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EX-32.2 - EXHIBIT 32.2 - VOXX International Corpex322q12018.htm
EX-32.1 - EXHIBIT 32.1 - VOXX International Corpex321q12018.htm
EX-31.2 - EXHIBIT 31.2 - VOXX International Corpex312q12018.htm
EX-31.1 - EXHIBIT 31.1 - VOXX International Corpex311q12018.htm



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, 2017

 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.)
 
2351 J Lawson Blvd., Orlando, Florida
(Address of principal executive offices)
 
32824
(Zip Code)
 
(800) 654-7750
(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, a smaller reporting company or an emerging growth 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    
Emerging growth company   o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
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.

1





Class
As of July 7, 2017
Class A Common Stock
21,899,370

Shares
Class B Common Stock
2,260,954

Shares

2




VOXX International Corporation and Subsidiaries
 

 
Table of Contents
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
FINANCIAL STATEMENTS (unaudited)
 
 
Consolidated Balance Sheets at May 31, 2017 and February 28, 2017
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended May 31, 2017 and 2016
 
Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2017 and 2016
 
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
 


3



PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

4



 
 
May 31, 2017
 
February 28, 2017
Assets
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
8,060

 
$
7,800

Accounts receivable, net
 
89,888

 
90,641

Inventory, net
 
165,409

 
153,053

Receivables from vendors
 
831

 
665

Prepaid expenses and other current assets
 
29,181

 
19,593

Income tax receivable
 
1,682

 
1,596

Total current assets
 
295,051

 
273,348

Investment securities
 
9,748

 
10,388

Equity investments
 
21,216

 
21,926

Property, plant and equipment, net
 
85,182

 
81,601

Goodwill
 
105,799

 
103,212

Intangible assets, net
 
175,732

 
176,289

Deferred income taxes
 
23

 
23

Other assets
 
1,624

 
1,699

Total assets
 
$
694,375

 
$
668,486

Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
71,669

 
$
61,143

Accrued expenses and other current liabilities
 
54,924

 
42,476

Income taxes payable
 
1,369

 
3,077

Accrued sales incentives
 
12,078

 
13,154

Current portion of long-term debt
 
10,420

 
10,217

Total current liabilities
 
150,460

 
130,067

Long-term debt, net of debt issuance costs
 
102,296

 
97,747

Capital lease obligation
 
2,792

 
1,400

Deferred compensation
 
3,868

 
4,224

Deferred income tax liabilities
 
27,773

 
30,155

Other tax liabilities
 
3,244

 
3,194

Other long-term liabilities
 
10,946

 
10,384

Total liabilities
 
301,379

 
277,171

Commitments and contingencies (see Note 22)
 


 


Stockholders' equity:
 
 

 
 

Preferred stock:
 
 
 
 
No shares issued or outstanding (see Note 19)
 

 

Common stock:
 
 
 
 
Class A, $.01 par value, 60,000,000 shares authorized, 24,067,444 shares issued and 21,899,370 shares outstanding at both May 31, 2017 and February 28, 2017
 
256

 
256

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

 
22

Paid-in capital
 
295,734

 
295,432

Retained earnings
 
156,338

 
159,369

Accumulated other comprehensive loss
 
(37,715
)
 
(43,898
)
Treasury stock, at cost, 2,168,074 shares of Class A Common Stock at both May 31, 2017 and February 28, 2017
 
(21,176
)
 
(21,176
)
Total VOXX International Corporation stockholders' equity
 
393,459

 
390,005

Non-controlling interest
 
(463
)
 
1,310

Total stockholders' equity
 
392,996

 
391,315

Total liabilities and stockholders' equity
 
$
694,375

 
$
668,486

See accompanying notes to consolidated financial statements.

5



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,
 
 
2017
 
2016
Net sales
 
$
159,103

 
$
155,456

Cost of sales
 
115,364

 
109,355

Gross profit
 
43,739

 
46,101

 
 
 
 
 
Operating expenses:
 
 

 
 

Selling
 
13,792

 
12,664

General and administrative
 
27,192

 
27,071

Engineering and technical support
 
10,594

 
13,479

Total operating expenses
 
51,578

 
53,214

Operating loss
 
(7,839
)
 
(7,113
)
 
 
 
 
 
Other income (expense):
 
 

 
 

Interest and bank charges
 
(1,913
)
 
(1,695
)
Equity in income of equity investees
 
1,803

 
1,808

Other, net
 
(1,020
)
 
(512
)
Total other expense, net
 
(1,130
)
 
(399
)
 
 
 
 
 
Loss before income taxes
 
(8,969
)
 
(7,512
)
Income tax benefit
 
(4,063
)
 
(1,392
)
Net loss
 
(4,906
)
 
(6,120
)
Less: net loss attributable to non-controlling interest
 
(1,875
)
 
(1,812
)
Net loss attributable to Voxx International Corporation
 
$
(3,031
)
 
$
(4,308
)
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
        Foreign currency translation adjustments
 
7,359

 
4,196

        Derivatives designated for hedging
 
(1,052
)
 
(491
)
        Pension plan adjustments
 
(120
)
 
(58
)
        Unrealized holding loss on available-for-sale investment securities, net of tax
 
(4
)
 
(5
)
          Other comprehensive income, net of tax
 
6,183

 
3,642

Comprehensive income (loss) attributable to VOXX International Corporation
 
$
3,152

 
$
(666
)
 
 
 
 
 
Net loss per common share attributable to VOXX International Corporation (basic)
 
$
(0.13
)
 
$
(0.18
)
 
 
 
 
 
Net loss per common share attributable to VOXX International Corporation (diluted)
 
$
(0.13
)
 
$
(0.18
)
 
 
 
 
 
Weighted-average common shares outstanding (basic)
 
24,160,324

 
24,160,324

Weighted-average common shares outstanding (diluted)
 
24,160,324

 
24,160,324


See accompanying notes to consolidated financial statements.



6



VOXX International Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
(unaudited)

 
 
Three Months Ended
May 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(4,906
)
 
$
(6,120
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
4,445

 
4,549

Amortization of debt discount
 
205

 
204

Bad debt expense
 
96

 
98

Non-cash bank charges
 

 
13

Gain on forward contracts
 
(299
)
 
(324
)
Loss on interest rate swap unwind
 

 
114

Equity in income of equity investees
 
(1,803
)
 
(1,808
)
Distribution of income from equity investees
 
2,515

 
1,536

Deferred income tax benefit
 
(2,181
)
 
(1,379
)
Non-cash compensation adjustment
 
(45
)
 
288

Stock based compensation expense
 
142

 
175

Gain on sale of property, plant and equipment
 
(10
)
 
(5
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
2,302

 
8,715

Inventory
 
(7,231
)
 
(5,153
)
Receivables from vendors
 
(52
)
 
741

Prepaid expenses and other
 
(9,588
)
 
254

Investment securities-trading
 
627

 
177

Accounts payable, accrued expenses, accrued sales incentives and other liabilities
 
18,111

 
(6,163
)
Income taxes payable
 
(1,901
)
 
(2,456
)
Net cash provided by (used in) operating activities
 
427

 
(6,544
)
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(2,816
)
 
(2,297
)
Proceeds from sale of property, plant and equipment
 
10

 
5

Purchase of business
 
(1,814
)
 

Net cash used in investing activities
 
(4,620
)
 
(2,292
)
Cash flows from financing activities:
 
 

 
 

Principal payments on capital lease obligation
 
(172
)
 
(119
)
Repayment of bank obligations
 
(15,330
)
 
(39,368
)
Borrowings on bank obligations
 
19,392

 
44,390

Net cash provided by financing activities
 
3,890

 
4,903

Effect of exchange rate changes on cash
 
563

 
724

Net increase (decrease) in cash and cash equivalents
 
260

 
(3,209
)
Cash and cash equivalents at beginning of period
 
7,800

 
11,767

Cash and cash equivalents at end of period
 
$
8,060

 
$
8,558


See accompanying notes to consolidated financial statements.


7



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

(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, 2017. Certain amounts in the prior year have been reclassified to conform to the current year presentation.

We operate in three reportable segments, Automotive, Premium Audio and Consumer Accessories. See Note 21 for the Company's segment reporting disclosures.

(2)    Acquisitions and Divestitures

Rosen Electronics LLC
On April 6, 2017, Voxx acquired the inventory and all intellectual property, including patents and trademarks of Rosen Electronics LLC. As consideration for the Rosen asset purchase, the Company paid $1,814. In addition, the Company agreed to pay a 2% royalty related to future net sales of Rosen products for three years.

Rosen's results of operations have been included in the consolidated financial statements from the date of acquisition. The purpose of this acquisition was to increase the Company's market share and strengthen its intellectual property related to the rear seat entertainment market.

The following summarizes the preliminary allocation of the purchase price for the fair value of the assets acquired and liabilities assumed at the date of acquisition:
Assets acquired:
 
   Inventory
$
2,310

   Intangible assets including trademarks, customer relationships and patents
604

      Total assets acquired
$
2,914

 
 
Liabilities assumed:
 
   Warranty accrual
$
500

   Other liabilities acquired
600

      Total
$
1,100

Total purchase price
$
1,814


Hirschmann Car Communication GmbH
On June 25, 2017, the Company entered into a definitive agreement to sell Hirschmann Car Communication GmbH and its subsidiaries. See Note 24 for more details of this subsequent event.

(3)    Net Income (Loss) Per Common Share
 
Basic net income (loss) per common share is based upon the weighted-average common shares outstanding during the period.  Diluted net income (loss) 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.

8

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


There are no reconciling items which impact the numerator of basic and diluted net income (loss) per common share.  A reconciliation between the denominator of basic and diluted net income (loss) per common share is as follows:

 
 
Three Months Ended
May 31,
 
 
2017
 
2016
Weighted-average common shares outstanding
 
24,160,324

 
24,160,324

Effect of dilutive securities:
 
 

 
 

Stock options, warrants and restricted stock
 

 

Weighted-average common shares and potential common shares outstanding
 
24,160,324

 
24,160,324

 
Restricted stock, stock options and warrants totaling 553,693 and 413,164 for the three months ended May 31, 2017 and 2016, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these stock options and warrants was greater than the average market price of the Company’s common stock during these periods, or the inclusion of these components would have been anti-dilutive.

(4)    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 May 31, 2017:

 
 
 
Fair Value Measurements at Reporting Date Using
 
Total
 
Level 1
 
Level 2
Cash and cash equivalents:
 
 
 
 
 
Cash and money market funds
$
8,060

 
$
8,060

 
$

Derivatives
 

 
 

 
 

Designated for hedging
$
(1,022
)
 
$

 
$
(1,022
)
Investment securities:
 

 
 

 
 

Trading securities
$
3,468

 
$
3,468

 
$

Available-for-sale securities
6

 
6

 

Other investments at cost (a)
6,274

 

 

Total investment securities
$
9,748

 
$
3,474

 
$


The following table presents assets measured at fair value on a recurring basis at February 28, 2017:


9

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

 
 
 
Fair Value Measurements at Reporting Date Using
 
Total
 
Level 1
 
Level 2
Cash and cash equivalents:
 
 
 
 
 
Cash and money market funds
$
7,800

 
$
7,800

 
$

Derivatives
 

 
 

 
 

Designated for hedging
$
335

 
$

 
$
335

Investment securities:
 

 
 

 
 

Trading securities
$
4,094

 
$
4,094

 
$

Available-for-sale securities
6

 
6

 

Other investments at cost (a)
6,288

 

 

Total investment securities
$
10,388

 
$
4,100

 
$


(a)
Included in this balance are investments in two non-controlled corporations accounted for at cost (see Note 5). The fair values of these investments would be based upon Level 3 inputs. At May 31, 2017 and February 28, 2017, it is not practicable to estimate the fair values of these items.

The carrying amount of the Company's accounts receivable, short-term debt, accounts payable, accrued expenses, bank obligations and long-term debt approximates fair value because of (i) the short-term nature of the financial instrument; (ii) the interest rate on the financial instrument being reset every quarter to reflect current market rates, 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, local operating expenses, as well as its general economic exposure to foreign currency fluctuations created in the normal course of business. The forward foreign currency derivatives qualifying for hedge accounting are designated as cash flow hedges and valued using observable forward rates for the same or similar instruments (Level 2). The duration of open forward foreign currency contracts ranges from 1 - 9 months and are classified in the balance sheet according to their terms. The Company also has an interest rate swap agreement as of May 31, 2017 that hedges interest rate exposure related to the forecasted outstanding balance of its Florida Mortgage, with monthly payments due through March 2026. The swap agreement locks the interest rate on the debt at 3.48% (inclusive of credit spread) through the maturity date of the loan. During the first quarter of Fiscal 2017, the Company unwound another interest rate swap agreement that hedged interest rate exposure related to one of its mortgage notes when that mortgage was paid in full. The fair value of that interest rate swap agreement on the date it was unwound was $(114), and was charged to interest expense in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) during the three months ended May 31, 2016. 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 assets or 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 $(52) for the three months ended May 31, 2017, and $(50) for the three months ended May 31, 2016.
Financial Statement Classification
The Company holds derivative instruments that are designated as hedging instruments. The following table discloses the fair value as of May 31, 2017 and February 28, 2017 of derivative instruments:

10

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

 
 
Derivative Assets and Liabilities
 
 
 
 
Fair Value
 
 
Account
 
May 31, 2017
 
February 28, 2017
Designated derivative instruments
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
26

 
$
654

 
 
Accrued expenses and other current liabilities
 
(706
)
 
(21
)
 
 
 
 
 
 
 
Interest rate swap agreements
 
Other long-term liabilities
 
(342
)
 
(298
)
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
(1,022
)
 
$
335


Cash flow hedges

During Fiscal 2017, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $34,260 and are designated as cash flow hedges at May 31, 2017. The current outstanding notional value of the Company's interest rate swap at May 31, 2017 is $8,988. 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 months ended May 31, 2017 and 2016 was as follows:
 
Three months ended
 
Three months ended
 
May 31, 2017
 
May 31, 2016
 
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 (a)
 
Gain (Loss) for Ineffectiveness in Other Income
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
(1,208
)
 
$
299

 
$
(52
)
 
$
(818
)
 
$
324

 
$
(50
)
Interest rate swaps
$
(44
)
 
$

 
$

 
$
180

 
$
(114
)
 
$

(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 income (loss) recognized in Other Comprehensive Income (Loss) for foreign currency contracts is expected to be recognized in cost of sales within the next twelve months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of May 31, 2017, no foreign currency contracts originally designated for hedge accounting were de-designated or terminated.

(5)    Investment Securities

As of May 31, 2017 and February 28, 2017, the Company had the following investments:


11

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

 
May 31, 2017
 
February 28, 2017
 
Cost
Basis
 
Unrealized
Holding
Gain/(Loss)
 
Fair
Value
 
Cost
Basis
 
Unrealized
Holding
Gain/(Loss)
 
Fair
Value
Investment Securities
 

 
 

 
 

 
 

 
 

 
 

Marketable Securities
 

 
 

 
 

 
 

 
 

 
 

Trading
 

 
 

 
 

 
 

 
 

 
 

Deferred Compensation
$
3,468

 
$

 
$
3,468

 
$
4,094

 
$

 
$
4,094

Available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Cellstar

 
6

 
6

 

 
6

 
6

Total Marketable Securities
3,468

 
6

 
3,474

 
4,094

 
6

 
4,100

Other Long-Term Investments
6,274

 

 
6,274

 
6,288

 

 
6,288

Total Investment Securities
$
9,742

 
$
6

 
$
9,748

 
$
10,382

 
$
6

 
$
10,388


Long-Term Investments

Trading Securities

The Company’s trading securities consist of mutual funds, which are held in connection with the Company’s deferred compensation plan. Unrealized holding gains and losses on trading securities are offset by changes in the corresponding deferred compensation liability.

Available-For-Sale Securities

The Company’s available-for-sale marketable securities include a less than 20% equity ownership in CLST Holdings, Inc. (“Cellstar").

Unrealized holding gains and losses, net of the related tax effect (if applicable), on available-for-sale securities are reported as a component of Accumulated Other Comprehensive Income (Loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis and reported in Other Income (Expense).

A decline in the market value of any available-for-sale security below cost that is deemed other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. No other-than-temporary losses were incurred by the Company during the three months ended May 31, 2017 or 2016.

Other Long-Term Investments

Other long-term investments include investments in two non-controlled corporations accounted for by the cost method. As of May 31, 2017, the Company's investments in Rx Networks and 360fly, Inc. totaled $1,821 and $4,453, respectively, or a total investment balance of $6,274. We held 10.2% and 4.7% of the outstanding shares of Rx Networks and 360fly, Inc., respectively, at May 31, 2017. No additional investment was made in either of these companies during the three months ended May 31, 2017.

(6)    Accumulated Other Comprehensive (Loss) Income

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


12

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

 
 
Foreign Currency Translation Gains (Losses)
 
Unrealized gains (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, 2017
 
$
(41,831
)
 
$
(98
)
 
$
(2,282
)
 
$
313

 
$
(43,898
)
Other comprehensive income (loss) before reclassifications
 
7,359

 
(4
)
 
(120
)
 
(845
)
 
6,390

Reclassified from accumulated other comprehensive income (loss)
 

 

 

 
(207
)
 
(207
)
Net current-period other comprehensive income (loss)
 
7,359

 
(4
)
 
(120
)
 
(1,052
)
 
6,183

Balance at May 31, 2017
 
$
(34,472
)
 
$
(102
)
 
$
(2,402
)
 
$
(739
)
 
$
(37,715
)

During the three months ended May 31, 2017, the Company recorded tax expense (benefit) related to unrealized losses on investments of $0, pension plan adjustments of $0, and derivatives designated in a hedging relationship of $(466).

Included in foreign currency translation gains of $7,359 for the three months ended May 31, 2017, was $1,677 of net gains resulting from translating the financial statements of the Company’s non-U.S. dollar functional currency subsidiaries into our reporting currency, which is the U.S. dollar, as well as approximately $4,511 of gains resulting from the re-measurement of an intercompany loan, payable in Euros, which is of a long-term investment nature. Remaining gains or losses pertain to the re-measurement of intercompany transactions of a long-term investment nature, with certain subsidiaries whose functional currency is not the U.S. dollar. Intercompany loans and transactions that are of a long-term investment nature are remeasured, and resulting gains and losses are reported in the same manner as translation adjustments. Within foreign exchange gains and losses in Other Comprehensive Income (Loss) for the three months ended May 31, 2017, the Company recorded gains of $7,258 related to the Euro, which was caused by the weakening of the U.S. dollar against the Euro by approximately 5%, and a net gain of $101 related to various other currencies.

(7)    Supplemental Cash Flow Information

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

 
 
Three Months Ended
May 31,
 
 
2017
 
2016
Non-cash investing and financing activities:
 
 
 
 
Capital expenditures funded by long-term obligations
 
$
1,917

 
$

       Mortgage settlement funded by long-term obligations
 

 
5,590

       Deferred financing costs funded by long-term obligations
 

 
1,753

Cash paid during the period:
 
 
 
 
Interest (excluding bank charges)
 
$
1,142

 
$
1,102

Income taxes (net of refunds)
 
$
53

 
$
2,288


(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 28, 2017.

Information regarding the Company's stock options and warrants is summarized below:


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
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
Outstanding at February 28, 2017
 
116,250

 
$
7.76

 
 
Granted
 

 

 
 
Exercised
 

 

 
 
Forfeited/expired
 

 

 
 
Outstanding and exercisable at May 31, 2017
 
116,250

 
$
7.76

 
0.38

A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are subject to forfeiture if employment terminates for a reason other than death, disability or retirement, prior to the release of the restrictions. The Company has a Supplemental Executive Retirement Plan (SERP), which was established in Fiscal 2014. Shares are granted based on certain performance criteria and vest on the later of three years from the date of grant (or three years from the date of participation in the SERP with respect to grants made when the plan was established in Fiscal 2014), or the grantee reaching the age of 65 years. The shares will also vest upon termination of the grantee's employment by the Company without cause, provided that the grantee, at the time of termination, has been employed by the Company for at least 10 years. When vested shares are issued to the grantee, the awards will be settled in shares or in cash, at the Company's sole option. The 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, which is 12.75 years. For these purposes, the fair market value of the restricted stock is determined based on the mean of the high and low price of the Company's common stock on the grant dates.

The following table presents a summary of the Company's restricted stock activity for the three months ended May 31, 2017:

 
Number of Shares
 
Weighted Average Grant Date Fair Value
Balance at February 28, 2017
437,443
 
$
6.99

Granted

 

Forfeited

 

Balance at May 31, 2017
437,443

 
$
6.99

Vested and unissued at May 31, 2017
56,181

 
$
13.62


During the three months ended May 31, 2017, the Company recorded $142 in stock-based compensation related to restricted stock awards. As of May 31, 2017, there was $1,200 of unrecognized stock-based compensation expense related to unvested restricted stock awards.

(9)    Supply Chain Financing

The Company has supply chain financing agreements and factoring agreements that were entered into for the purpose of accelerating receivable collection and better managing cash flow. The balances under the agreements are sold without recourse and are accounted for as sales of accounts receivable. Total receivable balances sold for the three months ended May 31, 2017, net of discounts, were $60,290, compared to $59,044 for the three months ended May 31, 2016.

(10)    Research and Development

Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to $7,810 for the three months ended May 31, 2017, compared to $10,256 for the three months ended May 31, 2016, net of customer

14

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

reimbursements, 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. Reimbursements of 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 because the performance of contract development services is not central to the Company's operations. For the three months ended May 31, 2017, the Company recorded $1,489 of development service reimbursements as a reduction of research and development expense based upon the achievement of a milestone, as compared to $460 for the three months ended May 31, 2016.

(11)    Goodwill and Intangible Assets

The change in goodwill by segment is as follows:

Automotive:
Amount
Beginning balance at March 1, 2017
$
56,680

Currency translation
2,586

Balance at May 31, 2017
$
59,266

 
 
Gross carrying amount at May 31, 2017
$
59,266

Accumulated impairment charge

Net carrying amount at May 31, 2017
$
59,266

 
 
Premium Audio:
 
Beginning balance at March 1, 2017
$
46,533

Activity during the period

Balance at May 31, 2017
$
46,533

 
 
Gross carrying amount at May 31, 2017
$
78,696

Accumulated impairment charge
(32,163
)
Net carrying amount at May 31, 2017
$
46,533

 
 
Total Goodwill, net
$
105,799


Note: The Company's Consumer Accessories segment did not carry a goodwill balance at May 31, 2017 or February 28, 2017.

At May 31, 2017, 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
 
$
65,941

 
$
29,472

 
$
36,469

Trademarks/Tradenames
 
415

 
396

 
19

Developed technology
 
31,290

 
4,762

 
26,528

Patents
 
8,821

 
5,133

 
3,688

License
 
1,400

 
1,400

 

Contract
 
2,141

 
1,761

 
380

Total finite-lived intangible assets
 
$
110,008

 
$
42,924

 
67,084

Indefinite-lived intangible assets
 
 
 
 
 
 
Trademarks
 
 
 
 
 
108,648

Total net intangible assets
 
 
 
 
 
$
175,732


At February 28, 2017, intangible assets consisted of the following: 

 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Total Net
Book
Value
Finite-lived intangible assets:
 
 
 
 
 
 
Customer relationships
 
$
64,780

 
$
27,830

 
$
36,950

Trademarks/Tradenames
 
415

 
395

 
20

Developed technology
 
31,290

 
4,081

 
27,209

Patents
 
8,494

 
4,775

 
3,719

License
 
1,400

 
1,400

 

Contract
 
2,141

 
1,732

 
409

Total finite-lived intangible assets
 
$
108,520

 
$
40,213

 
68,307

Indefinite-lived intangible assets
 
 
 
 
 
 
Trademarks
 
 
 
 
 
107,982

Total net intangible assets
 
 
 
 
 
$
176,289


The Company recorded amortization expense of $2,026 for the three months ended May 31, 2017 and $2,051 for the three months ended May 31, 2016. The estimated aggregate amortization expense for all amortizable intangibles for May 31 of each of the succeeding years is as follows:

Year
 
Amount
2018
 
$
8,037

2019
 
7,920

2020
 
7,866

2021
 
7,672

2022
 
7,157


(12)    Equity Investment

As of May 31, 2017 and February 28, 2017, 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

16

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

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.

 
 
May 31,
2017
 
February 28,
2017
Current assets
 
$
43,456

 
$
43,643

Non-current assets
 
6,379

 
6,207

Current liabilities
 
7,403

 
5,998

Members' equity
 
42,432

 
43,852

 
 
Three Months Ended
May 31,
 
 
2017
 
2016
Net sales
 
$
24,895

 
$
24,975

Gross profit
 
7,983

 
7,897

Operating income
 
3,573

 
3,607

Net income
 
3,606

 
3,616

 
The Company's share of income from ASA was $1,803 for the three months ended May 31, 2017 and $1,808 for the three months ended May 31, 2016.  

(13)    Income Taxes

For the three months ended May 31, 2017, the Company recorded an income tax benefit of $4,063, which includes a discrete income tax provision of $11. The calculation of the overall income tax benefit primarily consists of foreign taxes and an income tax provision resulting from the increase in deferred tax liabilities related to indefinite-lived intangible assets. The discrete income tax provision for the three months ended May 31, 2017 relates to the accrual of interest for unrecognized tax benefits. For the three months ended May 31, 2016, the Company recorded an income tax benefit of $1,392.

The effective tax rate for the three months ended May 31, 2017 was an income tax benefit of 45.3%, compared to an income tax benefit of 18.5% in the comparable prior period. The effective tax rate for the three months ended May 31, 2017 differs from the U.S. statutory rate of 35% primarily due to the mix of domestic and foreign earnings, and an income tax provision resulting from the increase in deferred tax liabilities related to indefinite-lived intangible assets.

At May 31, 2017, the Company had an uncertain tax position liability of $3,244, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local and foreign tax issues.

(14)    Inventory

Inventories by major category are as follows:

 
 
May 31,
2017
 
February 28,
2017
Raw materials
 
$
49,521

 
$
43,791

Work in process
 
4,758

 
5,225

Finished goods
 
111,130

 
104,037

Inventory, net
 
$
165,409

 
$
153,053



17

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

(15)     Financing Arrangements

The Company has the following financing arrangements:

 
 
May 31,
2017
 
February 28,
2017
Debt
 
 
 
 
Domestic credit facility (a)
 
$
97,325

 
$
92,793

Florida mortgage (b)
 
8,988

 
9,113

Euro asset-based lending obligation (c)
 
4,120

 
3,905

Schwaiger mortgage (d)
 
614

 
644

Klipsch note (e)
 
57

 
113

Voxx Germany mortgage (f)
 
3,890

 
3,875

Hirschmann line of credit (g)
 
997

 
1,002

Total debt
 
115,991

 
111,445

Less: current portion of long-term debt
 
10,420

 
10,217

Long-term debt
 
105,571

 
101,228

Debt issuance costs
 
3,275

 
3,481

 Total long-term debt, net of debt issuance costs
 
$
102,296

 
$
97,747


(a)          Domestic Credit Facility
 
From March 1, 2016 through April 25, 2016, the Company had a senior secured credit facility (the "Credit Facility") with an aggregate availability of $125,000, consisting of a revolving credit facility of $125,000, with a $30,000 multicurrency revolving credit facility sublimit, a $15,625 sublimit for Letters of Credit and a $6,250 sublimit for Swingline Loans. This Credit Facility was due on January 9, 2019; however, it was subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement).

On April 26, 2016, the Company amended and restated the Credit Facility ("Amended Credit Facility"). The Amended Credit Facility provides for a revolving credit facility with committed availability of up to $140,000, which may be increased, at the option of the Company, up to a maximum of $175,000, and a term loan in the amount of $15,000. The Amended Credit Facility also includes a $15,000 sublimit for letters of credit and a $15,000 sublimit for swingline loans. The availability under the revolving credit line within the Amended Credit Facility is subject to a borrowing base, which is based on eligible accounts receivable, eligible inventory and certain real estate, subject to reserves as determined by the lender, and is also limited by amounts outstanding under the Florida Mortgage (see Note 15(b)). As of May 31, 2017, $86,075 was outstanding under the revolving credit facility. The remaining availability under the revolving credit line of the Amended Credit Facility was $16,710 as of May 31, 2017.

The balance outstanding on the term loan at May 31, 2017 was $11,250. The term loan is repayable in consecutive quarterly installments of $938 through April 1, 2020. All other amounts outstanding under the Amended Credit Facility will mature and become due on April 26, 2021; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Amended Credit Agreement). The Company may prepay any amounts outstanding at any time, subject to payment of certain breakage and redeployment costs relating to LIBOR Rate Loans, provided that the term loan shall not be voluntarily prepaid except as set forth in the agreement. The commitments under the Amended Credit Facility may be irrevocably reduced at any time, without premium or penalty as set forth in the agreement.

Generally, the Company may designate specific borrowings under the Amended Credit Facility as either Base Rate Loans or LIBOR Rate Loans, except that swingline loans may only be designated as Base Rate Loans. Loans designated as LIBOR Rate Loans bear interest at a rate equal to the then applicable LIBOR rate plus a range of 1.75 - 2.25%. Loans designated as Base Rate loans bear interest at a rate equal to the applicable margin

18

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

for Base Rate Loans of 0.75 - 1.25% as defined in the agreement. Amounts outstanding in respect of the term loan bear interest at a rate equal to either (as selected by the Company pursuant to the agreement) (a) the then-applicable LIBOR Rate (not to be less than 0.00%) plus 4.25% or (b) the then-applicable Base Rate plus 3.25%. As of May 31, 2017, the weighted average interest rate on the facility was 3.39%.

The Amended Credit Facility requires compliance with a financial covenant calculated as of the last day of each month, consisting of a Fixed Charge Coverage Ratio. The Amended Credit Facility also contains covenants that limit the ability of the loan parties and certain of their subsidiaries which are not loan parties to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or dispose of a substantial portion of their business; (iv) transfer or dispose of assets; (v) change their name, organizational identification number, state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any Change of Control; (ix) make any Restricted Junior Payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transaction with an affiliate of any borrower or any of their subsidiaries; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the Amended Credit Facility were to fall below certain specified levels, as defined in the agreement, the lenders would have the right to assume dominion and control over the Company's cash. As of May 31, 2017, the Company was in compliance with this cash dominion covenant.

The Obligations under the loan documents are secured by a general lien on and security interest in substantially all of the assets of the borrowers and certain of the guarantors, including accounts receivable, equipment, real estate, general intangibles and inventory. The Company has guaranteed the obligations of the borrowers under the Amended Credit Agreement.

Charges incurred on the unused portion of the Amended Credit Facility during the three months ended May 31, 2017 totaled $61, compared to $49 during the three months ended May 31, 2016. These charges are included within Interest and Bank Charges on the Consolidated Statement of Operations and Comprehensive Income (Loss).

The Company accounted for the latest amendment as a modification of debt and added the costs incurred to amend the agreement, totaling $1,779, to the remaining financing costs related to the previous credit facility. These deferred financing costs are included in Long-term debt on the accompanying Consolidated Balance Sheets as a contra-liability balance, and are amortized through Interest and bank charges in the Consolidated Statements of Operations and Comprehensive Income (Loss) over the five year term of the Amended Credit Facility. During the three months ended May 31, 2017, the Company amortized $198 of these costs, compared to $196 for the three months ended May 31, 2016. The net unamortized balance of these debt issuance costs as of May 31, 2017 was $3,003.

(b)    Florida Mortgage
        
On July 6, 2015, VOXX HQ LLC, the Company’s wholly owned subsidiary, closed on a $9,995 industrial development revenue tax exempt bond under a loan agreement in favor of the Orange County Industrial Development Authority (the “Authority”) to finance the construction of the Company's manufacturing facility and executive offices in Lake Nona, Florida.  Wells Fargo Bank, N.A. ("Wells Fargo") was the purchaser of the bond and U.S. Bank National Association is the trustee under an Indenture of Trust with the Authority. Voxx borrowed the proceeds of the bond purchase from the Authority during construction as a revolving loan, which converted to a permanent mortgage upon completion of the facility in January 2016 (the "Florida Mortgage"). The Company makes principal and interest payments to Wells Fargo, which began March 1, 2016 and will continue through March of 2026. The Florida Mortgage bears interest at 70% of 1-month LIBOR plus 1.54% (2.25% at May 31, 2017) and is secured by a first mortgage on the property, a collateral assignment of leases and rents and a guaranty by the Company. The financial covenants of the Florida Mortgage are as defined in the Company’s Amended Credit Facility with Wells Fargo dated April 26, 2016.

The Company incurred debt financing costs totaling approximately $332 as a result of obtaining the Florida Mortgage, which are recorded as deferred financing costs and included in Long-term debt as a contra-liability balance on the accompanying Consolidated Balance Sheet and are being amortized through Interest and bank

19

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

charges in the Consolidated Statement of Operations and Comprehensive Income (Loss) over the ten year term of the Florida Mortgage. The Company amortized $8 of these costs during both of the three months ended May 31, 2017 and 2016, respectively.

On July 20, 2015, the Company entered into an interest rate swap agreement in order to hedge interest rate exposure related to the Florida Mortgage and pays a fixed rate of 3.48% under the swap agreement (See Note 4).

(c)          Euro Asset-Based Lending Obligation
 
Foreign bank obligations include a Euro accounts receivable factoring arrangement, which has a credit limit of up to 60% of eligible non-factored accounts receivable (see Note 9), and a Euro Asset-Based Lending ("ABL") credit facility, which has a credit limit of €8,000 and expires on July 31, 2017 for the Company's subsidiary, VOXX Germany. The rate of interest for these credit facilities is the three month Euribor plus 1.6% (1.27% at May 31, 2017). As of May 31, 2017, the amounts outstanding under these credit facilities, which are payable on demand, do not exceed their respective credit limits.
  
(d)          Schwaiger Mortgage
 
In January 2012, the Company's Schwaiger subsidiary purchased a building, entering into a mortgage note payable. The mortgage note bears interest at 3.75% and will be fully paid by December 2019.
 
(e)    Klipsch Notes

This balance represents a mortgage on a facility included in the assets acquired in connection with the Klipsch acquisition on March 1, 2011 and assumed by Voxx. The balance of this note will be fully paid by the end of Fiscal 2018.

(f)    Voxx Germany Mortgage

This balance represents a mortgage on the land and building housing Voxx Germany's headquarters in Pulheim, Germany, which was entered into in January 2013. The mortgage bears interest at 2.85%, payable in twenty-six quarterly installments through June 2019.

(g)    Hirschmann Line of Credit

In December 2014, Hirschmann entered into an agreement for a €8,000 working capital line of credit with a financial institution. The line of credit is payable on demand and is mutually cancelable. The rate of interest is the three month Euribor plus 2% (1.67% at May 31, 2017). Hirschmann and Voxx Germany are joint and severally liable for the line of credit balance, which is also guaranteed by VOXX International Corporation.

(16)     Other Income (Expense)

Other income (expense) is comprised of the following:

 
 
Three Months Ended
May 31,
 
 
 
2017
 
2016
 
Foreign currency loss
 
$
(832
)
 
$
(706
)
 
Interest income
 
18

 
25

 
Rental income
 
144

 
173

 
Miscellaneous
 
(350
)
 
(4
)
 
Total other, net
 
$
(1,020
)
 
$
(512
)
 


20

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


(17)    Foreign Currency

The Company has a subsidiary in Venezuela. Venezuela is currently experiencing significant political and civil unrest and economic instability and has implemented various foreign currency and price controls. The country has also experienced high rates of inflation over the last several years. The President of Venezuela has the authority to legislate certain areas by decree, which allows the government to nationalize certain industries or expropriate certain companies and property. These factors have had a negative impact on our business and 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 for Venezuela and continues to account for the subsidiary under this method.

From February 2013 through March 2016, the official exchange rate of the Venezuelan Bolivar Fuerte was 6.3 per U.S. dollar; however, since January 2014, the Venezuelan government has created multiple alternative exchange rates designated to be used for the purchase of goods and services deemed non-essential. In February 2015, the Venezuelan government introduced a new currency system, referred to as the Marginal Currency System, or SIMADI rate. This market-based exchange system consisted of a mechanism from which both businesses and individuals were allowed to purchase and sell foreign currency at the price set by the market. In March 2016, the Venezuelan government enacted further changes to its foreign currency exchange mechanisms, including a 59% devaluation of the official government exchange rate (re-named DIPRO) from 6.3 bolivars to 10.0 bolivars to the U.S. dollar.  Additionally, the SIMADI exchange rate was replaced by the DICOM, a new floating exchange rate for non-essential imports. The Venezuelan government reported that the DICOM exchange rate would be allowed to float to meet market needs. In May 2017, the Venezuelan government significantly devalued this currency further and as of May 31, 2017, the published DIPRO and DICOM rates offered were 10.0 and 2,010 bolivars to the U.S. dollar, respectively. As of May 31, 2017, the DICOM rate continues to be the appropriate rate to use for remeasuring its Venezuelan subsidiary’s financial statements. Total net currency exchange losses for Venezuela of $(84) were recorded for the three months ended May 31, 2017, as compared to $(69) for the three months ended May 31, 2016, and are included in Other Income (Expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Our investment in Venezuela mainly consists of $3,645 of properties that are currently being held for investment purposes. No impairments were recorded related to these properties during the three months ended May 31, 2017. The Company continues to monitor closely the continued economic instability, increasing inflation and currency restrictions imposed by the government and will continue to evaluate its local properties. Further devaluations or regulatory actions could impair the carrying value of these properties.

(18)     Lease Obligations

At May 31, 2017, the Company was obligated under non-cancelable operating leases for equipment, as well as warehouse and office facilities for minimum annual rental payments as follows:


21

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

 
Operating
Leases
2018
$
4,345

2019
1,491

2020
457

2021
245

2022
187

Thereafter
364

Total minimum lease payments
$
7,089


The Company has capital leases with a total lease liability of $3,685 at May 31, 2017. These leases have maturities through Fiscal 2022.

(19)     Capital Structure
 
The Company's capital structure is as follows:
 
 
 
 
 
Shares Authorized
 
Shares Outstanding
 
 
 
 
Security
 
Par
Value
 
May 31,
2017
 
February 28,
2017
 
May 31,
2017
 
February 28,
2017
 
Voting
Rights per
Share
 
Liquidation
Rights
Preferred Stock
 
$
50.00

 
50,000

 
50,000

 

 

 

 
$50 per share
Series Preferred Stock
 
$
0.01

 
1,500,000

 
1,500,000

 

 

 

 
 
Class A Common Stock
 
$
0.01

 
60,000,000

 
60,000,000

 
21,899,370

 
21,899,370

 
1
 
Ratably with Class B
Class B Common Stock
 
$
0.01

 
10,000,000

 
10,000,000

 
2,260,954

 
2,260,954

 
10
 
Ratably with Class A
Treasury Stock at cost
 
at cost

 
2,168,074

 
2,168,074

 
N/A
 
N/A
 
N/A
 
 


(20)    Variable Interest Entities

A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:

the power to direct the activities that most significantly impact the economic performance of the VIE; and

the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.

On September 1, 2015, Voxx acquired a majority voting interest in substantially all of the assets and certain specified liabilities of EyeLock, Inc. and EyeLock Corporation, a market leader of iris-based identity authentication solutions, through a newly-formed entity, EyeLock LLC. In connection with the acquisition, the Company entered into a Loan Agreement with EyeLock LLC. The terms of the Loan Agreement allowed EyeLock LLC to borrow up to $12,000, at an interest rate of 10%. During the second and third quarters of Fiscal 2017, as well as during the first quarter of Fiscal 2018, the Company issued three convertible promissory notes to EyeLock LLC, allowing EyeLock to borrow up to a

22

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

total of $15,000 in additional funds. The outstanding principal balance of these promissory notes are convertible at the sole option of Voxx into units of EyeLock LLC. The convertible promissory notes bear interest at 10% and can be used for working capital purposes related to new business opportunities. If Voxx chooses not to convert into equity, the outstanding loan principal will be repaid at a multiple ranging from 1.35 to 1.45 based on the repayment date. Amounts outstanding under the first loan agreement, as well as the convertible promissory note executed during the second quarter of Fiscal 2017 are due on September 1, 2017, while amounts outstanding under the convertible promissory note executed during the third quarter of Fiscal 2017 are due on November 1, 2017 and amounts outstanding under the convertible note executed during the first quarter of Fiscal 2018 are due on April 24, 2018. All three agreements include customary events of default and are collateralized by all of the property of Eyelock LLC.

We determined that we hold a variable interest in EyeLock LLC as a result of:

our majority voting interest and ownership of substantially all of the assets and certain liabilities of the entity; and

the loan agreements with EyeLock LLC, executed in conjunction with the acquisition, as well as during Fiscal 2017 and Fiscal 2018. The total outstanding balance of these loans as of May 31, 2017 was $25,345.
We concluded that we became the primary beneficiary of EyeLock LLC on September 1, 2015 in conjunction with the acquisition. This was the first date on which we had the power to direct the activities that most significantly impact the economic performance of the entity because we acquired a majority interest in substantially all of the assets and certain liabilities of EyeLock, Inc. and EyeLock Corporation on this date, as well as obtained a majority voting interest as a result of this transaction. Although we are considered to have control over EyeLock LLC under ASC 810, due to our majority ownership interest, the assets of EyeLock LLC can only be used to satisfy the obligations of EyeLock LLC. As a result of our majority ownership interest in the entity and our primary beneficiary conclusion, we consolidated EyeLock LLC within our consolidated financial statements beginning on September 1, 2015.

Assets and Liabilities of EyeLock LLC
The following table sets forth the carrying values of assets and liabilities of EyeLock LLC that were included on our Consolidated Balance Sheet as of May 31, 2017 and February 28, 2017:


23

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

 
 
May 31, 2017
 
February 28, 2017

Assets
 
(unaudited)
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
26

 
$
11

Accounts receivable, net
 
352

 
295

Inventory, net
 
181

 
135

Prepaid expenses and other current assets
 
207

 
189

Total current assets
 
766

 
630

Property, plant and equipment, net
 
251

 
276

Intangible assets, net
 
38,422

 
39,187

Other assets
 
90

 
96

Total assets
 
$
39,529

 
$
40,189

Liabilities and Partners' Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
439

 
$
710

Accrued expenses and other current liabilities
 
4,415

 
3,506

Total current liabilities
 
4,854

 
4,216

Long-term debt
 
25,345

 
22,098

Other long-term liabilities
 
1,200

 
1,200

Total liabilities
 
31,399

 
27,514

Commitments and contingencies
 
 
 
 
Partners' equity:
 
 
 
 
Capital
 
41,153

 
40,891

Retained earnings
 
(33,023
)
 
(28,216
)
Total partners' equity
 
8,130

 
12,675

Total liabilities and partners' equity
 
$
39,529

 
$
40,189



Revenue and Expenses of EyeLock LLC
The following table sets forth the revenues and expenses of EyeLock LLC that were included in our Consolidated Statements of Operations for the three months ended May 31, 2017 and 2016, respectively:


24

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

 
 
Three months ended
 
 
May 31, 2017
Net sales
 
$
64

Cost of sales
 
(22
)
Gross profit
 
86

Operating expenses:
 
 
Selling
 
593

General and administrative
 
1,658

Engineering and technical support
 
2,033

Total operating expenses
 
4,284

Operating loss
 
(4,198
)
Interest and bank charges
 
(609
)
Loss before income taxes
 
(4,807
)
Income tax expense
 

Net loss
 
$
(4,807
)
 
 
Three months ended
 
 
May 31, 2016
Net sales
 
$
47

Cost of sales
 
9

Gross profit
 
38

Operating expenses:
 
 
Selling
 
670

General and administrative
 
1,686

Engineering and technical support
 
2,056

Total operating expenses
 
4,412

Operating loss
 
(4,374
)
Interest and bank charges
 
(275
)
Loss before income taxes
 
(4,649
)
Income tax expense
 

Net loss

$
(4,649
)


(21)    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 applications, 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) compatible devices.
Our Consumer Accessories segment designs, markets and distributes remote controls; wireless and Bluetooth speakers; karaoke products; action cameras; iris identification and security related products; personal sound amplifiers; infant/

25

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

nursery products; and 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:

 
Automotive
 
Premium Audio
 
Consumer Accessories
 
Corporate/ Eliminations
 
Total
Three Months Ended May 31, 2017
 
 
 
 
 
 
 
 
 
Net sales
$
81,303

 
$
37,728

 
$
39,928

 
$
144

 
$
159,103

Equity in income of equity investees
1,803

 

 

 

 
1,803

Interest expense and bank charges
915

 
1,944

 
1,712

 
(2,658
)
 
1,913

Depreciation and amortization expense
1,675

 
883

 
1,164

 
723

 
4,445

Income (loss) before income taxes
3,981

 
(3,871
)
 
(7,125
)
 
(1,954
)
 
(8,969
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended May 31, 2016
 
 
 
 
 
 
 
 
 
Net sales
$
81,406

 
$
32,134

 
$
41,685

 
$
231

 
$
155,456

Equity in income of equity investees
1,808

 

 

 

 
1,808

Interest expense and bank charges
953

 
1,193

 
1,021

 
(1,472
)
 
1,695

Depreciation and amortization expense
1,861

 
865

 
1,155

 
668

 
4,549

Income (loss) before income taxes
1,466

 
(523
)
 
(5,549
)
 
(2,906
)
 
(7,512
)

(22)    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 does not believe that any of its current outstanding litigation matters will have a material adverse effect on the Company's financial statements, individually, or in the aggregate.
 
The products the Company sells are continually changing as a result of improved technology.  As a result, although the Company and its suppliers attempt to avoid infringing known proprietary rights, the Company may be subject to legal proceedings and claims for alleged infringement by patent, trademark or other intellectual property owners.  Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require the Company to either enter into royalty or license agreements that are not advantageous to the Company, or pay material amounts of damages.

(23)    New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenues from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements comprehensive information about the nature, amounts, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. ASU 2014-09 defines a five-step process to achieve this core principle and in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than are required under existing guidance, including identifying performance obligations in

26

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

the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations, among others.

Retrospective or modified retrospective application of the accounting standard is required. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” an amendment deferring the effective date of ASU 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016. The FASB issued additional amendments to the initial guidance in March 2016, April 2016, May 2016, December 2016 and February 2017 within ASU 2016-08, ASU 2016-10, ASU 2016-11 ASU 2016-12, ASU 2016-20 and ASU 2017-05. We expect to adopt the provisions of ASU 2014-09 effective March 1, 2018.

Preliminarily, the Company expects to use the modified retrospective method upon adoption of the standard. The Company has reviewed selected customer contracts representing certain of our revenue streams for the current fiscal year. The assessment of the impact on revenue and expenses based on these reviews to determine the impact to the Company's results of operations, financial position and cash flows as a result of this guidance is ongoing. The Company will continue to review customer contracts during Fiscal 2018. Any preliminary assessments are subject to change.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory.” The new standard amends the guidelines for the measurement of inventory from lower of cost or market to the lower of cost and net realizable value (NRV). NRV is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Under existing standards, inventory is measured at lower of cost or market, which requires the consideration of replacement cost, NRV and NRV less an amount that approximates a normal profit margin. This ASU eliminates the requirement to determine and consider replacement cost or NRV less an approximately normal profit margin for inventory measurement. This standard was effective for the quarter ended May 31, 2017 and did not have a material impact on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities," which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company is currently evaluating the impact, if any, the adoption of ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This amendment will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.

In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)." ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 was effective for the quarter ended May 31, 2017 and did not have a material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, "Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting," which eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of

27

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

influence by the investor. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. ASU 2016-07 was effective for the quarter ended May 31, 2017 and did not have a material effect on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments," which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact of the future adoption of this standard on its consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control.” This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendments in this ASU were effective for the quarter ended May 31, 2017 and did not have a material impact on the consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230)" to reduce diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. The revised guidance requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be applied on a retrospective basis beginning with the earliest period presented. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business," with the objective to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The amendments in ASU 2017-01 provide a screen to determine when a set of

28

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

assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen is expected to reduce the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (i) require that to be considered a business, a set of assets and liabilities acquired must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output; and (ii) remove the evaluation of whether a market participant could replace missing elements. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date of ASU 2017-01, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company is currently assessing the impact of the adoption of this pronouncement on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates today's requirement to calculate goodwill impairment using Step 2, which calculates an impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual or any interim goodwill impairments tests in fiscal years beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The new standard requires that an employer disaggregate the service cost component of net benefit cost. Also, these amendments provide guidance on how to present the service cost component and the other components of net benefit costs in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The guidance is effective for fiscal years beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)-Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for fiscal years beginning after December 15, 2018 and is not expected to have a significant impact on our financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements. The standard provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The new standard is effective for annual periods beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

(24)    Subsequent Event
    
On June 25, 2017, the Company entered into a definitive agreement to sell Hirschmann Car Communication GmbH and its worldwide subsidiaries (collectively, “Hirschmann”), to a subsidiary of TE Connectivity Ltd. Under the terms of the Stock Purchase Agreement (the “Agreement”), TE Connectivity (“TE”) will acquire all of the outstanding stock of Hirschmann for a total consideration of €148,500 or approximately $166,000, subject to certain contingencies and adjustments, less related transaction fees and expenses. Voxx International (Germany) GmbH, the Company's German wholly-owned subsidiary, is the selling entity in this transaction.


29

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

The Agreement contains representations, warranties and covenants that are customary for a transaction of this size and nature. The completion of the acquisition is subject to customary closing conditions and regulatory approvals. The Hirschmann subsidiary group, which is included within the Automotive segment, will be presented as discontinued operations in accordance with ASC 205-20 for the Company's second quarter ending August 31, 2017.


30



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, 2017 compared to the three months ended May 31, 2016. Next, we present EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per common share for the three months ended May 31, 2017 compared to the three months ended May 31, 2016 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 seventeen wholly-owned subsidiaries: Audiovox Atlanta Corp., VOXX Electronics Corporation, VOXX Accessories Corp., Voxx German Holdings GmbH ("Voxx Germany"), Audiovox Venezuela, C.A., Audiovox Canada Limited, Voxx Hong Kong Ltd., Audiovox International Corp., Audiovox Mexico, S. de R.L. de C.V. ("Voxx Mexico"), Code Systems, Inc., Oehlbach Kabel GmbH ("Oehlbach"), Schwaiger GmbH ("Schwaiger"), Invision Automotive Systems, Inc. ("Invision"), Klipsch Holding LLC ("Klipsch"), Car Communication Holding GmbH ("Hirschmann"), Omega Research and Development, LLC ("Omega") and Audiovox Websales LLC, as well as a majority owned subsidiary, EyeLock LLC ("EyeLock"). We market our products under the Audiovox® brand name and other brand names and licensed brands, such as 808®, AR for Her, Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energy®, Heco®, Hirschmann Car Communication®, Incaar, Invision®, Jamo®, Jensen®, Klipsch®, Mac Audio, Magnat®, Mirage®, myris®, Oehlbach®, Omega®, Phase Linear®, Prestige®, Pursuit®, RCA®, RCA Accessories, Schwaiger®, Recoton®, Terk® and VoxxHirschmann, as well as private labels through a large domestic and international distribution network.  We also function as an OEM ("Original Equipment Manufacturer") supplier to several customers, as well as market a number of products under exclusive distribution agreements, such as SiriusXM satellite radio products, 360Fly® Action Cameras and Singtrix®, the next generation in karaoke.  

On June 25, 2017, the Company entered into a definitive agreement to sell Hirschmann Car Communication GmbH and its subsidiaries. See Note 24 for more details of this subsequent event.
 
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 applications, collision avoidance systems and location-based services. The Premium Audio segment designs, manufactures, distributes and markets home theater systems, high-end loudspeakers, outdoor speakers, iPod/computer speakers, business music systems, cinema speakers, flat panel speakers, Bluetooth speakers, soundbars, headphones and DLNA (Digital Living Network Alliance) compatible devices. The Consumer Accessories segment designs, markets and distributes remote controls; wireless and Bluetooth speakers; karaoke products; action cameras, iris identification and security related products; personal sound amplifiers; infant/nursery products; and A/V connectivity, portable/home charging, reception and digital consumer products. See Note 21 to the Company's Consolidated Financial Statements for segment information.

31




Products included in these segments are as follows:

Automotive products include:

mobile multi-media video products, including in-dash, overhead and headrest systems,
autosound products including radios and amplifiers,
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,
location based services, and
power lift gates.

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,
wireless and Bluetooth headphones,
soundbars and sound bases, and
DLNA (Digital Living Network Alliance) compatible devices.
 
Consumer Accessories products include:

High-Definition Television ("HDTV") antennas,
Wireless Fidelity ("WiFi") antennas,
High-Definition Multimedia Interface ("HDMI") accessories,
security related products,
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,
action cameras,
karaoke products,
infant/nursery products,
power supply systems and charging products,
electronic equipment cleaning products,
personal sound amplifiers,
set-top boxes,
home and portable stereos, and
digital multi-media products, such as personal video recorders and MP3 products.


32



We believe our segments have expanding market opportunities with certain levels of volatility related to domestic and international markets, new car sales, increased competition by manufacturers, private labels, technological advancements, discretionary consumer spending and general economic conditions.  Also, all of our products are subject to price fluctuations which could affect the carrying value of inventories and gross margins in the future.
 
Our objective is to continue to grow our business by acquiring new brands, embracing new technologies, expanding product development and applying this to a continued stream of new products that should increase gross margins and improve operating income.  In addition, it is our intention to continue to acquire synergistic companies that would allow us to leverage our overhead, penetrate new markets and expand existing product categories through our business channels. Notwithstanding the above, if the appropriate opportunity arises, the Company will explore the potential divestiture of a product line or business.

Acquisitions

On April 6, 2017, Voxx acquired the inventory and all intellectual property, including patents and trademarks, of Rosen Electronics LLC. As consideration for the Rosen asset purchase, the Company paid $1,814. In addition, the Company agreed to pay a 2% royalty related to future net sales of Rosen products for three years. The purpose of this acquisition was to increase the Company's market share and strengthen its intellectual property related to the rear seat entertainment market. Details of the tangible and intangible assets acquired are outlined in Note 2 of this report.

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, 2017. Since February 28, 2017, 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 (loss), which present the results of our operations for the three months ended May 31, 2017 and 2016.  

The following tables set forth, for the periods indicated, certain statements of operations data for the three months ended May 31, 2017 and 2016.

Net Sales

 
 
May 31,
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Three Months Ended:
 
 
 
 
 
 
 
 
Automotive
 
$
81,303

 
$
81,406

 
$
(103
)
 
(0.1
)%
Premium Audio
 
37,728

 
32,134

 
5,594

 
17.4

Consumer Accessories
 
39,928

 
41,685

 
(1,757
)
 
(4.2
)
Corporate
 
144

 
231

 
(87
)
 
(37.7
)
Total net sales
 
$
159,103

 
$
155,456

 
$
3,647

 
2.3
 %

Automotive sales represented 51.1% of the net sales for the three months ended May 31, 2017, compared to 52.4% in the prior year period. The Company experienced a decrease in automotive sales during the three months ended May 31, 2017 primarily due to the continued decline in satellite radio sales, as a result of more vehicles being built equipped with these products as standard vehicle options. Additionally, the Company had a decrease in sales related to its international OEM manufacturing line as a result of the completion of a program with Bentley during the first quarter of Fiscal 2018, with final spare parts shipment during the quarter. As an offset to these decreases, the Company saw an increase in tuner and antenna sales internationally during the three months ended May 31, 2017, as well as an increase in sales from its domestic OEM manufacturing lines as a result of additional

33



vehicle models added to existing programs with Subaru, as well as due to GM offering certain of the Company's products as factory options during the first quarter of Fiscal 2018. Additionally, as a result of the Company's acquisition of Rosen Electronics LLC during the first quarter of Fiscal 2018, the Company saw an increase in aftermarket overhead and headrest DVD player sales for the three months ended May 31, 2017, as compared to the prior year.

Premium Audio sales represented 23.7% of our net sales for the three months ended May 31, 2017, compared to 20.7% in the prior year period. Sales have increased in this segment primarily as a result of the introduction of several new products, including various lines of HD wireless desktop and bookshelf size speakers, wireless soundbars and multi-room streaming audio systems. These products were all primarily launched during Fiscal 2017 and have been continuing to experience strong sales for the segment for the three months ended May 31, 2017. The Company also offered several close out promotions on certain soundbar models that are being phased out to make room for new product lines and resulted in further sales increases as a result of these promotions. The Company also experienced an increase in sales of several of its existing lines of home entertainment speakers due to successful marketing and promotional activity. These increases were partially offset by decreases in commercial speaker sales during the three months ended May 31, 2017 primarily as a result of the delay of certain projects and programs.

Consumer Accessory sales represented 25.1% of our net sales for the three months ended May 31, 2017, compared to 26.8% in the comparable prior year period. The Company experienced a decrease in consumer accessory sales due to factors including a decline in sales of the 360Fly action camera product, as certain of the Company's retailer vendors did not renew orders of the product during the first quarter. There was also a decrease in sales of hook-up products; remotes; clock radios; docking stations; reception products, such as antennas; and power products, such as cables and surge protectors, due to competition, changes in demand and changes in technology during the three months ended May 31, 2017. As an offset to these declines, the Company experienced an increase in sales of wireless speakers during the three months ended May 31, 2017, as compared to the prior year. While the sales of wireless speakers in this segment have remained strong since their initial launch, the Company had experienced declines during Fiscal 2017 due to the leveling out from load in shipments to fill customer inventory pipelines in the previous year. The Company is now beginning to see increases in sales of its wireless speaker lines again due to new orders and placements at retailers, as well as due to the launch of new product lines. The Company also experienced increases in sales during the three months ended May 31, 2017 related to its new Project Nursery product line, which includes baby monitors and which launched in the second quarter of Fiscal 2017. Additionally, during the three months ended May 31, 2017, the Company experienced an increase in international sales, primarily due to the roll out of an upgrade to the digital broadcasting platform in Europe during Fiscal 2017, which has required consumers to purchase new equipment, such as set top boxes.

Gross Profit and Gross Margin Percentage

 
 
May 31,
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Three Months Ended:
 
 
 
 
 
 
 
 
Automotive
 
$
23,912

 
$
24,415

 
$
(503
)
 
(2.1
)%
 
 
29.4
%
 
30.0
%
 
 

 
 

Premium Audio
 
10,175

 
11,133

 
(958
)
 
(8.6
)
 
 
27.0
%
 
34.6
%
 
 
 
 
Consumer Accessories
 
9,503

 
10,292

 
(789
)
 
(7.7
)
 
 
23.8
%
 
24.7
%
 
 
 
 
Corporate
 
149

 
261

 
(112
)
 
(42.9
)
 
 
$
43,739

 
$
46,101

 
$
(2,362