Business Context and Reporting Period
TASER International, Inc. (now associated with the AXON brand) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company developed and sold electronic control devices, accessories, training and related services, plus video hardware and EVIDENCE.com software-as-a-service. Operations were reported in two segments: ECD and Video.
Financial Overview
| Metric | Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 |
|---|---|---|---|---|
| Net sales | $28.8 million | $24.4 million | $82.6 million | $68.7 million |
| Gross margin | $16.8 million; 58.4% | $13.1 million; 53.7% | $48.5 million; 58.7% | $37.6 million; 54.7% |
| Income from operations | $5.3 million | $1.2 million | $17.8 million | $(3.7) million |
| Net income (loss) | $3.7 million | $1.1 million | $10.9 million | $(1.1) million |
| Diluted EPS | $0.07 | $0.02 | $0.19 | $(0.02) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $23.3 million | $14.6 million |
- Third-quarter sales increased 18.0%, while nine-month sales increased 20.3% year over year.
- ECD sales were $27.1 million in the third quarter and $78.8 million for the first nine months. Video sales were $1.7 million and $3.9 million, respectively.
- Growth was led by TASER X2 adoption, cartridge restocking and expanded AXON/EVIDENCE.com activity. Third-quarter X2 sales were $6.3 million versus $3.7 million in the prior year; nine-month sales were $16.6 million versus $5.1 million.
- SG&A was $9.5 million in the quarter and $26.8 million year to date, down 3.9% for the nine-month period. Research and development expense declined 22.1% year to date to $6.2 million.
- September 30, 2012 cash and cash equivalents were $26.0 million, and short-term investments were $3.2 million, for total cash, cash equivalents and investments of $29.1 million.
- Total assets were $102.6 million and total liabilities were $26.3 million. The company had no borrowings under its $10.0 million revolving credit facility, with $0.6 million of letters of credit outstanding and approximately $9.4 million available.
- The company repurchased approximately 3.8 million shares for $20.0 million during the first nine months; the program was completed in August 2012.
Material Changes Versus Prior Comparable Period
- Gross margin improved from 53.7% to 58.4% in the third quarter and from 54.7% to 58.7% for the first nine months, primarily because of manufacturing efficiencies, operating leverage and product mix in the ECD segment.
- Nine-month operating results benefited from a $2.2 million reversal of previously accrued Turner litigation expense. The prior-year period included a $3.3 million litigation judgment expense, a $1.4 million impairment charge and $0.8 million of property and equipment write-downs.
- The company reported nine-month net income of $10.9 million versus a net loss of $1.1 million in 2011. Comparability is affected by the litigation reversal and prior-year unusual charges.
- International sales declined to 17% of nine-month revenue from 22% in the prior-year period, while U.S. sales increased to 83% from 78%.
- Deferred revenue increased, including approximately $0.9 million of deferred EVIDENCE.com revenue and $9.2 million of deferred extended-warranty revenue at September 30, 2012.
Guidance, Outlook, Risks and Unusual Items
- Management expected a 2012 annual effective tax rate of approximately 39.6%, although the nine-month effective rate was 38.7% and the third-quarter rate was 30.5% because of favorable tax adjustments.
- Management stated that operating cash generation and available cash were expected to fund operations and strategic initiatives during 2012 and 2013, but noted that future cash generation and financing availability were not assured.
- The company identified market acceptance of X2, AXON and EVIDENCE.com; government budgets; product liability litigation; product defects; regulatory or firearms classification; intellectual-property disputes; cybersecurity and service outages; supplier and component risks; foreign exchange; competition; and manufacturing capacity as material risks.
- At September 30, 2012, the company was defending 33 product-liability lawsuits. The Turner case had a $5.5 million judgment, with approximately $1.1 million reserved for the company’s estimated uninsured exposure while an appeal was pending. The filing stated that the related 2008 insurance policy could be exhausted if the verdict stood.
- Other active litigation included patent litigation involving Karbon Arms, a website-feature patent claim by GEOTAG, a distributor contract dispute, and a California proposed class action alleging that TASER consumer devices were firearms under state law.
- The company carried approximately $2.2 million of unrecognized tax benefits and a $1.4 million valuation allowance related to Arizona research and development credits. Recognition of the unrecognized benefits would favorably affect the effective tax rate.
- The filing reported no off-balance-sheet arrangements, no debt borrowings, effective disclosure controls, and no material change in internal control over financial reporting.
Most Important Facts to Verify
- Whether X2, AXON Flex and EVIDENCE.com adoption continued to offset declining X26 sales and the Video segment’s negative gross margin.
- The sustainability of the reported 58.7% year-to-date gross margin after excluding litigation-related and other unusual items.
- The ultimate outcome and uninsured exposure from the Turner judgment and the broader product-liability docket, including insurance availability.
- Whether the company realized its projected 39.6% annual tax rate and whether the $2.2 million unrecognized tax benefit liability changed.
- Cash generation after the $20.0 million share repurchase and the company’s remaining liquidity under its revolving facility.
- The amount and timing of deferred EVIDENCE.com and warranty revenue recognized in subsequent periods.