VOXX INTERNATIONAL CORPORATION This section should be read in conjunction with the "Cautionary Statements" and "Risk Factors" in Item 1A of Part I, and Item 8 of Part II, "Consolidated Financial Statements and Supplementary Data."
We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of the business, including our strategy to give the reader a summary of the goals of our business and the direction in which our business is moving. 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 year endedFebruary 29, 2020 compared to the years endedFebruary 28, 2019 andFebruary 28, 2018 . Next, we present EBITDA, Adjusted EBITDA, and Diluted Adjusted EBITDA per common share for the year endedFebruary 29, 2020 compared to the years endedFebruary 28, 2019 andFebruary 28, 2018 in order to provide a useful and appropriate supplemental measure of our performance. We then provide an analysis of changes in our balance sheet and cash flows and discuss our financial commitments in the sections entitled "Liquidity and Capital Resources." We conclude this MD&A with a discussion of "Related Party Transactions" and "Recent Accounting Pronouncements."
Business Overview and Strategy
VOXX International Corporation is a leading international distributor, manufacturer and value-added service provider in the automotive electronics, consumer electronics and biometrics industries. We conduct our business through seventeen wholly-owned subsidiaries and one majority owned subsidiary. Voxx has a broad portfolio of brand names used to market our products 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. In recent years, we have focused our attention on acquiring synergistic businesses with the addition of several new subsidiaries. These subsidiaries have helped us to expand our core business and broaden our presence in the accessory and OEM markets. Our acquisitions ofKlipsch and Invision provided the opportunity to enter the manufacturing arena, and our acquisition of a controlling interest inEyeLock Inc. andEyeLock Corporation has allowed us to enter the growing and innovative biometrics market. The Company has also made strategic asset purchases in order to strengthen its product offerings and increase market share, such as the acquisition of certain assets and assumption of certain liabilities ofRosen Electronics LLC in Fiscal 2018 andVehicle Safety Holding Corp. in Fiscal 2020. Our intention is to continue to pursue business opportunities which will allow us to further expand our business model while leveraging overhead and exploring specialized niche markets in the electronics industry. Notwithstanding the above acquisitions, if the appropriate opportunity arises, the Company has been willing to explore the potential divestiture of a product line or business, such as with the sale of the Company's Hirschmann subsidiary onAugust 31, 2017 . EffectiveMarch 1, 2019 , the Company revised its reportable segments to better reflect the way the Company now manages its business. To reflect management's revised perspective, the Company now classifies its operations in the following three reportable segments:Automotive Electronics , Consumer Electronics, and Biometrics. Prior year segment amounts have been reclassified to conform to the current presentation. The characteristics of our operations that are relied on in making and reviewing business decisions within these segments include the similarities in our products, the commonality of our customers, suppliers and product developers across multiple brands, our unified marketing and distribution strategy, our centralized inventory management and logistics, and the nature of the financial information used by our Chief Operating Decision Maker ("CODM"). The CODM reviews the financial results of the Company based on the performance of theAutomotive Electronics , Consumer Electronics, and Biometrics segments. The Company's domestic and international business is subject to retail industry trends and conditions and the sales of new and used vehicles. Worldwide economic conditions impact consumer spending and if the global macroeconomic environment deteriorates, this could have a negative effect on the Company's revenues and earnings. In an attempt to offset any negative market conditions, the Company continues to explore strategies and alternatives to reduce its operating expenses, such as the consolidation of facilities and IT systems, and has been introducing new products to obtain a greater market share. Although we believe our product groups have expanding market opportunities, there are certain levels of volatility related to domestic and international markets, new car sales, increased competition by manufacturers, private labels, technological advancements, discretionary consumer spending and general economic conditions. Also, all of our 29
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products are subject to price fluctuations which could affect the carrying value of inventories and gross margins in the future.
DuringMarch 2020 , a global pandemic was declared by theWorld Health Organization related to the rapidly growing outbreak of COVID-19, which began spreading during the fourth quarter of our 2020 fiscal year. The pandemic has significantly impacted the economic conditions inthe United States , with accelerated effects in February through May, as federal, state and local governments have reacted to the public health crisis, creating significant uncertainties inthe United States , as well as the global economy. In the interest of public health and safety,U.S. jurisdictions (national, state and local) where our primary operations and those of many of our customers are located, required mandatory business closures and capacity limitations or other restrictions for those that were permitted to continue to operate. As of the date of this report, 5 of our operating locations were closed, and 3 were open, but operating with a reduced in-office employee presence. As a result of these developments, the Company anticipates an adverse impact on its revenues, results of operations and cash flows. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when, or the manner in which the conditions surrounding COVID-19 will change, including the timing of lifting any restrictions or closure requirements and/or any subsequent re-impositions. Due to the developing situation, the results of the first quarter endingMay 31, 2020 and the full fiscal year endingFebruary 28, 2021 could be impacted in ways we are not able to predict today, including, but not limited to, additional non-cash write-downs and impairments; foreign currency fluctuations; potential adjustments to the carrying value of inventory; and the delayed collections of, or inability to collect accounts receivables. DuringApril 2020 , as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, the Company borrowed$20,000 from its revolving credit facilities in theU.S. As of the date of this report, the Company continues to focus on cash flow and anticipates having sufficient resources to operate during Fiscal 2021. The Company has also implemented a number of other measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing approximately 20% of its employees globally startingApril 6, 2020 ; (ii) implementing temporary salary and hour reductions for both management and non-management level employees Company-wide, including its executive officers, and the Company's board of directors; (iii) executing substantial reductions in expenses, service provider costs, occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; and (iv) working globally with management teams to actively explore and identify all eligible government and other initiatives available to businesses or employees impacted by the COVID-19 pandemic. Acquisitions and Dispositions We have acquired and integrated several businesses, as well as divested certain businesses, the most recent of which are outlined in the Acquisitions and Dispositions section of Part I and presented in detail in Note 2 to the Notes to the Consolidated Financial Statements.
Net Sales Decline
Net sales from continuing operations over a five-year period have decreased
(26%) from
• Volatility in core
due to declines in global automotive sales, increased competition, lower
selling prices, changes in technology and demand, and the volatility of
the national and global economy;
• the discontinuance and reduction of various high volume/low margin product
lines such as clock radios, digital players, digital voice recorders, and
portable DVD players;
• decreased box office sales affecting the Company's cinema audio products;
• weather factors resulting in a change in demand for aftermarket remote
start products; and
• the sale of certain branded product inventory of the Company to a third
party in order to license the brand name for a commission;
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These items were partially offset by:
• the introduction of new products and lines in the
and Consumer Electronics segments, such as: OEM rear seat entertainment;
various Bluetooth and wireless speakers; multi-room streaming audio
solutions; neckband, on-ear, in-ear and over-ear headphones; nursery
products; and karaoke products,
• the acquisition of certain assets of Rosen Electronics LLC ,
• the acquisition of certain assets of Vehicle Safety Holdings Corp. ,
• the introduction of activity tracking band fulfillment programs and the
increase in product offerings under these programs,
• international digital broadcasting upgrades necessitating the purchase of
updated consumer accessory products, and
• successful marketing and promotional activity.
Critical Accounting Policies and Estimates (see Note 1 to the Consolidated Financial Statements)
General
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions can be subjective and complex and may affect the reported amounts of assets and liabilities, revenues and expenses reported in those financial statements. As a result, actual results could differ from such estimates and assumptions. During the fourth quarter of the Company's fiscal year, as well as subsequent toFebruary 29, 2020 , there have been significant changes to the global economic situation as a consequence of the COVID-19 pandemic. It is reasonably possible that this could cause changes to estimates as a result of the financial circumstances of the markets in which the Company operates, the price of the Company's publicly traded equity in comparison to the Company's carrying value, and the health of the global economy. Such changes to estimates could potentially result in impacts that would be material to the consolidated financial statements, particularly with respect to the fair value of the Company's reporting units in relation to potential goodwill impairment and the fair value of long-lived assets in relation to potential impairment.
The significant accounting policies and estimates which we believe are the most critical in fully understanding and evaluating the reported consolidated financial results include the following:
Revenue Recognition
OnMarch 1, 2018 , the Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments ("ASC 606"), using the modified retrospective method. Results for reporting periods beginningMarch 1, 2018 are presented under the new guidance, while prior period amounts continue to be reported in accordance with previous guidance without revision. Most of the changes resulting from the adoption of ASC Topic 606 onMarch 1, 2018 were changes in presentation within the Consolidated Balance Sheet, and we made no changes to opening Retained Earnings. The impact of the adoption of ASC Topic 606 has been immaterial to our net income; however, the adoption did increase the level of disclosure concerning our net sales. The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. We apply the FASB's guidance on revenue recognition, which requires us to recognize the amount of revenue and consideration that we expect to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy a performance obligation. We account for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, 31 --------------------------------------------------------------------------------
including various forms of discounts. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue.
Sales Incentives
Sales incentives are accounted for in accordance with ASC 606. We offer sales
incentives to our customers in the form of (1) co-operative advertising
allowances; (2) market development funds; (3) volume incentive rebates; and (4)
other trade allowances. We accrue the cost of co-operative advertising
allowances, volume incentive rebates, and market development funds at the latter
of when the customer purchases our products or when the sales incentive is
offered to the customer. We record the provision for other trade allowances at
the latter of when the sales incentive is offered or when the related revenue is
recognized. Except for other trade allowances, all sales incentives require the
customer to purchase our products during a specified period of time. All sales
incentives require customers to claim the sales incentive within a certain time
period (referred to as the "claim period"). All costs associated with sales
incentives are classified as a reduction of net sales.
Depending on the specific facts and circumstances, we utilize either the most
likely amount or the expected value methods to estimate the effect of
uncertainty on the amount of variable consideration to which we would be
entitled. The most likely amount method considers the single most likely amount
from a range of possible consideration amounts, while the expected value method
is the sum of probability-weighted amounts in a range of possible consideration
amounts. Both methods are based upon the contractual terms of the incentives and
historical experience with each customer. Although we make our best estimate of
sales incentive liabilities, many factors, including significant unanticipated
changes in the purchasing volume and the lack of claims from customers could
have a significant impact on the liability for sales incentives and reported
operating results. We record estimates for cash discounts, promotional rebates,
and other promotional allowances in the period the related revenue is recognized
("Customer Credits"). The provision for Customer Credits is recorded as a
reduction from gross sales and reserves for Customer Credits are presented
within accrued sales incentives on the Consolidated Balance Sheet.
Unearned sales incentives are volume incentive rebates where the customer did
not purchase the required minimum quantities of product during the specified
time. Volume incentive rebates are reversed into income in the period when the
customer did not reach the required minimum purchases of product during the
specified time. Unclaimed sales incentives are sales incentives earned by the
customer, but the customer has not claimed payment within the claim period
(period after program has ended). Unclaimed sales incentives are investigated in
a timely manner after the end of the program and reversed if deemed appropriate.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and current credit worthiness, as determined by a review of current credit information. We continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within management's expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past. Our five largest customer balances comprise 24% of our accounts receivable balance as ofFebruary 29, 2020 . A significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of accounts receivable and our results of operations. Inventory We value our inventory at the lower of the actual cost to purchase or the net realizable value of the inventory. Net realizable value is defined as estimated selling prices, less cost of completion, disposal, and transportation. We regularly review inventory quantities on-hand and record a provision in cost of sales for excess and obsolete inventory based primarily on selling prices, indications from customers based upon current price negotiations, and purchase orders. The cost of the inventory is determined primarily on a weighted moving average basis, with a portion valued at standard cost, which approximates actual costs on the first in, first out basis. Our industry is characterized by rapid technological change and frequent new product introductions that could result in an increase in the amount of obsolete inventory quantities on-hand. In addition, and as necessary, specific reserves for future known or anticipated events may be established. 32
-------------------------------------------------------------------------------- Estimates of excess and obsolete inventory may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the carrying value of inventory and our results of operations.
Long-Lived and Intangible Asset Impairments
As ofFebruary 29, 2020 , intangible assets totaled$88,288 and property, plant and equipment totaled$51,424 . Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based upon a change in the expected use of the asset or performance of the related asset group. At the present time, management intends to continue the development, marketing and selling of products associated with its intangible assets, and there are no known restrictions on the continuation of their use. In connection with the annual impairment test performed as of the last day of the fourth quarter of Fiscal 2020, the Company determined that several of its indefinite-lived trademarks in the Consumer Electronics segment, were impaired. The impairments were the result of the Company being unable to secure product placement into customer stores, anticipated shortfalls in sales due to economic uncertainty as a result of the COVID-19 pandemic, reduced demand from a large traditional brick-and-mortar customer, along with continued declines in the German economy. As a result, several indefinite-lived tradenames in the Consumer Electronics segment were impaired resulting in impairment charges of$2,828 recorded for the year endedFebruary 29, 2020 (see Note 1(k)). Related long-lived assets were tested for recoverability and determined to be recoverable and therefore no additional impairments related to long-lived assets were recorded in the Consumer Electronics segment. In the Biometrics segment, in connection with the annual impairment test for Fiscal 2020, the Company determined that its indefinite-lived trademark was impaired. The impairment of the trademark was the result of lack of customer acceptance of the related technology, lower than anticipated results, adjusted expectations for demand and anticipated delays of product deployment with target customers due to economic uncertainty given the COVID-19 pandemic. Related long-lived assets in the Biometrics segment were tested for recoverability and determined not to be recoverable. The fair value of the long-lived assets that were not recoverable were estimated, and when compared to their carrying value, were determined to also be impaired. As a result, total impairments in the Biometric segment of$27,402 for indefinite-lived and definite-lived intangible assets were recorded for the year endedFebruary 29, 2020 (see Note 1 (k)). The combined impairment charges for both the Consumer Electronics segment and the Biometrics segment aggregated$30,230 for fiscal year endedFebruary 29, 2020 . During the second quarter of Fiscal 2019, the Company re-evaluated its projections for several brands in its former Consumer Accessories and Automotive segments based on lower than anticipated results. Specifically, during the second quarter of Fiscal 2019, the lower than anticipated results were due to reduced product load-ins, increased competition for certain product lines, a streamlining of SKU's, and a change in market strategy for one of its brands. Accordingly, these were considered indicators of impairment requiring the Company to test the related indefinite-lived tradenames for impairment as ofAugust 31, 2018 . The Company also tested its indefinite-lived intangible assets as ofFebruary 28, 2019 as part of its annual impairment testing. During the fourth quarter, the Company further streamlined its SKU's in conjunction with its corporate realignment and transformation initiatives, and adjusted expectations for select customer demand, and the anticipated results from alternative sales channels for one of its brands. As a result of these analyses, it was determined that several of the Company's former Consumer Accessories trademarks and one of the Automotive trademarks were impaired with total impairment charges of$25,789 recorded for the year endedFebruary 28, 2019 (see Note 1(k)). No impairment losses were recorded related to indefinite lived intangible assets during Fiscal 2018. Approximately 39% of our indefinite-lived trademarks ($25,279 ) are at risk of impairment as ofFebruary 29, 2020 . The Company uses an income approach, based on the relief from royalty method, to value the indefinite-lived trademarks as part of its impairment test. This impairment test involves the use of accounting estimates and 33
-------------------------------------------------------------------------------- assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. The critical assumptions in the discounted cash flow model include revenues, long-term growth rates, royalty rates, and discount rates. Management exercises judgment in developing these assumptions. Certain of these assumptions are based upon industry projections, facts specific to the trademarks and consideration of our long-term view for the trademark and the markets we operate in. If we were to experience sales declines, a significant change in operating margins which may impact estimated royalty rates, an increase in our discount rates, and/or a decrease in our projected long-term growth rates, there would be an increased risk of impairment of these indefinite-lived trademarks. The cost of other intangible assets with definite lives and long-lived assets are amortized on an accelerated or straight-line basis over their respective lives. Management has determined that the current lives of these assets are appropriate. Management has reviewed the long-lived assets in the Consumer Electronics and Biometrics segments for recoverability, as discussed above, and noted that long-lived assets in the Biometrics segment were impaired as ofFebruary 29, 2020 (see Note 1(k)). Long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with ASC 360 whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying value of the long-lived assets are not recoverable on an undiscounted basis, they are then compared to their estimated fair market value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. The Company holds certain long-lived assets inVenezuela , which are held for investment purposes. During the second quarter of Fiscal 2019, the Company assessed the recoverability of these properties as a result of the country's continued economic deterioration, which included a significant currency devaluation in August of 2018. The Company estimated the future undiscounted cash flows expected to be received from these properties. The estimate of the future undiscounted cash flows considered the Company's financial condition and its intent and ability to retain its investments for a period of time sufficient to allow for the recovery of the carrying value. The future undiscounted cash flows did not exceed the net carrying value for the long-lived assets. The estimated fair value of the properties, which also considered the current conditions of the economy inVenezuela , the volatility of the real estate market, and the significant political unrest, resulted in a full non-cash impairment charge of$3,473 for the year endedFebruary 28, 2019 . The non-cash impairment charge is included in Other Income (Expense) on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The value of the Company's properties held for investment purposes inVenezuela is$0 as ofFebruary 29, 2020 . Voxx's goodwill totaled$55,000 as ofFebruary 29, 2020 .Goodwill is tested for impairment as of the last day of each fiscal year at the reporting unit level. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and estimation of the fair value of each reporting unit. Based on the Company's goodwill impairment assessment, all the reporting units with goodwill had estimated fair values as ofFebruary 29, 2020 that exceeded their carrying values. As a result of the annual assessment, no impairment charges were recorded related to goodwill during Fiscal 2020, Fiscal 2019 or Fiscal 2018.Goodwill allocated to ourKlipsch , Invision, Rosen, and VSHC reporting units was 84.6% ($46,533 ), 13.4% ($7,372 ), 1.6% ($880 ), and 0.4% ($215 ), respectively. The fair values of theKlipsch and Invision reporting units are greater than their carrying values by approximately 933.5% ($28,714 ) and 28.2% ($6,903 ), respectively, as ofFebruary 29, 2020 . The Company uses either an income approach or a market approach, or a combination of these approaches to determine the fair value of its reporting units. These approaches have a degree of uncertainty. The income approach employs a discounted cash flow model to value the reporting unit as part of its impairment test. This impairment test involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. The critical assumptions in the discounted cash flow model are revenues, operating margins, working capital and a discount rate (developed using a weighted average cost of capital analysis). Management exercises judgment in developing these assumptions. Certain of these assumptions are based upon industry projections, facts specific to the reporting unit, market participant assumptions and data, and consideration of our long-term view for the reporting unit and the markets we operate in. The market approach employs market multiples from guideline public 34 -------------------------------------------------------------------------------- companies operating in our industry. Estimates of fair value are derived by applying multiples based on revenue and earnings before interest, taxes, depreciation, and amortization ("EBITDA") adjusted for size and performance metrics relative to peer companies. If theKlipsch reporting unit were to experience sales declines, sustained pricing pressures, unfavorable operating margins, lack of new product acceptance by consumers, changes in consumer trends and preferred shopping channels, less than anticipated results for the holiday season, a change in the peer group or performance of the peer companies, an increase to the discount rate, and/or a decrease in our projected long-term growth rates used in the discounted cash flow model, there would be an increased risk of goodwill impairment for theKlipsch reporting unit. If the Invision reporting unit experienced an increase to the discount rate, a lack or delay in new product acceptance, cancellation or reduction in projected volumes from OEM customers, or a change in our projected long-term growth rates used in the discounted cash flow model, there would be an increased risk of goodwill impairment for the Invision reporting unit. If the Rosen and VSHC reporting units experienced an increase to the discount rate, sales declines, changes in consumer trends, or a decrease in our projected long-term growth rates used in the discounted cash flow model, there would be an increased risk of goodwill impairment for the Rosen and VSHC reporting units.
Warranties
We offer warranties of various lengths depending upon the specific product. Our standard warranties require us to repair or replace defective product returned by both end users and customers during such warranty period at no cost. We do not sell extended warranties. We record an estimate for warranty related costs in cost of sales, based upon historical experience of actual warranty claims and current information on repair costs and contract terms with certain manufacturers. While warranty costs have historically been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same warranty return rates or repair costs that have been experienced in the past. A significant increase in product return rates, or a significant increase in the costs to repair products, could have a material adverse impact on our operating results.
Stock-Based Compensation
We use the Black-Scholes option pricing model to compute the estimated fair value of stock-based awards. The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of stock-based awards reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility by considering the historical volatility of our stock, the implied volatility of publicly traded stock options in our stock and our expectations of volatility for the expected term of stock-based compensation awards. For restricted stock awards, the fair value of the award is the price on the date of grant. As a result, if other assumptions or estimates had been used for restricted stock awards granted in the current and prior periods, the total stock-based compensation expense for the current fiscal year of$2,282 could have been materially different. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.
Income Taxes
We account for income taxes in accordance with the guidance issued under
Statement ASC 740, "Income Taxes" ("ASC 740") with consideration for uncertain
tax positions. We record a valuation allowance to reduce our deferred tax
assets to the amount of future tax benefit that is more likely than not to be
realized.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying values of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. In evaluating our ability to recover our
deferred tax assets within the jurisdiction from which they arise, we consider
all positive and negative evidence including the results of recent operations,
scheduled reversal of deferred tax liabilities, future taxable income and tax
planning strategies. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled (see Note
8). The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with the authoritative guidance issued under ASC 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return
35
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should be recorded in the financial statements. The Company may recognize the
tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. The Company provides loss contingencies for
federal, state and international tax matters relating to potential tax
examination issues, planning initiatives and compliance responsibilities. The
development of these reserves requires judgments about tax issues, potential
outcomes and timing, which if different, may materially impact the Company's
financial condition and results of operations. The Company classifies interest
and penalties associated with income taxes as a component of Income tax expense
(benefit) on the Consolidated Statements of Operations and Comprehensive (Loss)
Income.
Results of Operations
Included in Item 8 of this annual report on Form 10-K are the Consolidated
Balance Sheets as of February 29, 2020 and February 28, 2019 and the
Consolidated Statements of Operations and Comprehensive (Loss) Income,
Consolidated Statements of Stockholders' Equity and Consolidated Statements of
Cash Flows for the years ended February 29, 2020 , February 28, 2019 and
February 28, 2018 . In order to provide the reader meaningful comparison, the
following analysis provides comparisons of the audited year ended February 29,
2020 with the audited year ended February 28, 2019 , and the audited year ended
February 28, 2019 with the audited year ended February 28, 2018 . We analyze and
explain the differences between periods in the specific line items of the
Consolidated Statements of Operations and Comprehensive (Loss) Income.
Year Ended
Continuing Operations
The tables presented in this section set forth, for the periods indicated,
certain Statement of Operations data for the years ended
Net Sales Fiscal Fiscal Fiscal 2020 2019 2018 Automotive Electronics$ 114,154 $ 161,647 $ 155,480 Consumer Electronics 279,675 283,144 350,526 Biometrics 461 1,098 636 Corporate 599 927 450 Total net sales$ 394,889 $ 446,816 $ 507,092
Fiscal 2020 compared to Fiscal 2019
Automotive Electronics sales, which include both OEM and aftermarket automotive electronics, represented 28.9% of the net sales for the year endedFebruary 29, 2020 , compared to 36.2% in the prior year. Sales in this segment decreased during the year endedFebruary 29, 2020 as compared to the prior year due to various factors, including a decline in sales of the Company's EVO rear seat entertainment product line, which was due in part to slower sales for certain programs that began in the prior year and the discontinuation of two planned programs, which is attributable to a softening of global automotive industry sales during the year. The Company's OEM and aftermarket security and remote start sales also declined during the year endedFebruary 29, 2020 as a result of competition due in part to a shift in demand from analog to digital remote start products, as well as the discontinuation of passive entry programs with certain customers. Sales of aftermarket satellite radio and headrest products have declined for the year endedFebruary 29, 2020 as compared to the prior year, as a result of an increase in standard factory equipped vehicles with these options, as well as due to price competition and increased tariffs for aftermarket headrest products. Additionally, during the year endedFebruary 29, 2020 , the Company made a non-refundable up-front payment to one of its customers as consideration for a future OEM program award, which resulted in a reduction of revenue. Offsetting the sales declines in this segment for the year endedFebruary 29, 2020 were 36
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increases in sales of certain aftermarket safety and security products as
compared to the prior year, as well as sales related to the Company's newly
acquired
Consumer Electronics sales represented 70.8% of net sales for the year endedFebruary 29, 2020 as compared to 63.4% in the prior year. Sales decreased for the year endedFebruary 29, 2020 as compared to the prior year due to several factors. The Company experienced decreases in sales of certain products, such as in theProject Nursery line, as a result of the elimination of baby video monitors; in wireless and bluetooth speakers, due a reduction in product placement with one of the Company's larger customers and the timing of annual orders from another; in sales of smart home products, as the Company is exiting this category; and in karaoke products, due to a one time holiday sale to one of the Company's customers in the prior year that did not repeat in the current fiscal year. The Company also continued to see a decline in sales of certain hook-up, power products, and headphones, as a result of changes in customer demand and technology, and due to the Company's continuing rationalization of SKU's in Fiscal 2020, with the goal of limiting sales of lower margin products. WithinEurope , the Company experienced decreases in sales across all product lines, as well as in the DIY business during the year endedFebruary 29, 2020 as a result of a slowdown in the European market. Offsetting these decreases, the Company had an increase in sales within both of its premium mobility and premium wireless and bluetooth speaker categories as a result of the launch of new lines of soundbars, Bluetooth speakers, and wireless earbuds, as well as stronger sales of several existing products. The Company's premium home separate speaker product sales also increased as a result of the continued successful sales of its new domestic product lines that launched during the second quarter of Fiscal 2019, and additional distribution partners for the Company's premium commercial speaker products had a favorable impact on sales for the year endedFebruary 29, 2020 as well. Additionally, reception product sales were up for the year endedFebruary 29, 2020 as a result of expanded SKU offerings with certain customers and stronger market share, and sales of the Company's activity bands have increased year over year as a result of increased motion program participants, as well as additional product offerings for participants, including the Apple watch and Fitbit. Biometrics represented 0.1% of our net sales for the year endedFebruary 29, 2020 , compared to 0.2% in the prior year. This segment experienced a decrease in product sales for the year endedFebruary 29, 2020 as a result of its product mix, as the Company was selling more of its higher dollar Hbox products during the year endedFebruary 28, 2019 . During the year endedFebruary 29, 2020 , the Company began selling its EXT outdoor perimeter access product, as well as an updated version of its Nano NXT perimeter access product, which both sell at a lower price point and have not yet achieved the sales volumes to surpass prior year sales dollars.
Fiscal 2019 compared to Fiscal 2018
Automotive Electronics sales, which include both OEM and aftermarket automotive electronics, represented 36.2% of the net sales for the year endedFebruary 28, 2019 , compared to 30.7% in the prior year. Sales in this segment increased during the year endedFebruary 28, 2019 as compared to the prior year primarily due to a full year of sales of its EVO headrest product within the OEM manufacturing line. Sales were also positively impacted by the Company's Subaru remote start program and the launch of new CarLink products. Offsetting these sales increases were declines in our aftermarket headrest and remote start products, as well as a decline in satellite radio sales for the year endedFebruary 28, 2019 . The declines in both satellite radio sales and aftermarket headrests are the result of an increase in standard factory equipped vehicles with these options. Sales declines in aftermarket remote start products were caused primarily by an inventory shortage of certain digital platform remote start products that were in higher demand during the fiscal year as compared to analog systems. Consumer Electronics sales represented 63.4% of net sales for the year endedFebruary 28, 2019 as compared to 69.1% in the prior year. Sales in Consumer Electronics decreased for the year endedFebruary 28, 2019 partially as a result of lower sales of certain discontinued products including powered towers, digital speakers, and digital systems; elimination of overstock in certain inventory levels; as well as a shift in demand from traditional wired mobility products to Bluetooth/wireless solutions. New products for premium Bluetooth/wireless solutions have not yet launched and are planned for the first half of Fiscal 2020. Closeout promotions for many of these products led to increased sales in the prior fiscal year and did not repeat during the year endedFebruary 28, 2019 . The Company also experienced decreases in sales due to the timing of customer orders for certain wireless and Bluetooth speakers, including large load-in orders of new wireless speaker product during the year endedFebruary 28, 2018 that did not repeat in the current year, and a streamlining of products and reduced store counts for certain retailers. Further, during Fiscal 2018, the Company launched its Striiv activity tracking band and significant load-in orders for this product during the year endedFebruary 28, 2018 did not repeat in the current year. Sales were also impacted during 37
-------------------------------------------------------------------------------- the year endedFebruary 28, 2019 by lower sales in reception, remotes, hookup, headphones and power categories due to retail distribution changes, price competition and changes in demand. Additionally, the Company has limited certain product distribution within the segment in Fiscal 2019 in order to improve margins. Within its European market, the Company experienced a decrease in sales for the year endedFebruary 28, 2019 as a result of the timing of certain customer orders, a shift in sales strategy related to our e-commerce channel that has had temporarily delayed sales, as well as sales of equipment and set top boxes related to a digital broadcasting upgrade in the prior year that did not repeat in the current year. Partially offsetting the sales decline in Consumer Electronics for the year endedFebruary 28, 2019 has been the successful launch of new premium home entertainment product lines during Fiscal 2019 and an increase in in-wall and in-ceiling architectural speaker product sales that launched during the second half of Fiscal 2018. The segment has also experienced higher sales of karaoke products, specifically the new Singsation line, as well as increases in sales from additional placements and higher direct import sales of itsProject Nursery products and the introduction of the new smart home line during the year endedFebruary 28, 2019 . Due to the ongoing sales declines in the segment as a result of technology advancements and changes in retail distribution, during the year endedFebruary 28, 2019 , the Company restructured its former Consumer Accessories segment, which included an aggressive SKU rationalization program to limit sales of lower margin products. Biometrics represented 0.2% of our net sales for the year endedFebruary 28, 2019 , compared to 0.1% in the prior year. Sales increases for the year endedFebruary 28, 2019 were due primarily to sales of the segment's HBOX products.
Gross Profit and Gross Margin Percentage
Fiscal Fiscal Fiscal
2020 2019 2018
Automotive Electronics $ 23,131 $ 40,621 $ 39,829
20.3 % 25.1 % 25.6 %
Consumer Electronics 86,588 82,230 92,361
31.0 % 29.0 % 26.3 %
Biometrics (160 ) (1,082 ) (120 )
-34.7 % -98.5 % -18.9 %
Corporate 217 (352 ) 227
$ 109,776 $ 121,417 $ 132,297
27.8 % 27.2 % 26.1 %
Fiscal 2020 compared to Fiscal 2019
Gross margins in theAutomotive Electronics segment decreased 480 basis points for the year endedFebruary 29, 2020 . The decrease in margins was driven primarily by the declines in higher margin OEM security, remote start, and rear seat entertainment sales, which also resulted in lower absorption of fixed overhead costs in the current year periods, further decreasing margins for the segment. Additionally, slow moving write-off adjustments were made during the fiscal year, in part due to the slower rear seat entertainment sales and the discontinuation of certain programs. There was also a decline in aftermarket headrest product sales, which typically generate higher margins for the segment. Margins were negatively affected further during the year endedFebruary 29, 2020 by tariff increases, as certain of the Company's products are manufactured inChina , while production of certain other products were relocated to other countries with higher labor costs. During the year endedFebruary 29, 2020 , the Company also made a non-refundable up-front payment to a customer as consideration for a future OEM program award, which negatively impacted margins. As an offset to these margin declines during the year endedFebruary 29, 2020 , theAutomotive Electronics segment experienced declines in satellite radio sales, which contribute lower margins to the group, while increased sales of certain aftermarket security products and products related to the newly acquiredVehicle Safety Holdings Corp. business contributed favorably to margins for the year. Gross margins in the Consumer Electronics segment increased 200 basis points for the year endedFebruary 29, 2020 compared to the prior year. Margin increases during the year endedFebruary 29, 2020 were driven in part by increased sales of the Company's high margin premium wireless and bluetooth speakers, mobility products, home separate, and commercial speakers, as well as the result of heavy discounts offered on older mobility products in the prior year, such as wired headphones and neckbands, that did not repeat in the current year. Margins have been 38
-------------------------------------------------------------------------------- negatively affected during the year endedFebruary 29, 2020 by tariff increases, as certain of the Company's products are manufactured inChina , while production of certain other products were relocated to other countries with higher labor costs. The Company offset some of the effects of these tariff increases, where possible, with price increases. Margin declines were also driven by declining sales of products with typically higher margins, such asProject Nursery and karaoke products, as well as by sales declines within the European market and higher warehousing costs incurred related to the use of a third party for warehousing services inEurope beginning during the first quarter of Fiscal 2020. Gross margins in the Biometrics segment increased for the year endedFebruary 29, 2020 compared to the prior year. These increases were primarily due to the write off slow moving inventory and parts in Fiscal 2019 related to its myris product, which negatively impacted margins in the prior year. Offsetting these factors were sales of certain inventory during the year endedFebruary 28, 2019 that had been previously written off, and contributed positively to margins in the prior year, as well as higher sales of licensing fees in the prior year, which earned higher margins for the segment. Additionally, during the year endedFebruary 29, 2020 , the Company incurred certain tooling and defective repair costs, as well as provided beta samples to certain customers and prospects at no charge, which negatively impacted margins for the current fiscal year.
Fiscal 2019 compared to Fiscal 2018
Gross margins in theAutomotive Electronics segment decreased 50 basis points for the year endedFebruary 28, 2019 . Gross profits decreased during the fiscal year primarily as a result of decreases in sales of certain higher margin products, such as aftermarket headrest products and remote start systems. As an offset, the segment experienced increases in gross profits for the year endedFebruary 28, 2019 as a result of the sales of our new EVO product, as well as due to decreases in sales of low margin products such as satellite radios and due to certain production related cost-cutting measures, lower tooling costs, and lower inventory reserve requirements. Gross margins in the Consumer Electronics segment increased 270 basis points for the year endedFebruary 28, 2019 compared to the prior year. The segment margins were positively impacted by a shift in product mix including the introduction of our new Reference and Reference Premier lines during Fiscal 2019; the recent introduction of our new karaoke line; a decline in sales of lower margined products, such as premium mobility products and Striiv activity bands; the absence of digital reception products in the European market; and a decline in sales of certain premium sound system, sound bar, and Bluetooth speaker products that were being phased out during the prior fiscal year with heavy close out promotions. Additionally, the Company had improved margins and profits for itsProject Nursery line. As an offset to these increases, the segment experienced decreased sales of wireless speakers and reception products and overall lower sales in the European market during the year endedFebruary 28, 2019 , for which the product mix generally contributes higher profit margins for the segment, as well as increases in inventory write-downs related to certain slow moving products, and higher warehousing expenses related to the consolidation of our operations inGermany . Gross margins in the Biometrics segment decreased for the year endedFebruary 28, 2019 compared to the prior year. This was primarily due to the write off slow moving inventory and parts in Fiscal 2019 related to its myris product, which negatively impacted margins in the year. Offsetting this decrease was the sale of certain inventory during the year endedFebruary 28, 2019 that had been previously written off, and contributed positively to margins, as well as higher sales of licensing fees, which earned higher margins for the segment. Operating Expenses Fiscal Fiscal Fiscal 2020 2019 2018 Operating Expenses: Selling$ 38,471 $ 40,915 $ 45,999 General and administrative 68,928 66,935
78,957
Engineering and technical support 21,602 24,387 26,440
Intangible asset impairment charges 30,230 25,789 -
Restructuring expense - 4,588 -
Total Operating Expenses $ 159,231 $ 162,614 $
151,396
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Fiscal 2020 compared to Fiscal 2019
The Company experienced an overall decrease in operating expenses of
Selling expenses have decreased for the year endedFebruary 29, 2020 due to various factors, including headcount reductions related to Fiscal 2019 restructuring activities, lower commissions as a result of the decline in sales for the year, lower trade show expenses due to attending fewer shows, and lower advertising costs and display amortization expense, due to cost cutting measures, as well as the fact that many displays and fixtures are fully amortized or have been removed. These expense decreases were offset by salary increases resulting from transfers of certain employees from general and administrative to selling in conjunction with restructuring activities taking place in Fiscal 2019, and additional hires at the Company'sKlipsch , Oehlbach and Schwaiger subsidiaries, as well as higher web fees as a result of an increase in the Company's online platform activity and web advertising. General and administrative expenses increased during the year endedFebruary 29, 2020 . During the year endedFebruary 29, 2020 , the Company granted 200,000 fully vested common shares to the Company's Chief Executive Officer, as well as granted additional shares which vest on future dates in accordance with his employment agreement signed inJuly 2019 , resulting in an increase in compensation expense of approximately$1,700 for the year endedFebruary 29, 2020 . Additionally, during the year endedFebruary 28, 2019 , the Company received reimbursement of approximately$3,000 for certain professional fees and disbursements resulting from the favorable outcome of a lawsuit, which did not occur during the year endedFebruary 29, 2020 . Disregarding these specific items, general and administrative expenses would have decreased for the year. General and administrative expenses were also higher during the year endedFebruary 29, 2020 due to higher payroll expenses resulting from increased medical claims as compared to the prior year. Offsetting the increases to general and administrative expenses discussed above were decreases in salary expense during the year endedFebruary 29, 2020 due to reductions in headcount and the transfer of certain employees to selling in conjunction with Fiscal 2019 restructuring activities, lower executive salaries due to salary and bonus structures under new employment agreements, as well as lower office and equipment rental expenses as a result of cost containment measures and lease expirations that were not renewed. Engineering and technical support expenses for the year endedFebruary 29, 2020 declined as compared to the prior year. For the year endedFebruary 29, 2020 , expenses were down primarily due to headcount reduction at certain of the Company's subsidiaries, decreased research and development spending related to projects that were completed during the current year period, as well as due to the movement of work related to certain projects utilizing outside contractors to in-house employees at bothEyeLock and Invision. These declines were partially offset by an increase in research and development expenses related to the start of new projects and higher certification fees for certain products under development, as well as salary and related expenses resulting from new hires at certain subsidiaries. In connection with its annual impairment test performed as of the last day of the fourth quarter of Fiscal 2020, the Company determined that several of its indefinite-lived intangible assets within the Consumer Electronics segment, as well as certain indefinite-lived and definite-lived intangible assets within the Biometrics segment were impaired. The impairments within the Consumer Electronics segment were the result of the Company being unable to secure product placement into customer stores, anticipated shortfalls in sales due to economic uncertainty as a result of the COVID-19 pandemic, reduced demand from a large traditional brick-and-mortar customer, along with continued declines in the German economy. The impairments within the Biometrics segment were the result of lack of customer acceptance of the related technology, lower than anticipated results, adjusted expectations for demand, and anticipated delays of product deployment with target customers due to economic uncertainty related to the COVID-19 pandemic. The Company recorded total impairment charges of$30,230 for the year endedFebruary 29, 2020 related to these impairments.
Fiscal 2019 compared to Fiscal 2018
The Company experienced an overall increase in operating expenses of$11,218 for Fiscal 2019 as compared to Fiscal 2018. Excluding intangible asset impairment charges and restructuring expenses, operating expenses decreased$19,159 in Fiscal 2019. Selling expenses have decreased for the year endedFebruary 28, 2019 primarily due to various cost-cutting measures including lower advertising costs related to printed media and sales promotions, headcount reductions, 40 -------------------------------------------------------------------------------- adjustments to our trade show participation, and lower travel and entertainment expenses. There were also lower commissions for the year as a result of lower sales. Offsetting these declines was an increase in online platform fees, which includes a termination charge for a discontinued platform, as well as higher online advertising. General and administrative expenses decreased during the year endedFebruary 28, 2019 primarily due to lower professional fees, bonus accruals and incentives. Professional fees were down for the year due to the reimbursement of legal fees associated with a favorable judgment in a counterfeit lawsuit. Executive bonus accruals were lower as a result of lower profitability in Fiscal 2019, as well as due to the fact that executive bonuses for the year endedFebruary 28, 2018 included a bonus related to the sale of Hirschmann. In addition, expenses are down for the year endedFebruary 28, 2019 due to cost cutting efforts related to headcount reductions, travel and entertainment, and various other general office expenses. Partially offsetting these expense decreases were higher professional fees related to assessing the impact of the Tax Cuts and Jobs Act. Engineering and technical support expenses for the year endedFebruary 28, 2019 declined as compared to the prior year primarily as a result of lower net research and development costs. These costs are driven by the timing of the start and completion of the Company's product development projects, such as the Company's new EVO headrest product, which was completed and launched in the second half of Fiscal 2018. Engineering and technical expenses also decreased as a result of headcount reductions made in the prior year and due to cost cutting measures related to travel and entertainment in the current year. These declines were partially offset by an increase in healthcare costs, as well as research and development expense incurred byEyeLock LLC . During the second quarter of Fiscal 2019, the Company re-evaluated its projections for several brands in itsAutomotive Electronics and former Consumer Accessories segments based on lower than anticipated results, such as reduced product load-ins, increased competition for certain product lines, a streamlining of SKU's, and a change in market strategy for one of its brands. During the fourth quarter, the Company further streamlined its SKU's in conjunction with its corporate realignment and transformation initiatives, and adjusted expectations for select customer demand, and the anticipated results from alternative sales channels for one of its brands. As a result of these analyses, it was determined that certain trademarks in the Automotive and former Consumer Accessories segments were impaired. The Company recorded total impairment charges of$25,789 during the year endedFebruary 28, 2019 related to these impairments. During the year endedFebruary 28, 2019 , the Company began to realign certain businesses within the former Consumer Accessories and Premium Audio segments to lower and contain fixed costs, generate efficiencies and better leverage resources. InGermany , the Company's Schwaiger and Oehlbach businesses were combined into one entity operating in one physical location and the Company's Magnat business was realigned with its Klipsch European operation. Domestically, the Company conducted an aggressive SKU rationalization program in order to discontinue certain consumer accessory product lines and focus on offerings with longer product life cycles, sustainable gross margins, and better growth potential. Certain restructuring initiatives are expected to continue in to Fiscal 2020. Total restructuring expense incurred for the year endedFebruary 28, 2019 were$4,588 , primarily consisting of severance charges. Other (Expense)Income Fiscal Fiscal Fiscal 2020 2019 2018 Interest and bank charges$ (3,569 ) $ (4,449 ) $ (6,009 ) Equity in income of equity investee 5,174 6,618 7,178 Gain on sale of real property 4,057 - - Impairment of Venezuela investment properties - (3,473 ) - Impairment of notes receivable - (16,509 ) - Investment (loss) gain 775 (530 ) 1,416 Other, net 2,078 577 (7,590 ) Total other (expense) income$ 8,515 $ (17,766 ) $ (5,005 )
Fiscal 2020 compared to Fiscal 2019
Interest and bank charges represent expenses for the Company's bank obligations
and supply chain financing arrangements, interest related to finance leases, and
amortization of deferred financing costs. During the second and
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third quarters of Fiscal 2020, the Company temporarily suspended its domestic
supply chain financing, thus resulting in a reduction of the related fees. The
Company also repaid two of its outstanding mortgages and the entire outstanding
balance of its asset-based lending obligation in Germany during the second half
of Fiscal 2020, thus reducing interest expense related to these obligations.
Equity in income of equity investee represents the Company's share of income
from its 50% non-controlling ownership interest in ASA Electronics, LLC ("ASA").
The decrease in income for the year ended February 29, 2020 is primarily a
result of the impact of tariffs, increase in warranty costs, as well as due to
certain product recall expenses incurred during the year ended February 29, 2020
that were not present in the prior year.
On September 30, 2019 , the Company, through its subsidiary Voxx German Holdings
Gmbh ("the Seller"), sold its real property in Pulheim, Germany to CLM S.A. RL
("the Purchaser") for €10,920. Net proceeds received from the transaction were
approximately $9,500 after transactional costs and repayment of the outstanding
mortgage. Concurrently with the sale, the Seller entered into an operating lease
arrangement ("lease") with the Purchaser for a small portion of the real
property to continue to operate its sales office in Germany . The transaction
qualified for sale leaseback accounting in accordance with ASC 842 and the
Company recognized a gain on the execution of the sale transaction for the year
ended February 29, 2020 .
During Fiscal 2018, the Company sold its investment in RxNetworks, a
non-controlled corporation, consisting of shares of the investee's preferred
stock. Voxx recognized a gain of $1,416 during Fiscal 2018 for the sale of this
investment; however, a portion of the cash proceeds were subject to a hold-back
provision, which was not included in the gain recognized in Fiscal 2018. During
the second quarter of Fiscal 2020, the hold-back provision expired, and the
Company received the remaining proceeds from the sale, recording an investment
gain of $775 for the year ended February 29, 2020 . During the fourth quarter of
Fiscal 2019, all of the outstanding common stock Fathom Systems Inc. , a
non-controlled corporation in which Voxx was invested, were repurchased by the
investee for a price per share significantly below the value when issued. This
resulted in a loss on Voxx's investment in Fathom of $530 for the year ended
February 28, 2019 .
Other, net includes net foreign currency gains or losses, interest income,
rental income, and other miscellaneous income and expense. Other, net increased
for the year ended February 29, 2020 . During the year ended February 29, 2020 ,
the Company received the proceeds from a key man life insurance policy in the
amount of $1,000 , related to a former employee of Klipsch Group, Inc. that Voxx
became the beneficiary of in conjunction with the acquisition of Klipsch in
Fiscal 2012. As an offset to this income, the Company incurred a charge of $804
during the year ended February 29, 2020 for a payment made to TE Connectivity
Ltd. in final settlement of the working capital calculation related to the
Fiscal 2018 sale of Hirschmann Car Communication GmbH .
Fiscal 2019 compared to Fiscal 2018
Interest and bank charges represent expenses for the Company's bank obligations and supply chain financing arrangements interest related to capital leases, and amortization of deferred financing costs. These charges decreased for the year endedFebruary 28, 2019 as compared to the prior year due primarily to the fact that the Company did not carry an outstanding balance on its Credit Facility during Fiscal 2019. The Company repaid the entire outstanding balance of the Credit Facility following the sale of Hirschmann onAugust 31, 2017 . This was partially offset by an increase in the LIBOR rate, which has caused an increase in factoring fees incurred by the Company, as well as an increase in bank charges related to the unused portion of the Credit Facility. Equity in income of equity investee represents the Company's share of income from its 50% non-controlling ownership interest inASA Electronics, LLC ("ASA"). The decrease in income for the year endedFebruary 28, 2019 was due to higher tooling costs for certain R&D projects, higher legal expenses, and a change in product amortization expense, as well as due to the liquidation and sell through of certain slow-moving inventory stock. The Company has certain long-lived assets inVenezuela , which are held for investment purposes. During the second quarter of Fiscal 2019, the Company assessed the recoverability of these properties as a result of the country's continued economic deterioration, which included a significant currency devaluation in August of 2018. The Company recorded an impairment charge for the year endedFebruary 28, 2019 representing the remaining balance of these properties. 42 -------------------------------------------------------------------------------- During Fiscal 2018 and Fiscal 2019, the Company held various notes receivable from 360fly, Inc., designers and creators of 360° cameras and technology. The notes were due onJanuary 19, 2019 . During the fourth quarter of Fiscal 2019, the credit quality of the debtor deteriorated, and the notes were deemed uncollectible by Voxx, resulting in an impairment charge of$16,509 , representing the entire outstanding balance of these notes atFebruary 28, 2019 . During the fourth quarter of Fiscal 2019, all of the outstanding common stockFathom Systems Inc. , a non-controlled corporation in which Voxx was invested, were repurchased by the investee for a price per share significantly below the value when issued. This resulted in a loss on Voxx's investment in Fathom of$530 for the year endedFebruary 28, 2019 . Voxx has no remaining investment or ownership in this company as ofFebruary 28, 2019 . During Fiscal 2018, one of the Company's cost method investments,Rx Networks , was sold to a third party, resulting in a gain recognized by the Company for the year endedFebruary 28, 2018 representing the excess of the consideration for the investment held by the Company on the date of the transaction. Other, net, for the year endedFebruary 28, 2019 includes net gains on foreign currency of$220 , interest income of$994 , and rental income of$517 . Other, net, for the year endedFebruary 28, 2018 included net losses on foreign currency of$(8,769) , interest income of$210 , and rental income of$553 . Interest income for the year endedFebruary 28, 2019 includes interest earned from money market investments for which the Company increased its investment in during the fiscal year. Included in the foreign currency losses for the year endedFebruary 28, 2018 are losses on forward contracts totaling$(6,618) incurred in conjunction with the sale of Hirschmann.
Income from Discontinued Operations
OnAugust 31, 2017 (the "Closing Date"), the Company completed its sale of Hirschmann to a subsidiary of 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 . For the year endedFebruary 28, 2018 , income from discontinued operations consisted primarily of a gain on sale of$36,118 , as well as operating income of$2,817 . Operating income for the Company's discontinued operation during this period was comprised primarily of tuner and antenna sales, which ceased following the sale of Hirschmann onAugust 31, 2017 . For the years endedFebruary 29, 2020 andFebruary 28, 2019 , there was no income from discontinued operations, as all sales and operations relating to the discontinued operation ceased following the sale of Hirschmann onAugust 31, 2017 . Income Tax Provision During Fiscal 2020, the Company recorded an income tax provision of$882 related to federal, state and foreign taxes from continuing operations. The Company's effective tax rate of (2.2)% differs from the statutory rate of 21% primarily related to (i) current year losses for which limited tax benefit was provided; (ii) permanent differences, including the non-controlling interest and a global intangible low tax income ("GILTI") inclusion; and (iii) an increase in the valuation allowance recorded against foreign deferred tax assets. During Fiscal 2020, the Company maintained a partial and full valuation allowance against certainU.S. and foreign deferred tax assets as the Company could not conclude that such assets will be realized on a more-likely-than-not basis. Any decline in the valuation allowance could have a favorable impact on our income tax provision and net income in the period in which such determination is made. The effective tax rate of 10.4% in Fiscal 2019 differs from the statutory rate of 21% primarily related to current year losses for which limited tax benefit was provided. During Fiscal 2019, the Company maintained a partial valuation allowance against certainU.S. and foreign deferred tax assets as the Company could not conclude that such assets will be realized on a more-likely-than-not basis. Any decline in the valuation allowance could have a favorable impact on our income tax provision and net income in the period in which such determination is made. The effective tax rate of 72.4% in Fiscal 2018 differs from the statutory rate of 32.7% primarily due to the impact of Tax Cuts and Jobs Act ("TCJA"), the partial reversal of the Company's valuation allowance as certain deferred tax assets became realizable on a more-likely-than-not basis and the reversal of uncertain tax positions under ASC 740 related to the expiration of the statute of limitations. During Fiscal 2018, the Company maintained a partial valuation allowance against itsU.S. deferred tax assets and certain foreign jurisdictions. Any decline in the valuation allowance could have a favorable impact on our income tax provision and net income in the period in which such determination is made.
On
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(ii) enacted technical corrections so that qualified improvement property can be
immediately expensed under IRC Section 168(k) and net operating losses arising
in tax years beginning in 2017 and ending in 2018 can be carried back two years
and carried forward twenty years without a taxable income limitation, as opposed
to carried forward indefinitely; and (iii) made modifications to the federal net
operating loss rules including permitting federal net operating losses incurred
in 2018, 2019, and 2020 to be carried back to the five preceding taxable
years. The Company is currently evaluating the impact of the CARES Act. With
respect to the technical correction to net operating losses, the Company may
record an income tax provision as its valuation allowance related to net
operating losses with limited carryforward periods may increase. The Company
will account for the CARES Act changes in the quarter ending May 31, 2020 , the
period in which the new legislation was enacted.
EBITDA, Adjusted EBITDA and Adjusted Diluted EBITDA per Common Share
EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per common share are not
financial measures recognized by GAAP. EBITDA represents net (loss) income,
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, life insurance proceeds, certain
settlements, gains on sale of real property, gains on the sale of discontinued
operations, losses on forward contracts, impairment charges, investment gains
and losses, restructuring charges, and environmental remediation charges.
Depreciation, amortization, stock-based compensation, and impairment charges are
non-cash items. Diluted Adjusted EBITDA per common share represents the
Company's diluted earnings per common share based on Adjusted EBITDA.
We present EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per common share
in this Form 10-K because we consider them to be useful and appropriate
supplemental measures of our performance. Adjusted EBITDA and diluted adjusted
earnings per common share help us to evaluate our performance without the
effects of certain GAAP calculations that may not have a direct cash impact on
our current operating performance. In addition, the exclusion of certain costs
or gains relating to certain events that occurred during the periods presented
allows for a more meaningful comparison of our results from period-to-period.
These non-GAAP measures, as we define them, are not necessarily comparable to
similarly entitled measures of other companies and may not be an appropriate
measure for performance relative to other companies. EBITDA, Adjusted EBITDA and
Diluted Adjusted EBITDA per common share should not be assessed in isolation
from, are not intended to represent, and should not be considered to be more
meaningful measures than, or alternatives to, measures of operating performance
as determined in accordance with GAAP.
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Reconciliation of GAAP Net Income Attributable to
to EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per Common Share (2)
Fiscal Fiscal Fiscal
2020 2019 2018
Net (loss) income attributable to VOXX
International Corporation $ (26,443 ) $ (46,091 ) $ 35,304
Adjustments:
Interest expense and bank charges (1) 3,070 2,884 5,169
Depreciation and amortization (1) 12,055 11,112
13,879
Income tax expense (benefit) 882 (6,131 ) (13,262 ) EBITDA (10,436 ) (38,226 ) 41,090 Adjustments: Stock-based compensation 2,282 551 552 Life insurance proceeds (1,000 ) - - Gain on sale of real property (4,057 ) - - Settlement of Hirschmann working capital 804 - - Gain on sale of discontinued operations - - (36,118 ) Loss on forward contracts attributable to sale of business - -
6,618
Impairment of investment properties in Venezuela - 3,473 - Impairment of notes receivable - 16,509 - Investment (gain) loss (775 ) 530 (1,416 ) Environmental remediation charges - 454 - Restructuring charges - 4,588 - Intangible asset impairment charges (1) 19,543 25,789 - Adjusted EBITDA$ 6,361 $ 13,668 $ 10,726 Diluted (loss) income per common share attributable to VOXX International Corporation$ (1.08 ) $ (1.89 ) $ 1.44 Diluted Adjusted EBITDA per common share attributable to VOXX International Corporation$ 0.26 $ 0.56 $ 0.44
(1) For purposes of calculating Adjusted EBITDA for the Company, interest
expense, bank charges, depreciation and amortization, and intangible asset
impairment charges added back to net (loss) income have been adjusted in
order to exclude the minority interest portion of these expenses attributable
to
(2) EBITDA, Adjusted EBITDA and Diluted Adjusted EBITDA per common share in this
presentation are based on a reconciliation to Net income attributable to VOXX
continuing and discontinued operations for all periods presented. The Company
sold its Hirschmann subsidiary on August 31, 2017 .
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Liquidity and Capital Resources
Cash Flows, Commitments and Obligations
As ofFebruary 29, 2020 , we had working capital of$146,798 which includes cash and cash equivalents of$37,425 compared with working capital of$151,169 atFebruary 28, 2019 , which included cash and cash equivalents of$58,236 . We plan to utilize our current cash position as well as collections from accounts receivable, the cash generated from our operations, when applicable, and the income on our investments to fund the current operations of the business. However, we may utilize all or a portion of current capital resources to pursue other business opportunities, including acquisitions, or to further pay down our debt. The following table summarizes our cash flow activity for all periods presented: Year Year Year Ended Ended Ended February 29, February 28, February 28, 2020 2019 2018 Cash provided by (used in): Operating activities$ (1,009 ) $ 22,562 $ (25,539 ) Investing activities (6,709 ) (11,037 ) 161,360 Financing activities (12,593 ) (924 ) (92,247 ) Effect of exchange rate changes on cash (500 ) (4,105 ) 366 Net (decrease) increase in cash and cash equivalents$ (20,811 ) $ 6,496$ 43,940
Net cash used in/provided by operating activities:
Operating activities used cash of$1,009 for Fiscal 2020, due to factors including sales declines and losses incurred byEyeLock LLC , as well as decreases in accounts payable, accrued expenses, and accrued sales incentives. This was offset by decreases in inventory and accounts receivable, which were driven by the decreases in sales. During Fiscal 2019, operating activities provided cash of$22,562 , partially due to a decrease in inventory, as the Company purchases its inventory in line with sales levels, which have declined in the current fiscal year, as well as a decrease in prepaid expenses and other assets. This was offset by lower earnings achieved by the Company in Fiscal 2019, driven in part by sales declines and losses incurred byEyeLock LLC . The Company also had a decrease in accounts receivable, directly resulting from lower sales in the fiscal year. During Fiscal 2018, operating activities used cash of$25,539 principally due to net losses incurred byEyeLock LLC , an increase in the Company's prepaid expenses and other assets, as well as a net decrease in accounts payable and accrued expenses. This was offset by a decrease in inventory.
Net cash used in/provided by investing activities:
Investing activities used cash of$6,709 during Fiscal 2020, primarily due to the acquisition of VSHC inJanuary 2020 (see Note 2), as well as capital additions made by the Company. This was offset by the proceeds received from the sale of the Company's real property in Pulheim,Germany (see Note 11). Investing activities used cash of$11,037 during Fiscal 2019, primarily as a result of the issuance of notes receivable to 360fly, Inc. (see Note 1(f)), as well as capital additions made by the Company. During Fiscal 2018, investing activities provided cash of$161,360 primarily as a result of the sale of Hirschmann onAugust 31, 2017 (see Note 2), which was offset by capital additions, as well as the acquisition ofRosen Electronics LLC (see Note 2) and the issuance of notes receivable to 360fly, Inc. (see Note 1(f)).
Net cash used in/provided by financing activities:
Financing activities used cash of$12,593 during Fiscal 2020, primarily due to the repayment of outstanding bank obligations, including the entire outstanding balance of Voxx Germany's Euro asset-based lending facility, and the repurchase of shares of the Company's Class A common stock. 46 -------------------------------------------------------------------------------- During Fiscal 2019, financing activities used cash of$924 primarily due to the repayment of outstanding bank obligations, which include mortgages, capital leases, and an asset-based lending facility inGermany ; offset by borrowings related to the German asset based lending facility. During Fiscal 2018, financing activities used cash of$92,247 , primarily due to the repayment of balances outstanding on the Company's Credit Facility following the sale of Hirschmann onAugust 31, 2017 . 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 7(b)). As ofFebruary 29, 2020 , there was no balance outstanding under the revolving credit facility. The entire outstanding balance of the term loan, which is not renewable, was repaid in Fiscal 2018. The availability under the revolving credit line of the Credit Facility was$84,436 as ofFebruary 29, 2020 . All amounts outstanding under the Credit Facility will mature and become due onApril 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. 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 under the Credit Facility 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 under the Credit Facility designated as Base Rate Loans shall bear interest at a rate equal to the applicable margin for Base Rate Loans of 0.75% - 1.25%, as defined in the agreement. Provided that the Company is in a Compliance Period (the period commencing on that day in which Excess Availability is less than 12.5% of the Maximum Revolver Amount and ending on a day in which Excess Availability is equal to or greater than 12.5% 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 RestrictedJunior 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. As ofFebruary 29, 2020 , the Company was not in a Compliance Period.
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.
OnJune 11, 2020 , the Company amended the Credit Facility. Under the amendment, the committed availability of the revolving credit facility was revised to$127,500 and the maturity date of the facility was extended toApril 26, 2022 (see Note 17). The Company has a Euro asset-based loan facility inGermany with a credit limit of €8,000 that expires onJuly 31, 2020 . The Company's subsidiariesVoxx German Holdings GmbH ,Oehlbach Kabel GmbH , andSchwaiger GmbH are authorized to borrow funds under this facility for working capital purposes. The Company also has a separate Euro asset-based loan facility for its Magnat subsidiary expiring onDecember 31, 2020 . 47
-------------------------------------------------------------------------------- The Company also utilizes supply chain financing arrangements and factoring agreements as a component of our financing for working capital, which accelerates receivable collection and helps to better manage cash flow. Under the agreements, the Company has agreed to sell certain of its accounts receivable balances to banking institutionswho 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 1(h)). 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. During the second quarter of Fiscal 2020, the Company temporarily suspended its domestic supply chain financing activities; however, during the fourth quarter, the Company resumed its activities under one supply chain financing arrangement in response to general economic concerns related to the COVID-19 pandemic. Subsequent toFebruary 29, 2020 , all supply chain financing activities have resumed. As noted elsewhere in this report, we expect the COVID-19 pandemic may continue to have an adverse effect on our business. Federal, state and local governments have taken a variety of actions to contain the spread of COVID-19. Many jurisdictions required mandatory business closures or imposed capacity limitations and other restrictions affecting our operations. We are proactively taking steps to increase available cash including, but not limited to, utilizing existing supply chain financing agreements that had previously been suspended during Fiscal 2020 as noted above, and utilizing funds available under our existing Credit Facility. DuringApril 2020 , the Company borrowed$20,000 from its available Credit Facility funds. As further noted in Item 7 and elsewhere in this report, the Company is also implementing a number of other measures to help preserve liquidity in response to the COVID-19 pandemic. Certain contractual cash obligations and other commitments will impact our short and long-term liquidity. AtFebruary 29, 2020 , such obligations and commitments are as follows: Amount of Commitment Expiration per Period Less than 1-3 4-5 After Contractual Cash Obligations Total 1 Year Years Years 5 Years Finance lease obligations (1)$ 1,333 $ 613 $ 613 $ 107 $ - Operating lease obligations (1) 3,175 784 1,363 769 259 Total contractual cash obligations$ 4,508 $ 1,397 $ 1,976 $ 876 $ 259 Other Commitments Bank obligations (2)$ 607 $ 607 $ - $ - $ - Stand-by letters of credit (3) 68 68 - - - Other (4) 7,614 500 1,000 1,000 5,114 Contingent earn-out payments and other (5) 67 67 - - - Pension obligation (6) 748 - - - 748 Unconditional purchase obligations (7) 54,255 54,255 - - - Total commercial commitments$ 63,359 $ 55,497 $ 1,000 $ 1,000 $ 5,862 Total Commitments$ 67,867 $ 56,894 $ 2,976 $ 1,876 $ 6,121
(1) Represents total principal payments due under finance and operating lease
obligations. Total current balances (included in other current liabilities)
due under finance and operating leases are
leases are
(2) Represents amounts outstanding under the VOXX Germany and Magnat Euro
asset-based lending facilities at
(3) We issue standby letters of credit to secure certain purchases and insurance
requirements. These letters of credit are issued during the ordinary course
of business through major domestic banks as requested by certain suppliers.
(4) This amount represents the outstanding balance of the mortgage for our
manufacturing facility in
(5) Represents contingent consideration payments due in connection with the Rosen
acquisition.
(6) Represents the liability for an employer defined benefit pension plan
covering certain eligible current and former employees of VOXX Germany.
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(7) Open purchase obligations represent inventory commitments. These obligations
are not recorded in the consolidated financial statements until commitments
are fulfilled and such obligations are subject to change based on
negotiations with manufacturers.
We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and possible future public or private debt and/or equity offerings. At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows, credit arrangements, access to equity capital markets, taken together, provides 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 . In the event that 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. For further information about COVID-19, refer to "Item 1A. Risk Factors," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 17, "Subsequent Events," of the Notes to the Consolidated Financial Statements included in "Item 8. Consolidated Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
Impact of Inflation and Currency Fluctuation
Inflation did not have a material impact on our operations for the years endedFebruary 29, 2020 ,February 28, 2019 orFebruary 28, 2018 . Severe increases in inflation; however, could affect the global andU.S. economies and could have an adverse impact on our business, financial condition and results of operations. Discussion of the impact of foreign currency fluctuations is included in Item 7A. In accordance with the guidelines in ASC 830,Venezuela is 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 inVenezuela to record all transactions as if they were denominated inU.S. dollars. SinceJanuary 2014 , the Venezuelan government has created multiple alternative exchange rates designated to be used for the purchase of goods and services deemed non-essential. As ofFebruary 29, 2020 andFebruary 28, 2019 , the published rates offered for the Sovereign Bolivar were approximately 73,470 and 3,290 Sovereign Bolivar/$1 , respectively. Net currency exchange losses of$2 and$6 were recorded for the years endedFebruary 29, 2020 andFebruary 28, 2019 , respectively. All currency exchange gains and losses are included in Other (Expense) Income on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company has certain U. S. dollar denominated assets and liabilities in its Venezuelan subsidiary, including ourU.S. dollar denominated intercompany debt, which has been subject to currency fluctuations associated with the devaluation of the Sovereign Bolivar. The Company also has certain long-lived assets inVenezuela , which are held for investment purposes. During the second quarter of Fiscal 2019, the Company assessed the recoverability of these properties as a result of the country's continued economic deterioration, which included a significant currency devaluation in August of 2018. The Company estimated the future undiscounted cash flows expected to be received from these properties. The estimate of the future undiscounted cash flows considered the Company's financial condition and its intent and ability to retain its investments for a period of time sufficient to allow for the recovery of the carrying value. The future undiscounted cash flows did not exceed the net carrying value for the long-lived assets. The estimated fair value of the properties, which also considered the current conditions of the economy inVenezuela , the volatility of the real estate market, and the significant political unrest, resulted in a full non-cash impairment charge of$3,473 for the year endedFebruary 28, 2019 . The non-cash impairment charge is included in Other (expense) income on the Consolidated Statements of Operations and Comprehensive (Loss) Income. 49 --------------------------------------------------------------------------------
Seasonality
We typically experience seasonality in our operations. Our business is significantly impacted by the holiday season, as we generally sell a substantial amount of our products during September, October and November due to increased promotional and advertising activities during the holiday season.
Related Party Transactions
None noted.
Recent Accounting Pronouncements
We are required to adopt certain new accounting pronouncements. See Note 1(w) of
the Notes to the Consolidated Financial Statements of this Annual Report on Form
10-K.
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