VOXX - VOXX International: A Weak Finish To FY2023 With More Challenges Ahead Avoid

2023-05-31 20:24:37 ET

Summary

• Company finished FY2023 on a weak note with both sales and profitability down on a quarter-over-quarter and year-over-year basis.
• Pronounced weakness in the company's automotive aftermarket and premium audio products have been the main drivers behind the disappointing performance.
• While VOXX managed to generate some cash in the fourth quarter, full-year free cash flow was negative by a whopping $41.8 million.
• Liquidity might be further pressured in case of an unfavorable court ruling in early August. With the court likely to confirm a material arbitration award against the company, another sell-off might be in the cards.
• With challenging market conditions expected to persist for the next couple of quarters and odds for an adverse court ruling remaining high, investors should avoid the company's shares.

Note:

I have covered VOXX International Corporation ( VOXX ) previously, so investors should view this as an update to my earlier articles on the company.

Two weeks ago, VOXX International Corporation or "VOXX" reported disappointing Q4/FY2023 and full-year results with both sales and profitability down on a quarter-over-quarter and year-over-year basis:

On the conference call , management openly admitted to the weak performance and projected adverse market conditions to persist for the first half of fiscal year 2024:

While we had a lot of positive developments and continued to win the new business globally, fiscal 2023 was certainly a challenging year. We were faced with a myriad of roadblocks throughout OEM customers shutting down production, retailers cutting back on orders, inflation and fears of recession globally, which had a big impact on consumer spending and our retail business.

Supply chain issues improved during the year, but the hangover of high cost on inventory lasted throughout the year. Chip scarcity was a major issue and come into some of our expected automotive OEM growth. Virtually all of our competitors and industry peers have been feeling the pinch and we continue to see layoffs, particularly across the technology and consumer sectors. We have been vigilant about controlling costs, while working to enhance margins to offset some of these pressures.

As we look into fiscal 2024 and particularly the first half, we see more of the same with respect to the global economy. We hope to see better conditions in the second half of the year with some possible easing by the Fed and lower cost due to an improved supply chain.

In fact, the substantial year-over-year revenue decline was mostly the result of pronounced weakness in automotive aftermarket and particularly premium audio products:

The weak retail environment in Q3 continued into the fourth quarter and our sales came in considerably below the prior year and our forecast. It’s been a challenging environment and consumers continue to pivot away from CE products for the home, which during COVID as you know, was very strong and we believe this has pulled some sales forward.

While automotive OEM product sales increased to a new multi-year high in Q4, management estimated approximately $18 million of lost revenue for the full year due to supply chain issues faced by its customers.

While VOXX managed to generate some cash in the fourth quarter, full-year free cash flow was negative by a whopping $41.8 million.

In addition, the company used $5.1 million for the repurchase of 0.5 million common shares.

VOXX ended FY2023 with cash and cash equivalents of $6.1 million and $84.0 million available under its up to $165.0 million revolving credit facility.

Total outstanding debt and lease obligations amounted to $43.1 million at the end of February.

Moreover, the company has accrued $43.4 million for damages awarded to Seaguard Electronics LLC ("Seaguard") in arbitration as disclosed in the annual report on form 10-K:

In March 2007, the Company entered into a contract with Seaguard Electronics, LLC relating to the Company’s purchase from Seaguard of a stolen vehicle recovery product and back-end services. In August 2018, Seaguard filed a demand for arbitration against the Company with the American Arbitration Association (“AAA”) alleging claims for breach of contract and patent infringement. (...)

On November 29, 2021, the Arbitrator issued an interim award with Seaguard prevailing on its breach of contract claim. (...)

Seaguard was awarded damages in the amount of $39,444 against the Company. On March 3, 2022, the Arbitrator issued a Partial Final Award on Bifurcated Issue in the amount of $39,444, plus $798 for its attorneys’ fees and costs. On March 11, 2022, the Arbitrator fixed the schedule of the patent portion of the bifurcated arbitration, with a trial date set for October 16, 2023. The Company has put its suppliers on notice of its indemnification rights with respect to the alleged infringing products.

On March 14, 2022, Seaguard filed a Petition in the United States District Court, Central District of California, Western Division, to confirm the Partial Final Award. On April 25, 2022, the Company filed its opposition to Seaguard’s Petition to Confirm and a Counter-Petition to Vacate the Partial Final Award. On May 31, 2022, the Court ordered the matter taken under submission for decision without oral hearing. The court has issued an Order informing the parties that it will rule on the pending Petitions by August 3, 2023.

An adverse court ruling in early August would put pressure on the company's liquidity and almost certainly result in another sell-off in the shares.

Please keep in mind that Seaguard might be awarded additional damages related to potential patent infringements by VOXX with a trial date having been set for October 16.

Turning to the company's outlook, management expects sales to be " modestly lower " on a year-over-year basis for the first half of FY2024 but to increase thereafter with anticipated gross margin improvement throughout the year and operating expenses declining as a percentage of net sales.

Bottom Line

VOXX International Corporation finished FY2023 on a decisively weak note and warned of challenging market conditions to persist for the first half of FY2024 with a return to year-over-year growth expected in the second half.

With the next couple of quarters likely to be more of the same and the very real potential for an unfavorable court ruling in the Seaguard case in early August, I would advise investors to avoid the shares.

For further details see: