Business Context and Reporting Period
TASER International, Inc. (the historical issuer associated with AXON Enterprise, Inc.) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company develops and sells conducted electrical weapons, accessories, training and related services, as well as AXON video products and EVIDENCE.com software-as-a-service.
Operations are reported in two segments: CEW and Video. The filing was signed August 7, 2013, and reported 51.1 million common shares outstanding as of July 25, 2013.
Financial Results and Key Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net sales | $32.2 million | $28.2 million | $62.6 million | $53.9 million |
| Gross margin | $19.7 million; 61.4% | $16.5 million; 58.5% | $38.2 million; 61.0% | $31.7 million; 58.9% |
| Operating income | $6.8 million; 21.2% | $6.1 million; 21.5% | $12.1 million; 19.3% | $12.5 million; 23.2% |
| Net income | $4.5 million | $3.4 million | $7.8 million | $7.2 million |
| Diluted EPS | $0.08 | $0.06 | $0.14 | $0.12 |
| Operating cash flow | Not separately provided | Not separately provided | $12.2 million | $13.4 million |
- Q2 sales increased 14.0%; first-half sales increased 16.2%.
- CEW revenue was $30.3 million in Q2 and $58.3 million for the first half. Video revenue was $1.9 million in Q2 and $4.3 million for the first half.
- Video revenue grew approximately 47.5% in Q2 and 99.3% in the first half, although the Video segment remained unprofitable at the operating level.
- SG&A increased 30.2% in Q2 and 28.2% in the first half, reflecting strategic hiring, higher legal and professional fees, sales commissions and marketing investments.
- Research and development expense was $2.0 million in Q2 and $4.0 million for the first half.
- The six-month effective tax rate was 35.7%; management estimated a 2013 full-year rate of approximately 38.8% before discrete adjustments.
Liquidity, Capital Resources and Balance Sheet
- Cash and cash equivalents were $19.1 million at June 30, 2013, compared with $36.1 million at December 31, 2012.
- Total cash, cash equivalents and investments were $31.7 million, including $10.7 million of short-term investments and $1.9 million of long-term investments.
- Net cash decreased $17.0 million during the first six months. Operating cash flow of $12.2 million was offset by $12.0 million of investing outflows and $17.3 million of financing outflows.
- The company repurchased 3.0 million shares for approximately $25.0 million at a weighted average cost of $8.20 per share. The repurchase authorization was substantially exhausted by June 30, 2013.
- The company had no borrowings under its $10.0 million revolving credit facility, $0.6 million of outstanding letters of credit and $9.4 million of available borrowing capacity. The facility matured June 30, 2014.
- Total liabilities were $33.3 million and stockholders’ equity was $79.7 million. Capital lease obligations were approximately $0.1 million; the filing reports no material conventional debt.
- Management believed operating cash flow, cash and available credit would be sufficient to fund 2013 operations and strategic initiatives, while noting that future financing availability was not assured.
Material Changes Versus the Prior Comparable Period
- The TASER X26P launched as a major growth driver, contributing $4.6 million of Q2 sales and $8.0 million of first-half sales. X26 revenue declined $1.7 million in Q2 and $4.3 million in the first half as customers adopted newer platforms.
- Cartridge revenue increased 20.1% in Q2 and 18.9% in the first half.
- AXON Flex and EVIDENCE.com bookings increased to $2.0 million in Q2 from $0.5 million and to $3.4 million for the first half from $0.8 million. Reported EVIDENCE.com revenue is deferred and recognized over one- to five-year service periods.
- Gross margin improved due to higher sales, higher average selling prices, CEW operating leverage and improved Video economics. Video cost efficiency benefited from use of third-party cloud storage.
- Operating income declined 3.6% for the first half despite revenue growth, primarily because 2012 included a $2.2 million litigation judgment recovery and because SG&A increased substantially.
- Warranty expense increased to $0.5 million for the first half, including a change in estimate for AXON Flex and costs associated with the X26P launch. The warranty reserve increased to $0.7 million.
- Inventory increased to $13.2 million from $11.0 million, partly due to completed CEW units held in anticipation of future sales. The excess and obsolete inventory reserve declined to $0.7 million from $2.3 million following disposal of most previously reserved X3 inventory.
Guidance, Outlook, Risks and Unusual Items
- Management expected Video segment gross margins to continue improving as fixed costs are leveraged and cloud-storage efficiencies continue, but the segment had an operating loss of $2.7 million in Q2 and $4.1 million for the first half.
- Management cited continued adoption of the X26P, X2, AXON Flex and EVIDENCE.com platforms, while cautioning that quarterly results may fluctuate because international sales are intermittent and customer sales cycles can be lengthy.
- The company had 23 pending product-liability lawsuits and three additional product-litigation matters on appeal. The Turner case had a $1.1 million reserve, with oral argument scheduled for September 2013; the applicable 2008 insurance policy year was already exhausted.
- The company recorded an estimated $0.8 million liability relating to a withdrawn settlement offer in the AA & Saba distributor-contract litigation. Other commercial and intellectual-property litigation remained pending.
- Unrecognized tax benefits totaled approximately $3.1 million. Management did not expect a significant change during the following 12 months; recognition would favorably affect the effective tax rate.
- Principal risks include dependence on CEW product adoption, acceptance of the EVIDENCE.com model, product defects and warranty claims, data-security breaches or service outages, government budgets and regulation, competition, intellectual-property disputes, litigation publicity, supplier constraints and foreign-exchange exposure.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the historical issuer-to-AXON corporate-name and business transition before comparing this filing with current AXON results.
- Assess whether X26P and cartridge growth offset declining legacy X26 sales and whether Video bookings converted into recurring revenue.
- Track Video gross-margin improvement and the timing of profitability after continued sales-force and infrastructure investment.
- Reconcile cash usage, the $25.0 million share repurchase, investment purchases and remaining liquidity against future operating needs.
- Review developments in the Turner appeal, pending product-liability cases, insurance coverage and the AA & Saba matter.
- Evaluate the realizability of the $21.1 million net deferred tax asset and resolution of the $3.1 million unrecognized tax-benefit liability.