AXON Enterprise, Inc. (formerly TASER International, Inc.) — Q1 2013 Form 10-Q Summary
Reporting period: Three months ended March 31, 2013; filed May 7, 2013. The company developed and sold conducted electrical weapons, accessories, and emerging video hardware and software, including AXON products and EVIDENCE.com. Results were unaudited and included the wholly owned European subsidiary.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $30.4 million | $25.6 million | +18.7% |
| Gross margin | $18.5 million; 60.6% | $15.2 million; 59.4% | +$3.2 million |
| Income from operations | $5.3 million; 17.3% | $6.5 million; 25.2% | -$1.2 million |
| Net income | $3.3 million; 10.8% | $3.8 million; 14.8% | -13.3% |
| Diluted earnings per share | $0.06 | $0.07 | Decrease |
| Net cash from operating activities | $4.5 million | $3.7 million | +$0.9 million |
- CEW segment revenue was $28.0 million, up 13.1%. Video segment revenue was $2.4 million, up 175.3%, including $1.2 million from AXON/EVIDENCE.com.
- Revenue growth was driven by TASER X2 adoption, the January 2013 launch of TASER X26P, and increased adoption of AXON Flex and EVIDENCE.com. X26 revenue declined $2.6 million as customers upgraded to newer products.
- Sales, general and administrative expense increased 26.6% to $11.2 million, or 36.8% of sales, primarily due to strategic hiring, higher stock compensation, sales activity, and other litigation-related expenses. Research and development expense declined 5.6% to $2.0 million.
- Q1 2012 included a $2.2 million litigation judgment recovery related to the Turner case; there was no comparable recovery in 2013. This materially affected the year-over-year decline in operating and net income.
- Cash and cash equivalents were $38.6 million at March 31, 2013, compared with $36.1 million at December 31, 2012. The company held no short-term investments or cash equivalents at quarter-end.
- Capital expenditures and intangible-asset purchases totaled approximately $0.5 million. Financing cash use included $5.4 million of common-stock repurchases, partly offset by a $1.9 million excess tax benefit from stock-based compensation.
- The company had $0.1 million of capital lease obligations and no borrowings under its $10.0 million revolving credit facility. Letters of credit reduced available borrowing capacity to $9.4 million. The facility matures June 30, 2014, and the company was in compliance with its covenants.
- Total assets were $117.1 million and total liabilities were $28.9 million at March 31, 2013. The company reported no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue increased $4.8 million, or 18.7%, while gross margin expanded 120 basis points to 60.6%.
- Video revenue grew $1.5 million, and quarterly Video bookings increased to $1.4 million from $0.4 million. Bookings represented orders and were not equivalent to recognized revenue; EVIDENCE.com revenue is generally recognized over one to five years.
- Operating margin fell to 17.3% from 25.2%, primarily because of the absence of the prior-year $2.2 million litigation recovery and increased SG&A spending.
- Net income declined $0.5 million despite higher sales and gross profit.
- The company authorized a $25.0 million share-repurchase program and repurchased 702,866 shares for approximately $5.4 million during the quarter. By April 25, 2013, approximately 1.9 million shares had been repurchased for $14.8 million, leaving approximately $10.2 million authorized.
- The reserve for excess and obsolete inventory declined to $0.6 million from $2.3 million, primarily following disposal of most previously reserved X3 inventory.
- Deferred revenue increased to $13.8 million, including approximately $2.0 million related to EVIDENCE.com and $11.8 million related to extended warranties.
Guidance, outlook, risks and unusual items
- Management expected a 2013 effective tax rate of approximately 38.8%, compared with a first-quarter effective rate of 37.0%. The estimate reflected state taxes and nondeductible expenses.
- Management stated that operating cash flow, existing cash, and the available credit facility were expected to be sufficient to fund operations and strategic initiatives during 2013, while noting that future cash generation and financing availability were not assured.
- The company had a $3.0 million liability for unrecognized tax benefits. Recognition of this amount would favorably affect the effective tax rate, but management did not expect a significant change in the liability during the following 12 months.
- The company was defending 26 product-liability lawsuits alleging wrongful death or personal injury involving TASER devices. Management did not expect the matters individually or in aggregate to materially affect the business, but acknowledged that litigation outcomes are inherently uncertain and may exceed insurance coverage.
- The Turner case carried a $1.1 million reserve and remained on appeal. If the company were unsuccessful, the 2008 policy-year insurance coverage could be fully exhausted for related cases.
- Other material litigation included intellectual-property litigation involving GEOTAG and Karbon Arms and a distributor-contract dispute with AA & Saba Consultants. The company recorded an estimated $0.8 million liability for its settlement offer in the AA & Saba matter.
- Key operating risks included dependence on X26, X26P and X2 sales; adoption of EVIDENCE.com; product defects and warranty costs; data-security breaches and service outages; government and budget constraints; litigation and adverse publicity; intellectual-property claims; regulation; supplier and component risks; foreign-exchange exposure; and competition.
- Management reported effective disclosure controls and procedures as of March 31, 2013, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether rapid Video-segment growth and increased bookings translate into sustained recognized revenue and improved profitability.
- The pace of customer migration from X26 to X2 and X26P and the effect on product mix and margins.
- Whether higher SG&A investment produces sufficient revenue growth to restore operating leverage.
- The ultimate cost, timing, insurance recovery, and reserve adequacy for the Turner matter and other product-liability litigation.
- The company’s continued ability to realize its $21.2 million of net deferred tax assets and the resolution of approximately $3.0 million of unrecognized tax benefits.
- The remaining authorization and cash impact of the share-repurchase program, including the effect on liquidity and share count.
- Customer concentration and collections: one distributor represented approximately 13.7% of Q1 sales, and three customers represented approximately 39% of aggregate receivables at quarter-end.