXX International Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
 (In thousands, except share and per share data)
(unaudited)

 
 
Three Months Ended May 31,
 
 
2012
 
2011
Net sales
 
$
194,036

 
$
165,325

Cost of sales
 
143,540

 
121,637

Gross profit
 
50,496

 
43,688

Operating expenses:
 
 

 
 

Selling
 
13,205

 
11,904

General and administrative
 
25,225

 
22,653

Engineering and technical support
 
7,411

 
3,811

Acquisition-related costs
 
1,596

 
1,343

Total operating expenses
 
47,437

 
39,711

Operating income
 
3,059

 
3,977

Other (expense) income:
 
 

 
 

Interest and bank charges
 
(2,244
)
 
(1,483
)
Equity in income of equity investees
 
1,357

 
1,129

Other, net
 
(9,656
)
 
481

Total other (expense) income, net
 
(10,543
)
 
127

(Loss) income before income taxes
 
(7,484
)
 
4,104

Income tax (benefit) expense
 
(2,784
)
 
1,617

Net (loss) income
 
$
(4,700
)
 
$
2,487

Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation adjustments
 
(4,622
)
 
1,327

Derivatives designated for hedging
 
296

 
(704
)
Other-than-temporary impairment loss on available for sale investment
 

 
300

Unrealized holding loss on available-for-sale investment securities arising during the period, net of tax
 

 
(12
)
Other comprehensive (loss) income, net of tax
 
(4,326
)
 
911

Comprehensive (loss) income
 
$
(9,026
)
 
$
3,398

 
 
 
 
 
Net (loss) income per common share (basic)
 
$
(0.20
)
 
$
0.11

Net (loss) income per common share (diluted)
 
$
(0.20
)
 
$
0.11

Weighted-average common shares outstanding (basic)
 
23,301,464

 
23,079,394

Weighted-average common shares outstanding (diluted)
 
23,301,464

 
23,287,621


See accompanying notes to consolidated financial statements.



5



VOXX International Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
 
Three Months Ended May 31,
 
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(4,700
)
 
$
2,487

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
2,784

 
2,541

Bad debt (recovery) expense
 
(51
)
 
293

Equity in income of equity investees
 
(1,357
)
 
(1,129
)
Distribution of income from equity investees
 
391

 
279

Deferred income tax (benefit) expense
 
(2,020
)
 
358

Non-cash compensation adjustment
 
113

 
(36
)
Non-cash stock based compensation expense
 
63

 
250

(Gain) loss on sale of property, plant and equipment
 
(12
)
 
11

Impairment loss on marketable securities
 

 
300

Changes in operating assets and liabilities (net of assets and liabilities acquired):
 
 

 
 

Accounts receivable
 
25,565

 
19,038

Inventory
 
(6,497
)
 
6,029

Receivables from vendors
 
267

 
618

Prepaid expenses and other
 
2,825

 
(973
)
Investment securities-trading
 
316

 
(27
)
Accounts payable, accrued expenses, accrued sales incentives and other current liabilities
 
6,607

 
(249
)
Income taxes payable
 
(4,139
)
 
(1,042
)
Net cash provided by operating activities
 
20,155

 
28,748

Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(8,439
)
 
(484
)
Purchase of long-term investments
 
(261
)
 

Increase in notes receivable
 
40

 
59

Purchase of acquired business (net of cash acquired)
 
(107,628
)
 
(167,250
)
Net cash used in investing activities
 
(116,288
)
 
(167,675
)
Cash flows from financing activities:
 
 

 
 

Repayment of short-term debt
 

 
(268
)
Principal payments on capital lease obligation
 
(75
)
 
(22
)
Repayment of bank obligations
 
(41,364
)
 
(29,439
)
Borrowings on bank obligations
 
147,817

 
89,100

Deferred financing costs
 
(3,445
)
 
(3,000
)
Proceeds from exercise of stock options
 
1,539

 

Net cash provided by financing activities
 
104,472

 
56,371

Effect of exchange rate changes on cash
 
(668
)
 
163

Net increase (decrease) in cash and cash equivalents
 
7,671

 
(82,393
)
Cash and cash equivalents at beginning of period
 
13,606

 
98,630

Cash and cash equivalents at end of period
 
$
21,277

 
$
16,237

See accompanying notes to consolidated financial statements.

6



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 29, 2012.

We have determined that we operate in one reportable segment, the Electronics Group, based on review of ASC 280 “Segment Reporting”.

(2)    Acquisitions

Hirschmann

On March 14, 2012 (the "Closing Date"), VOXX International, through its wholly-owned subsidiary VOXX International (Germany) GmbH ("Voxx Germany"), purchased the stock of Car Communication Holding GmbH ("Hirschmann"), a recognized tier-1 supplier of communications and infotainment solutions, primarily to the automotive industry, pursuant to the Sale and Purchase Agreement for €87,571 ($114,397 based upon the rate of exchange as of the close of business on the Closing Date) subject to an adjustment for working capital plus related transaction fees and expenses. 

On the Closing Date, the Company, certain of its directly and indirectly wholly-owned domestic subsidiaries, and Voxx Germany (collectively, the “Borrowers”) entered into an Amended and Restated Credit Agreement (the “Amended Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), as Agent, and the other lenders party thereto. The Company borrowed $148,000 under the Amended Credit Agreement on the Closing Date and used a portion of the proceeds from such borrowing to fund Voxx Germany's acquisition of Hirschmann. On the Closing Date, the Company also repaid and terminated its existing asset-based loan facility with Wells Fargo Capital Finance, LLC.

In order to hedge the fluctuation in the exchange rate before closing, the Company entered into two forward contracts totaling $63,750, both due in March 2012. The forward contracts were not designated for hedging, and as such, were marked to market at February 29, 2012 and when they were settled in the first quarter of Fiscal 2013. A foreign currency gain of $1,581 was recorded in the fourth quarter of Fiscal 2012 when the contracts were marked to market at year-end and a foreign currency loss of $2,670 was recorded for the three months ended May 31, 2012 reflecting the loss on settlement of these contracts.

As the Hirschmann acquisition occurred on March 14, 2012, the consolidated financial statements presented for the three months ended May 31, 2012 include the operations of Hirschmann beginning on the Closing Date.
The Company is currently in the process of performing a formal valuation of the assets and liabilities acquired to determine appropriate fair values. Management has estimated the fair value of tangible assets acquired and liabilities assumed based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change during the purchase price measurement period as the Company finalizes the valuations of the net tangible and intangible assets.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed, as of the date of the acquisition, and the estimated amounts assigned to goodwill and intangible asset classifications:

7

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

 
 
As of March 14, 2012
Cash
 
$
6,769

Accounts receivable
 
25,921

Inventory
 
20,178

Prepaid expenses and other current assets
 
2,281

Property, plant and equipment, net
 
18,659

Goodwill
 
70,864

Intangible assets
 
22,433

Other assets
 
940

Total assets acquired
 
168,045

Accounts payable and accrued expenses
 
26,953

Income taxes payable
 
2,848

Deferred taxes, net
 
5,639

Bank obligations
 
11,430

Capital lease obligations
 
911

Pension and deferred compensation
 
5,867

Net tangible and intangible assets acquired
 
$
114,397

The preliminary amounts assigned to goodwill and intangible assets for the acquisition are as follows:
 
 
March 14, 2012
 
Amortization Period (Years)
Goodwill (non-deductible)
 
$
70,864

 
N/A
Tradenames (non-deductible)
 
6,761

 
Indefinite
Customer relationships
 
9,376

 
10
Patents
 
6,296

 
10
 
 
$
93,297

 
 
Acquisition related costs relating to this acquisition of $1,131 and $1,596 were expensed as incurred during the year ended February 29, 2012 and during the three months ended May 31, 2012, respectively, and are included in acquisition-related costs for these respective periods in the consolidated statements of operations and comprehensive income (loss).

Hirschmann has an employer financed defined benefit pension plan, which covers eligible Hirschmann regular full-time employees. The plan provides for retirement and disability benefits for participating employees, and are only granted if the participating employee has completed ten years of service after reaching the age of 25. The retirement age as it pertains to the defined pension plan is 65. Benefits available under the pension plan are generally determined by years of service and the levels of compensation during those years. In October 1994, the benefits under Hirschmann's defined benefit pension plan were closed to new participants, and as of the acquisition date, pension benefits continue to accrue only for previously existing plan members still employed by Hirschmann. Based on actuarial data provided as of the acquisition date, the Hirschmann defined benefit pension plan was under-funded by approximately $5,300, which is included as a liability in the March 14, 2012 opening balance sheet. The under-funded status of the plan at May 31, 2012 is $5,046 and is included in other liabilities in the accompanying consolidated balance sheet.
Pro Forma Information

The following unaudited pro forma information illustrates the effect on net sales and net income for the three months ended May 31, 2012 and May 31, 2011, assuming that the acquisition had taken place on March 1, 2011.


8

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

 
Three Months Ended
 
May 31, 2012
 
May 31, 2011
Net sales:
 
 
 
As reported
$
194,036

 
$
165,325

Pro forma
201,550

 
212,758

Net income:
 
 
 
As reported
$
(4,700
)
 
$
2,487

Pro forma
(745
)
 
5,349

Basic earnings per share:
 
 
 
As reported
$
(0.20
)
 
$
0.11

Pro forma
(0.03
)
 
0.23

Diluted earnings per share:
 
 
 
As reported
$
(0.20
)
 
$
0.11

Pro forma
(0.03
)
 
0.23

Average shares - basic
23,301,464

 
23,079,394

Average shares - diluted
23,301,464

 
23,287,621


The above pro-forma results include certain adjustments for the periods presented to adjust the financial results and give consideration to the assumption that the acquisition occurred on the first day of Fiscal 2012. These adjustments include costs such as an estimate for amortization associated with intangible assets acquired, additional financing costs as a result of the acquisition, and the movement of expenses specific to the acquisition from Fiscal 2013 to Fiscal 2012. These pro-forma results of operations have been estimated for comparative purposes only and may not reflect the actual results of operations that would have been achieved had the transaction occurred on the date presented or be indicative of results to be achieved in the future.

(3)    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 May 31,
 
 
2012
 
2011
Weighted-average common shares outstanding
 
23,301,464

 
23,079,394

Effect of dilutive securities:
 
 

 
 

Stock options, warrants and restricted stock
 

 
208,227

Weighted-average common shares and potential common shares outstanding
 
23,301,464

 
23,287,621

 
Stock options and warrants totaling 921,019 and 14,606 for the three months ended May 31, 2012 and 2011, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these options and warrants was greater than the average market price of the Company’s common stock during these periods or their inclusion would have been anti-dilutive.

(4)    Fair Value Measurements and Derivatives


9

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

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 May 31, 2012:

 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
21,277

 
$
21,277

 
$

 
$

Derivatives
 

 
 

 
 

 
 

Designated for hedging
$
654

 
$

 
$
654

 
$

Not designated
148

 

 
148

 

Total derivatives
$
802

 
$

 
$
802

 
$

Long-term investment securities:
 

 
 

 
 

 
 

Marketable securities at fair value
 

 
 

 
 

 
 

Trading securities
$
3,130

 
$
3,130

 
$

 
$

Available-for-sale securities
3

 
3

 

 

Total marketable securities at fair value
3,133

 
3,133

 

 

Other investments at amortized cost (a)
9,871

 

 

 

Total  long-term investment securities
$
13,004

 
$
3,133

 
$

 
$


The following table presents assets measured at fair value on a recurring basis at February 29, 2012:


10

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
13,606

 
$
13,606

 
$

 
$

Derivatives
 

 
 

 
 

 
 

Designated for hedging
$
(103
)
 
$

 
$
(103
)
 
$

Not designated
1,581

 

 
1,581

 

Total derivatives
$
1,478

 
$

 
$
1,478

 
$

Long-term investment securities:
 

 
 

 
 

 
 

Marketable securities at fair value
 

 
 

 
 

 
 

Trading securities
$
3,447

 
$
3,447

 
$

 
$

Available-for-sale securities
3

 
3

 

 

Total marketable securities at fair value
3,450

 
3,450

 

 

Other investments at amortized cost (a)
9,652

 

 

 

Total  long-term investment securities
$
13,102

 
$
3,450

 
$

 
$


(a)
Other investments at amortized cost include the Company's held-to-maturity investment. There were no events or changes in circumstances that occurred to indicate a significant adverse effect on the cost of these 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 as well as its general economic exposure to foreign currency fluctuations created in the normal course of business. The 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). Forward foreign currency contracts not designated under hedged transactions were valued at spot rates or forward rates for the same or similar instruments (Level 2). The duration of open forward foreign currency contracts designated for hedging range from 1 - 3 months and are classified in the balance sheet according to their terms.
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 Statement of Operations and Comprehensive Income (Loss) and amounted to $179 and $(90) for the three months ended May 31, 2012 and 2011, respectively.
Financial Statement Classification
The Company holds derivative instruments that are designated as hedging instruments, and holds certain instruments not so designated. The following table discloses the fair value as of May 31, 2012 and February 29, 2012 for both types of derivative instruments:

11

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

 
 
Derivative Assets and Liabilities
 
 
 
 
Fair Value
 
 
Account
 
May 31, 2012
 
February 29, 2012
Designated derivative instruments
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
654

 
$

 
 
Accrued expenses
 

 
(103
)
 
 
 
 
 
 
 
Derivatives not designated
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
148

 
1,581

 
 
 
 
 
 
 
Total derivatives
 
 
 
$
802

 
$
1,478


During the three months ended May 31, 2012, the Company settled two foreign currency contracts for derivatives not designated in a hedged transaction. In connection with the acquisition of Hirschmann on March 14, 2012, the Company acquired 36 foreign currency contracts which were unable to qualify for hedge accounting for the quarter ended May 31, 2012. There were 28 contracts of this nature outstanding at May 31, 2012, with a current notional value of approximately $7,000. During the three months ended May 31, 2011, the Company settled one foreign currency contract for a derivative not designated in a hedged transaction. There were no contracts of this nature outstanding at May 31, 2011.
Cash flow hedges
In February 2012, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $5,275, and are designated as cash flow hedges. For cash flow hedges, the effective portion of the gain or loss is reported as a component of other comprehensive (loss) income and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
Activity related to cash flow hedges recorded during the three months ended May 31, 2012 and 2011 was as follows:
 
For The Three Months Ended
 
For The Three Months Ended
 
May 31, 2012
 
May 31, 2011
 
Gain (Loss) Recognized in Other Comprehensive Income
 
Gain (Loss) Reclassified into Cost of Sales
 
Gain (Loss) for Ineffectiveness in Other Income
 
Gain (Loss) Recognized in Other Comprehensive Income
 
Gain (Loss) Reclassified into Cost of Sales
 
Gain (Loss) for Ineffectiveness in Other Income
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
475

 
$
(171
)
 
$
179

 
$
(466
)
 
$
8

 
$
(90
)

The net gain recognized in other comprehensive income for foreign currency contracts is expected to be recognized in cost of sales within the next six months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of May 31, 2012, no contracts originally designated for hedge accounting were de-designated or terminated.

(5)    Investment Securities


12

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

In accordance with the Company's investment policy, all long and short-term investment securities are invested in "investment grade" rated securities. As of May 31, 2012 and February 29, 2012, the Company had the following investments:

 
May 31, 2012
 
February 29, 2012
 
Cost
Basis
 
Unrealized
holding
gain/(loss)
 
Fair
Value
 
Cost
Basis
 
Unrealized
holding
gain/(loss)
 
Fair
Value
Long-Term Investments
 

 
 

 
 

 
 

 
 

 
 

Marketable Securities
 

 
 

 
 

 
 

 
 

 
 

Trading
 

 
 

 
 

 
 

 
 

 
 

Deferred Compensation
$
3,130

 
$

 
$
3,130

 
$
3,447

 
$

 
$
3,447

Available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Cellstar

 
3

 
3

 

 
3

 
3

Bliss-tel

 

 

 

 

 

Held-to-maturity Investment
7,556

 

 
7,556

 
7,545

 

 
7,545

Total Marketable Securities
10,686

 
3

 
10,689

 
10,992

 
3

 
10,995

Other Long-Term Investment
2,315

 

 
2,315

 
2,107

 

 
2,107

Total Long-Term Investments
$
13,001

 
$
3

 
$
13,004

 
$
13,099

 
$
3

 
$
13,102


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.

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 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. During Fiscal 2010, Fiscal 2011 and Fiscal 2012, the Company monitored the performance of its Bliss-tel investment and determined that its investment in the company was other than temporarily impaired based on factors, such as its market price (which has consistently remained below cost in excess of twelve months), Bliss-tel's continued losses, its deteriorating financial position, and conditions in the local and global economy, as well as the political environment in Thailand. During Fiscal 2010 and Fiscal 2011, the Company recorded other than temporary impairment losses of $1,000 and $1,600, respectively. During Fiscal 2012, Bliss-tel stopped trading on the Thai stock exchange and has remained suspended from trading through May 31, 2012. As a result of this suspension, and the continued presence of the factors discussed above, management estimated the value of the investment to be $0 at February 29, 2012 and recorded total impairment charges of $1,225 for the fiscal year ended February 29, 2012. As of May 31, 2012, the Company owns 36,250,000 shares and 22,500,000 warrants in Bliss-tel, with the warrants due to expire in July 2012. As all of the above factors remain present and the company remains

13

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

suspended from trading, management's estimate of the value of this investment remains $0 at May 31, 2012.

Held-to-Maturity Investment

Long-term investments include an investment in U.S. dollar-denominated bonds issued by the Venezuelan government, which is classified as held-to-maturity and accounted for under the amortized cost method.
Other Long-Term Investments

Other long-term investments include an investment in a non-controlled corporation of $2,315 accounted for by the cost method. During the three months ended May 31, 2012, Voxx loaned an additional $250 in the Company and as of May 31, 2012, held approximately 16% of its outstanding shares.

(6)    Accumulated Other Comprehensive Loss

The Company’s accumulated other comprehensive losses consist of the following:

 
 
May 31, 2012
 
February 29, 2012
Accumulated other comprehensive losses:
 
 
 
 
Foreign exchange losses
 
$
(8,681
)
 
$
(4,059
)
Unrealized losses on investments, net of tax
 
(21
)
 
(21
)
Derivatives designated in hedging relationship
 
403

 
107

Total accumulated other comprehensive losses
 
$
(8,299
)
 
$
(3,973
)

(7)    Supplemental Cash Flow Information

The following is supplemental information relating to the consolidated statements of cash flows:

 
 
Three Months Ended May 31,
 
 
2012
 
2011
Non-cash investing activities:
 
 
 
 
Capital expenditures funded by mortgage notes
 
7,810

 

Cash paid during the period:
 
 
 
 
Interest (excluding bank charges)
 
$
1,636

 
$
932

Income taxes (net of refunds)
 
$
1,876

 
$
254


(8)    Accounting for Stock-Based Compensation
 
The Company has various stock-based compensation plans, which are more fully described in Note 1 of the Company’s Form 10-K for the fiscal year ended February 29, 2012.

The Company granted 246,250 options during May of 2011, which vested on February 29, 2012, expire two years from date of vesting (February 28, 2014), have an exercise price equal to $7.75, $.25 above the sales price of the Company’s stock on the day prior to the date of grant, have a contractual term of 2.75 years and a grant date fair value of $3.08 per share determined based upon a Black-Scholes valuation model.

In addition, the Company issued 22,500 warrants during May of 2011 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 considered exercisable at May 31, 2012.


14

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

As of May 31, 2012, all outstanding options were fully vested and the Company had no unrecognized compensation costs related to stock options.

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 and exercisable at February 29, 2012
 
1,070,625

 
$
6.72

 
 
Granted
 

 

 
 
Exercised
 
(241,927
)
 
6.37

 
 
Forfeited/expired
 

 

 
 
Outstanding and exercisable at May 31, 2012
 
828,698

 
$
6.81

 
1.24


In May of 2011, the Company granted 100,000 shares of restricted stock. 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 grant will not be issued to the grantee before they vest. The grantee cannot transfer the rights to receive shares before the restricted shares vest. One-third of the restricted stock awards vested on February 29, 2012, one-third will vest on February 28, 2013 and one-third will vest on February 28, 2014. The Company expenses the cost of the restricted stock awards on a straight-line basis over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock, $7.60, 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 three months ended May 31, 2012:

 
Number of shares (in thousands)
 
Weighted Average Grant Date Fair Value
Balance at February 29, 2012
66,667

 
$
7.60

Granted

 

Vested

 

Forfeited

 

Balance at May 31, 2012
66,667

 
$
7.60


During the three months ended May 31, 2012, the Company recorded $63 in stock-based compensation related to restricted stock awards. As of May 31, 2012, there was $443 of unrecognized stock-based compensation expense related to unvested restricted stock awards. This expense is expected to be fully recognized by February 28, 2014.

(9)    Goodwill and Intangible Assets

The change in goodwill is as follows:

Balance at February 29, 2012
$
87,366

Goodwill related to Hirschmann acquisition
70,864

Balance at May 31, 2012
$
158,230


At May 31, 2012, intangible assets consisted of the following:  


15

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Total Net
Book
Value
Trademarks/Tradenames not subject to amortization
 
$
136,526

 
$

 
$
136,526

Customer relationships subject to amortization (5-20 years)
 
59,490

 
8,484

 
51,006

Trademarks/Tradenames subject to amortization (3-12 years)
 
1,237

 
744

 
493

Patents subject to amortization (5-10 years)
 
9,238

 
1,190

 
8,048

License subject to amortization (5 years)
 
1,400

 
1,283

 
117

Contract subject to amortization (5 years)
 
1,556

 
1,315

 
241

Total
 
$
209,447

 
$
13,016

 
$
196,431


At February 29, 2012, intangible assets consisted of the following: 

 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Total Net
Book
Value
Trademarks/Tradenames/Licenses not subject to amortization
 
$
129,765

 
$

 
$
129,765

Customer relationships subject to amortization (5-20 years)
 
50,113

 
7,432

 
42,681

Trademarks/Tradenames subject to amortization (3-12 years)
 
1,237

 
722

 
515

Patents subject to amortization (5-10 years)
 
2,942

 
1,005

 
1,937

License subject to amortization (5 years)
 
1,400

 
1,213

 
187

Contract subject to amortization (5 years)
 
1,556

 
1,292

 
264

Total
 
$
187,013

 
$
11,664

 
$
175,349


The Company recorded amortization expense of $1,336 and $1,045 for the three months ended May 31, 2012 and 2011, respectively. The estimated aggregate amortization expense for the cumulative five years ending May 31, 2017 amounts to $26,798.

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 primarily by using a discounted cash flow methodology that requires considerable management judgment and long-term assumptions. There were no impairment triggering events during the three months ended May 31, 2012, therefore, management believes the current carrying value of its intangible assets is not impaired. 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.

(10)    Equity Investments

As of May 31, 2012 and February 29, 2012, the Company had a 50% non-controlling ownership interest in ASA Electronics, LLC and Subsidiary (“ASA”), which acts as a distributor of televisions and other automotive sound, security and accessory products for specialized vehicles, such as RV’s and van conversions.

The following table 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.


16

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

 
 
May 31,
2012
 
February 29,
2012
Current assets
 
$
31,018

 
$
28,934

Non-current assets
 
5,263

 
5,068

Current liabilities
 
4,561

 
4,216

Members' equity
 
31,720

 
29,786

 
 
Three Months Ended May 31,
 
 
2012
 
2011
Net sales
 
$
23,415

 
$
20,673

Gross profit
 
6,515

 
6,054

Operating income
 
2,703

 
2,249

Net income
 
2,714

 
2,257

 
The Company's share of income from ASA for the three months ended May 31, 2012 and 2011 was $1,357 and $1,129, respectively.  

(11)    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 2013, excluding discrete items is estimated to be 37.4% (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.

For the three months ended May 31, 2012 the Company recorded a benefit for income taxes of $2,784, which consisted of U.S., state and local and foreign taxes, including discrete items related to the accrual of interest for uncertain tax positions under ASC 740, "Income Taxes."  For the three months ended May 31, 2011, the Company recorded a provision for income taxes of $1,617 which consisted of U. S., state, local and foreign taxes, including discrete items related to the accrual of interest for uncertain tax positions under ASC 740 and a change in the tax rates.

In connection with the Hirschmann business combination, the Company recorded a net deferred tax liability of approximately $6,800 related to the basis difference between the financial reporting value and the tax value of Hirschmann's assets and liabilities.

(12)    Inventory

Inventories by major category are as follows:

 
 
May 31,
2012
 
February 29,
2012
Raw materials
 
$
27,709

 
$
18,495

Work in process
 
5,104

 
1,888

Finished goods
 
119,968

 
109,131

Inventory, net
 
$
152,781

 
$
129,514


(13)    Accrued Sales Incentives

A summary of the activity with respect to sales incentives is provided below:


17

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

 
 
Three Months Ended May 31,
 
 
2012
 
2011
Opening balance
 
$
18,154

 
$
11,981

Liabilities acquired during acquisition
 

 
7,149

Accruals
 
7,613

 
7,496

Payments and credits
 
(7,333
)
 
(8,009
)
Reversals for unearned sales incentive
 
(320
)
 
(28
)
Reversals for unclaimed sales incentives
 
(39
)
 
(294
)
Ending balance
 
$
18,075

 
$
18,295


(14)    Product Warranties and Product Repair Costs

The following table provides a summary of the activity with respect to product warranties and product repair costs:
 
 
 
Three Months Ended May 31,
 
 
2012
 
2011
Opening balance
 
$
8,795

 
$
9,051

Liabilities acquired during acquisitions
 
1,799

 
1,480

Liabilities accrued for warranties issued during the period
 
2,367

 
1,162

Warranty claims paid during the period
 
(2,516
)
 
(2,184
)
Ending balance
 
$
10,445

 
$
9,509


(15)     Financing Arrangements

The Company has the following financing arrangements:

 
 
May 31,
2012
 
February 29,
2012
Debt
 
 
 
 
Domestic bank obligations (a)
 
$
150,285

 
$
31,510

Foreign bank obligations (b)
 
1,560

 
1,818

Euro term loan agreement (c)
 
1,239

 
2,024

Other (d)
 
10,622

 
3,100

Total debt
 
163,706

 
38,452

Less: current portion of long-term debt
 
18,201

 
3,592

 
 
$
145,505

 
$
34,860


(a)          Domestic Bank Obligations
 
From March 1, 2012 through March 13, 2012, we had a revolving credit facility (the "Credit Facility"). Funds from the Credit Facility were used to complete the acquisition of Klipsch in March 2011, as well as to fund the temporary short-term working capital needs of the Company. The Credit Facility had an aggregated committed availability of up to $175 million, which could be increased at the option of the Company up to a maximum of $200 million. The Credit Facility included a $25 million sublimit for issuances of letters of credit and a $20 million sublimit for Swing Loans.
The Credit Agreement contained covenants that limited 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 business; (iv) transfer or dispose of assets; (v) change their names, organizational identification number,

18

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any Change of Control; (ix) make any Restricted Junior Payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transactions with an Affiliate of certain entities of the Company; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; and/or (xv) consign or sell any of their inventory on certain terms.
As a result of the addition of the Credit Facility, the Company incurred debt financing costs of approximately $3.3 million which are recorded as deferred financing costs that are included in other assets and amortized through interest and bank charges over the term of the Credit Facility.
On March 14, 2012, the Company amended and restated its $175 million Credit Facility (the "Amended Facility"). The Amended Facility provides for senior secured credit facilities in an aggregate principal amount of $205 million, consisting of a U.S. revolving credit facility of $80 million; a $50 million multicurrency revolving facility, of which up to the equivalent of $50 million is available only to VOXX International (Germany) GmbH in euros and the euro equivalent of $15 million available to domestic borrowers; and a five year term loan facility in the aggregate principal amount of $75 million. The Amended Facility includes a $25 million sublimit for issuers of letters of credit for domestic borrowings and a $10 million sublimit for Swing Loans.
$60 million of the U. S. revolving credit facility is available on a revolving basis for five years from the closing date. An additional $20 million is available during the three month periods from September 1, 2012 through November 30, 2012 and from September 1, 2013 through November 30, 2013.
Generally, the Company may designate specific borrowings under the Amended Facility as either Alternate Base Rate Loans or LIBOR Rate Loans, except that Swing 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 1.25 - 2.25% based on excess availability in the borrowing base. Loans designated as Alternate Base Rate loans shall bear interest at a rate equal to the base rate plus an applicable margin ranging from 0.25 - 1.25% based on excess availability in the borrowing base. As of May 31, 2012, the interest rate on the facility was 2.24%.
The $75 million five year term loan facility is payable in twenty quarterly installments of principal commencing May 31, 2012, each in the amount of $3,750. All other amounts outstanding under the Amended Facility will mature and become due on March 13, 2017. The Company may prepay any amounts outstanding at any time, subject to payment of certain breakage and redeployment costs relating to LIBOR Rate Loans. The commitments under the Amended Facility may be irrevocably reduced at any time without premium or penalty.
The Amended Facility requires compliance with the following financial covenants calculated as of the last day of each fiscal quarter: (a) Total Leverage Ratio (i) from the Closing Date through February 28, 2013 of less than or equal to 3.25 to 1.00; (ii) from March 1, 2013 through February 28, 2014 of less than or equal to 3.0 to 1.00; and (iii) from March 1, 2014 to Maturity Date of less than or equal to 2.75 to 1.00, and (b) Consolidated EBIT to Consolidated Interest Expense Ratio of greater than or equal to 3.0 to 1.00.

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 (including capital expenditures).

The Amended Facility contains customary events of default, including, without limitation: failure to pay principal thereunder when due; failure to pay any interest or other amounts thereunder for a period of three (3) business days after becoming due; failure to comply with certain agreements or covenants contained in the Amended Facility; failure to satisfy certain judgments against a Loan Party or any of its Subsidiaries (other than Immaterial Subsidiaries); certain insolvency and bankruptcy events; and failure to pay when due certain other indebtedness

19

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

in an amount in excess of $5 million.

The Obligations under the Amended Facility are secured by a general lien on and security interest in the assets of certain entities of the Company, including accounts receivable, equipment, substantially all of the real estate, general intangibles and inventory provided that the assets of Hirschman Car Communication GmbH and the foreign guarantors will only secure the Foreign Obligations. All Guarantors other than subsidiaries of Hirschmann Car Communication GmbH have jointly and severally guaranteed (or will jointly and severally guarantee) the obligations of any and all Credit Party Obligations, and each Foreign Guarantor will jointly and severally guarantee the obligations of Hirschmann Car Communications GmbH under the Credit Agreement (i.e., the Foreign Obligations).

On March 14, 2012, the Company borrowed approximately $148 million under this amended credit facility as a result of its stock purchase agreement related to Hirschmann. As of May 31, 2012, approximately $150 million was outstanding under the line.

As a result of the amendment to the Credit Facility, the Company incurred additional debt financing costs of approximately $3.4 million which are recorded as deferred financing costs. The Company has accounted for the amendment as a modification of debt and has added these costs to the remaining financing costs related to the original Credit Facility. These deferred financing costs have been included in other assets on the accompanying consolidated balance sheet and are being amortized through interest and bank charges over the five year term of the Amended Facility. During the three months ended May 31, 2012 and 2011, the Company amortized $302 and $170, respectively, of deferred financing costs.
(b)          Euro Asset-Based Lending Obligation
 
Foreign bank obligations include a financing arrangement totaling 16,000 Euros 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 November 1, 2012.  Selected accounts receivable are purchased from the Company on a non-recourse basis at 85% of face value and payment of the remaining 15% upon receipt from the customer of the balance of the receivable purchased. The activity under the factoring agreement is accounted for as a sale of accounts receivable. The rate of interest is the three month Euribor plus 1.9% (2.57% at May 31, 2012), and the Company pays 0.22% of its gross sales as a fee for the accounts receivable factoring arrangement. As of May 31, 2012, the amount of accounts receivable available for factoring exceeded the amounts outstanding under this obligation.
 
(c)          Euro Term Loan Agreement
 
On March 30, 2008, Audiovox Germany entered into a 5,000 Euro term loan agreement. This agreement is for a five-year term with a financial institution and was used to repay the Audiovox Germany intercompany debt to VOXX International Corporation. Payments under the term loan are to be made in two semi-annual installments of 500 Euros beginning on September 30, 2008 and ending on March 30, 2013. Interest accrues at a fixed rate of 4.82%. Any amount repaid cannot be reborrowed. The term loan is secured by a pledge of the stock of Audiovox Germany and the Magnat brand name, prohibits the distribution of dividends, and takes precedence to all other intercompany loans with VOXX International Corporation.
 
(d)          Other Debt
 
This amount includes an assumed liability in connection with the Company's Invision acquisition, which was repaid during the fourth quarter of Fiscal 2012, as well as a note payable on a facility acquired in connection with the Company's Klipsch acquisition and a mortgage note on a building purchased by the Company's Schwaiger subsidiary. Additionally, on April 20, 2012, the Company purchased the building housing Klipsch's headquarters in Indianapolis, IN for $10.9 million. The Company paid $3.1 million cash at closing, plus $106 in closing costs, and assumed the mortgage held by the seller, Woodview LLC, in the amount of $7.8 million. The mortgage is due in June 2013 and bears interest at 5.85%. Woodview LLC is a related party, as certain partners are executives of Klipsch.


20

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

At May 31, 2012 Hirschmann has a line of credit with an availability of up to 6,000€. The line was to expire on June 30, 2012 and has been extended 60 days through August 31, 2012. The rate of interest is the three month Euribor plus 1%. As of May 31, 2012, the outstanding balance on this line of credit was $0.

(16)     Other Income (Expense)

Other income (expense) is comprised of the following:

 
 
Three Months Ended May 31,
 
 
2012
 
2011
Loss on foreign currency contracts
 
$
(2,670
)
 
$

Net settlement charges related to patent lawsuit
 
(8,365
)
 

Interest income
 
177

 
151

Rental income
 
193

 
140

Miscellaneous
 
1,009

 
190

Total other, net
 
$
(9,656
)
 
$
481


Miscellaneous includes income related to a legal settlement received by Klipsch of $800 recorded during the three months ended May 31, 2012.

(17)    Foreign Currency

The Company has certain operations in Venezuela. Venezuela has been operating in a difficult economic environment, which has been troubled with local political issues and 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 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 had been 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 Venezuela under this method.

On June 9, 2010, the Venezuelan government introduced a newly regulated foreign currency exchange system, Sistema de Transacciones con Titulos en Moneda Extranjera (“SITME”), which is controlled by the Central Bank of Venezuela (“BCV”). The SITME imposes volume restrictions on the conversion of Venezuelan Bolivar Fuertes to U.S. Dollars, currently limiting such activity to a maximum equivalent of $350 per month. As a result of this restriction, we have limited new U.S. dollar purchases to remain within the guidelines imposed by SITME.

(18)     Lease Obligations

During 1998, the Company entered into a 30-year capital lease for a building with its principal stockholder and current chairman, which was the headquarters of the discontinued Cellular operation. This lease was restructured in December 2006, and expires on November 30, 2026.  The Company currently subleases the building to Personal Communication Devices, LLC (Formerly UTStarcom) for monthly payments of $50 for a term of three years, terminating on October 31, 2012. 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, 2017 are $6,515.
 

21

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

At May 31, 2012, the Company was obligated under non-cancellable capital and operating leases for equipment and warehouse facilities for minimum annual rental payments as follows:

 
Capital
Lease
 
Operating
Leases
2013
$
574

 
$
9,260

2014
574

 
7,476

2015
574

 
3,612

2016
574

 
2,592

2017
602

 
1,316

Thereafter
7,136

 
879

Total minimum lease payments
10,034

 
$
25,135

Less:  minimum sublease income
250

 
 

Net
9,784

 
 

Less:  amount representing interest
3,646

 
 

Present value of net minimum lease payments
6,138

 
 

Less: current installments included in accrued expenses and other current liabilities
154

 
 

Long-term capital obligation
$
5,984

 
 


The Company leases certain facilities from its principal stockholder. At May 31, 2012, minimum annual rental payments on these related party leases, in addition to the capital lease payments, which are included in the above table, are as follows:

2012
$
1,337

2013
1,360

2014
1,384

2015
1,408

2016
1,026

Thereafter
6,310

Total
$
12,825


(19)     Capital Structure
 
The Company's capital structure is as follows:
 
 
 
 
 
Shares Authorized
 
Shares Outstanding
 
 
 
 
Security
 
Par
Value
 
May 31,
2012
 
February 29,
2012
 
May 31,
2012
 
February 29,
2012
 
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

 
21,136,795

 
20,875,600

 
One
 
Ratably with Class B
Class B Common Stock
 
$
0.01

 
10,000,000

 
10,000,000

 
2,260,954

 
2,260,954

 
Ten
 
Ratably with Class A
Treasury Stock at cost
 
at cost

 
1,817,132

 
1,817,112

 

 

 

 
 

(20)    Contingencies

22

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)


The Company is currently, and has in the past been, a party to various routine legal proceedings incident to the ordinary course of business.  If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for.  The Company 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 these specific matters 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 its suppliers or distributors, of third party patents, trade secrets, trademarks or copyrights.  Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require the Company to either enter into royalty or license agreements which are not advantageous to the Company or pay material amounts of damages.

The Company has been party to a breach of license agreement lawsuit brought against it by MPEG LA, LLC ("MPEG"). During the third quarter of Fiscal 2012, the Company's claim for summary judgment was denied and the case was tried in the New York Supreme Court, Suffolk County. In December 2011, the Company received advisory judgment in the case, concluding that the Company owed MPEG penalties related to license agreement obligations arising from the manufacture and sale of its products. The Company recorded a charge of approximately $3.6 million in Fiscal 2012 and, based on the advisory jury's verdict, remitted payment of $2.6 million to MPEG in December 2011 in order to resolve this matter. On May 29, 2012, the Company received notice that the advisory judgment was overturned by the presiding Judge in the case. The Judge's ruling gave the Company and MPEG the option to (a) reach an agreement on the balance still owed; (b) allow the Judge to determine the balance; or (c) proceed to another trial and have a new jury determine the balance owed. On June 29, 2012, the Company reached a settlement agreement with MPEG and agreed to pay an additional $10.5 million in final resolution of the matter. The payment is in addition to the $2.6 million paid in December 2011, bringing the total settlement to $13.1 million. As a result of this settlement, the Company recorded a charge of $9.5 million during the first quarter of Fiscal 2013. The charge has been recorded in "Other (Expense) Income" in the Consolidated Statement of Operations. The Company continues seeking indemnification from its suppliers for royalty payments previously paid to them that it maintains they were responsible to remit to MPEG and plans to vigorously pursue its option under its indemnification agreements. The Company completed negotiations with one vendor for an amount of $1.1 million, which has been recorded as an offset to the settlement expense as a recovery in "Other (Expense)Income" on the Consolidated Statement of Operations and Comprehensive Income (Loss), for a net charge of $8.4 million. At this time, we cannot determine the success of any additional efforts, nor quantify a range of amounts. Management will continue to evaluate the developments associated with the negotiations with its suppliers.

(21)    New Accounting Pronouncements
 
In January 2010, the FASB issued authoritative guidance in ASC 820 "Fair Value Measurements and Disclosures" that improves disclosures around fair value measurements. This pronouncement requires additional disclosures regarding transfers between Levels 1, 2 and 3 of the fair value hierarchy of this pronouncement as well as a more detailed reconciliation of recurring Level 3 measurements. Certain disclosure requirements of this pronouncement were effective and adopted by the Company on March 1, 2010. The remaining disclosure requirements of this pronouncement were effective for the Company’s first quarter in Fiscal 2012. The adoption of this pronouncement did not have a material impact on the Company’s financial statements. In May 2011, ASC 820 was further amended to clarify certain disclosure requirements and improve consistency with international financial reporting standards. This amendment is to be applied prospectively and is effective for the Company's first quarter of Fiscal 2013. The adoption has not had a material effect on the Company's financial statements.

In June 2011, the FASB issued authoritative guidance included in ASC 220 "Comprehensive Income" related to the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The adoption of this disclosure-only guidance did not have

23

VOXX International Corporation and Subsidiaries
Notes to Consolidated Financial Statements, continued
(Dollars in thousands, except share and per share data)

an impact on the Company's consolidated financial results and has been adopted by the Company for the first quarter of Fiscal 2013.

In September 2011, the FASB issued authoritative guidance in ASC 350 "Intangibles - Goodwill and other" intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011, or the Company's first quarter of Fiscal 2013. The Company has adopted this guidance as of March 1, 2012 and does not expect the guidance to have a material impact on its financial statements.


(22)    Subsequent Events

With the exception of those matters discussed in Note 20 with regard to the Company's settlement with MPEG, there were no material subsequent events that required recognition or additional disclosure in these financial statements.

24



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 months ended May 31, 2012 compared to the three months ended May 31, 2011. Next, we present Adjusted EBITDA and diluted adjusted EBITDA per common share for the three months ended May 31, 2012 compared to the three months ended May 31, 2011 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 and percentages presented in our MD&A below are exclusive of discontinued operations and are in thousands, except share and per share data.

Business Overview
 
Effective December 1, 2011, Audiovox Corporation changed its name to VOXX International Corporation ("Voxx," "We," "Our," "Us" or "Company"). The Company believes that the name VOXX International would be a name that better represents the widely diversified interests of the Company, and the more than 30 global brands 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. Voxx is a leading international distributor in the accessory, mobile and consumer electronics industries. On March 14, 2012, the Company acquired Car Communication Holding GmbH and its worldwide subsidiaries, a recognized tier-1 supplier of communications and infotainment solutions, primarily to the automotive industry. We conduct our business through nineteen wholly-owned subsidiaries: American Radio Corp., Audiovox Electronics Corporation (“AEC”), Audiovox Accessories Corp. (“AAC”), 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”), Technuity, Inc., Code Systems, Inc., Oehlbach Kabel GmbH ("Oehlbach"), Schwaiger GmbH (“Schwaiger”), Invision Automotive Systems, Inc. (“Invision”), Klipsch Holding LLC ("Klipsch"), Car Communication Holding GmbH ("Hirschmann") and 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 Acoustic Research®, Advent®, Car Link®, Code-Alarm®, Energy®, Excalibur®, Heco®, Hirschmann Car Communication®, Incaar, Invision®, Jamo®, Jensen®, Klipsch®, Mac Audio, Magnat®, Mirage®, Oehlbach®, Prestige®, RCA®, Schwaiger®, 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 and presently have one reportable segment (the "Electronics Group"), which is organized by product category.  
 
The Company currently reports sales data for the following two product categories:

Electronics 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,
automotive security and remote start systems,
automotive power accessories,
automotive antenna systems,
automotive digital TV tuner systems,
rear observation and collision avoidance systems,
home and portable stereos,
digital multi-media products such as personal video recorders and MP3 products,

25



camcorders,
clock-radios,
digital voice recorders,
premium loudspeakers,
architectural speakers,
commercial speakers,
on-ear and in-ear headphones,
soundbars, and
portable DVD players.
 
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,
power cords,
performance enhancing electronics,
TV universal remotes,
flat panel TV mounting systems,
iPod specialized products,
wireless headphones,
wireless speakers,
rechargeable battery backups (UPS) for camcorders, cordless phones and portable video (DVD) batteries and accessories,
power supply systems,
electronic equipment cleaning products,
personal sound amplifiers, and
set-top boxes.

We believe our product groups 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.

Reportable Segments
 
We have determined that we operate in one reportable segment, the Electronics Group, based on review of ASC 280, “Segment Reporting.” The characteristics of our operations that are relied on in making and reviewing business decisions include the similarities in our products, the commonality of our customers, suppliers and product developers across multiple brands, our unified marketing and distribution strategy, our centralized inventory management and logistics, and the nature of the financial information used by our Executive Officers.  Management reviews the financial results of the Company based on the performance of the Electronics Group.

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 the 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. A summary of the Company's significant 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 29, 2012.   Since February 29, 2012,

26



there have been no changes in our critical accounting policies or changes to the assumptions and estimates related to them.
 
The Company evaluates its indefinite lived intangible assets for impairment triggering events at each reporting period in accordance with ASC 350. Based on our evaluation, there were no triggering events and no impairment of indefinite lived intangible assets in the quarter ended May 31, 2012. Due to the continued economic volatility, including fluctuations in interest rates, growth rates and changes in demand for our products, there could be a change in the valuation of indefinite lived intangible assets when the Company conducts its annual impairment test.

Results of Operations
 
As you read this discussion and analysis, refer to the accompanying consolidated statements of operations and comprehensive income (loss), which present the results of our operations for the three months ended May 31, 2012 and 2011.  

The following tables set forth, for the periods indicated, certain statements of operations data for the three months ended May 31, 2012 and 2011.

Net Sales

 
 
May 31,
 
 
 
 
 
 
2012
 
2011
 
$ Change
 
% Change
Three Months Ended
 
 
 
 
 
 
 
 
Electronics
 
$
152,828

 
$
132,316

 
$
20,512

 
15.5
%
Accessories
 
41,208

 
33,009

 
8,199

 
24.8

Total consolidated net sales
 
$
194,036

 
$
165,325

 
$
28,711

 
17.4
%

Electronic sales represented 78.8% of the net sales for the three months ended May 31, 2012, compared to 80.0% in the prior year period. For the three months ended May 31, 2012, approximately $36.6 million of the increase in sales from this product group was the result of our recent acquisition of Hirschmann.  In addition, the electronics group experienced increases due to new mobile product offerings. These increases were partially offset by a decline in sales of consumer electronics products including camcorders, clock radios, digital players and digital voice recorders as a result of declines in demand and the exiting of certain products; a decline in OEM sales due to remote start sales, which were affected by a warmer winter, and the conclusion of Ford's production program for headrest DVD systems; a decline in satellite fulfillment sales; and a decline in our audio product line. The audio decline is partially offset by sales related to new product introductions such as slot machine speakers and mobile ipod and ipad interfaces.

Accessory sales represented 21.2% of our net sales for the three months ended May 31, 2012, compared to 20.0% in the prior year period.  The increase in the accessories group was primarily related to increased sales in wireless speakers as well as in our international markets.

During the quarter ended May 31, 2012, the release of unearned or unclaimed sales incentives was not material. We believe the reversal of earned but unclaimed or unearned sales incentives upon expiration of the claim period is a disciplined, rational, consistent, and systematic method of reversing these claims.  These sales incentive programs are expected to continue and will either increase or decrease based upon competition and customer demands.

Gross Profit

 
 
May 31,
 
 
 
 
 
 
2012
 
2011
 
$ Change
 
% Change
Three Months Ended
 
 
 
 
 
 
 
 
Gross profit
 
$
50,496

 
$
43,688

 
$
6,808

 
15.6
%
Gross margin percentage
 
26.0
%
 
26.4
%
 
 

 
 

 
Gross margins, which decreased by (40) basis points for the three months ended May 31, 2012, were negatively impacted primarily by unfavorable swings between hedged costs and related sales, increasing transportation costs and the absence of a duty refund in Audiovox Germany, as well as the shifting of warehouse facilities in Asia and decreases in camcorder and digital voice recorder

27



sales during the quarter ended May 31, 2012. These factors were offset by increased sales in mobile related products; better margins in our existing product lines; new product introductions; and the Hirschmann acquisition.

Operating Expenses and Operating Loss

 
 
May 31,
 
 
 
 
 
 
2012
 
2011
 
$ Change
 
% Change
Three Months Ended
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling
 
$
13,205

 
$
11,904

 
$
1,301

 
10.9
 %
General and administrative
 
25,225

 
22,653

 
2,572

 
11.4

Engineering and technical support
 
7,411

 
3,811

 
3,600

 
94.5

Acquisition-related costs
 
1,596

 
1,343

 
253

 
18.8

Total operating expenses
 
$
47,437

 
$
39,711

 
$
7,726

 
19.5
 %
 
 
 
 
 
 
 
 
 
Operating income
 
$
3,059

 
$
3,977

 
$
(918
)
 
(23.1
)%

Operating expenses increased $7,726 for the three months ended May 31, 2012, from $39,711 in the comparable prior year period.  As a percentage of net sales, operating expenses increased slightly to 24.4% as compared to 24.0% for the comparable prior year period. The increase in total operating expenses was due primarily to our recent acquisition of Hirschmann which accounted for $8.4 million during the three months ended May 31, 2012, as well as an increase in legal fees primarily related to Hirschmann.  These increases were partially offset by reductions in depreciation expense, headcount reductions in select groups, reductions of commissions and bonuses as a result of lower net sales, not considering Hirschmann, as well as reduced occupancy costs due to the purchase of the Klipsch headquarters in Indianapolis, IN, which had previously been leased.

Other Income (Expense)

 
 
May 31,
 
 
 
 
 
 
2012
 
2011
 
$ Change
 
% Change
Three Months Ended
 
 
 
 
 
 
 
 
Interest and bank charges
 
$
(2,244
)
 
$
(1,483
)
 
$
(761
)
 
51.3
 %
Equity in income of equity investees
 
1,357

 
1,129

 
228

 
20.2

Other, net
 
(9,656
)
 
481

 
(10,137
)
 
(2,107.5
)
Total other (expense) income
 
$
(10,543
)
 
$
127

 
$
(10,670
)
 
(8,401.6
)%

Interest and bank charges represent expenses for bank obligations of VOXX International Corporation and Audiovox Germany, interest for a capital lease, and amortization of the debt discount on our credit facility. The increase in these expenses for the three months ended May 31, 2012, is due primarily to interest expense, fees and amortization of deferred financing costs related to the Amended Credit Facility entered into on March 14, 2012 primarily to fund our Hirschmann acquisition.

Other, net during the three months ended May 31, 2012 included charges in connection with a patent suit of approximately $8,400, and losses on forward exchange contracts of approximately $2,700 incurred in conjunction with the Hirschmann acquisition. These charges were partially offset by income recorded related to a favorable settlement received by Klipsch of approximately $800 during the three months ended May 31, 2012.


Income Tax Benefit/Provision

The effective tax rate was a benefit for income taxes of 37.2% for the three months ended May 31, 2012 compared to a provision for income taxes of 39.4% in the comparable prior periods.  The effective tax rate for the three months ended May 31, 2012 is different than the statutory rate primarily due to state and local taxes, differences between the U.S. and foreign tax rates, Section 199 deductions and transaction costs associated with Hirschmann.
 

28



Net Income (Loss)

The following table sets forth, for the periods indicated, selected statement of operations data beginning with net income (loss) and basic and diluted net income (loss) per common share.

 
 
Three Months Ended May 31,
 
 
2012

2011
Net (loss) income
 
$
(4,700
)
 
$
2,487

Net (loss) income per common share:
 
 

 
 

Basic
 
$
(0.20
)
 
$
0.11

Diluted
 
$
(0.20
)
 
$
0.11


Net (loss) income decreased for the three months ended May 31, 2012 versus the prior year period primarily as a result of expenses associated with the patent suit and losses on forward exchange contracts, partially offset by the addition of our Hirschmann acquisition.

Adjusted EBITDA and Diluted Adjusted EBITDA per Common Share

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, costs relating to our acquisitions and loss on foreign exchange. Depreciation, amortization, and stock-based compensation expense 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 costs relating to our acquisitions 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 an alternative to, measures of operating performance as determined in accordance with GAAP.

Reconciliation of GAAP Net Income to Adjusted EBITDA


29



 
 
Three Months Ended May 31,
 
 
2012
 
2011
Net (loss) income
 
$
(4,700
)
 
$
2,487

Adjustments:
 
 
 
 
Interest and bank charges
 
2,244

 
1,483

Depreciation and amortization
 
2,784

 
2,541

Taxes
 
(2,784
)
 
1,617

EBITDA
 
(2,456
)
 
8,128

Stock-based compensation
 
63

 
250

Net settlement charges related to MPEG suit
 
8,365

 

Klipsch settlement recovery
 
(800
)
 

Asia restructuring charges
 
521

 

Acquisition related costs
 
1,596

 
1,343

Loss on foreign exchange as a result of Hirschmann acquisition
 
2,670

 

Adjusted EBITDA
 
$
9,959

 
$
9,721

Diluted earnings (loss) per common share
 
$
(0.20
)
 
$
0.11

Diluted adjusted EBITDA per common share
 
$
0.43

 
$
0.42


Liquidity and Capital Resources

Cash Flows, Commitments and Obligations
 
As of May 31, 2012, we had working capital of $169,715 which includes cash and cash equivalents of $21,277, compared with working capital of $182,985 at February 29, 2012, which included cash and short-term investments of $13,606. The increase in cash is primarily due to draws on our amended credit facility (a portion of which was used to fund the Hirschmann acquisition) and a decrease in accounts receivable, partially offset by payments on the outstanding line, the purchase of the Klipsch headquarters facility, and an increase in inventory.  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 $20,155 for the three months ended May 31, 2012 principally due to a decrease in accounts receivable, partially offset by increased inventory.

The Company experienced a consistent accounts receivable turnover rate of 5.6 during both the three months ended May 31, 2012 and May 31, 2011.

Inventory turnover increased to 3.4 during the three months ended May 31, 2012 compared to 3.1 during the three months ended May 31, 2011.

Investing activities used cash of $116,288 during the three months ended May 31, 2012, primarily due to the Hirschmann acquisition as well as the purchase of the Klipsch headquarters facility.
 
Financing activities provided cash of $104,472 during the three months ended May 31, 2012, primarily from borrowings on bank obligations used to finance the Hirschmann acquisition, offset by repayments of those obligations.
 
On March 14, 2012, the Company amended and restated its revolving credit facility (the “Amended Facility”). The Amended Facility provides for senior secured credit facilities in an aggregate principal amount of $205 million, consisting of a U.S. revolving credit facility of $80 million; a $50 million multicurrency revolving facility, of which up to the equivalent of $50 million is available only to VOXX International (Germany) GmbH in euros; and a five year term loan facility in the aggregate principal amount of $75 million. The Amended Facility includes a $25 million sublimit for issuers of letters of credit for domestic borrowings and a $10 million sublimit for Swing Loans. $60 million of the U. S. revolving credit facility is available on a revolving basis for five years from the closing date. An additional $20 million is available during the three month periods from September 1, 2012 through November 30, 2012 and from September 1, 2013 through November 30, 2013. Generally, the Company may designate specific borrowings under the Amended Facility as either Alternate Base Rate Loans or LIBOR Rate Loans, except that Swing 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

30



plus a range of 1.25 - 2.25% based on excess availability in the borrowing base. Loans designated as Alternate Base Rate loans shall bear interest at a rate equal to the base rate plus an applicable margin ranging from 0.25 - 1.25% based on excess availability in the borrowing base. On March 14, 2012, the Company borrowed approximately $148 million under this amended credit facility as a result of its stock purchase agreement related to Hirschmann and the repayment of the former facility. Further details regarding the facility are outlined in Note 15(a) of this report. At May 31, 2012, the Company had $817 outstanding in standby letters of credit. No commercial letters of credit were outstanding as of May 31, 2012.
Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity.  At May 31, 2012, 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)
 
$
10,034

 
$
574

 
$
1,148

 
$
1,176

 
$
7,136

Operating leases (2)
 
25,135

 
9,260

 
11,088

 
3,908

 
879

Total contractual cash obligations
 
$
35,169

 
$
9,834

 
$
12,236

 
$
5,084

 
$
8,015

 
 
 
 
 
 
 
 
 
 
 
Other Commitments
 
 
 
 
 
 
 
 
 
 
Bank obligations (3)
 
$
151,845

 
$
16,560

 
$

 
$
135,285

 
$