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 months ended
May 31, 2022compared to the three months ended May 31, 2021. Next, we present EBITDA and Adjusted EBITDA attributable to Voxx for the three months ended May 31, 2022compared to the three months ended May 31, 2021, 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 material cash requirements 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 otherwise indicated, all amounts presented in our MD&A below are in thousands, except per share and per share data.
VOXX International Corporation("Voxx," "We," "Our," "Us" or the "Company") is a leading international manufacturer and distributor operating in the Automotive 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., Audiovox Mexico, S. de R.L. de C.V.("Voxx Mexico"), Code Systems, Inc., Oehlbach Kabel GmbH("Oehlbach"), Schwaiger GmbH("Schwaiger"), Invision Automotive Systems, Inc.("Invision"), Premium Audio Company LLC("PAC," which includes Klipsch Group, Inc.and 11 Trading Company LLC), Omega Research and Development, LLC("Omega"), Voxx Automotive Corp., Audiovox Websales LLC, VSM-Rostra LLC("VSM"), VOXX DEI LLC, and VOXX DEI Canada, Ltd.(collectively, with VOXX DEI, LLC, "DEI"), as well as majority owned subsidiaries, EyeLock LLC("EyeLock") and Onkyo Technology KK ("Onkyo"). 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®, Integra®, Invision®, Jamo®, Klipsch®, Mac Audio™, Magnat®, Mirage®, myris®, Oehlbach®, Omega®, Onkyo®, Pioneer®, Prestige®, Project Nursery®, Python®, RCA®, RCA Accessories, Rosen®, Rostra®, Schwaiger®, Smart Start®, Terk®, Vehicle Safety Automotive, Viper®, and Voxx 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 as SiriusXMsatellite radio products. COVID-19 While COVID-19 did not have a significant adverse impact on demand for our products for the three months ended May 31, 2022, we did experience pandemic-related pressures in the global supply network that caused logistical issues, including higher freight costs, supplier product delays, and inflation with respect to materials and labor costs, which impacted our results for the three months ended May 31, 2022. As countries around the world continue to combat COVID-19, and as government-imposed regulations regarding, among other things, COVID-19 testing, travel restrictions, and vaccine mandates change, there is still a risk that the pandemic may impact the overall demand environment, and our ability to source product and materials to meet demand levels and maintain adequate inventory levels, as well as maintain staffing levels at our own facilities in order to fulfill our customer orders and contractual obligations. 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. We will continue to closely monitor updates regarding the spread of COVID-19 and its variants, the 33 -------------------------------------------------------------------------------- distribution of vaccines and vaccine boosters, and any applicable local, state, and federal government-imposed restrictions, and we will adjust our operations accordingly. In light of the foregoing, we may take actions to alter our business operations or such actions that we determine are in the best interest of our employees, customers, suppliers, and shareholders.
The Company continues to focus on cash flow and expects to have sufficient resources to operate over the next twelve month period.
The Company operates in three reportable segments based on our products and internal organizational structure. The operating segments consist of
Automotive Electronics, Consumer Electronics, and Biometrics. See Note 22 to the Company's Consolidated Financial Statements for segment information.
The products included in these segments are:
mobile multimedia infotainment products, including dome, seatback and headrest systems;
automotive security, vehicle access and remote start systems;
satellite radios, including plug and play models and direct connect models;
telematics applications for smart phones;
mobile interface modules;
automotive electrical accessories;
rear view and collision avoidance systems;
driver distraction products;
? power lift gates; ? turn signal switches; ?
automotive lighting products;
automotive sensor and camera systems;
? USB ports; ? cruise control systems; and ? heated seats.
Consumer electronics products include:
? premium loudspeakers; ? architectural speakers; ? commercial speakers; ? outdoor speakers; ?
wireless and Bluetooth speakers;
? home theater systems; ? business music systems; 34
? streaming music systems; ? A/V receivers; ?
over-ear and in-ear headphones;
wired and wireless headphones and earbuds;
Bluetooth headsets and earpieces;
high-definition television (“HDTV”) antennas;
Wireless Fidelity (“Wi-Fi”) antennas;
high-definition multimedia interface (“HDMI”) accessories;
home electronics accessories such as wiring, power cords and other connectivity products;
performance enhancement electronics;
universal remote controls for televisions;
mounting systems for flat screen televisions;
? karaoke products; ? infant/nursery products; ?
power systems and charging products;
cleaning preparations for electronic equipment;
? personal sound amplifiers; ? set-top boxes; and ? home and portable stereos.
Biometric products include:
iris identification products, and
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 fluctuations in the unemployment rate and inflation have been pressured as a result of factors including the COVID-19 pandemic, supply chain shortages, and the war in the
Ukraineand 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. 35
Acquisitions and disposals
September 8, 2021, the Company's subsidiary, PAC, completed the transaction to acquire the home audio/video business of Onkyo Home Entertainment Corporationwith its partner Sharp through the newly formed joint venture, Onkyo Technology KK (see Note 2).
Significant 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; business combinations; 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; 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 ended
February 28, 2022. During Fiscal 2022, changes to the global economic situation continued to occur as a consequence of the COVID-19 pandemic and related supply chain challenges, chip shortages, and freight issues that could continue during Fiscal 2023. 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 Company's 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. Since February 28, 2022, there have been no changes in our critical accounting policies.
As you read this discussion and analysis, refer to the accompanying Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income, which present the results of our operations for the three months ended
May 31, 2022and 2021.
The following tables present, for the periods indicated, certain statements of operating data for the three months ended
Net SalesMay 31, 2022 2021 $ Change % Change Three Months Ended Automotive Electronics $ 39,585 $ 42,657 $ (3,072 )(7.2 )% Consumer Electronics 88,937 94,113 (5,176 ) (5.5 )% Biometrics 103 205 (102 ) (49.8 )% Corporate 107 85 22 25.9 % Total net sales $ 128,732 $ 137,060 $ (8,328 )(6.1 )% Automotive Electronicssales represented 30.7% of the net sales for the three months ended May 31, 2022, compared to 31.1% in the prior year period and decreased $3,072for the three months ended May 31, 2022, as compared to the three months ended May 31, 2021. The primary driver of the sales decrease was the decline in sales of aftermarket security products of approximately $3,700, which includes aftermarket remote starts and telematic products. In the prior year, component shortages caused some customers to make large product purchases earlier in order to avoid future stock outages, and has led to high inventory levels at some customers during the three months ended May 31, 2022and caused delays in our sales. Chip shortages and shipping delays have also lead to sales declines for these products for the quarter. Sales of the Company's OEM and aftermarket automotive safety electronics also decreased approximately $1,100in total for the three months ended May 31, 2022primarily as a result of component part shortages, labor shortages, and low inventories of vehicles in which these products are generally installed, as well as some fall-off in business for certain older products. Additionally, the Company experienced a decline in satellite radio sales of approximately $1,000for the three months ended May 31, 2022as a result of inventory shortages which have negatively affected the Company's ability to fulfill orders. As an offset to these sales declines, the Company's OEM rear seat entertainment sales experienced a net increase of approximately $2,300during the three months ended May 31, 2022, as a result of the start of a new rear seat entertainment program with Stellantis during the second half of Fiscal 2022 that was not present in the comparable prior year period. This was offset by a decline in sales for certain customer programs due to chip shortages. Aftermarket accessory 36 -------------------------------------------------------------------------------- product sales also increased approximately $400for the three months ended May 31, 2022due to the successful launch of new soundbars for club cars during the second quarter of Fiscal 2022. Consumer Electronics sales represented 69.1% of our net sales for the three months ended May 31, 2022, compared to 68.7% in the comparable prior year period and decreased $5,176for the three months ended May 31, 2022, as compared to the three months ended May 31, 2021. This net decrease was a result of several factors. The Company experienced a net decrease in domestic sales of its premium home theater speakers, mobility products and wireless speaker products totaling approximately $13,100during the three months ended May 31, 2022. The Company has been selling its remaining inventory of certain home theater products in preparation for new product launches expected in the second quarter of Fiscal 2023 and sales of these older product lines have been on the decline. The Company also moved from a fulfillment model to a direct to customer model for its online platform sales of mobility products in order to improve pricing, which has resulted in a decrease in sales for the three months ended May 31, 2022as a result of the transition. This was partially offset by higher sales and customer demand for premium soundbars and Bluetooth speakers, despite experiencing chip shortages causing some product backorders and vendor delays. There was also a total decrease in domestic sales of accessory products of approximately $2,500for the three months ended May 31, 2022impacting most major accessory product lines, including hook-up, nursery, smart home, clock, and reception products. This decline was a result of a general softness of sales in the accessory market following prior year rebound sales experienced after the COVID-19 shut-downs in Fiscal 2021. Net sales further decreased for the three months ended May 31, 2022as a result of an increase in the Company's reserve for returns of approximately $1,000relating to certain premium audio products. Finally, there was a decline in sales of approximately $900related to wireless accessory speakers during the three months ended May 31, 2022, due to the timing of customer orders, as one of its larger customers made a large purchase in the first quarter of Fiscal 2022 for the Spring, while in the current year, this seasonal order was placed in the fourth quarter of Fiscal 2022. As an offset to these declines, the Company experienced an increase in domestic sales of Onkyo and Pioneerproducts of approximately $10,000for the three months ended May 31, 2022. The Company's 11 Trading Companysubsidiary began selling these products through a distribution agreement during Fiscal 2021 and during the third quarter of Fiscal 2022, the Company completed an acquisition of certain assets of the Onkyo Home Entertainmentbusiness with its joint venture partner, resulting in the establishment of the Company's Onkyo subsidiary. Sales of Onkyo and Pioneerproducts have increased since the acquisition, as there has been higher factory production of these products to meet customer demand, which the Company is still working toward. Prior to the acquisition, the Onkyo Home Entertainmentparent company was unable to meet customer demand due to financial difficulty. Sales of premium audio products made by the Company's PAC Australia subsidiary have also increased approximately $2,600in during the three months ended May 31, 2022, as this entity was established during the first quarter of Fiscal 2022 and began shipping product at the end of May 2021. Biometrics sales represented 0.1% of our net sales for the three months ended May 31, 2022and 2021. Sales for the three months ended May 31, 2022have decreased approximately $100. The decrease in sales during the three months ended May 31, 2022was due primarily to higher sales of the NIXT product in the prior year, as the product launched during Fiscal 2021.
Gross profit and gross margin percentage
May 31, 2022 2021 $ Change % Change Three Months Ended Automotive Electronics
$ 8,782 $ 11,522 $ (2,740 )(23.8 )% 22.2 % 27.0 % Consumer Electronics 24,326 25,052 (726 ) (2.9 )% 27.4 % 26.6 % Biometrics 25 40 (15 ) (37.5 )% 24.3 % 19.5 % Corporate 106 81 25 30.9 % $ 33,239 $ 36,695 $ (3,456 )(9.4 )% 25.8 % 26.8 % Gross margin percentages for the Company have decreased 100 basis points for the three months ended May 31, 2022, as compared to the three months ended May 31, 2021. Gross margin percentages in the Automotive Electronicssegment decreased 480 basis points for the three months ended May 31, 2022, as compared to the prior year period. The increased cost of materials and shipping, as well as increases in tariffs included in cost of goods sold, have negatively affected margins during the three months ended May 31, 2022for such items as OEM rear seat entertainment and OEM automotive safety products, which the Company has been actively working to mitigate through a combination of sales price adjustments and other sourcing strategies, as such supply chain issues are expected to continue through 37 -------------------------------------------------------------------------------- most of Fiscal 2023. These mitigating actions have helped to stabilize margins for certain other product lines within the segment during the three months ended May 31, 2022, or have helped to reduce the negative impact of these supply chain issues. Additionally, certain new OEM rear seat entertainment products that began selling during the second half of Fiscal 2022, and that have positively contributed to sales for the three months ended May 31, 2022, have generated lower margins than are normally achieved in this segment. Finally, sales of aftermarket security products, which have higher profit margins than those typically achieved by the segment, have experienced sales declines during the three months ended May 31, 2022and thus have contributed negatively to the segment's margins for the quarter. Offsetting these negative margin impacts, and in addition to mitigating strategies related to rising supply chain costs noted above, the decrease in sales of satellite radio products for the three months ended May 31, 2022, which typically generate lower margins for the Company, contributed positively to margins overall. Gross margin percentages in the Consumer Electronics segment increased 80 basis points for the three months ended May 31, 2022, as compared to the prior year period. Sales of Onkyo and Pioneerproducts positively impacted margins for the three months ended May 31, 2022, as there have been higher sales and higher factory production of these products since the acquisition of the Onkyo Home Entertainmentbusiness in September 2021, as compared to sales under its distribution agreement with Onkyo Home Entertainment Corp.prior to the acquisition. The Company has more control over pricing and costing of the products since it acquired the business as well, which has further improved these margins. Offsetting this positive margin impact, significant increases to container costs and surcharges affecting cost of sales for many of the products within the segment have caused declines in margins for the three month ended May 31, 2022, which the Company has actively worked to mitigate through pricing adjustments and other sourcing strategies, and has effectively helped to stabilize margins for some products, or has helped to reduce the negative impact of these issues for others. These supply chain issues are expected to continue through most of Fiscal 2023. In addition, the Company saw declines in sales of its older line of premium home theater speakers during the three months ended May 31, 2022in preparation for new product launches. As these products have typically generated higher margins for the segment, this decrease in sales negatively impacted margins for the quarter. Gross margin percentages in the Biometrics segment improved 480 basis points for the three months ended May 31, 2022as compared to the prior year period. The increase in margins for the three months ended May 31, 2022was primarily a result of tooling costs incurred during the three months ended May 31, 2021that did not repeat in the current year. Operating Expenses May 31, 2022 2021 $ Change % Change Three Months Ended Operating expenses: Selling $ 12,285 $ 11,467 $ 8187.1 % General and administrative 19,130 18,676 454 2.4 % Engineering and technical support 8,389 6,232 2,157 34.6 % Acquisition costs 136 676 (540 ) (79.9 )% Total operating expenses $ 39,940 $ 37,051 $ 2,8897.8 %
Total operating expenses increased
For the three months ended
May 31, 2022, selling expenses increased $818. This increase was primarily attributable to higher trade show expenses of approximately $700, as the Company attended the annual Consumer Electronics Show ("CES") in person in 2022. The 2021 CES event was held virtually due to the COVID-19 pandemic. The Company also saw an increase in travel expenses for the three months ended May 31, 2022of approximately $300due to the continued lifting of the Company's COVID-19 related restrictions which have allowed salesmen to begin traveling to customer sites again. Additionally, salary and benefits expenses increased approximately $200during the three months ended May 31, 2022, due in part to an increase in headcount, as well as due to certain medical accrual releases in the prior year that did not repeat. Finally, there was an increase in web platform expenses of approximately $100for the three months ended May 31, 2022as a result of a net increase in online advertising and promotion, as well as due to the higher cost of online platform fees. Offsetting these increases in selling expenses, there was a decrease in commission expense of approximately $300for the three months ended May 31, 2022as a result of a decrease in the Company's sales for the quarter, as compared to the three months ended May 31, 2021. The Company also experienced a decrease in advertising expenses of approximately $300primarily as a result of the timing of the launch of new displays at customer sites, which is expected in the second quarter of Fiscal 2022. General and administrative expenses increased $454during the three months ended May 31, 2022, as compared to the prior year period. Depreciation and amortization expense increased approximately $300due to the amortization of intangible assets of the Company's new Onkyo subsidiary, which was not present in the prior year period. Benefit expenses also increased $300for the 38 -------------------------------------------------------------------------------- three months ended May 31, 2022due to the absence of medical releases in the current year quarter as compared to prior year. Fees related to taxes and licensing increased approximately $200during the three months ended May 31, 2022due primarily to licenses required for the Company's Onkyo subsidiary established in September 2021. The Company also experienced an increase in insurance expense of approximately $200related to an overall increase in insurance policy premiums as compared to the prior year, including cyber security and directors and officers coverage. Finally, travel and entertainment expense increased approximately $100as a result of the lifting of COVID restrictions on the Company's travel policies. As an offset to these increases in general and administrative expense, the Company experienced a net decrease in professional fees of approximately $600for the three months ended May 31, 2022due to a decrease in certain fees incurred in the prior year related to an arbitration case, and the absence of consulting fees related to the EyeLockdistribution agreement with GalvanEyes LLCthat was approved during Fiscal 2022. Salary expense also decreased approximately $100for the three months ended May 31, 2022, due primarily to lower profitability for bonus accruals as compared to the prior year period. Engineering and technical support expenses increased $2,157for the three months ended May 31, 2022, as compared to the prior year period. The Company experienced an increase in direct labor and related payroll expense of approximately $1,800for the three months ended May 31, 2022primarily as a result of additional headcount created by the September 2021acquisition resulting in the establishment of the Company's Onkyo subsidiary, as well as due to the use of outside labor for certain projects. The Company also experienced a net increase in research and development expense of approximately $200for the three months ended May 31, 2022, primarily as a result of the Company's product development projects related to its new Onkyo subsidiary within its Consumer Electronics segment, as well as the development and launch of other new products in both the Consumer Electronics and Automotive segments. This was offset by decreases related to projects in development during the prior year that have been completed, as well as due to a headcount reduction in the Biometrics segment. Acquisition costs decreased $540for the three months ended May 31, 2022, as compared to the prior year period. During both the three months ended May 31, 2022and May 31, 2021, acquisition costs incurred were related to consulting and due diligence fees for the asset purchase agreement signed with Onkyo Home Entertainment Corporationand the joint venture created with Sharp Corporation to complete the transaction. This transaction was completed on September 8, 2021. Other (Expense) Income May 31, 2022 2021 $ Change % Change Three Months Ended Interest and bank charges $ (730 ) $ (528 ) $ (202 )(38.3 )% Equity in income of equity investee 1,588 2,723 (1,135 ) (41.7 )% Interim arbitration award (986 ) - (986 ) (100.0 )% Other, net (2,110 ) 442 (2,552 ) (577.4 )% Total other income $ (2,238 ) $ 2,637 $ (4,875 )(184.9 )% Interest and bank charges represent interest expense and fees related to the Company's bank obligations, shareholder loan, supply chain financing and factoring agreements, interest related to finance leases, and amortization of debt issuance costs. The Company borrowed funds from the Wells Fargo Credit Facility for operating purposes during the three months ended May 31, 2022. This resulted in an increase in interest expense incurred for the three months ended May 31, 2022as compared to the prior year period, in which the Company did not borrow any funds from the Credit Facility. Additionally, the Company's new Onkyo subsidiary entered into a shareholder loan payable to the Company's joint venture partner, Sharp, during the third quarter of Fiscal 2022, for which interest expense was incurred during the three months ended May 31, 2022. This shareholder loan was not outstanding during the three months ended May 31, 2021. Equity in income of equity investee represents the Company's share of income from its 50% non-controlling ownership interest in ASA Electronics LLCand Subsidiaries ("ASA"). The decrease in income for the three months ended May 31, 2022is due to a decrease in ASA revenue, gross profit, and net income resulting from an increase in supply chain and logistics costs impacting all industries. During the first quarter of Fiscal 2023, the Company recorded a charge of $986representing interest expense related to the interim arbitration award accrued during Fiscal 2022, as the award will be payable to Seaguard plus interest when settled. Other, net includes net foreign currency gains or losses, interest income, rental income, and other miscellaneous income and expense. During the three months ended May 31, 2022, the Company had net foreign currency losses of $2,366, as compared to net foreign currency gains of $116for the three months ended May 31, 2021. Foreign currency losses for the three months ended May 31, 2022were primarily driven by declines in the Japanese Yen, which impacted the re-measurement of the Company's 39 --------------------------------------------------------------------------------
Intercompany loans from Onkyo subsidiaries and interest payable that are not long-term investments. The loss attributable to these revaluations for the three months ended
Provision for income tax
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. For the three months ended
May 31, 2022, the Company recorded an income tax benefit of $1,092, which includes a discrete income tax benefit of $164related primarily to the reversal of uncertain tax position liabilities as a result of the lapse of the applicable statute of limitations. For the three months ended May 31, 2021, the Company recorded an income tax provision of $484, which includes a discrete income tax benefit of $74related primarily to the reversal of uncertain tax position liabilities as a result of the lapse of the applicable statute of limitations. The effective tax rates for the three months ended May 31, 2022and 2021 were an income tax benefit of 12.2% on pre-tax loss of $8,939and an income tax provision of 21.2% on pre-tax income of $2,281, respectively. The effective tax rate for the three months ended May 31, 2022and 2021 differs from the U.S.statutory rate of 21% as a result of a number of factors, including the non-controlling interest related to EyeLock LLC, state and local income taxes, nondeductible permanent differences, income taxed in foreign jurisdictions at varying tax rates, and a decrease in valuation allowance.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are not financial measures recognized by GAAP. EBITDA represents net (loss) income attributable to
VOXX International Corporation, computed in accordance with GAAP, before interest expense and bank charges, taxes, and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted for stock-based compensation expense, foreign currency losses (gains), acquisition costs, certain non-routine legal and professional fees, and awards. Depreciation, amortization, stock-based compensation, and foreign currency losses (gains) are non-cash items. We present EBITDA and Adjusted EBITDA in this Form 10-Q because we consider them to be useful and appropriate supplemental measures of our performance. Adjusted EBITDA helps 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 and Adjusted EBITDA 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 VOXX International Corporationto EBITDA and Adjusted EBITDA Three months ended May 31, 20222021
Net income (loss) attributable to
$ (6,527 )$
Interest expense and bank charges (1) 527
Depreciation and amortization (1) 2,904
Income tax (benefit) expense (1,092 ) 484 EBITDA (4,188 ) 6,350 Stock-based compensation 126 236 Foreign currency losses (gains) (1) 2,362 (116 ) Acquisition costs 136
Professional fees related to distribution agreement with GalvanEyes LLC - 325 Non-routine legal fees 508 686 Interim arbitration award 986 - Adjusted EBITDA $ (70 )
$ 8,157(1) For purposes of calculating Adjusted EBITDA for the Company, interest expense and bank charges, depreciation and amortization, as well as foreign currency losses and (gains) have been adjusted in order to exclude the non-controlling interest portion of these expenses attributable to EyeLock LLC. 40 --------------------------------------------------------------------------------
Cash and capital resources
Cash flows, commitments and obligations
May 31, 2022, we had working capital of $121,976which includes cash and cash equivalents of $5,733, compared with working capital of $126,756at February 28, 2022, which included cash and cash equivalents of $27,788. 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 of May 31, 2022, we had cash amounts totaling $114held in foreign bank accounts, none of which would be subject to United Statesfederal income taxes if made available for use in the United States. The Tax Cuts and Jobs Act provides a 100% participation exemption on dividends received from foreign corporations after January 1, 2018, as the United Stateshas moved away from a worldwide tax system and closer to a territorial system for earnings of foreign corporations. Operating activities used cash of $22,267for the three months ended May 31, 2022due to factors including the increase in inventory and the decrease in accounts payable, accrued expenses and other current liabilities, and accrued sales incentives, as well as due to losses incurred by EyeLock LLC. This was offset primarily by the decrease in accounts receivable. For the three months ended May 31, 2021, operating activities used cash of $17,043due to factors including the decrease in accounts payable and accrued expenses, the increase in inventory, as well as losses incurred by EyeLock LLC. This was offset by increases in net sales, as well as a decrease in accounts receivable. Investing activities used cash of $1,383during the three months ended May 31, 2022primarily due to capital expenditures. For the three months ended May 31, 2021, investing activities used cash of $3,927primarily due the issuance of a promissory note to Onkyo Home Entertainment Corp., as well as due to capital expenditures. Financing activities used cash of $838during the three months ended May 31, 2022due to the repayment of borrowings from the Company's Credit Facility and Euro asset-based loan in Germany, the settlement of market stock unit awards in cash, the payment of withholding taxes on the net issuance of a stock award, as well as repayments of finance leases and the Floridamortgage. This was offset by borrowings from the Credit Facility. During the three months ended May 31, 2021, financing activities used cash of $1,755primarily due to the payment of withholding taxes on the net issuance of a stock award, the payment of deferred finance fees related to the amendment of the Credit Facility, as well as repayments of finance leases and the Floridamortgage. Federal, state, and local governments have taken a variety of actions to contain the spread of COVID-19. Many jurisdictions imposed various regulations, including capacity limitations and other restrictions affecting our operations during the Company's 2022 fiscal year, following the mandatory lockdowns imposed during the 2021 fiscal year. Many of the most severe restrictions have been lifted, 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 has a senior secured credit facility (the "Credit Facility") that provides for a revolving credit facility with committed availability of up to $140,000. 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 16(b)). The availability under the revolving credit line of the Credit Facility was $122,259as of May 31, 2022. All amounts outstanding under the Credit Facility will mature and become due on April 19, 2026; however, it is subject to acceleration upon the occurrence of an Event of Default (as defined in the 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 1.75 - 2.25%. Loans designated as Base Rate loans shall bear interest at a rate equal to the applicable margin for Base Rate Loans plus a range of 0.75 - 1.25%, as defined in the Agreement, and shall not be lower than 1.75%. The Credit Facility provides for a Benchmark Replacement that will replace the LIBOR rate for all revolver usage. The Benchmark Replacement is subject to the occurrence of a Benchmark Transition Event, as defined in the Second Amended and Restated Credit Agreement and becomes effective after a five-day transition period following the event. 41 -------------------------------------------------------------------------------- Provided that the Company is in a Compliance Period (the period commencing on that day in which Excess Availability is less than 15% of the Maximum Revolver Amount and ending on a day in which Excess Availability is equal to or greater than 15% 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.
Obligations under the Credit Facility Documents are secured by a general lien and charge on substantially all of the assets of the Borrowers and certain of the Guarantors, including accounts receivable, equipment, real estate, general intangible assets and inventory. The Company has guaranteed the obligations of the borrowers under the Agreement.
The Company has a Euro asset-based loan facility in
Germanywith a credit limit of €8,000 that expires on July 31, 2023. The Company's subsidiaries Voxx German Holdings GmbH, Oehlbach Kabel GmbH, and Schwaiger GmbHare 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 its 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.
Material cash needs
Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity. At
May 31, 2022, such obligations and commitments are as follows: 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) $ 229 $ 190 $ 39$ - $ - Operating leases (1) 4,315 1,248 1,661 717 689 Total contractual cash obligations $ 4,544 $ 1,438 $ 1,700 $ 717 $ 689Other Commitments Bank obligations (2) $ 5,600$ - $ - $ 5,600$ - Stand-by and commercial letters of credit (3) 50 50 - - - Other (4) 10,742 500 1,000 1,000 8,242 Contingent consideration (5) 5,675 674 1,480 1,550 1,971 Pension obligation (6) 246 - - - 246 Unconditional purchase obligations (7) 170,598 170,598 - - - Total other commitments 192,911 171,822 2,480 8,150 10,459 Total commitments $ 197,455 $ 173,260 $ 4,180 $ 8,867 $ 11,1481.
Represents the total principal payments due under finance lease and finance lease obligations. The total current balances (included in Accruals and other current liabilities) due under finance lease and operating lease obligations is
Represents amounts outstanding under the Company’s credit facility and VOXX Germany’s asset-based loan facility as of
We issue stand-by and commercial letters of credit to secure certain purchases and certain insurance requirements.
This amount represents the outstanding mortgage balances of our manufacturing plant in
Represents the contingent liability payable to
for future purchases of certain product inventory.
Represents the liabilities of an employer-sponsored defined benefit pension plan covering certain eligible current and former employees of Voxx Germany.
Purchase obligations in progress represent inventory commitments. These obligations are only recognized in the consolidated financial statements once the commitments have been fulfilled, given that these obligations are likely to change depending 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 subsidiary,
EyeLock LLC, and our accrual related to an unfavorable interim arbitration for which a schedule for the issuance of a final award has not yet been established. 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 have any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that could have a material current or future effect on our financial condition or results of operations.
Related party transactions
April 29, 2021 EyeLock LLCentered into a three-year exclusive distribution agreement ("the Agreement") with GalvanEyes LLC, a Florida LLC, managed by Beat Kahli, the largest holder of Voxx's Class A Common Shares. The Agreement was included in the Company's Proxy Statement filed on June 17, 2021and was approved by the Company's shareholders at the Annual Meeting of Shareholders held on July 29, 2021. See Note 21 of the Notes to the Unaudited Consolidated Financial Statement of this Form 10-Q.
New accounting statements
We are required to adopt certain new accounting pronouncements. See note 25 to our consolidated financial statements included.
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