AXON Enterprise, Inc. (formerly TASER International, Inc.) — 2013 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The filing was signed November 5, 2013. The company develops and sells conducted electrical weapons, cameras, evidence-management software and related services through its TASER Weapons and EVIDENCE.com & Video segments.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $35.2 million | $28.8 million | $97.8 million | $82.6 million |
| Gross margin | $22.1 million | $16.8 million | $60.3 million | $48.5 million |
| Gross margin percentage | 62.8% | 58.4% | 61.6% | 58.7% |
| Operating income | $6.9 million | $5.3 million | $18.9 million | $17.8 million |
| Net income | $5.1 million | $3.7 million | $12.9 million | $10.9 million |
| Diluted EPS | $0.10 | $0.07 | $0.24 | $0.19 |
- Revenue mix: Q3 TASER Weapons revenue was $31.6 million, while EVIDENCE.com & Video revenue was $3.6 million. Nine-month revenue was $89.9 million and $7.9 million, respectively.
- Cash flow: Nine-month operating cash flow was $23.1 million, compared with $23.3 million in 2012. Investing cash flow was negative $13.2 million, primarily reflecting net investment purchases. Financing cash flow was negative $11.0 million, principally because of the $25.0 million share repurchase.
- Liquidity: Cash and cash equivalents were $35.0 million at September 30, 2013. Cash, cash equivalents and investments totaled $48.3 million, including $13.3 million of short- and long-term investments.
- Debt: The company had approximately $0.1 million of capital lease obligations and no borrowings under its $10.0 million revolving credit facility. Letters of credit of $0.6 million reduced availability to $9.4 million. The company was in compliance with its debt covenants.
- Balance sheet: Total assets were $128.5 million and total liabilities were $36.3 million. Accounts receivable were $20.1 million and inventory was $12.3 million.
Material changes versus the prior comparable period
- Q3 sales increased 22.3%, and nine-month sales increased 18.4%. Growth was driven by the X26P and X2 weapons and substantially higher EVIDENCE.com & Video revenue.
- EVIDENCE.com & Video revenue increased 111.5% in Q3 and 104.7% for the first nine months. Bookings for EVIDENCE.com and AXON Flex increased to $5.8 million in Q3 and $9.3 million for the nine-month period, but future bookings may depend on municipal budget appropriations.
- Gross margin improved because of higher average selling prices, lower trade-in credits, sales leverage and improved EVIDENCE.com & Video cost efficiency.
- SG&A increased 33.9% in Q3 and 30.2% for the first nine months, primarily due to strategic hiring, higher sales commissions, marketing investments and product and commercial litigation costs.
- Research and development expense increased 22.9% in Q3 and 4.7% for the first nine months. Management expected R&D spending to increase through 2014 as EVIDENCE.com expanded into adjacent law-enforcement technologies.
- The company repurchased 3.05 million shares for approximately $25.0 million at a weighted average cost of $8.20 per share. The authorized program was completed in the second quarter and no open repurchase program remained.
- The X26P was introduced during 2013 and contributed $5.6 million of Q3 sales and $13.6 million of nine-month sales. X26 sales declined as customers shifted toward the X2 and X26P platforms.
Outlook, unusual items, risks and contingencies
- Management stated that operating cash flow, available cash and the revolving facility were expected to be sufficient to fund 2013 operations and strategic initiatives, but noted that future cash generation and borrowing availability were not assured.
- Management expected product and commercial litigation defense costs to trend downward in the second half of 2014, while R&D spending was expected to increase through 2014.
- The nine-month 2012 results included a $2.2 million litigation judgment recovery related to the Turner case; there was no comparable recovery in 2013. The Turner reserve remained $1.1 million, and the appeal had been argued on September 19, 2013.
- The company was defending 22 product-liability lawsuits and had three additional product-liability matters on appeal. The 2008 insurance policy year had no remaining insurance coverage for certain related cases if the Turner appeal was unsuccessful.
- The company had additional commercial and intellectual-property litigation, including matters involving GEOTAG, Karbon Arms and AA & Saba Consultants. A previously recorded $0.8 million settlement offer related to AA & Saba was withdrawn after rejection, while the amount remained recorded as an estimated liability.
- Warranty expense increased due to updated AXON Flex return estimates and launches of the X26P and AXON Body. The warranty reserve was $0.7 million at September 30, 2013, compared with $0.5 million at year-end 2012.
- Deferred revenue increased to $18.6 million, including approximately $3.7 million for EVIDENCE.com services and $14.5 million for extended warranties. These amounts will be recognized over the applicable service periods.
- The effective tax rate was 32.2% for the first nine months. Management estimated a 2013 full-year effective tax rate of approximately 38.2% before discrete items and recorded $3.1 million of unrecognized tax benefits.
- On October 7, 2013, the company agreed to acquire Familiar, Inc. for $1.3 million in cash and 107,749 shares of common stock. The acquisition was intended to support mobile-video research and development for the EVIDENCE.com & Video segment.
- Key disclosed risks included dependence on government and municipal budgets, product acceptance and defects, service outages or data-security breaches, litigation and adverse publicity concerning product-related injuries or deaths, intellectual-property disputes, regulation, supplier concentration, foreign exchange and competition.
Investor verification checklist
- Verify whether X26P, X2, AXON Body, AXON Flex and EVIDENCE.com adoption continued and whether bookings converted into appropriated and recognized revenue.
- Reconcile reported revenue growth with the increase in deferred revenue and the one-to-five-year recognition period for EVIDENCE.com services.
- Review the effect of elevated litigation, warranty and legal expenses on recurring operating margins and cash flow.
- Monitor the Turner appeal and the remaining insurance coverage for the 2008 policy year, as well as the other product-liability and commercial matters.
- Assess the sustainability of the reported tax rate, including the $3.1 million unrecognized tax benefit and the estimated 38.2% full-year rate before discrete items.
- Evaluate liquidity after the $25.0 million share repurchase, investment purchases and the Familiar acquisition, including continued compliance with credit-facility covenants.