Ethan Miller
Note:
I have covered VOXX International Corporation (NASDAQ:VOXX) previously, so investors should view this as an update to my earlier articles on the company.
Leading automotive and consumer electronics products manufacturer and distributor VOXX International Corporation or "VOXX International" continues to operate in a challenging business environment as once again evidenced by the company's Q3/2024 results in January:
Regulatory Filings
While the consumer electronics segment showed signs of life with sales of premium audio products up by 8.7% year-over-year, this was more than offset by pronounced weakness in the automotive business, as outlined by management on the conference call (emphasis added by author):
We had some challenges in Q3 as our OEM business was almost cut in half as we and our customers felt the impact of the UAW strike. As always, we base plans on our customer forecast, which obviously were not met when production lines were either impacted or completely shut down.
With the strike now behind us, we expect to see the Automotive business begin to normalize. With the contracts that we have been awarded, we should be in a position of growth. However, with the general economy slowing based on the Fed's moves to date and car prices at all-time highs, we anticipate some near-term softness.
During the quarter, Automotive sales were down 26%, with the miss in OEM, as I just mentioned, and primarily in rear-seat entertainment, which are the biggest programs for our OEM business. Business with Ford and Stellantis were both down due to the UAW strike with Nissan sales also down. (...)
For the year, the Automotives segment sales are off about 12.5%, and Q4 is going to be tough based on the current conditions, though, again, some loosening on the OEM side with the strike behind us.
Even with the UAW strike now behind the industry, management expects weakness in the automotive segment to continue in the near-term.
Adding insult to injury, performance of the company's ailing biometrics subsidiary, EyeLock LLC, was underwhelming once again with sales dropping to an immaterial amount.
Even worse, exclusive biometrics solutions distributor GalvanEyes LLC, an entity controlled by VOXX International's largest shareholder Beat Kahli, stopped making agreed quarterly payments last year (emphasis added by author):
On April 29, 2021 EyeLock LLC entered into a three-year exclusive distribution agreement (“the Agreement”) with GalvanEyes LLC, a Florida LLC, managed by Beat Kahli, the largest holder of Voxx’s Class A Common Shares. (...)
Under the Agreement, in addition to paying for any products purchased, GalvanEyes agreed to pay EyeLock $10,000 in the form of an annual fee, over a two-year period, of up to $5,000 per year, with payments on a quarterly basis beginning on September 1, 2021 and ending on August 31, 2023.
The quarterly installment payments owed by GalvanEyes for both the three months ended May 31, 2023 and August 31, 2023 remain unpaid and are currently past due.
GalvanEyes and the Company are considering renegotiating the distribution agreement and have agreed to defer the payments due on May 31, 2023 and August 31, 2023 to February 29, 2024, pending the resolution of the renegotiation.
Two weeks ago, the company announced the formation of a 50:50 joint venture ("BioCenturion LLC") with GalvanEyes Partners LLC (emphasis added by author):
Under the Agreement, both companies will be contributing selected assets and liabilities to the joint venture. GalvanEyes will serve as the managing member and will be responsible for all working capital needs over the next two years, after which, the companies will evaluate the best path forward for the business. The new entity will be run by Allen Ibaugh, who served both as President of EyeLock and CEO of GalvanEyes and will combine and manage the talent from both organizations.
As a result, VOXX International will no longer be required to fund the loss-making biometrics operations which should benefit cash flows going forward. Please note that EyeLock LLC's approximately $70 million promissory note due to the company is not part of the agreement and therefore will remain outstanding.
In conjunction with the transaction, Beat Kahli has stepped down as President of VOXX International to focus on his new role as Chairman and CEO of BioCenturion LLC.
In addition, the company agreed to settle arbitration proceedings with former supplier Seaguard Electronics LLC for an aggregate cash payment of $42 million as discussed in more detail in VOXX International's quarterly report on form 10-Q (emphasis added by author):
On December 22, 2023, the Company and Seaguard entered into a Settlement Agreement and Mutual Release, with an effective date of January 10, 2024, in which the Company agreed to pay Seaguard $42,000 in full and final settlement of all judgments and claims that have been awarded or asserted or could have been asserted by Seaguard against the Company and its subsidiaries. An initial payment of $10,000 was made on December 27, 2023 and the final payment of $32,000 is due on the agreement effective date of January 10, 2024. Upon receipt of the final payment, Seaguard will file a Satisfaction of Judgment with the court and a Dismissal of the Arbitration with the American Arbitration Association. The Company will file a Dismissal of the Appeal within five days after the filing of the Satisfaction of Judgment.
While the $42 million payment will reduce the company's available liquidity very substantially, I expect the settlement to result in a $0.20 per share non-cash gain in the fourth quarter from the release of the respective balance sheet accrual.
As of the end of Q3, VOXX International had $59.3 million available under its $165 million asset-based revolving credit facility.
However, with Q4 usually being the strongest cash flow quarter of the year, I would expect the company to finish FY2024 with at least $25 million in remaining borrowing capacity.
With the biometrics segment no longer dragging down cash flows and considering anticipated benefits from additional inventory reductions going forward, I would expect VOXX International's liquidity to remain sufficient for the time being.
However, even with some long-standing legacy issues now behind the company, and the recent addition of Gentex Corporation (GNTX) as a strategic investor, it is hard to get excited about the company's near-term prospects as FY2025 is expected to start on a weak note again (emphasis added by author):
As we look into Q4 and the first half of calendar '24, we believe it's going to be tight. Look at what's happening now. Interest rates almost all-time highs, and that impacts not only consumers, but our customers as well.
Credit card debt is very high. Government subsidies from the pandemic are over. After a decent holiday season amidst all of these challenges, we feel the economy is slowing. And therefore, we expect the next few months to be soft, and we're going to continue to be diligent in managing our costs.
While management expects new product launches in the consumer electronics segment and ongoing cost savings initiatives to offset some of the projected weakness, the company is likely to lose money in H1/2025.
Bottom Line
In recent months, VOXX International has successfully addressed a couple of long-standing legacy issues.
Going forward, the biometrics business will no longer be a drag on cash flows and the recent arbitration settlement, while painful, is likely to result in a substantial accounting gain in the company's upcoming Q4/FY2024 results.
In addition, the consumer electronics segment has been showing signs of life as of late but this has been more than offset by weakness in the company's automotive business which is expected to continue into FY2025.
In sum, I don't see any compelling reasons to initiate or add to existing positions at this point.
Consequently, I am reiterating my "Hold" rating on the shares.
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