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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 August 31, 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 October 8, 2014
Class A Common Stock
22,172,968

Shares
Class B Common Stock
2,260,954

Shares

1




VOXX International Corporation and Subsidiaries
 

 
Table of Contents
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
FINANCIAL STATEMENTS (unaudited)
 
 
Consolidated Balance Sheets at August 31, 2014 and February 28, 2014
 
Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended August 31, 2014 and 2013
 
Consolidated Statements of Cash Flows for the Six Months Ended August 31, 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
 


2



PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

VOXX International Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)

3



 
 
August 31, 2014
 
February 28, 2014
Assets
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
9,401

 
$
10,603

Accounts receivable, net
 
110,740

 
147,054

Inventory, net
 
153,797

 
144,339

Receivables from vendors
 
3,573

 
2,443

Investment securities, current
 
966

 

Prepaid expenses and other current assets
 
20,697

 
15,897

Income tax receivable
 
5,993

 
2,463

Deferred income taxes
 
2,738

 
3,058

Total current assets
 
307,905

 
325,857

Investment securities
 
12,547

 
14,102

Equity investments
 
21,392

 
20,628

Property, plant and equipment, net
 
82,317

 
83,222

Goodwill
 
115,052

 
117,938

Intangible assets, net
 
169,533

 
174,312

Deferred income taxes
 
776

 
760

Other assets
 
9,104

 
10,331

Total assets
 
$
718,626

 
$
747,150

Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
64,656

 
$
55,373

Accrued expenses and other current liabilities
 
48,602

 
59,247

Income taxes payable
 
2,974

 
3,634

Accrued sales incentives
 
16,172

 
17,401

Deferred income taxes
 
10

 
9

Current portion of long-term debt
 
8,501

 
5,960

Total current liabilities
 
140,915

 
141,624

Long-term debt
 
87,786

 
103,222

Capital lease obligation
 
5,794

 
6,114

Deferred compensation
 
5,774

 
5,807

Other tax liabilities
 
10,854

 
11,060

Deferred tax liabilities
 
33,402

 
34,963

Other long-term liabilities
 
12,988

 
14,776

Total liabilities
 
297,513

 
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, 23,988,240 shares issued and 22,172,968 shares outstanding at August 31, 2014 and February 28, 2014
 
255

 
255

Class B Convertible, $.01 par value, 10,000,000 authorized, 2,260,954 shares issued and outstanding
 
22

 
22

Paid-in capital
 
291,110

 
290,960

Retained earnings
 
156,378

 
158,571

Accumulated other comprehensive loss
 
(8,301
)
 
(1,873
)
Treasury stock, at cost, 1,815,272 shares of Class A Common Stock at August 31, 2014 and February 28, 2014
 
(18,351
)
 
(18,351
)
Total stockholders' equity
 
421,113

 
429,584

Total liabilities and stockholders' equity
 
$
718,626

 
$
747,150

See accompanying notes to consolidated financial statements.

4



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

 
 
Three Months Ended
August 31,
 
Six Months Ended
August 31,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
177,343

 
$
183,818

 
$
364,242

 
$
376,790

Cost of sales
 
124,939

 
129,716

 
258,785

 
268,175

Gross profit
 
52,404

 
54,102

 
105,457

 
108,615

Operating expenses:
 
 

 
 

 
 
 
 
Selling
 
13,010

 
12,602

 
27,606

 
25,725

General and administrative
 
29,088

 
29,043

 
58,703

 
57,981

Engineering and technical support
 
9,215

 
9,226

 
18,476

 
17,961

Restructuring expense
 

 
989

 

 
1,292

Total operating expenses
 
51,313

 
51,860

 
104,785

 
102,959

Operating income
 
1,091

 
2,242

 
672

 
5,656

Other (expense) income:
 
 

 
 

 
 
 
 
Interest and bank charges
 
(1,577
)
 
(1,799
)
 
(3,185
)
 
(3,779
)
Equity in income of equity investees
 
1,455

 
1,496

 
3,386

 
3,252

Venezuela currency devaluation, net
 
(6,334
)
 
15

 
(6,232
)
 
15

Other, net
 
723

 
5,697

 
1,274

 
5,713

Total other (expense) income, net
 
(5,733
)
 
5,409

 
(4,757
)
 
5,201

(Loss) income before income taxes
 
(4,642
)
 
7,651

 
(4,085
)
 
10,857

Income tax (benefit) expense
 
(1,960
)
 
2,788

 
(1,892
)
 
3,852

Net (loss) income
 
$
(2,682
)
 
$
4,863

 
$
(2,193
)
 
$
7,005

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(7,000
)
 
1,758

 
(7,441
)
 
(562
)
Derivatives designated for hedging
 
311

 
3

 
951

 
314

Pension plan adjustments
 
50

 
(18
)
 
60

 
(12
)
Unrealized holding gain on available-for-sale investment securities arising during the period, net of tax
 
2

 

 
2

 

Other comprehensive (loss) income, net of tax
 
(6,637
)
 
1,743

 
(6,428
)
 
(260
)
Comprehensive (loss) income
 
$
(9,319
)
 
$
6,606

 
$
(8,621
)
 
$
6,745

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

 
$
(0.09
)
 
$
0.29

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

 
$
(0.09
)
 
$
0.29

Weighted-average common shares outstanding (basic)
 
24,433,922

 
24,122,364

 
24,433,922

 
23,921,319

Weighted-average common shares outstanding (diluted)
 
24,433,922

 
24,258,788

 
24,433,922

 
24,103,468


See accompanying notes to consolidated financial statements.



5



VOXX International Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

 
 
Six Months Ended
August 31,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(2,193
)
 
$
7,005

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
8,000

 
7,961

Amortization of debt discount
 
558

 
688

Bad debt expense
 
235

 
481

Loss (gain) on forward contracts
 
272

 
(62
)
Equity in income of equity investees
 
(3,386
)
 
(3,252
)
Distribution of income from equity investees
 
2,622

 
1,453

Deferred income tax expense
 
(1,090
)
 
(64
)
Non-cash compensation adjustment
 
(952
)
 
102

Non-cash stock based compensation expense
 
151

 
489

Venezuela currency devaluation on investment securities
 
6,702

 

Loss on sale of property, plant and equipment
 
160

 
20

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
34,396

 
27,263

Inventory
 
(11,560
)
 
(15,062
)
Receivables from vendors
 
(1,141
)
 
5,484

Prepaid expenses and other
 
(4,175
)
 
(1,513
)
Investment securities-trading
 
(60
)
 
(153
)
Accounts payable, accrued expenses, accrued sales incentives and other liabilities
 
(356
)
 
14,782

Income taxes payable
 
(4,357
)
 
(503
)
Net cash provided by operating activities
 
23,826

 
45,119

Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(5,977
)
 
(5,731
)
Purchase of long-term investments
 
(6,000
)
 

Net cash used in investing activities
 
(11,977
)
 
(5,731
)
Cash flows from financing activities:
 
 

 
 

Principal payments on capital lease obligation
 
(260
)
 
(178
)
Repayment of bank obligations
 
(12,267
)
 
(56,103
)
Borrowings on bank obligations
 

 
7,800

Proceeds from exercise of stock options
 

 
3,766

Net cash used in financing activities
 
(12,527
)
 
(44,715
)
Effect of exchange rate changes on cash
 
(524
)
 
(1,064
)
Net decrease in cash and cash equivalents
 
(1,202
)
 
(6,391
)
Cash and cash equivalents at beginning of period
 
10,603

 
19,777

Cash and cash equivalents at end of period
 
$
9,401

 
$
13,386


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 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
August 31,
 
Six Months Ended
August 31,
 
 
2014
 
2013
 
2014
 
2013
Weighted-average common shares outstanding
 
24,433,922

 
24,122,364

 
24,433,922

 
23,921,319

Effect of dilutive securities:
 
 

 
 

 
 

 
 

Stock options and warrants
 

 
136,424

 

 
182,149

Weighted-average common shares and potential common shares outstanding
 
24,433,922

 
24,258,788

 
24,433,922

 
24,103,468

 
Restricted stock, stock options and warrants of 163,792 and 0 for the three months ended August 31, 2014 and 2013 and 163,792 and 0 for the six months ended August 31, 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.


7

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 August 31, 2014:

 
 
 
Fair Value Measurements at Reporting Date Using
 
Total
 
Level 1
 
Level 2
Cash and cash equivalents:
 
 
 
 
 
Cash and money market funds
$
9,401

 
$
9,401

 
$

Derivatives
 

 
 

 
 

Designated for hedging
$
324

 
$

 
$
324

Total derivatives
$
324

 
$

 
$
324

Investment securities:
 

 
 

 
 

Trading securities
$
4,293

 
$
4,293

 
$

Available-for-sale securities
3

 
3

 

Other investments at amortized cost (a)
9,217

 

 

Total investment securities
$
13,513

 
$
4,296

 
$


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 (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

8

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 August 31, 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. During Fiscal 2014, the Company also entered into 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 - 6 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 $49 and $36 for the three and six months ended August 31, 2014, respectively and $(33) and $(30) for the three and six months ended August 31, 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 August 31, 2014 and February 28, 2014 of derivative instruments:
 
 
Derivative Assets and Liabilities
 
 
 
 
Fair Value
 
 
Account
 
August 31, 2014
 
February 28, 2014
Designated derivative instruments
 
 
 
 
 
 
Foreign currency contracts
 
Accrued expenses and other current liabilities
 
$
(89
)
 
$
(784
)
 
 
Prepaid expenses and other current assets
 
428

 

Interest rate swap agreements
 
Other liabilities
 
(15
)
 
(179
)
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
324

 
$
(963
)

Cash flow hedges

During Fiscal 2014, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $17,612 and are designated as cash flow hedges at August 31, 2014. The current outstanding notional value of the

9

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

Company's three interest rate swaps at August 31, 2014 is $6,890, $37,500 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 six months ended August 31, 2014 and 2013 was as follows:

 
Three months ended
 
Six months ended
 
August 31, 2014
 
August 31, 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
$
356

 
$
(70
)
 
$
49

 
$
831

 
$
(272
)
 
$
36

Interest rate swaps
$
10

 
$

 
$

 
$
164

 
$

 
$

 
Three months ended
 
Six months ended
 
August 31, 2013
 
August 31, 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
$
(410
)
 
$
84

 
$
(33
)
 
$
(15
)
 
$
62

 
$
(30
)
Interest rate swaps
$
349

 
$

 
$

 
$
364

 
$

 
$


(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 nine months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of August 31, 2014, no contracts originally designated for hedge accounting were de-designated or terminated.

(4)    Investment Securities

As of August 31, 2014 and February 28, 2014, the Company had the following investments:


10

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

 
August 31, 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
$
4,293

 
$

 
$
4,293

 
$
4,234

 
$

 
$
4,234

Available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Cellstar

 
3

 
3

 

 
3

 
3

Held-to-maturity Investment
966

 

 
966

 
7,640

 

 
7,640

Total Marketable Securities
5,259

 
3

 
5,262

 
11,874

 
3

 
11,877

Other Long-Term Investments
8,251

 

 
8,251

 
2,225

 

 
2,225

Total Investment Securities
$
13,510

 
$
3

 
$
13,513

 
$
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 August 31, 2014.
The Company recorded a remeasurement loss during the three months ended August 31, 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

11

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 six months ended August 31, 2014 or 2013. As of August 31, 2014, the Company owns 72,500,000 shares in its Bliss-tel investment, which carries a value of $0 at August 31, 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 August 31, 2014.

Other Long-Term Investments

Other long-term investments include investments in three non-controlled corporations accounted for by the cost method. As of August 31, 2014, the Company's investment in Rx Networks totaled $2,251 and we held 16.5% of the outstanding shares of this company. No additional investment was made in Rx Networks during the three and six months ended August 31, 2014. In September 2014, subsequent to the end of the second quarter, the Company received a payment of $250 from Rx Networks as a repayment of the funds loaned to the Company in Fiscal 2013. During the six months ended August 31, 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 August 31, 2014. No additional investment was made in EyeLock, Inc. or EyeSee360, Inc. during the three and six months ended August 31, 2014 in excess of the initial investment. The total balance of these three investments at August 31, 2014 was $8,251.

(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
 
(7,441
)
 
2

 
60

 
754

 
(6,625
)
Reclassified from accumulated other comprehensive income (loss)
 

 

 

 
197

 
197

Net current-period other comprehensive (loss) income
 
(7,441
)
 
2

 
60

 
951

 
(6,428
)
Balance at August 31, 2014
 
$
(7,206
)
 
$
(72
)
 
$
(1,259
)
 
$
236

 
$
(8,301
)

During the three and six months ended August 31, 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 $123 and $320, respectfully.

(6)    Supplemental Cash Flow Information

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


12

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

 
 
Six Months Ended
August 31,
 
 
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)
 
$
2,106

 
$
2,769

Income taxes (net of refunds)
 
$
2,264

 
$
3,876


(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 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 2.50 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 August 31, 2014.

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
 

 

 
 
Exercised
 

 

 
 
Forfeited/expired
 

 

 
 
Outstanding and exercisable at August 31, 2014
 
79,204

 
$
6.79

 
0.83

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 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. The shares will not be issued to the grantee before they vest. 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 six months ended August 31, 2014:


13

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

 
Number of Shares
 
Weighted Average Grant Date Fair Value
Balance at February 28, 2014
84,588
 
$
13.62

Granted

 

Vested

 

Forfeited

 

Balance at August 31, 2014
84,588
 
$
13.62


During the three and six months ended August 31, 2014, the Company recorded $76 and $151, respectively, in stock-based compensation related to restricted stock awards. As of August 31, 2014, there was $976 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 for the three and six months ended August 31, 2014 were approximately $38,872 and $86,409, respectively, compared to $14,058 and $31,365 for the three and six months ended August 31, 2013, respectively.

(9)    Research and Development

Expenditures for research and development are charged to expense as incurred. Such expenditures amount to $5,894 and $5,730 for the three months ended August 31, 2014 and 2013, respectively, and $11,283 and $11,192 for the six months ended August 31, 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 August 31, 2014 and 2013, the Company recorded $2,586 and $409, respectively, and for the six months ended August 31, 2014 and 2013, the Company recorded $4,797 and $1,338, 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:


14

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

Automotive:
 
Beginning balance at March 1, 2014
$
71,405

Currency translation
(2,886
)
Balance at August 31, 2014
$
68,519

 
 
Gross carrying amount at August 31, 2014
$
68,519

Accumulated impairment charge

Net carrying amount at August 31, 2014
$
68,519

 
 
Premium Audio:
 
Beginning balance at March 1, 2014
$
46,533

Activity during the period

Balance at August 31, 2014
$
46,533

 
 
Gross carrying amount at August 31, 2014
$
78,696

Accumulated impairment charge
(32,163
)
Net carrying amount at August 31, 2014
$
46,533

 
 
Total Goodwill, net
$
115,052


Note: The Company's Consumer Accessories segment did not carry a goodwill balance at August 31, 2014 or February 28, 2014.

At August 31, 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)
 
$
66,935

 
$
18,360

 
$
48,575

Trademarks/Tradenames (3-12 years)
 
415

 
380

 
35

Patents (5-10 years)
 
9,992

 
3,262

 
6,730

License (5 years)
 
1,400

 
1,400

 

Contract (5 years)
 
1,557

 
1,519

 
38

Total finite-lived intangible assets
 
$
80,299

 
$
24,921

 
55,378

Indefinite-lived intangible assets
 
 
 
 
 
 
Trademarks
 
 
 
 
 
114,155

Total net intangible assets
 
 
 
 
 
$
169,533


At February 28, 2014, intangible assets consisted of the following: 


15

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 $1,406 and $1,442 for the three months ended August 31, 2014 and 2013, respectively, and $2,821 and $2,876 for the six months ended August 31, 2014 and 2013, respectively. The estimated aggregate amortization expense for the cumulative five years ending August 31, 2019 amounts to $27,628.

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. There were no impairment triggering events during the three and six months ended August 31, 2014, 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.

(11)    Equity Investment

As of August 31, 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.


16

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

 
 
August 31,
2014
 
February 28,
2014
Current assets
 
$
44,042

 
$
41,820

Non-current assets
 
5,327

 
5,171

Current liabilities
 
6,585

 
5,735

Members' equity
 
42,784

 
41,256

 
 
Six Months Ended
August 31,
 
 
2014
 
2013
Net sales
 
$
49,496

 
$
50,633

Gross profit
 
14,798

 
14,865

Operating income
 
6,352

 
6,481

Net income
 
6,772

 
6,503

 
The Company's share of income from ASA was $1,455 and $1,496 for the three months ended August 31, 2014 and 2013, respectively, and $3,386 and $3,252 for the six months ended August 31, 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 44.7% (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 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 August 31, 2014, the Company recorded a benefit for income taxes of $1,960, which consisted of U.S., state and local and foreign taxes, including a discrete provision of $67. The discrete provisions relates to the accrual of interest for uncertain tax positions under ASC 740. For the three months ended August 31, 2013, the Company recorded a provision for income taxes of $2,788.

The effective tax rate for the six months ended August 31, 2014 was a benefit for income taxes of 46.3% compared to a provision for income taxes of 35.5% in the comparable prior period.  The effective tax rate for the six months ended August 31, 2014 is different than the statutory rate primarily due to state and local taxes, U.S. effects of foreign operations, including the non-deductible devaluation of the Venezuela bonds, various federal and state tax credits and the discrete tax benefit of $68.

(13)    Inventory

Inventories by major category are as follows:

 
 
August 31,
2014
 
February 28,
2014
Raw materials
 
$
34,826

 
$
32,193

Work in process
 
5,622

 
4,664

Finished goods
 
113,349

 
107,482

Inventory, net
 
$
153,797

 
$
144,339


(14)     Financing Arrangements

The Company has the following financing arrangements:

17

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


 
 
August 31,
2014
 
February 28,
2014
Debt
 
 
 
 
Domestic bank obligations (a)
 
$
73,950

 
$
87,950

Euro asset-based lending obligation (b)
 
3,971

 
3,762

Schwaiger mortgage (c)
 
1,492

 
1,706

Klipsch notes (d)
 
7,388

 
7,855

Audiovox Germany loans (e)
 
7,092

 
7,909

Hirschmann line of credit (f)
 
2,394

 

Total debt
 
96,287

 
109,182

Less: current portion of long-term debt
 
8,501

 
5,960

 Total long-term debt
 
$
87,786

 
$
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 August 31, 2014, the interest rate on the facility was 2.27%.

The Amended Facility requires compliance with non-financial and financial covenants. As of August 31, 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.

18

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


As of August 31, 2014, approximately $73,950 was outstanding under the line. Charges incurred on the unused portion of the Credit Facility and Amended Credit Facility during the three and six months ended August 31, 2014 totaled $71 and $139, respectively, compared to $38 and $53 during the three and six months ended August 31, 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 six months ended August 31, 2014, the Company amortized $279 and $558 of these costs, respectively, compared to $344 and $688 during the three and six months ended August 31, 2013.

(b)          Euro Asset-Based Lending Obligation
 
Foreign bank obligations include a financing arrangement entered into in October 2000, 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 November 1, 2014. The rate of interest is the three month Euribor plus 1.9% (2.1% at August 31, 2014), and the Company pays 0.22% of its gross sales as a fee for the accounts receivable factoring arrangement. As of August 31, 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 August 31, 2014 is $498 and will be fully paid by the end of Fiscal 2018.

On April 20, 2012, the Company purchased the building housing Klipsch's headquarters in Indianapolis, IN for approximately $10,900. The Company paid $3,100 cash at closing and assumed the mortgage held by the seller, Woodview LLC, in the amount of $7,800. Woodview LLC was a related party, as certain members are executives of Klipsch. 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 will pay a fixed rate of 3.92% under the swap agreement (see Note 3). The balance of the mortgage at August 31, 2014 was $6,890.

(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

19

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% (2.2% at August 31, 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
August 31,
 
Six Months Ended
August 31,
 
 
2014
 
2013
 
2014
 
2013
Net settlement gains
 
$

 
$
4,025

 
$

 
$
4,025

Foreign currency gain (loss)
 
237

 
49

 
365

 
(184
)
Interest income
 
55

 
130

 
138

 
272

Rental income
 
291

 
412

 
591

 
721

Miscellaneous
 
140

 
1,081

 
180

 
879

Total other, net
 
$
723

 
$
5,697

 
$
1,274

 
$
5,713


Included in Miscellaneous for the three and six months ended August 31, 2013 is income related to the recovery of funds from Circuit City of approximately $900 that has been 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 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 six months ended August 31, 2014,

20

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

which was approximately 50 Bolivar Fuerte/$1 at August 31, 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. Net currency exchange losses of $(6,334) and $(6,232) were recorded for the three and six months ended August 31, 2014, respectively, which includes the remeasurement loss on the Company's Venezuelan bonds of $(6,702), as described in Note 4, and are included in Other Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income (Loss).

Our investment in Venezuela includes approximately $13,192 of rental properties that are currently being held for investment purposes. As of August 31, 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 August 31, 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. 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 $4,894.
 
At August 31, 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

 
$
5,345

2016
574

 
4,626

2017
617

 
1,739

2018
1,148

 
896

2019
1,148

 
257

Thereafter
4,939

 
659

Total minimum lease payments
9,000

 
$
13,522

Less:  minimum sublease income
840

 
 

Net
8,160

 
 

Less:  amount representing interest
2,131

 
 

Present value of net minimum lease payments
6,029

 
 

Less: current installments included in accrued expenses and other current liabilities
235

 
 

Long-term capital obligation
$
5,794

 
 


At August 31, 2014, minimum annual rental payments on related party leases from its principal stockholder, including the capital lease payments, which are included in the above table, are as follows:


21

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

2015
$
1,390

2016
1,414

2017
828

2018
631

2019
631

Thereafter
4,890

Total
$
9,784


(18)     Capital Structure
 
The Company's capital structure is as follows:
 
 
 
 
 
Shares Authorized
 
Shares Outstanding
 
 
 
 
Security
 
Par
Value
 
August 31,
2014
 
February 28,
2014
 
August 31,
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

 
22,172,968

 
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

 
1,815,272

 
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.

Segment data for each of the Company's segments are presented below:


22

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

 
Automotive
 
Premium Audio
 
Consumer Accessories
 
Corporate/ Eliminations
 
Total
Three Months Ended August 31, 2014
 
 
 
 
 
 
 
 
 
Net sales
$
92,942

 
$
38,953

 
$
45,235

 
$
213

 
$
177,343

Equity in income of equity investees
1,455

 

 

 

 
1,455

Interest expense and bank charges
1,498

 
2,242

 
1,429

 
(3,592
)
 
1,577

Depreciation and amortization expense
2,283

 
914

 
334

 
536

 
4,067

(Loss) income before income taxes (a)
(2,552
)
 
(1,801
)
 
(885
)
 
596

 
(4,642
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended August 31, 2013
 
 
 
 
 
 
 
 
 
Net sales
$
96,889

 
$
40,806

 
$
45,618

 
$
505

 
$
183,818

Equity in income of equity investees
1,496

 

 

 

 
1,496

Interest expense and bank charges
1,954

 
1,876

 
2,505

 
(4,536
)
 
1,799

Depreciation and amortization expense
2,125

 
843

 
582

 
441

 
3,991

Income (loss) before income taxes
6,093

 
1,947

 
(1,114
)
 
725

 
7,651

 
 
 
 
 
 
 
 
 
 
Six Months Ended August 31, 2014
 
 
 
 
 
 
 
 
 
Net sales
$
195,327

 
$
74,163

 
$
94,366

 
$
386

 
$
364,242

Equity in income of equity investees
3,386

 

 

 

 
3,386

Interest expense and bank charges
2,969

 
4,520

 
3,540

 
(7,844
)
 
3,185

Depreciation and amortization expense
4,468

 
1,797

 
674

 
1,061

 
8,000

(Loss) income before income taxes (a)
2,999

 
(3,403
)
 
(4,489
)
 
808

 
(4,085
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended August 31, 2013
 
 
 
 
 
 
 
 
 
Net sales
$
201,066

 
$
80,972

 
$
93,933

 
$
819

 
$
376,790

Equity in income of equity investees
3,252

 

 

 

 
3,252

Interest expense and bank charges
3,851

 
3,702

 
4,998

 
(8,772
)
 
3,779

Depreciation and amortization expense
4,193

 
1,748

 
1,174

 
846

 
7,961

Income (loss) before income taxes
10,406

 
2,607

 
(2,669
)
 
513

 
10,857


(a) Included in the (loss) income before taxes for the three and six months ended August 31, 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 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.


23

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

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 2013-10, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes." ASU 2013-10 allows the Fed Funds Effective Swap Rate (OIS) to be designated as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 and did not have a material effect on the Company's consolidated financial statements.

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

Refer to Note 4 for discussion of the payment received from the Company's investee, Rx Networks, subsequent to August 31, 2014.

The Company’s unrecognized tax benefits include amounts related to various U.S federal, state and local and foreign tax issues. The Company believes that it is reasonably possible that a decrease of up to $5,900 in unrecognized tax benefits may be necessary within the coming year as a result of the expected resolution of various income tax examinations. The majority of such decrease would result in a discrete tax benefit impacting the Company’s effective income tax rate.


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 and six months ended August 31, 2014 compared to the three and six months ended August 31, 2013. Next, we present adjusted EBITDA and diluted adjusted EBITDA per common share for the three and six months ended August 31, 2014 compared to the three and six months ended August 31, 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:


25



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:

premium loudspeakers,
architectural speakers,
commercial speakers,
outdoor speakers,
flat panel speakers,
wireless speakers,
bluetooth speakers,
home theater systems,
business music systems,
streaming music systems,
on-ear and in-ear headphones,
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,
power cords,
performance enhancing electronics,
TV universal remotes,
flat panel TV mounting systems,
iPod specialized products,
wireless headphones,
wireless speakers,
bluetooth speakers,
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,
set-top boxes,
home and portable stereos,
digital multi-media products, such as personal video recorders and MP3 products,
camcorders,
clock radios,
digital voice recorders, and
portable DVD players.

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.
 

26



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. 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 six months ended August 31, 2014 and 2013.  

The following tables set forth, for the periods indicated, certain statements of operations data for the three and six months ended August 31, 2014 and 2013.

Net Sales

 
 
August 31,
 
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
Three Months Ended:
 
 
 
 
 
 
 
 
Automotive
 
$
92,942

 
$
96,889

 
$
(3,947
)
 
(4.1
)%
Premium Audio
 
38,953

 
40,806

 
(1,853
)
 
(4.5
)
Consumer Accessories
 
45,235

 
45,618

 
(383
)
 
(0.8
)
Corporate
 
213

 
505

 
(292
)
 
(57.8
)
Total net sales
 
$
177,343

 
$
183,818

 
$
(6,475
)
 
(3.5
)%
Six Months Ended:
 
 
 
 
 
 
 
 
Automotive
 
$
195,327

 
$
201,066

 
$
(5,739
)
 
(2.9
)%
Premium Audio
 
74,163

 
80,972

 
(6,809
)
 
(8.4
)
Consumer Accessories
 
94,366

 
93,933

 
433

 
0.5

Corporate
 
386

 
819

 
(433
)
 
(52.9
)
Total net sales
 
$
364,242

 
$
376,790

 
$
(12,548
)