Business Context and Reporting Period
TASER International, Inc. (now Axon Enterprise, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company operated through two reportable segments: TASER Weapons, comprising conducted electrical weapons and accessories, and Axon, comprising cameras, Evidence.com software, digital evidence management, and related services.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $46.7 million | $37.2 million | $91.5 million | $73.4 million |
| Gross margin | $30.7 million; 65.8% | $23.2 million; 62.4% | $60.6 million; 66.2% | $45.4 million; 61.9% |
| Income from operations | $9.4 million; 20.1% | $6.2 million; 16.7% | $20.1 million; 22.0% | $11.1 million; 15.1% |
| Net income | $6.1 million | $3.9 million | $13.3 million | $7.3 million |
| Diluted EPS | $0.11 | $0.07 | $0.24 | $0.13 |
| Operating cash flow | Not separately provided | Not separately provided | $11.0 million | $6.0 million |
- Q2 sales increased 25.7% year over year; six-month sales increased 24.7%.
- TASER Weapons sales increased 15.8% in Q2 and 16.9% for the six months, driven mainly by adoption of the X26P and X2 smart weapons.
- Axon sales increased 97.5% in Q2 and 86.5% for the six months, led by Axon cameras and Evidence.com.
- Axon bookings were $30.6 million in Q2 and $53.6 million for the six months, compared with $11.3 million and $17.3 million, respectively, in the prior-year periods.
- Cash, cash equivalents and investments totaled $99.0 million at June 30, 2015, including $40.4 million of cash and cash equivalents, $46.3 million of short-term investments and $12.4 million of long-term investments.
- Total assets were $212.2 million and total liabilities were $58.3 million at June 30, 2015. Inventory increased to $23.7 million from $18.3 million at year-end 2014, partly in anticipation of higher sales.
- Net cash decreased $8.0 million during the first six months, primarily because $27.2 million of investing outflows exceeded operating and financing inflows. Investing included $17.4 million of net investment purchases and $7.8 million of cash consideration for the MediaSolv acquisition.
- The company had approximately $50,000 of total long-term debt and capital lease obligations. Its $10.0 million revolving credit facility had no borrowings, approximately $3.0 million of letters of credit outstanding and approximately $7.0 million available at June 30, 2015.
- Total deferred revenue was $39.0 million, including $16.2 million current and $22.7 million long-term, compared with $35.7 million at December 31, 2014.
Material Changes Versus the Prior Comparable Period
- Gross margin expanded by 340 basis points in Q2 and 430 basis points for the six months, reflecting higher production levels, improved TASER Weapons pricing and scale-related improvement in Axon and Evidence.com margins.
- Operating margin increased to 20.1% in Q2 from 16.7% and to 22.0% for the six months from 15.1%.
- SG&A increased 14.0% in Q2 and 9.9% for the six months, although it declined as a percentage of sales. The increase reflected hiring, international expansion, marketing, consulting, lobbying and direct-sales activity.
- Research and development increased 70.9% in Q2 and 48.2% for the six months, primarily due to Axon engineering, software, cloud, mobile and wearable technology development.
- MediaSolv Solutions Corporation was acquired on May 5, 2015, for a preliminary total purchase price of $8.8 million, including $7.8 million in cash, $1.0 million of contingent consideration and $5.6 million of preliminary goodwill.
- Unlike the first six months of 2014, the company made no common-stock repurchases during the first six months of 2015. The remaining $7.6 million authorization was substantially exhausted by a subsequent August 2015 repurchase of approximately 0.3 million shares.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 full-year effective tax rates of approximately 32.9% before discrete adjustments in the quarterly discussion and approximately 36.6% in the six-month discussion; actual results may differ because of the new international tax structure and future earnings mix.
- Management expected SG&A to increase during the remainder of 2015 as strategic investments continue. It also expected Axon fixed costs to stabilize and cost of services to decline as a percentage of revenue, while cautioning that overall margins could decrease as Axon becomes a larger portion of sales.
- The company believed available cash, investments, operating cash flow and its credit facility would be sufficient for operations and strategic initiatives for 2015 and the foreseeable future, but noted that future cash generation and financing availability are not assured.
- Future Axon bookings may be subject to municipal appropriations or cancellation clauses. If customers do not appropriate funds, booked amounts may not convert into revenue.
- The company was defending 12 active product-liability lawsuits and had one additional matter on appeal. Management assessed that material aggregate loss was not reasonably possible, but acknowledged that litigation outcomes and insurance coverage remain uncertain.
- Outstanding off-balance-sheet commitments included approximately $3.0 million of letters of credit and $2.4 million of surety bonds, principally related to Axon installations and integrations.
- Unrecognized tax benefits totaled approximately $3.0 million. Recognition would favorably affect the effective tax rate, while Arizona research and development credits may expire if not used.
- On July 16, 2015, the company acquired its UK distributor, Tactical Safety Responses Limited, for $4.0 million in cash at closing plus potential earn-outs. The acquisition was to be accounted for in the third quarter.
- The filing identified risks from product acceptance, competition, product defects, cybersecurity breaches, Evidence.com outages, supplier and component constraints, government budgets and appropriations, foreign currency movements, regulatory changes, litigation and intellectual-property claims.
Investor Verification Items
- Verify the continuing conversion of Axon bookings into billed revenue and recognized subscription revenue, including the effect of government appropriation clauses.
- Assess whether Axon gross-margin improvements are sustainable as data-storage, professional-services and product-development costs grow.
- Review the final purchase accounting and operating contribution of MediaSolv and the subsequent UK acquisition, including earn-outs and integration costs.
- Monitor cash conversion, inventory growth, deferred revenue and investment balances following the acquisition and planned strategic investments.
- Reconcile the different quarterly and year-to-date tax-rate outlook disclosures and track utilization or expiration of deferred tax assets and research credits.
- Evaluate product-liability litigation exposure, insurance limits, deductibles and any settlements or judgments not yet reflected in the financial statements.
- Confirm the status of the revolving credit facility, letters of credit, surety bonds and compliance with financial covenants.