Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 31, 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 October 6, 2017
Class A Common Stock
21,920,011

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
 
 
Consolidated Balance Sheets at August 31, 2017 (unaudited) and February 28, 2017
 
Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended August 31, 2017 and 2016
 
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended August 31, 2017 and 2016
 
Notes to Unaudited 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)
 
 
August 31, 2017
 
February 28, 2017
Assets
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
45,821

 
$
956

Accounts receivable, net
 
70,956

 
79,971

Inventory, net
 
142,053

 
122,352

Receivables from vendors
 
617

 
634

Prepaid expenses and other current assets
 
23,543

 
12,332

Income tax receivable
 
1,644

 
1,596

Assets held for sale, current
 

 
55,507

Total current assets
 
284,634

 
273,348

Investment securities
 
8,763

 
10,388

Equity investments
 
21,340

 
21,926

Property, plant and equipment, net
 
66,197

 
65,589

Goodwill
 
53,916

 
53,905

Intangible assets, net
 
153,403

 
154,939

Deferred income taxes
 
23

 
23

Other assets
 
6,541

 
1,699

Assets held for sale, non-current
 

 
86,669

Total assets
 
$
594,817

 
$
668,486

Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
44,146

 
$
46,244

Accrued expenses and other current liabilities
 
49,227

 
32,110

Income taxes payable
 
2,320

 
703

Accrued sales incentives
 
13,033

 
13,154

Current portion of long-term debt
 
6,770

 
9,215

Liabilities held for sale, current
 

 
28,641

Total current liabilities
 
115,496

 
130,067

Long-term debt, net of debt issuance costs
 
8,842

 
97,747

Capital lease obligation
 
849

 
926

Deferred compensation
 
3,624

 
3,844

Deferred income tax liabilities
 
28,757

 
27,627

Other tax liabilities
 
3,328

 
3,194

Other long-term liabilities
 
3,389

 
2,125

Liabilities held for sale, non-current
 

 
11,641

Total liabilities
 
164,285

 
277,171

Commitments and contingencies
 


 


Stockholders' equity:
 
 

 
 

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

 

Common stock:
 
 
 
 
Class A, $.01 par value, 60,000,000 shares authorized, 24,068,105 and 24,067,444 shares issued and 21,900,011 and 21,899,370 shares outstanding at August 31, 2017 and February 28, 2017, respectively
 
256

 
256


4



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

 
22

Paid-in capital
 
295,847

 
295,432

Retained earnings
 
173,445

 
159,369

Accumulated other comprehensive loss
 
(15,478
)
 
(43,898
)
Treasury stock, at cost, 2,168,094 and 2,168,074 shares of Class A Common Stock at August 31, 2017 and February 28, 2017, respectively
 
(21,176
)
 
(21,176
)
Total VOXX International Corporation stockholders' equity
 
432,916

 
390,005

Non-controlling interest
 
(2,384
)
 
1,310

Total stockholders' equity
 
430,532

 
391,315

Total liabilities and stockholders' equity
 
$
594,817

 
$
668,486

See accompanying notes to unaudited consolidated financial statements.

5



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

 
 
Three Months Ended
August 31,
 
Six Months Ended
August 31,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
113,470

 
$
118,325

 
$
228,293

 
$
232,225

Cost of sales
 
85,049

 
85,882

 
169,728

 
167,809

Gross profit
 
28,421

 
32,443

 
58,565

 
64,416

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 
 
 
Selling
 
10,652

 
9,924

 
23,061

 
21,306

General and administrative
 
20,640

 
18,021

 
40,837

 
38,148

Engineering and technical support
 
7,383

 
6,609

 
14,037

 
14,655

Total operating expenses
 
38,675

 
34,554

 
77,935

 
74,109

Operating loss
 
(10,254
)
 
(2,111
)
 
(19,370
)
 
(9,693
)
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 

 
 

 
 
 
 
Interest and bank charges
 
(1,843
)
 
(1,729
)
 
(3,635
)
 
(3,293
)
Equity in income of equity investees
 
1,927

 
1,545

 
3,730

 
3,353

Investment gain
 
1,416

 

 
1,416

 

Other, net
 
(7,629
)
 
223

 
(8,636
)
 
(257
)
Total other (expense) income, net
 
(6,129
)
 
39

 
(7,125
)
 
(197
)
 
 
 
 
 
 
 
 
 
Loss from continuing operations before income taxes
 
(16,383
)
 
(2,072
)
 
(26,495
)
 
(9,890
)
Income tax expense (benefit) from continuing operations
 
3,465

 
(5,543
)
 
(3,963
)
 
(6,940
)
Net (loss) income from continuing operations
 
(19,848
)
 
3,471

 
(22,532
)
 
(2,950
)
 
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations, net of tax (Note 2)
 
34,931

 
(2,167
)
 
32,710

 
(1,866
)
Net income (loss)
 
15,083

 
1,304

 
10,178

 
(4,816
)
Less: net loss attributable to non-controlling interest
 
(2,023
)
 
(1,716
)
 
(3,898
)
 
(3,528
)
Net income (loss) attributable to VOXX International Corporation
 
$
17,106

 
$
3,020

 
$
14,076

 
$
(1,288
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
        Foreign currency translation adjustments
 
20,480

 
(680
)
 
27,839

 
3,516

        Derivatives designated for hedging
 
(134
)
 
(21
)
 
(1,186
)
 
(512
)
        Pension plan adjustments
 
1,810

 
6

 
1,690

 
(52
)
        Unrealized holding gain (loss) on available-for-sale investment securities, net of tax
 
81

 
(3
)
 
77

 
(8
)
          Other comprehensive income (loss), net of tax
 
22,237

 
(698
)
 
28,420

 
2,944

Comprehensive income attributable to VOXX International Corporation
 
$
39,343

 
$
2,322

 
$
42,496

 
$
1,656

 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic:
 
 
 
 
 
 
 
 
          Continuing operations
 
$
(0.74
)
 
$
0.21

 
$
(0.77
)
 
$
0.02

          Discontinued operations
 
$
1.45

 
$
(0.09
)
 
$
1.35

 
$
(0.08
)
          Attributable to VOXX International Corporation
 
$
0.71

 
$
0.12

 
$
0.58

 
$
(0.05
)
 
 
 
 
 
 
 
 
 

6



Earnings (loss) per share - diluted:
 
 
 
 
 
 
 
 
          Continuing operations
 
$
(0.74
)
 
$
0.21

 
$
(0.77
)
 
$
0.02

          Discontinued operations
 
$
1.45

 
$
(0.09
)
 
$
1.35

 
$
(0.08
)
          Attributable to VOXX International Corporation
 
$
0.71

 
$
0.12

 
$
0.58

 
$
(0.05
)
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (basic)
 
24,160,680

 
24,160,324

 
24,160,502

 
24,160,324

Weighted-average common shares outstanding (diluted)
 
24,160,680

 
24,242,447

 
24,160,502

 
24,255,341


See accompanying notes to unaudited consolidated financial statements.



7



VOXX International Corporation and Subsidiaries
Unaudited Consolidated Statements of Cash Flows

 
 
Six Months Ended
August 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net loss from continuing operations
 
$
(22,532
)
 
$
(2,950
)
Net income (loss) from discontinued operations
 
32,710

 
(1,866
)
 
 
 
 
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Depreciation and amortization
 
9,093

 
9,104

Amortization of debt discount
 
411

 
410

Bad debt expense
 
179

 
20

Non-cash bank charges
 

 
76

Non-cash interest on borrowings
 

 
1,053

Gain (loss) on forward contracts
 
6,389

 
(424
)
Loss on interest rate swap unwind
 

 
114

Equity in income of equity investees
 
(3,730
)
 
(3,353
)
Distribution of income from equity investees
 
4,316

 
3,344

Deferred income tax benefit
 
1,347

 
(1,421
)
Non-cash compensation adjustment
 
370

 
727

Stock based compensation expense
 
299

 
363

Gain on sale of property, plant and equipment
 
(10
)
 
(5
)
Gain on sale of RxNetworks
 
(1,416
)
 

Gain on sale of Hirschmann
 
(36,118
)
 

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
11,331

 
6,497

Inventory
 
(16,783
)
 
(15,517
)
Receivables from vendors
 
240

 
943

Prepaid expenses and other
 
(18,032
)
 
(1,172
)
Investment securities-trading
 
345

 
(91
)
Accounts payable, accrued expenses, accrued sales incentives and other liabilities
 
480

 
2,478

Income taxes payable
 
(1,096
)
 
(5,347
)
Net cash used in operating activities
 
(32,207
)
 
(7,017
)
Cash flows provided by (used in) investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(4,842
)
 
(5,098
)
Proceeds from sale of property, plant and equipment
 
10

 
9

Issuance of notes receivable
 
(2,000
)
 

Proceeds from sale of long-term investment
 
2,617

 

Purchase of business
 
(1,814
)
 

Proceeds from sale of Hirschmann, net of settlement of forward contracts
 
170,020

 

Net cash provided by (used in) investing activities
 
163,991

 
(5,089
)
Cash flows provided by (used in) financing activities:
 
 

 
 

Principal payments on capital lease obligation
 
(419
)
 
(237
)
Repayment of bank obligations
 
(127,915
)
 
(27,946
)
Borrowings on bank obligations
 
36,057

 
32,767

Proceeds from exercise of stock options
 
5

 

Net cash (used in) provided by financing activities
 
(92,272
)
 
4,584

Effect of exchange rate changes on cash
 
(1,491
)
 
606


8



Net increase (decrease) in cash and cash equivalents
 
38,021

 
(6,916
)
Cash and cash equivalents at beginning of period
(a)
7,800

(a)
11,767

Cash and cash equivalents at end of period
 
$
45,821

(a)
$
4,851


(a) Cash and cash equivalents at February 28, 2017, February 29, 2016 and August 31, 2016 include $6,844, $6,789, and $3,403, respectively, in current assets held for sale for Hirschmann.
See accompanying notes to unaudited consolidated financial statements.


9



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

(1)    Basis of Presentation

The accompanying unaudited interim consolidated financial statements of VOXX International Corporation and Subsidiaries ("Voxx" or the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America and include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented.  The results of operations are not necessarily indicative of the results to be expected for the full fiscal year or any interim period.  These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto contained in the Company's Form 10-K for the fiscal year ended February 28, 2017. The Company's financial statements for the prior periods presented herein have been recast to reflect a certain business that was classified as discontinued operations during the second quarter of Fiscal 2018. See Note 2 for additional information.

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 Dispositions

Rosen Electronics LLC
On April 18, 2017, Voxx acquired certain assets and assumed certain liabilities 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% fee 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
$
2,314

   Goodwill
10

   Intangible assets including trademarks and customer relationships
520

      Total assets acquired
$
2,844

 
 
Liabilities assumed:
 
   Warranty accrual
$
500

   Other liabilities acquired
530

      Total
$
1,030

Total purchase price
$
1,814


Hirschmann Car Communication GmbH
On August 31, 2017 (the "Closing Date"), the Company completed its sale of Hirschmann Car Communication GmbH and its subsidiaries (collectively, “Hirschmann”) to a subsidiary of TE Connectivity Ltd ("TE"). The consideration received by the Company was €148,500. The purchase price, at the exchange rate as of the close of business on the Closing Date approximated $177,000, and is subject to adjustment based upon the final working capital. VOXX International (Germany) GmbH, the Company's German wholly-owned subsidiary, was the selling entity in this transaction.


10

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

The Hirschmann subsidiary group, which was included within the Automotive segment, qualified to be presented as a discontinued operation in accordance with ASC 205-20 beginning in the Company's second quarter ending August 31, 2017. Voxx will not have any continuing involvement in the Hirschmann business subsequent to the Closing Date.

In order to hedge the fluctuation in the exchange rate before closing, the Company entered into forward contracts totaling €148,500, which could be settled on dates ranging from August 31, 2017 through September 6, 2017. As the sale of Hirschmann closed on August 31, 2017, the Company settled all of the forward contracts on this date. The forward contracts were not designated for hedging and a total foreign currency loss of $(6,618) was recorded in continuing operations for the three and six months ended August 31, 2017 when the contracts were settled.

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operation to the amounts presented separately in the Company's Consolidated Balance Sheet:

 
 
February 28, 2017
Cash and cash equivalents
 
$
6,844

Accounts receivable, net
 
10,670

Inventory, net
 
30,701

Receivables from vendors
 
31

Prepaid expenses and other current assets
 
7,261

Assets held for sale, current
 
$
55,507

Property, plant and equipment, net
 
16,012

Goodwill
 
49,307

Intangible assets, net
 
21,350

Assets held for sale, non-current
 
$
86,669

Accounts payable
 
14,899

Accrued expenses and other current liabilities
 
10,366

Income taxes payable
 
2,374

Current portion of long-term debt
 
1,002

Liabilities held for sale, current
 
$
28,641

Capital lease obligation
 
474

Deferred compensation
 
380

Deferred income tax liabilities
 
2,528

Other long-term liabilities
 
8,259

Liabilities held for sale, non-current
 
$
11,641

Net assets held for sale
 
$
101,894


The following table presents a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net income from discontinued operations, net of tax, presented separately in the Consolidated Statements of Operations and Comprehensive Income (Loss):


11

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

 
 
Three Months Ended
August 31,
 
Six Months Ended
August 31,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
47,545

 
$
40,937

 
$
91,824

 
$
82,492

Cost of sales
 
32,925

 
26,887

 
63,610

 
54,314

Gross profit
 
14,620

 
14,050

 
28,214

 
28,178

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling
 
1,396

 
1,190

 
2,778

 
2,473

General and administrative
 
7,680

 
6,882

 
14,676

 
13,826

Engineering and technical support
 
3,982

 
4,682

 
7,920

 
10,115

Total operating expenses
 
13,058

 
12,754

 
25,374

 
26,414

Operating income of discontinued operations
 
1,562

 
1,296

 
2,840

 
1,764

 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
Interest and bank charges (a)
 
(157
)
 
(140
)
 
(279
)
 
(271
)
Other, net
 
150

 
(41
)
 
138

 
(73
)
Total other expense of discontinued operations, net
 
(7
)
 
(181
)
 
(141
)
 
(344
)
 
 
 
 
 
 
 
 
 
Gain on sale of discontinued operation before taxes
 
36,118

 

 
36,118

 

Total income from discontinued operation before taxes
 
37,673

 
1,115

 
38,817

 
1,420

Income tax expense on discontinued operation (b)
 
2,742

 
3,282

 
6,107

 
3,286

Income from discontinued operation, net of taxes
 
$
34,931

 
$
(2,167
)
 
$
32,710

 
$
(1,866
)
Income per share - basic
 
$
1.45

 
$
(0.09
)
 
$
1.35

 
$
(0.08
)
Income per share - diluted
 
$
1.45

 
$
(0.09
)
 
$
1.35

 
$
(0.08
)

(a) Includes an allocation of consolidated interest expense and interest expense directly related to debt assumed by the buyer. The allocation of consolidated interest expense was based upon the ratio of net assets of the discontinued operation to that of the Consolidated Company.

(b) The income tax expense on discontinued operations for the three and six months ended August 31, 2017, was positively impacted by an income tax benefit related to the partial reversal of the Company’s valuation allowance as the Company utilized a significant portion of its tax attributes to offset the U.S. tax gain related to sale of Hirschmann sale.

The following table presents supplemental cash flow information of the discontinued operation:
 
 
Six Months Ended
August 31,
 
 
2017
 
2016
Operating activities:
 
 
 
 
Depreciation and amortization expense
 
$
2,939

 
$
3,020

Stock-based compensation expense
 
50

 
37

 
 
 
 
 
Investing activities:
 
 
 
 
Capital expenditures
 
$
2,652

 
$
3,088

 
 
 
 
 
Non-cash investing an financing activities:
 
 
 
 
Capital expenditures funded by long-term obligations
 
$
1,910

 
$


12

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


(3)    Net Income (Loss) Per Common Share
 
Basic net income (loss) per common share from continuing operations, net of non-controlling interest, is based upon the weighted-average common shares outstanding during the period. Diluted net income (loss) per common share from continuing operations, net of non-controlling interest reflects the potential dilution that would occur if common stock equivalent securities or other contracts to issue common stock were exercised or converted into common stock.

There are no reconciling items which impact the numerator of basic and diluted net income (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
August 31,
 
Six Months Ended
August 31,
 
 
2017
 
2016
 
2017
 
2016
Weighted-average common shares outstanding
 
24,160,680

 
24,160,324

 
24,160,502

 
24,160,324

Effect of dilutive securities:
 
 

 
 

 
 

 
 

Stock options, warrants and restricted stock
 

 
82,123

 

 
95,017

Weighted-average common shares and potential common shares outstanding
 
24,160,680

 
24,242,447

 
24,160,502

 
24,255,341

 
Restricted stock, stock options and warrants totaling 586,395 and 328,576 for the three months ended August 31, 2017 and 2016, respectively, and 570,044 and 460,869 for the six months ended August 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 August 31, 2017:


13

VOXX International Corporation and Subsidiaries
Notes to Unaudited 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
$
45,821

 
$
45,821

 
$

Derivatives
 

 
 

 
 

Designated for hedging
$
(1,057
)
 
$

 
$
(1,057
)
Investment securities:
 

 
 

 
 

Trading securities
$
3,749

 
$
3,749

 
$

Available-for-sale securities
3

 
3

 

Other investments at cost (a)
5,011

 

 

Total investment securities
$
8,763

 
$
3,752

 
$


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

 
 
 
Fair Value Measurements at Reporting Date Using
 
Total
 
Level 1
 
Level 2
Cash and cash equivalents:
 
 
 
 
 
Cash and money market funds
$
956

 
$
956

 
$

Derivatives
 

 
 

 
 

Designated for hedging
$
345

 
$

 
$
345

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 August 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 from 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. 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 - 6 months and are classified in the balance sheet according to their terms. The Company also has an interest rate swap agreement as of August 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 six months ended August 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

14

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

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) and $(95) for the three and six months ended August 31, 2017, respectively, and $29 and $(21) for the three and six months ended August 31, 2016, respectively.
Financial Statement Classification
The following table discloses the fair value as of August 31, 2017 and February 28, 2017 of derivative instruments:
 
 
Derivative Assets and Liabilities
 
 
 
 
Fair Value
 
 
Account
 
August 31, 2017
 
February 28, 2017
Designated derivative instruments
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$

 
$
643

 
 
Accrued expenses and other current liabilities
 
(690
)
 

 
 
 
 
 
 
 
Interest rate swap agreements
 
Other long-term liabilities
 
(367
)
 
(298
)
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
(1,057
)
 
$
345

In connection with the sale of Hirschmann on August 31, 2017 (see Note 2), the Company entered into forward contracts totaling €148,500, which could be settled on dates ranging from August 31, 2017 through September 6, 2017. As the sale of Hirschmann closed on August 31, 2017, the Company settled all of the forward contracts on this date. The forward contracts were not designated for hedging and a total foreign currency loss of $(6,618) was recorded for the three and six months ended August 31, 2017, within continuing operations, when the contracts were settled.

Cash flow hedges

During Fiscal 2017, the Company entered into forward foreign currency contracts, which have a current outstanding notional value of $9,720 and are designated as cash flow hedges at August 31, 2017. The current outstanding notional value of the Company's interest rate swap at August 31, 2017 is $8,864. 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 pertaining to continuing operations recorded during the three and six months ended August 31, 2017 and 2016 was as follows:

15

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

 
Three months ended
 
Six months ended
 
August 31, 2017
 
August 31, 2017
 
Pretax Gain(Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
 
Gain (Loss)for Ineffectiveness in Other Income
 
Pretax Gain (Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
 
Gain (Loss) for Ineffectiveness in Other Income
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
(533
)
 
$
42

 
$
(52
)
 
$
(1,266
)
 
$
317

 
$
(95
)
Interest rate swaps
(25
)
 

 

 
(69
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Six months ended
 
August 31, 2016
 
August 31, 2016
 
Pretax Gain(Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
 
Gain (Loss)for Ineffectiveness in Other Income
 
Pretax Gain (Loss) Recognized in Other Comprehensive Income
 
Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
 
Gain (Loss) for Ineffectiveness in Other Income
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
108

 
$
44

 
$
29

 
$
(536
)
 
$
259

 
$
(21
)
Interest rate swaps
(107
)
 

 

 
73

 
(114
)
 

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 nine months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. As of August 31, 2017, no foreign currency contracts originally designated for hedge accounting were de-designated or terminated. Refer to Note 6 for information regarding activity related to cash flow hedges pertaining to discontinued operations.

(5)    Investment Securities

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


16

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

 
August 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
$
3,749

 
$

 
$
3,749

 
$
4,094

 
$

 
$
4,094

Available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Cellstar

 
3

 
3

 

 
6

 
6

Total Marketable Securities
3,749

 
3

 
3,752

 
4,094

 
6

 
4,100

Other Long-Term Investments
5,011

 

 
5,011

 
6,288

 

 
6,288

Total Investment Securities
$
8,760

 
$
3

 
$
8,763

 
$
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 and six months ended August 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 August 31, 2017, the Company's investments in 360fly, Inc. totaled $4,453 and we held 5.0% of the outstanding shares of this company. No additional investment was made in 360fly, Inc. during the three and six months ended August 31, 2017. During the three and six months ended August 31, 2017, the Company issued a senior secured note to 360fly, Inc. totaling $2,000. This note bears interest at 8% and is due on August 31, 2019.

On July 31, 2017, RxNetworks, a Canadian company in which Voxx held a cost method investment consisting of shares of the investee's preferred stock, was sold to a third party. In consideration for its holdings in RxNetworks on July 31, 2017, Voxx received cash, as well as a proportionate share of the value (consisting of preferred stock) in a newly formed subsidiary of RxNetworks, called Fathom Systems Inc. ("Fathom"). As a result of this transaction, Voxx recognized a gain of $1,416 for the three and six months ended August 31, 2017. The cash proceeds were subject to a hold-back provision, which was not included in the calculation of the gain recognized. As of August 31, 2017, the Company's investment in Fathom is being accounted for by the cost method and totaled $558 and we held 8.3% of the outstanding

17

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

shares of this company. Voxx's total cost method investment balance for 360fly, Inc. and Fathom was $5,011 as of August 31, 2017.

(6)    Accumulated Other Comprehensive (Loss) Income

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

 
 
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
 
17,100

 
(12
)
 
(265
)
 
(1,422
)
 
15,401

Reclassified from accumulated other comprehensive income (loss)
 
10,739

 
89

 
1,955

 
236

 
13,019

Net current-period other comprehensive income (loss)
 
27,839

 
77

 
1,690

 
(1,186
)
 
28,420

Balance at August 31, 2017
 
$
(13,992
)
 
$
(21
)
 
$
(592
)
 
$
(873
)
 
$
(15,478
)

In the above table, all reclassifications of other comprehensive income (loss) for the six months ended August 31, 2017 for foreign currency translation, investments and pension plan adjustments are related to the sale of Hirschmann on August 31, 2017 (see Note 2). Within reclassifications for derivatives designated in a hedging relationship, pre-tax losses totaling $(71) are related to cash flow hedge activity of discontinued operations for the six months ended August 31, 2017, and $335 is related to the sale of Hirschmann on August 31, 2017. Within other comprehensive income (loss) before reclassifications for derivatives designated in a hedging relationship, $(501) is related to cash flow hedge activity of discontinued operations for the six months ended August 31, 2017.

During the three and six months ended August 31, 2017, the Company recorded tax expense (benefit) related to derivatives designated in a hedging relationship of $(207) and $(673), respectively, unrealized losses on investments of $0 and pension plan adjustments of $0.

The other comprehensive income (loss) before reclassification of $17,100 includes the remeasurement of intercompany transactions of a long-term nature of $12,070 with certain subsidiaries whose functional currency is not the U.S. dollar, and $5,029 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. Foreign currency translation gains (losses) reclassified from accumulated other comprehensive income (loss) of $10,739 include $9,911 due to the settlement of a euro based loan and the recognition of the cumulative translation adjustment of $828 due to the sale of Hirschmann.

(7)    Supplemental Cash Flow Information

The following is supplemental information relating to the consolidated statements of cash flows, including continuing and discontinued operations:


18

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

 
 
Six Months Ended
August 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
 

 
1,769

Cash paid during the period:
 
 
 
 
Interest (excluding bank charges)
 
$
2,430

 
$
2,225

Income taxes (net of refunds)
 
2,001

 
3,086


See Note 2 for additional supplemental cash flow information pertaining to discontinued operations.

(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:

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

 
$
7.76

 
 
Granted
 

 

 
 
Exercised
 
661

 
7.76

 
 
Forfeited/expired
 

 

 
 
Outstanding and exercisable at August 31, 2017
 
115,589

 
$
7.76

 
0.13

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, or as a result of the sale of all of the issued and outstanding stock, or all, or substantially all, of the assets of the subsidiary of which the grantee serves as CEO and/or President. 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. During July 2017, the Company granted 74,156 shares of restricted stock under the SERP. 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. 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 fair market value of the restricted stock granted during July 2017 was $6.52.

In conjunction with the sale of Hirschmann on August 31, 2017 (see Note 2), all restricted shares granted to the CEO and President of Hirschmann, totaling 72,300 shares became immediately vested in accordance with the SERP and were settled in cash in the amount of $582. The remaining unrecognized stock-based compensation expense related to this

19

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

individual's restricted stock awards was recognized as a reduction of the gain on sale of discontinued operations in the amount of $373.

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

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

Granted
74,156

 
6.52

Vested and settled
72,300

 
5.98

Forfeited

 

Balance at August 31, 2017
439,299

 
$
7.08

Vested and unissued at August 31, 2017
56,181

 
$
13.62


During the three and six months ended August 31, 2017, the Company recorded $131 and $250 in stock-based compensation related to restricted stock awards for continuing operation, respectively. As of August 31, 2017, there was $670 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 and six months ended August 31, 2017, net of discounts, were $30,515 and $63,927, respectively, compared to $31,819 and $60,800 for the three and six months ended August 31, 2016, respectively.

(10)    Research and Development

Expenditures for research and development are charged to expense as incurred. Such expenditures amounted to $3,400 and $6,186 for the three and six months ended August 31, 2017, respectively, compared to $2,826 and 6,552 for the three and six months ended August 31, 2016, respectively, net of customer reimbursements, and are included in continuing operations within Engineering and Technical Support Expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss).


(11)    Goodwill and Intangible Assets

The change in goodwill pertaining to continuing operations by segment is as follows:


20

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

Automotive:
Amount
Beginning balance at March 1, 2017
$
7,373

Goodwill acquired (see Note2)
10

Balance at August 31, 2017
$
7,383

 
 
Gross carrying amount at August 31, 2017
$
7,383

Accumulated impairment charge

Net carrying amount at August 31, 2017
$
7,383

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

Activity during the period

Balance at August 31, 2017
$
46,533

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

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

 
 
Total Goodwill, net
$
53,916


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

At August 31, 2017, intangible assets consisted of the following:  

 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Total Net
Book
Value
Finite-lived intangible assets:
 


 
 
 
 
Customer relationships
 
$
50,033

 
$
24,885

 
$
25,148

Trademarks/Tradenames
 
415

 
397

 
18

Developed technology
 
31,290

 
5,442

 
25,848

Patents
 
2,812

 
2,048

 
764

License
 
1,400

 
1,400

 

Contract
 
2,141

 
1,790

 
351

Total finite-lived intangible assets
 
$
88,091

 
$
35,962

 
52,129

Indefinite-lived intangible assets
 
 
 
 
 
 
Trademarks
 
 
 
 
 
101,274

Total net intangible assets
 
 
 
 
 
$
153,403


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


21

VOXX International Corporation and Subsidiaries
Notes to Unaudited 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
 
$
49,005

 
$
22,615

 
$
26,390

Trademarks/Tradenames
 
415

 
395

 
20

Developed technology
 
31,290

 
4,081

 
27,209

Patents
 
2,755

 
1,930

 
825

License
 
1,400

 
1,400

 

Contract
 
2,141

 
1,732

 
409

Total finite-lived intangible assets
 
$
87,006

 
$
32,153

 
54,853

Indefinite-lived intangible assets
 
 
 
 
 
 
Trademarks
 
 
 
 
 
100,086

Total net intangible assets
 
 
 
 
 
$
154,939


The Company recorded amortization expense for continuing operations of $1,642 and $3,255, respectively for the three and six months ended August 31, 2017, and $1,620 and $3,240 for the three and six months ended August 31, 2016, respectively. The estimated aggregate amortization expense for continuing operations for all amortizable intangibles for August 31 of each of the succeeding years is as follows:

Year
 
Amount
2018
 
$
6,399

2019
 
6,281

2020
 
6,228

2021
 
6,003

2022
 
5,874


(12)    Equity Investment

As of August 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 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.


22

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

 
 
August 31,
2017
 
February 28,
2017
Current assets
 
$
43,783

 
$
43,643

Non-current assets
 
6,983

 
6,207

Current liabilities
 
8,086

 
5,998

Members' equity
 
42,680

 
43,852

 
 
 
 
 
 
 
Six Months Ended
August 31,
 
 
2017
 
2016
Net sales
 
$
49,477

 
$
47,864

Gross profit
 
16,137

 
15,093

Operating income
 
7,391

 
6,686

Net income
 
7,460

 
6,706

 
The Company's share of income from ASA was $1,927 and $3,730, respectively, for the three and six months ended August 31, 2017 and $1,545 and $3,353 for the three and six months ended August 31, 2016, respectively.  

(13)    Income Taxes

For the six months ended August 31, 2017, the Company recorded an income tax benefit from continuing operations of $(3,963), which includes a discrete income tax provision of $65 related to the accrual of interest for unrecognized tax benefits and the re-measurement of state deferred taxes based on law changes enacted during the period. The income tax benefit relates primarily to foreign taxes offset by an income tax benefit for domestic losses incurred during Fiscal 2018, as the U.S. taxable income from discontinued operations is treated as a source of income under the intra-period allocation guidance. For the six months ended August 31, 2016, the Company recorded an income tax benefit from continuing operations of $(6,940), which includes a discrete income tax provision of $166 related to the accrual of interest for unrecognized tax benefits.

The effective tax rate for the six months ended August 31, 2017 and August 31, 2016 was an income tax benefit from continuing operations of 15.0% and 70.2%, respectively. The effective tax rate for the six months ended August 31, 2017 differs from the U.S. statutory rate of 35% primarily due to the ability to provide an income tax benefit for domestic losses, as the U.S. taxable income from discontinued operations is treated as a source of income under the intra-period allocation guidance, coupled with the mix of domestic and foreign earnings, the non-controlling interest related to EyeLock LLC, and an income tax benefit related to various federal tax credits.

For the three months ended August 31, 2017, the Company recorded an income tax provision from continuing operations of $3,465, which includes a discrete income tax provision of $55 related to the accrual of interest for unrecognized tax benefits and the re-measurement of state deferred taxes based on law changes enacted during the quarter. For the three months ended August 31, 2016, the Company recorded an income tax benefit from continuing operations of $(5,543), which includes a discrete income tax provision of $64 related to the accrual of interest for unrecognized tax benefits.

The effective tax rate for the three months ended August 31, 2017 and August 31, 2016 was an income tax provision from continuing operations of 21.2% and an income tax benefit of 267.6%, respectively. The effective tax rate for the three months ended August 31, 2017 differs from the U.S. statutory rate of 35% primarily due to the ability to provide an income tax benefit for domestic losses as the U.S. taxable income from discontinued operations is treated as a source of income under the intra-period allocation guidance, coupled with the mix of domestic and foreign earnings, the non-controlling interest related to EyeLock LLC, and an income tax benefit related to various federal tax credits.

At August 31, 2017, the Company had an uncertain tax position liability from continuing operations of $3,328, including interest and penalties. The unrecognized tax benefits include amounts related to various U.S. federal, state and local and foreign tax issues.


23

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

(14)    Inventory

Inventories by major category are as follows:

 
 
August 31,
2017
 
February 28,
2017
Raw materials
 
$
25,603

 
$
20,488

Work in process
 
2,494

 
2,270

Finished goods
 
113,956

 
99,594

Inventory, net
 
$
142,053

 
$
122,352


(15)     Financing Arrangements

The Company has the following financing arrangements:

 
 
August 31,
2017
 
February 28,
2017
Debt
 
 
 
 
Domestic credit facility (a)
 
$
94

 
$
92,793

Florida mortgage (b)
 
8,864

 
9,113

Euro asset-based lending obligation (c)
 
5,164

 
3,905

Schwaiger mortgage (d)
 
592

 
644

Klipsch note (e)
 
15

 
113

Voxx Germany mortgage (f)
 
3,953

 
3,875

Total debt
 
18,682

 
110,443

Less: current portion of long-term debt
 
6,770

 
9,215

Long-term debt
 
11,912

 
101,228

Debt issuance costs
 
3,070

 
3,481

 Total long-term debt, net of debt issuance costs
 
$
8,842

 
$
97,747


(a)          Domestic Credit Facility
 
The Company has a senior secured credit facility (the "Credit Facility") that 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 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 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)). In conjunction with the sale of Hirschmann on August 31, 2017 (see Note 2), the Company paid down substantially all of the outstanding balance of the revolving credit facility, as well as the entire outstanding balance of the term loan. As of August 31, 2017, $94 was outstanding under the revolving credit facility. The remaining availability under the revolving credit line of the Credit Facility was $100,563 as of August 31, 2017.

All amounts outstanding under the 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 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.


24

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

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 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 for Base Rate Loans of 0.75 - 1.25% as defined in the agreement. As of August 31, 2017, the weighted average interest rate on the facility was 5.00%.

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 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 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 August 31, 2017, the Company was in compliance with all debt covenants, including cash dominion.

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.

Charges incurred on the unused portion of the Credit Facility during the three and six months ended August 31, 2017 totaled $57 and $118, respectively, compared to $73 and $122 during the three and six months ended August 31, 2016, respectively. These charges are included within Interest and Bank Charges on the Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company has deferred financing costs related to the Credit Facility and a previous amendment and modification of the 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 Credit Facility. During the three and six months ended August 31, 2017, the Company amortized $197 and $395 of these costs, respectively, compared to $198 and $394 for the three and six months ended August 31, 2016, respectively. The net unamortized balance of these deferred financing costs as of August 31, 2017 was $2,806.

(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% (2.86% at August 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 Credit Facility with Wells Fargo dated April 26, 2016.


25

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

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 Sheets and are being amortized through Interest and Bank Charges in the Consolidated Statements of Operations and Comprehensive Income (Loss) over the ten-year term of the Florida Mortgage. The Company amortized $8 and $16 of these costs during both of the three and six months ended August 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, 2020 for the Company's subsidiary, VOXX Germany. The rate of interest for the factoring arrangement is the three-month Euribor plus 1.6% (1.28% at August 31, 2017) and the rate of interest for the ABL is the three-month Euribor plus 2.3% (1.97% at August 31, 2017). As of August 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 Note

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.

(16)     Other Income (Expense)

Other income (expense) is comprised of the following:

 
 
Three Months Ended
August 31,
 
Six Months Ended
August 31,
 
 
2017
 
2016
 
2017
 
2016
Foreign currency loss
 
$
(7,387
)
 
$
(67
)
 
$
(8,219
)
 
$
(773
)
Interest income
 
16

 
77

 
31

 
100

Rental income
 
131

 
176

 
275

 
349

Miscellaneous
 
(389
)
 
37

 
(723
)
 
67

Total other, net
 
$
(7,629
)
 
$
223

 
$
(8,636
)
 
$
(257
)

Included within the foreign currency loss for the three and six months ended August 31, 2017 is a loss on forward contracts totaling $(6,618) incurred in conjunction with the sale of Hirschmann (see Note 2).


26

VOXX International Corporation and Subsidiaries
Notes to Unaudited 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.

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 (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 August 31, 2017, the published DIPRO and DICOM rates offered were 10.0 and 3,250 bolivars to the U.S. dollar, respectively. As of August 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 gains (losses) for Venezuela of $21 and $105 were recorded for the three and six months ended August 31, 2017, respectively, as compared to $(134) and $(65), respectively, for the three and six months ended August 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 $3,611 of properties that are currently being held for investment purposes. No impairments were recorded related to these properties during the three and six months ended August 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 August 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 for continuing operations, as follows:


27

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

 
Operating
Leases
2018
$
1,341

2019
745

2020
294

2021
266

2022
203

Thereafter
390

Total minimum lease payments
$
3,239


The Company has capital leases with a total lease liability of $1,152 at August 31, 2017. These leases have maturities through Fiscal 2021.

(19)     Capital Structure
 
The Company's capital structure is as follows:
 
 
 
 
 
Shares Authorized
 
Shares Outstanding
 
 
 
 
Security
 
Par
Value
 
August 31,
2017
 
February 28,
2017
 
August 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

 
21,900,011

 
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

 
2,168,094

 
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 Fiscal 2017, as well as during the first and second quarters of Fiscal 2018, the Company issued four convertible promissory notes to EyeLock LLC, allowing the entity to borrow up to a total of $21,000 in

28

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

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 only 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 1.50 based on the repayment date. Amounts outstanding under the initial loan agreement are due on November 1, 2017, while the four convertible promissory notes executed during Fiscal 2017 and Fiscal 2018 are due on November 1, 2017, April 24, 2018 and September 1, 2018, respectively. All four 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 August 31, 2017 was $28,456.
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 August 31, 2017 and February 28, 2017:


29

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

 
 
August 31, 2017
 
February 28, 2017

Assets
 
(unaudited)
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
(24
)
 
$
11

Accounts receivable, net
 
108

 
295

Inventory, net
 
118

 
135

Receivables from vendors
 
106

 

Prepaid expenses and other current assets
 
109

 
189

Total current assets
 
417

 
630

Property, plant and equipment, net
 
232

 
276

Intangible assets, net
 
37,657

 
39,187

Other assets
 
90

 
96

Total assets
 
$
38,396

 
$
40,189

Liabilities and Partners' Equity