VOXX INTERNATIONAL CORPORATION Forward-Looking Statements
Certain information in this Quarterly Report on Form 10-Q would constitute
forward-looking statements, including, but not limited to, information relating
to the future performance and financial condition of the Company, the impact of
the COVID-19 pandemic on our results of operations, 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 and could be exacerbated by the COVID-19 pandemic
and any worsening of the global business and economic environment as a result.
We begin Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") with an overview of the business. This is followed by a
discussion of the Critical Accounting Policies and Estimates that we believe are
important to understanding the assumptions and judgments incorporated in our
reported financial results. In the next section, we discuss our results of
operations for the three and nine months ended November 30, 2020 compared to the
three and nine months ended November 30, 2019 . Next, we present EBITDA, Adjusted
EBITDA, and Diluted Adjusted EBITDA per common share attributable to Voxx for
the three and nine months ended November 30, 2020 compared to the three and nine
months ended November 30, 2019 , in order to provide a useful and appropriate
supplemental measure of our performance. We then provide an analysis of changes
in our balance sheets and cash flows and discuss our financial commitments in
the sections entitled "Liquidity and Capital Resources." We conclude this MD&A
with a discussion of "Related Party Transactions" and "Recent Accounting
Pronouncements."
Unless specifically indicated otherwise, all amounts presented in our MD&A below are in thousands, except share and per share data.
Business Overview
VOXX International Corporation ("Voxx," "We," "Our," "Us" or the "Company") is a leading international manufacturer and distributor operating in theAutomotive Electronics , Consumer Electronics, and Biometrics industries. The Company has widely diversified interests, with more than 30 global brands that it has acquired and grown throughout the years, achieving a powerful international corporate image, and creating a vehicle for each of these respective brands to emerge with its own identity. We conduct our business through nineteen wholly-owned subsidiaries:Audiovox Atlanta Corp. ,VOXX Electronics Corporation ,VOXX Accessories Corp. ,VOXX German Holdings GmbH ("Voxx Germany"),Audiovox Canada Limited ,Voxx Hong Kong Ltd. ,Audiovox International Corp. , AudiovoxMexico ,S. de R.L. de C.V. ("Voxx Mexico"),Code Systems, Inc. ,Oehlbach Kabel GmbH ("Oehlbach"),Schwaiger GmbH ("Schwaiger"),Invision Automotive Systems, Inc. ("Invision"),Premium Audio Company LLC ("Klipsch"),Omega Research and Development, LLC ("Omega"),Voxx Automotive Corp. ,Audiovox Websales LLC ,VSM-Rostra LLC ,VOXX DEI LLC , andVOXX DEI Canada, Ltd. , as well as a majority owned subsidiary,EyeLock LLC ("EyeLock"). We market our products under the Audiovox® brand name and other brand names and licensed brands, such as 808®, Acoustic Research®, Advent®, Avital®, Car Link®, Chapman®, Clifford®, Code-Alarm®, Crimestopper™, Directed®, Discwasher®, Energy®, Heco®, Invision®, Jamo®, Klipsch®, Mac Audio™, Magnat®, Mirage®, myris®, Oehlbach®, Omega®, Prestige®, Project Nursery®, Python®, RCA®, RCA Accessories, Rosen®, Rostra®, Schwaiger®, Smart Start®, Terk®,Vehicle Safety Automotive , Viper® andVoxx Automotive , as well as private labels through a large domestic and international distribution network. We also function as an OEM ("Original Equipment Manufacturer") supplier to several customers, as well as market a number of products under exclusive distribution agreements, such asSiriusXM satellite radio products andOnkyo & Pioneer Corp. products inNorth America .
COVID-19
DuringMarch 2020 , a global pandemic was declared by theWorld Health Organization and a National Emergency was declared by the President ofthe United States related to the rapidly growing outbreak of COVID-19. The pandemic has significantly impacted economic conditions inthe United States , as federal, state, and local governments have reacted to the public health crisis, creating significant uncertainties inthe United States , as well as the global economy. In the interest of public health and safety,U.S. jurisdictions (national, state, and local) where our primary operations and those of many of our customers are located required mandatory business closures, capacity limitations, or other restrictions for those permitted to continue to operate or allowed to reopen since the initial shut-downs inMarch 2020 . As of the date of this filing, all of our operating locations are open, with certain locations operating at reduced capacity. As a result of these developments, the Company's business has been impacted for the three and nine months endedNovember 30, 2020 . Although the Company's revenues have increased for the three and nine months endedNovember 30, 2020 , as compared to the prior year periods, sales within certain product lines across the Company's segments have been negatively affected. The situation is still rapidly changing and additional impacts to the business may arise that we are not 32
-------------------------------------------------------------------------------- aware of currently, which could have an adverse impact on revenues, results of operations, and cash flows for the 2021 fiscal year. We cannot predict whether, when, or the manner in which the conditions surrounding COVID-19 will change, including the timing of lifting any restrictions and/or any subsequent re-impositions. Due to the evolving situation, future results of the Company could be impacted in ways we are not able to predict today, including, but not limited to, non-cash write-downs and impairments; foreign currency fluctuations; potential adjustments to the carrying value of inventory; and the delayed collections of, or inability to collect accounts receivables. DuringApril 2020 , as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, the Company borrowed$20,000 from its Credit Facility in theU.S. This$20,000 precautionary borrowing was repaid inNovember 2020 . As of the date of this report, the Company continues to focus on cash flow and anticipates having sufficient resources to operate for the coming twelve-month period. In addition, the Company implemented a number of other measures in Fiscal 2021 to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing approximately 20% of its employees globally; (ii) implementing temporary salary and hour reductions for both management and non-management level employees Company-wide, including its executive officers, and the Company's board of directors; (iii) executing substantial reductions in expenses, service provider costs, occupancy costs, capital expenditures and overall costs; and (iv) working globally with management teams to actively explore and identify all eligible government and other initiatives available to businesses or employees impacted by the COVID-19 pandemic. As of our filing date, less than 1% of our employees worldwide remain on furlough. The above-referenced temporary salary and hour reductions were eliminated by the Company during the three months endedNovember 30, 2020 .
Reportable Segments
The Company operates in three reportable segments based on our products and internal organizational structure. The operating segments consist ofAutomotive Electronics , Consumer Electronics, and Biometrics. See Note 23 to the Company's Consolidated Financial Statements for segment information.
Products included in these segments are as follows:
? mobile multi-media video products, including in-dash, overhead and headrest
systems,
? automotive security, vehicle access, and remote start systems,
? autosound products including radios and amplifiers,
? satellite radios, including plug and play models and direct connect models,
? smart phone telematics applications,
? mobile interface modules,
? automotive power accessories,
? rear observation and collision avoidance systems,
? driver distraction products,
? power lift gates,
? turn signal switches,
? automotive lighting products,
? automotive sensing and camera systems,
? USB ports,
? cruise control systems, and
? heated seats.
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Consumer Electronics products include:
? premium loudspeakers, ? architectural speakers, ? commercial speakers, ? outdoor speakers, ? flat panel speakers, ? wireless and Bluetooth speakers, ? home theater systems, ? business music systems, ? streaming music systems, ? on-ear and in-ear headphones, ? wired and wireless Bluetooth headphones and ear buds, ? soundbars and sound bases, ? DLNA (Digital Living Network Alliance ) compatible devices, ? High-Definition Television ("HDTV") antennas, ? Wireless Fidelity ("WiFi") antennas, ? High-Definition Multimedia Interface ("HDMI") accessories, ? home electronic accessories such as cabling, power cords, and other connectivity products, ? performance enhancing electronics, ? TV universal remotes, ? flat panel TV mounting systems, ? karaoke products, ? infant/nursery products, ? activity tracking bands, ? healthcare wearables, ? power supply systems and charging products, ? electronic equipment cleaning products, ? personal sound amplifiers, ? set-top boxes, ? home and portable stereos, and ? digital multi-media products, such as personal video recorders and MP3 products. Biometrics products include:
? iris identification products, and
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? biometric security related products. 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. All of our products are subject to price fluctuations which could affect the carrying value of inventories and gross margins in the future. Macroeconomic factors, such as increases in the unemployment rate, have been pressured as a result of the COVID-19 stay at home orders and have created a challenging demand environment in some of our markets, the duration and severity of which we are still unable to predict. Our objective is to continue to grow our business by acquiring new brands, embracing new technologies, expanding product development, and applying this to a continued stream of new products that should increase gross margins and improve operating income. In addition, it is our intention to continue to acquire synergistic companies that would allow us to leverage our overhead, penetrate new markets and expand existing product categories through our business channels. Notwithstanding the above, if the appropriate opportunity arises, the Company will explore the potential divestiture of a product line or business. Acquisitions and Dispositions OnJuly 1, 2020 , the Company completed the acquisition of certain assets and liabilities, which comprise the aftermarket vehicle remote start and security systems and connected car solutions (telematics) business fromDirected LLC andDirected Electronics Canada Inc. (collectively, withDirected LLC , "Directed") (see Note 2).
On
Critical Accounting Policies and Estimates
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; accrued sales incentives; expected credit losses on accounts receivable; inventory valuation; valuation of long-lived assets; valuation and impairment assessment of goodwill, trademarks, and other intangible assets; warranties; stock-based compensation; recoverability of deferred tax assets; and the reserve for uncertain tax positions at the date of the consolidated financial statements. A summary of the Company's critical accounting policies is identified in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the fiscal year endedFebruary 29, 2020 . During the fourth quarter of the Company's 2020 fiscal year, as well as subsequent toFebruary 29, 2020 , there have been significant changes to the global economic situation as a consequence of the COVID-19 pandemic. It is possible that this could cause changes to estimates in the future as a result of the financial circumstances of the markets in which the Company operates, the price of the Company's publicly traded equity in comparison to the Company's carrying value, and the health of the global economy. Such changes to estimates could potentially result in impacts that would be material to the consolidated financial statements, particularly with respect to the fair value of the Company's reporting units in relation to potential goodwill impairment and the fair value of long-lived assets in relation to potential impairment. SinceFebruary 29, 2020 , there have been no changes in our critical accounting policies, with the exception of the Company's adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," onMarch 1, 2020 .
Results of Operations
As you read this discussion and analysis, refer to the accompanying Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss), which present the results of our operations for the three and nine months endedNovember 30, 2020 and 2019.
The following tables set forth, for the periods indicated, certain statements of
operations data for the three and nine months ended
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--------------------------------------------------------------------------------Net Sales November 30, 2020 2019 $ Change % Change Three Months Ended Automotive Electronics$ 61,488 $ 29,985 $ 31,503 105.1 % Consumer Electronics 139,039 79,914 59,125 74.0 % Biometrics 343 138 205 148.6 % Corporate 195 75 120 160.0 % Total net sales$ 201,065 $ 110,112 $ 90,953 82.6 % Nine Months Ended Automotive Electronics$ 111,397 $ 86,472 $ 24,925 28.8 % Consumer Electronics 288,545 206,601 81,944 39.7 % Biometrics 703 398 305 76.6 % Corporate 439 341 98 28.7 % Total net sales$ 401,084 $ 293,812 $ 107,272 36.5 % Automotive sales represented 30.6% and 27.8% of the net sales for the three and nine months endedNovember 30, 2020 , respectively, compared to 27.2% and 29.4% in the respective prior year periods. Sales in this segment increased during both the three and nine months endedNovember 30, 2020 , as compared to the prior year periods. The primary driver of sales increases in this segment for both periods were sales of OEM and aftermarket products related to the Company's VSM and DEI subsidiaries, established in connection with the Company's acquisitions in the fourth quarter of Fiscal 2020 and the second quarter of Fiscal 2021, respectively. Sales from these two new subsidiaries comprised approximately 49% and 41% of the segment's sales for the three and nine months endedNovember 30, 2020 , respectively, neither of which was present in the prior year periods. The Company also saw an increase in sales of its aftermarket security and remote start products during the three and nine months endedNovember 30, 2020 , respectively, partly due to a boost in demand following business re-openings after the COVID-19 shut-downs, as purchases could not be made by customers during the shut-downs. During the three months endedNovember 30, 2020 , there was an increase in sales of the Company's OEM rear seat entertainment products due to a pick-up in sales following the shut-downs, as well as due to the successful launch of a new program with one of its customers inOctober 2020 . Offsetting these increases, the segment experienced sales declines in certain product lines during the three and nine months endedNovember 30, 2020 related to the COVID-19 pandemic, as well as certain other factors. The Company's OEM remote start sales decreased during both the three and nine months endedNovember 30, 2020 as a result of an increase in the use of Tier 1 factory installed remote start products by many automotive manufacturers (which the Company does not sell) over accessory level remote starts. This has negatively impacted the Company's sales to certain of its OEM remote start customers. Sales of aftermarket headrest products also decreased during the three and nine months endedNovember 30, 2020 due to the COVID-19 related shut-downs of car dealerships and other brick and mortar businesses during the first quarter of the year, followed by stock-outages of several products in the third quarter, which continued to negatively impact sales. For the nine months endedNovember 30, 2020 , the Company experienced a decrease in sales of OEM rear seat entertainment products due to several automotive manufacturing plant shut-downs beginning inMarch 2020 as a result of COVID-19, including Ford,GM ,FCA , and Subaru. Many plants began to gradually re-open during the second quarter of our fiscal year, and while some of the programs have begun to ramp up production again, others have yet to return to pre-COVID levels, thus negatively impacting sales for the year-to-date period. Additionally, OEM rear seat entertainment sales were negatively impacted during the nine months endedNovember 30, 2020 by the cancellation of a program with one of the Company's larger customers that had been in production during the prior year period. Consumer Electronics sales represented 69.2% and 71.9% of our net sales for the three and nine months endedNovember 30, 2020 , respectively, compared to 72.6% and 70.3% in the comparable prior year periods. Sales increased for the three and nine months endedNovember 30, 2020 as compared to the prior year due primarily to the positive sales and promotion of several of the Company's premium audio products. During both the three and nine months endedNovember 30, 2020 , the Company experienced greater consumer demand and achieved market share growth in its premium home theater and subwoofer categories, and launched a new premium wireless computer speaker system, which has contributed positively to sales in both periods and was not available in the prior fiscal year. The Company also experienced increased sales of premium mobility products due to the discounting of older wireless ear buds in preparation for the launch of new product. Sales of hookup products increased during the three and nine months endedNovember 30, 2020 due to the large number of individuals working from home as a result of the COVID-19 pandemic, which caused an increase in demand for cabling and other hookup related products. WithinEurope , the Company experienced stronger online sales during the three and nine months endedNovember 30, 2020 due to many consumers shopping from home during the pandemic, as well as an increase in sales in its Do It Yourself ("DIY") line of products, a new sales channel of discount retailers, and a shift in focus of premium audio products 36
-------------------------------------------------------------------------------- inEurope from low margin to traditional home theater products, which has contributed positively to sales. Additionally, during the three and nine months endedNovember 30, 2020 , the Company's newly formed subsidiary, 11Trading Company LLC , began sellingOnkyo and Pioneer products through new distribution agreements. Offsetting these sales increases were decreases in sales related to the COVID-19 pandemic, as well as other factors. The Company experienced decreases in sales of certain consumer electronic and accessory products, such as reception products and wireless speakers, primarily due to nationwide brick and mortar business closures related to the COVID-19 pandemic, delayed customer orders due to the pandemic, as well as due to the Company's continuing rationalization of SKU's for certain of these products, with the goal of limiting sales of lower margin products. For the three and nine months endedNovember 30, 2020 , there was also a decrease in sales of the Company's premium commercial speaker products due to the shut-down of cinemas during the pandemic. Additionally, one of the Company's healthcare programs ended inSeptember 2020 , resulting in a decrease in sales of its motion products for both the three and nine months endedNovember 30, 2020 . For the nine months endedNovember 30, 2020 , sales of the Company's smart home products decreased, as the Company began exiting this category during Fiscal 2020. Biometrics sales represented 0.2% of our net sales for both the three and nine months endedNovember 30, 2020 , compared to 0.1% in both of the respective prior year periods. Sales during the three and nine months endedNovember 30, 2020 increased compared to the prior year periods due to an increase in sales of its EXT outdoor perimeter access product, and the updated version of its Nano NXT perimeter access product, both of which launched in the second quarter of Fiscal 2020. Additionally, the Company began selling its NIXT product during the three months endedNovember 30, 2020 , which can be optionally fitted with iTEMP, a product that can take an individual's temperature before allowing iris access.
Gross Profit and Gross Margin Percentage
November 30,
2020 2019 $ Change % Change
Three Months Ended
Automotive Electronics $ 15,777 $ 6,023 $ 9,754 161.9 %
25.7 % 20.1 %
Consumer Electronics 42,109 25,627 16,482 64.3 %
30.3 % 32.1 %
Biometrics 50 (39 ) 89 228.2 %
14.6 % (28.3 )%
Corporate 192 (147 ) 339 230.6 %
$ 58,128 $ 31,464 $ 26,664 84.7 %
28.9 % 28.6 %
Nine Months Ended
Automotive Electronics $ 25,555 $ 18,228 $ 7,327 40.2 %
22.9 % 21.1 %
Consumer Electronics 90,166 63,040 27,126 43.0 %
31.2 % 30.5 %
Biometrics 28 13 15 115.4 %
4.0 % 3.3 %
Corporate 430 (39 ) 469 1202.6 %
$ 116,179 $ 81,242 $ 34,937 43.0 %
29.0 % 27.7 %
Gross margin percentages for the Company have increased 30 and 130 basis points
for the three and nine months ended November 30, 2020 , respectively, as compared
to the three and nine months ended November 30, 2019 .
Gross margin percentages in the Automotive Electronics segment increased 560 and
180 basis points for the three and nine months ended November 30, 2020 ,
respectively, as compared to the prior year periods. The primary driver of the
margin increases in this segment has been sales of OEM and aftermarket products
related to the Company's VSM and DEI subsidiaries, whose products have higher
profit margins than those typically achieved by the segment, and whose sales
were not present in the prior year periods. The increase in sales of higher
margin aftermarket remote start and security products also contributed
positively to the segment's margins during the three and nine months ended
November 30, 2020 , and for the three months ended November 30, 2020 , an increase
in sales of the Company's OEM rear seat entertainment products positively
impacted margins for the segment. Offsetting these positive impacts, the decline
in sales of higher margin OEM security and remote start products during the
three and nine months ended November 30, 2020 due to the shift in demand from
accessory level remote starts to production level, factory installed remote
starts caused a decline in margins in both periods. In addition,
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there was a decline in aftermarket headrest sales during the three and nine
months ended
Gross margin percentages in the Consumer Electronics segment decreased 180 basis points for the three months endedNovember 30, 2020 , but increased 70 basis points for the nine months endedNovember 30, 2020 as compared to the prior year periods. Margin declines during the three and nine months endedNovember 30, 2020 were primarily driven by the Company's newest line of premium wireless computer speakers, which have contributed positively to sales, but have been sold at lower margins than those typically associated with the Company's premium wireless speaker products, particularly during the three months endedNovember 30, 2020 as a result of holiday promotions. The Company's premium headphone margins have also been negatively impacted in the three and nine months endedNovember 30, 2020 due to close out sales of certain older products at lower margins in preparation for the launch of its newest line of wireless earbuds. Additionally, although sales inEurope have increased in the three and nine months endedNovember 30, 2020 , the increase in sales generated from a new sales channel of discount retail customers has generated lower margins and had a negative impact on both periods. As an offset to these negative impacts, the segment has experienced increases in margins during both the three and nine months endedNovember 30, 2020 due to factors including the increased sales of the Company's high margin premium home theater speaker products, as well as an increase in sales of hookup products in both periods. InEurope , a shift in focus of premium audio products from low margin to traditional home theater products, as well as less discounting of product, contributed positively to both sales and overall margins related to this product line. Additionally, while the Company experienced decreases in sales of certain product lines during the three and nine months endedNovember 30, 2020 , such as reception products and remotes, the margins earned on these products improved during both periods as compared to the prior year, due to the movement of production out ofChina . Finally, sales within the Company's newly formed subsidiary, 11Trading Company LLC , which began sellingOnkyo and Pioneer products through new distribution agreements during the three and nine months endedNovember 30, 2020 , has contributed positively to margins in both periods. Gross margin percentages in the Biometrics segment improved in both the three and nine months endedNovember 30, 2020 as compared to the respective prior year periods. The increase in margins for the three and nine months endedNovember 30, 2020 was primarily a result of prior year events that negatively impacted the segment's margins in Fiscal 2020. Certain tooling and defective repair costs incurred in the three and nine months endedNovember 30, 2019 , as well as the provision of beta samples to certain customers at no cost during the prior year periods, negatively impacted margins in the prior fiscal year. A large sale made at a loss during the nine months endedNovember 30, 2019 also caused lower margins in the prior year to date period. In the current year, the Company provided more onsite and remote support to customers during the three and nine months endedNovember 30, 2020 , which generates higher margins for the segment. Offsetting these positive margin impacts for the three and nine months endedNovember 30, 2020 has been the reduction in pricing on certain products, which has helped to drive higher sales in Fiscal 2021, but has resulted in lower margins for the segment. Additionally, the release of inventory reserves in the comparable prior year periods had a positive impact on the segment's gross margin for the prior year, thus negatively impacting the current year margin comparisons. Operating Expenses November 30, 2020 2019 $ Change % Change Three Months Ended Operating expenses: Selling$ 12,761 $ 9,580 $ 3,181 33.2 % General and administrative 21,128 16,689 4,439 26.6 % Engineering and technical support 5,676 5,059 617 12.2 % Total operating expenses$ 39,565 $ 31,328 $ 8,237 26.3 % Nine Months Ended Operating expenses: Selling$ 30,190 $ 28,162 $ 2,028 7.2 % General and administrative 51,668 51,896 (228 ) (0.4 )% Engineering and technical support 14,942 15,901 (959 ) (6.0 )% Total operating expenses$ 96,800 $ 95,959 $ 841 0.9 %
Total operating expenses have increased for the three and nine months ended
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For both the three and nine months ended November 30, 2020 , the Company
experienced a net increase in selling expenses. Increases in selling expenses
were primarily attributable to increases in commission expense during both the
three and nine months ended November 30, 2020 as a result of higher sales.
Salary expense also increased for the three and nine months ended November 30,
2020 due to the additional headcount created by acquisitions resulting in the
establishment of the VSM and DEI subsidiaries in the fourth quarter of Fiscal
2020 and the second quarter of Fiscal 2021, respectively, as well as additional
hires related to the Company's distribution agreements for Onkyo and Pioneer
products. While advertising expense decreased for the nine months ended
November 30, 2020 due to the COVID-19 pandemic closure and phased re-opening of
many brick and mortar stores during the year, web advertising expenses increased
in both periods due to an increase in online traffic, with many consumers
working and shopping from home during the mandatory quarantines and business
shut-downs throughout the country. Offsetting these increases in selling
expenses for the three and nine months ended November 30, 2020 , were decreases
due to factors related to the COVID-19 pandemic, which resulted in the temporary
shut-down of many brick and mortar stores and mandatory quarantine orders during
the first quarter of our Fiscal 2021 year, with phased re-openings taking place
beginning in the second quarter. Company-wide furloughs and pay reductions at
all levels, as well as the elimination of all non-essential travel, resulted in
a decrease in salary and travel and entertainment expenses for the nine months
ended November 30, 2020 . Pay reductions and most of the Company's furloughs
ended in the third quarter of Fiscal 2021; however, non-essential travel was
still limited through November 30, 2020 , affecting both periods. Additionally,
trade show expenses decreased for both the three and nine months ended
November 30, 2020 as a result of the cancellation of all events year-to-date due
to COVID-19.
For the three months ended November 30, 2020 , there was a net increase in
general and administrative expenses, while there was a net decrease during the
nine months ended November 30, 2020 as compared to the respective prior year
periods. Increases to general and administrative expenses during both the three
and nine months ended November 30, 2020 were due primarily to salary expense and
professional fees. Increases in salary expense were due to higher bonus accruals
for the three and nine months ended November 30, 2020 as a result of the
positive performance of the Company. Professional fees were higher for both
periods as the result of ongoing acquisition-related services provided in
connection with the Company's new DEI and VSM subsidiaries, as well as due to a
stock grant awarded to the Company's non-employee directors during the third
quarter of Fiscal 2021. During the nine months ended November 30, 2020 ,
insurance expense increased as a result of the deductible related to an IT
security incident in the second quarter of the fiscal year, as well as due to
the Company's new VSM, DEI, and 11 Trading Company LLC subsidiaries. As an
offset to these general and administrative expense increases were decreases
related to the COVID-19 pandemic, as well as other factors. Office and occupancy
expenses decreased for both the three and nine months ended November 30, 2020
due to lower overhead, as certain of the Company's offices were shut down during
the first and second quarters of the fiscal year due to the COVID-19 pandemic,
and most re-opened offices have remained at a reduced capacity through November
30, 2020 . Bad debt expense decreased for the three and nine months ended
November 30, 2020 as a result of the recovery of certain receivable balances
that were previously written off. Depreciation and amortization expense also
decreased, net, for the three and nine months ended November 30, 2020 as a
result of the impairment of certain definite-lived intangible assets at EyeLock
in the fourth quarter of Fiscal 2020, which reduced the amortizable base of
these assets. This was offset by increases in depreciation and amortization
expense related to newly acquired tangible and intangible assets within the VSM
and DEI subsidiaries. Additionally, while the Company experienced a net increase
in salary expense during both the three and nine months ended November 30, 2020 ,
Company-wide furloughs and pay reductions at all levels due to the pandemic, as
well as the elimination of non-essential travel, resulted in salary and travel
and entertainment expense decreases during the nine months ended November 30,
2020 . Pay reductions and most of the Company's furloughs ended in the third
quarter of Fiscal 2021; however, non-essential travel was still limited through
November 30, 2020 . Finally, during the second quarter of Fiscal 2020, the
Company granted 200,000 fully vested shares of Class A Common Stock to the
Company's Chief Executive Officer in accordance with his employment agreement,
resulting in compensation expense of approximately $800 for the nine months
ended November 30, 2019 that did not repeat in the current fiscal year.
Engineering and technical support expenses increased for the three months ended
November 30, 2020 and decreased for the nine months ended November 30, 2020 as
compared to the respective prior year periods. There were increases in salary
expense during both the three and nine months ended November 30, 2020 driven by
additional headcount and labor related to the Company's new VSM and DEI
subsidiaries established in connection with the Company's acquisitions in the
fourth quarter of Fiscal 2020 and second quarter of Fiscal 2021, respectively.
Research and development expense increased for the three months ended
November 30, 2020 due to the timing of new product launches compared to the
prior year. For the nine months ended November 30, 2020 , Company-wide furloughs
and pay reductions at all levels, as well as the elimination of non-essential
travel, contributed to decreases in salary and travel and entertainment expense.
Pay reductions and most of the Company's furloughs ended in the third quarter of
Fiscal 2021; however, non-essential travel was still limited through November
30, 2020 , affecting both periods.
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Other (Expense) Income
November 30,
2020 2019 $ Change % Change
Three Months Ended
Interest and bank charges $ (471 ) $ (751 ) $ 280 37.3 %
Equity in income of equity investee 1,761 967 794 82.1 %
Gain on sale of real property - 4,057 (4,057 ) (100.0 )%
Investment gain 42 - 42 100.0 %
Other, net (121 ) (322 ) 201 62.4 %
Total other income $ 1,211 $ 3,951 $ (2,740 ) (69.3 )%
Nine Months Ended
Interest and bank charges $ (2,334 ) $ (2,635 ) $ 301 11.4 %
Equity in income of equity investee 4,506 3,672 834 22.7 %
Gain on sale of real property - 4,057 (4,057 ) (100.0 )%
Investment gain 42 775 (733 ) (94.6 )%
Other, net 21 1,869 (1,848 ) (98.9 )%
Total other income $ 2,235 $ 7,738 $ (5,503 ) (71.1 )%
Interest and bank charges represent interest expense and fees related to the
Company's bank obligations, supply chain financing agreements and factoring
agreements, interest related to finance leases, amortization of debt issuance
costs, and credit card fees. For the three and nine months ended November 30,
2020 , interest expense was lower due to reduced factoring and supply chain
financing fees. While the Company sold a larger balance of customer accounts
receivable during these periods as compared to the prior year, the related fees
charged have been lower in Fiscal 2021.
Equity in income of equity investee represents the Company's share of income
from its 50% non-controlling ownership interest in ASA Electronics LLC and
Subsidiaries ("ASA"). The increase in income for the three and nine months ended
November 30, 2020 is due to an increase in ASA net income, primarily as a result
of improved margins, lower overhead, and growth in the RV and marine markets.
On September 30, 2019 , the Company, through its subsidiary Voxx German Holdings
Gmbh (the "Seller"), sold its real property in Pulheim, Germany to CLM S.A. RL
(the "Purchaser") for €10,920. Net proceeds received from the transaction were
approximately $9,500 after transactional costs and repayment of the outstanding
mortgage. Concurrently with the sale, the Seller entered into an operating lease
arrangement ("lease") with the Purchaser for a small portion of the real
property to continue to operate its sales office in Germany . The transaction
qualified for sale leaseback accounting in accordance with ASC 842 and the
Company recognized a gain on the execution of the sale transaction for the three
and nine months ended November 30, 2019 .
During Fiscal 2018, the Company sold its investment in RxNetworks, a
non-controlled corporation, consisting of shares of the investee's preferred
stock. Voxx recognized a gain during Fiscal 2018 on the sale of this investment;
however, a portion of the cash proceeds were subject to a hold-back provision,
and was not included in the gain recognized in Fiscal 2018. During the second
quarter of Fiscal 2020, the hold-back provision expired, and the Company
received the majority of the remaining proceeds from the sale, recording an
investment gain of $775 for the nine months ended November 30, 2019 . A final
pay-out of $42 received in November 2020 was recorded as an investment gain for
the three and nine months ended November 30, 2020 .
Other, net includes net foreign currency gains or losses, interest income,
rental income, and other miscellaneous income and expense. During the three and
nine months ended November 30, 2020 interest income decreased as a result of
lower interest rates applicable to the Company's short-term money market
investments. Additionally, during the nine months ended November 30, 2020 , the
Company had foreign currency losses of $(445) as compared to foreign currency
gains of $297 for the nine months ended November 30, 2019 . During the nine
months ended November 30, 2019 , the Company received the proceeds of a key man
life insurance policy in the amount of $1,000 , related to a former employee of
Klipsch Group, Inc. that Voxx became the beneficiary of in conjunction with the
acquisition of Klipsch in Fiscal 2012, which were offset by a charge of $804
related to a payment made to TE Connectivity Ltd. in final settlement of the
working capital calculation related to the Fiscal 2018 sale of Hirschmann Car
Communication GmbH . This settlement impacted both the three and nine months
ended November 30, 2019 .
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--------------------------------------------------------------------------------Income Tax Provision
The Company's provision for income taxes consists of federal, foreign, and state taxes necessary to align the Company's year-to-date tax provision with the annual effective rate that it expects to achieve for the full year. At each interim period, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments, as necessary. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act made various tax law changes including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted a technical corrections so that qualified improvement property can be immediately expensed under IRC Section 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and carried forward twenty years without a taxable income limitation as opposed to carried forward indefinitely, and (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years. With respect to the technical correction to net operating losses, the Company recorded a discrete income tax provision of$4,275 during the nine months endedNovember 30, 2020 , as its valuation allowance related to net operating losses with limited carryforward periods increased. For the three months endedNovember 30, 2020 , the Company recorded an income tax provision of$2,334 , which includes a discrete income tax benefit of$542 related primarily to the finalization of the federal and certain state tax return filings. For the three months endedNovember 30, 2019 , the Company recorded an income tax provision of$2,720 , which includes a discrete income tax provision of$1,035 . The Company recorded a discrete tax provision of$1,153 in connection with excluding theU.S. tax jurisdiction from the estimated annual effective tax rate and a discrete tax benefit of$118 primarily related to the reversal of uncertain tax provision liabilities as a result of the lapse of the applicable statute of limitations, the remeasurement of deferred tax assets and liabilities for enacted state law changes, offset by an income tax provision related to the finalization of federal and state tax filings during the quarter endedNovember 30, 2019 . The effective tax rates for the three months endedNovember 30, 2020 and 2019 were an income tax provision of 11.8% on pre-tax income of$19,774 and an income tax provision of 66.6% on pre-tax income of$4,087 , respectively. The effective tax rate for the three months endedNovember 30, 2020 differs from theU.S. statutory rate of 21% primarily due to the anticipated reversal of a portion of theU.S. valuation allowance based on projected current year earnings, immediateU.S. taxation of foreign earnings, non-controlling interest related toEyeLock LLC , state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the three months endedNovember 30, 2019 differed from the statutory rate of 21% primarily due to the calculation of theU.S. tax provision on a discrete basis, theU.S. taxation of foreign earnings, nondeductible permanent differences, non-controlling interest related toEyeLock LLC , an increase in the valuation allowance, state and local income taxes, and income taxed in foreign jurisdictions at varying tax rates. For the nine months endedNovember 30, 2020 , the Company recorded an income tax provision of$6,724 , which includes a discrete income tax provision of$3,609 . The Company recorded a discrete tax provision of$4,275 related to an increase in valuation allowance as a result of the technical correction to net operating losses as provided in the CARES Act, and a discrete income tax benefit of$697 related to finalization of federal and state tax filings during the quarter endedNovember 30, 2020 , and the reversal of uncertain tax provision liabilities as a result of the lapse of the applicable statute of limitations, offset with a discrete tax provision of$31 related to the accrual for interest for unrecognized tax benefits. For the nine months endedNovember 30, 2019 , the Company recorded an income tax provision of$1,190 , which includes a discrete income tax benefit of$345 . The Company recorded a discrete tax benefit of$50 in connection with excluding theU.S. tax jurisdiction from the estimated annual effective tax rate, and a discrete income tax benefit of$295 primarily related to the reversal of uncertain tax provision liabilities as a result of the lapse of the applicable statute of limitations, the remeasurement of deferred tax assets and liabilities for enacted state law changes, offset by an income tax provision related to the finalization of federal and state tax filings during the quarter endedNovember 30, 2019 . The effective tax rates for the nine months endedNovember 30, 2020 and 2019 were an income tax provision of 31.1% on pre-tax income of$21,614 and an income tax provision of 17.1% on a pre-tax loss of$6,979 , respectively. The effective tax rate for the nine months endedNovember 30, 2020 differs from theU.S. statutory rate of 21% primarily due to the anticipated reversal of a portion of theU.S. valuation allowance based on projected current year earnings, immediateU.S. taxation of foreign earnings, non-controlling interest related toEyeLock LLC , state and local income taxes, nondeductible permanent differences, and income taxed in foreign jurisdictions at varying tax rates. The effective tax rate for the nine months endedNovember 30, 2019 differed from the statutory rate of 21% primarily due to the calculation of theU.S. taxation provision on a discrete basis, theU.S. taxation of foreign earnings, nondeductible permanent differences, non-controlling interest related toEyeLock LLC , an increase in the valuation allowance, state and local income taxes, and income taxed in foreign jurisdictions at varying tax rates.
EBITDA, Adjusted EBITDA, and Diluted Adjusted EBITDA per Common Share
EBITDA, Adjusted EBITDA, and Diluted Adjusted EBITDA per common share are not
financial measures recognized by GAAP. EBITDA represents net income (loss)
attributable to
41
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EBITDA adjusted for stock-based compensation expense, certain settlements,
gains, and life insurance proceeds. Depreciation, amortization, and stock-based
compensation are non-cash items. Diluted Adjusted EBITDA per common share
represents the Company's diluted earnings per common share based on Adjusted
EBITDA.
We present EBITDA, Adjusted EBITDA, and Diluted Adjusted EBITDA per common share
in this Form 10-Q because we consider them to be useful and appropriate
supplemental measures of our performance. Adjusted EBITDA and Diluted Adjusted
EBITDA per common share help us to evaluate our performance without the effects
of certain GAAP calculations that may not have a direct cash impact on our
current operating performance. In addition, the exclusion of certain costs or
gains relating to certain events allows for a more meaningful comparison of our
results from period-to-period. These non-GAAP measures, as we define them, are
not necessarily comparable to similarly entitled measures of other companies and
may not be an appropriate measure for performance relative to other companies.
EBITDA, Adjusted EBITDA, and Diluted Adjusted EBITDA per common share should not
be assessed in isolation from, are not intended to represent, and should not be
considered to be more meaningful measures than, or alternatives to, measures of
operating performance as determined in accordance with GAAP.
Reconciliation of GAAP Net Income Attributable to
to EBITDA, Adjusted EBITDA, and Diluted Adjusted EBITDA per Common Share
Three months ended Nine months ended
November 30, November 30,
2020 2019 2020 2019
Net income (loss) attributable to VOXX
International Corporation $ 18,251 $ 2,464 $ 17,319 $ (4,648 )
Adjustments:
Interest expense and bank charges (1) 325 625 1,907 2,269
Depreciation and amortization (1) 2,904 2,796 8,128 8,313
Income tax expense 2,334 2,720 6,724 1,190
EBITDA 23,814 8,605 34,078 7,124
Stock-based compensation 768 471 1,454 1,816
Gain on sale of real property - (4,057 ) - (4,057 )
Settlement of Hirschmann working capital - 804 - 804
Investment gain (42 ) - (42 ) (775 )
Life insurance proceeds - - (420 ) (1,000 )
Adjusted EBITDA $ 24,540 $ 5,823 $ 35,070 $ 3,912
Diluted income (loss) per common share
attributable to VOXX International
Corporation $ 0.74 $ 0.10 $ 0.71 $ (0.19 )
Diluted Adjusted EBITDA per common share
attributable to VOXX International
Corporation $ 0.99 $ 0.24 $ 1.43 $ 0.16 (1) For purposes of calculating Adjusted EBITDA for the Company, interest expense
and bank charges, as well as depreciation and amortization, have been
adjusted in order to exclude the non-controlling interest portion of these
expenses attributable to
Liquidity and Capital Resources
Cash Flows, Commitments and Obligations
As ofNovember 30, 2020 , we had working capital of$163,034 which includes cash and cash equivalents of$21,337 , compared with working capital of$146,798 atFebruary 29, 2020 , which included cash and cash equivalents of$37,425 . We plan to utilize our current cash position as well as collections from accounts receivable, the cash generated from our operations, when applicable, and the income on our investments to fund the current operations of the business. However, we may utilize all or a portion of current capital resources to pursue other business opportunities, including acquisitions, or to further pay down our debt. As ofNovember 30, 2020 , we had cash amounts totaling$3,742 held in foreign bank accounts, none of which would be subject toUnited States federal income taxes if made available for use inthe United States . The Tax Cuts and Jobs Act provides a 100% participation exemption on dividends received from foreign corporations afterJanuary 1, 2018 asthe United States has moved away from a worldwide tax system and closer to a territorial system for earnings of foreign corporations. 42
-------------------------------------------------------------------------------- Operating activities used cash of$2,628 for the nine months endedNovember 30, 2020 due to factors including the increase in both accounts receivable and inventory, as well as losses incurred byEyeLock LLC . This was offset primarily by increases in accounts payable, accrued expenses, and sales incentives. For the nine months endedNovember 30, 2019 , operating activities used cash of$23,887 due to factors including sales declines and losses incurred byEyeLock LLC , as well as increases in accounts receivable due in part to the suspension of the Company's domestic supply chain finance arrangements, increases in inventory, and decreases in accrued expenses. These operating cash usages were offset primarily by decreases in receivables from vendors and increases in accrued sales incentives.
Investing activities used cash of
Financing activities used cash of$1,680 during the nine months endedNovember 30, 2020 due to the repayment of the Company's precautionary borrowing of$20,000 from the Credit Facility, the repayment of the Magnat subsidiary's Euro asset-based loan balance upon its expiration, repayments of finance leases, and the payment of deferred finance fees related to the amendment of the Credit Facility, offset by the precautionary borrowing of$20,000 made inApril 2020 . During the nine months endedNovember 30, 2019 , financing activities used cash of$11,563 primarily due to the repayment of bank obligations, including the entire outstanding balance of Voxx Germany's Euro asset-based loan facility, and the repurchase of shares of the Company's Class A common stock. Federal, state, and local governments have taken a variety of actions to contain the spread of COVID-19. Many jurisdictions required mandatory business closures during the Company's fiscal year and imposed capacity limitations and other restrictions affecting our operations. Many of these restrictions were lifted in phases throughout Fiscal 2021, but could return if there is a resurgence of the pandemic spread. We have proactively taken steps to increase available cash, including, but not limited to, utilizing existing supply chain financing and factoring agreements, and utilizing available funds under our existing Credit Facility. The Company also implemented a number of other measures to help preserve liquidity, as further described in our Form 10-K for the year endedFebruary 29, 2020 . The Company has a senior secured credit facility (the "Credit Facility") that provides for a revolving credit facility with committed availability of up to$127,500 . The availability under the revolving credit line within the Credit Facility is subject to a borrowing base, which is based on eligible accounts receivable, eligible inventory and certain real estate, subject to reserves as determined by the lender, and is also limited by amounts outstanding under the Florida Mortgage (see Note 17(b)). The availability under the revolving credit line of the Credit Facility was$107,033 as ofNovember 30, 2020 . All amounts outstanding under the Credit Facility will mature and become due onApril 26, 2022 ; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the Credit Agreement). The Company may prepay any amounts outstanding at any time, subject to payment of certain breakage and redeployment costs relating to LIBOR Rate Loans. The commitments under the Credit Facility may be irrevocably reduced at any time, without premium or penalty as set forth in the agreement. Generally, the Company may designate specific borrowings under the Credit Facility as either Base Rate Loans or LIBOR Rate Loans, except that Swingline Loans may only be designated as Base Rate Loans. Loans designated as LIBOR Rate Loans shall bear interest at a rate equal to the then applicable LIBOR rate plus a range of 2.00 - 2.50%. Loans designated as Base Rate loans shall bear interest at a rate equal to the applicable margin for Base Rate Loans of 1.00 - 1.50% as defined in the agreement. Provided that the Company is in a Compliance Period (the period commencing on that day in which Excess Availability is less than 20.0% of the Maximum Revolver Amount and ending on a day in which Excess Availability is equal to or greater than 20.0% for any consecutive 30-day period thereafter), the Credit Facility requires compliance with a financial covenant calculated as of the last day of each month, consisting of a Fixed Charge Coverage Ratio. The Credit Facility also contains covenants, subject to defined carveouts, that limit the ability of the loan parties and certain of their subsidiaries which are not loan parties to, among other things: (i) incur additional indebtedness; (ii) incur liens; (iii) merge, consolidate or dispose of a substantial portion of their business; (iv) transfer or dispose of assets; (v) change their name, organizational identification number, state or province of organization or organizational identity; (vi) make any material change in their nature of business; (vii) prepay or otherwise acquire indebtedness; (viii) cause any change of control; (ix) make any restricted junior payment; (x) change their fiscal year or method of accounting; (xi) make advances, loans or investments; (xii) enter into or permit any transaction with an affiliate of any borrower or any of their subsidiaries; (xiii) use proceeds for certain items; (xiv) issue or sell any of their stock; or (xv) consign or sell any of their inventory on certain terms. In addition, if excess availability under the Credit Facility were to fall below certain specified levels, as defined in the agreement, the lenders would have the right to assume dominion and control over the Company's cash. 43 --------------------------------------------------------------------------------
The obligations under the loan documents are secured by a general lien on and security interest in substantially all of the assets of the borrowers and certain of the guarantors, including accounts receivable, equipment, real estate, general intangibles, and inventory. The Company has guaranteed the obligations of the borrowers under the Credit Agreement.
The Company has a Euro asset-based loan facility inGermany with a credit limit of €8,000 that expires onJuly 31, 2023 . The Company's subsidiariesVoxx German Holdings GmbH ,Oehlbach Kabel GmbH , andSchwaiger GmbH are authorized to borrow funds under this facility for working capital purposes. The Company also utilizes supply chain financing arrangements and factoring agreements as a component of our financing for working capital, which accelerates receivable collection and helps to better manage cash flow. Under the agreements, the Company has agreed to sell certain of its accounts receivable balances to banking institutions who have agreed to advance amounts equal to the net accounts receivable balances due, less a discount as set forth in the respective agreements (see Note 9). The balances under these agreements are accounted for as sales of accounts receivable, as they are sold without recourse. Cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the Company's Consolidated Statements of Cash Flows. Fees incurred in connection with the agreements are recorded as interest expense by the Company.
Certain contractual cash obligations and other commercial commitments will
impact our short and long-term liquidity. At
Amount of Commitment Expiration per Period
Less than 2-3 4-5 After
Contractual Cash Obligations Total 1 Year Years Years 5 Years
Finance lease obligation (1) $ 855 $ 469 $ 386 $ - $ -
Operating leases (1) 4,924 1,111 1,692 980 1,141
Total contractual cash obligations $ 5,779 $ 1,580 $ 2,078 $ 980 $ 1,141
Other Commitments
Bank obligations (2) $ - $ - $ - $ - $ -
Stand-by and commercial letters of
credit (3) 7,257 7,257 - - -
Other (4) 7,239 500 1,000 1,000 4,739
Pension obligation (5) 818 - - - 818
Unconditional purchase obligations
(6) 170,367 170,367 - - -
Total other commitments 185,681 178,124 1,000 1,000 5,557
Total commitments $ 191,460 $ 179,704 $ 3,078 $ 1,980 $ 6,698 1. Represents total principal payments due under operating and finance lease
obligations. Total current balances (included in other current liabilities)
due under finance and operating lease obligations are
respectively, at
and operating leases are
2. Represents amounts outstanding under the Company's Credit Facility and the
VOXX Germany asset-based lending facility at
3. We issue standby and commercial letters of credit to secure certain purchases
and insurance requirements.
4. This amount represents the outstanding balance of the mortgage for our
manufacturing facility in
5. Represents the liability for an employer defined benefit pension plan covering
certain eligible current and former employees of Voxx Germany.
6. Open purchase obligations represent inventory commitments. These obligations
are not recorded in the consolidated financial statements until commitments
are fulfilled given that such obligations are subject to change based on
negotiations with manufacturers.
We regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations,
available borrowings under bank lines of credit and possible future public or
private debt and/or equity offerings. At times, we evaluate possible
acquisitions of, or investments in, businesses that are complementary to ours,
which transactions may require the use of cash. We believe that our cash, other
liquid assets, operating cash flows, credit arrangements, and access to equity
capital markets, taken together, provide adequate resources to fund ongoing
operating expenditures for the next twelve months, including the intercompany
loan funding we provide to our majority owned
44
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subsidiary, EyeLock LLC . In the event they do not, we may require additional
funds in the future to support our working capital requirements or for other
purposes and may seek to raise such additional funds through the sale of public
or private equity and/or debt financings as well as from other sources. No
assurance can be given that additional financing will be available in the future
or that if available, such financing will be obtainable on terms favorable when
required.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations, or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
Related Party Transactions None noted. New Accounting Pronouncements
We are required to adopt certain new accounting pronouncements. See Note 26 to our consolidated financial statements included herein.
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