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TASR > SEC Filings for TASR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for TASER INTERNATIONAL INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the Company's financial condition as of September 30, 2012, and results of operations for the three and nine months ended September 30, 2012 and 2011. The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations section contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Certain statements contained in this report may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements may relate to, among other things: the impact of recently issued and adopted accounting standards and guidance; estimated amortization charges in future years and our projected effective tax rate for 2012; our expectations about unrecognized tax benefits and deferred income taxes; assumptions about the future vesting of outstanding stock options and the amortization of costs relating thereto; our litigation strategy; our intentions to hold our investment securities to maturity and expectations relating to the redemption prices of these securities; the outcome of pending litigation against us; the sufficiency of our valuation reserves, including warranty, accounts receivable, deferred taxes and inventory reserves; the sufficiency of our capital resources and the availability of financing to the Company and our strategy with respect to hedging activities. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. Such factors include, but are not limited to:
market acceptance of our products; budgetary and political constraints of prospects and customers; litigation risks resulting from alleged product-related injuries and media publicity concerning allegations of deaths occurring after use of the TASER device and the negative impact this publicity could have on sales; our dependence on sales of our TASER X26 and X2 ECDs; our ability to manage our growth; our ability to increase manufacturing production to meet demand; the outcome of pending litigation; establishment and expansion of our direct and indirect distribution channels; the acceptance of our EVIDENCE.com software model; breach of our security measures resulting in unauthorized access to customer data; our ability to design, introduce and sell new products; delays in development schedules; risks relating to acquisitions and joint ventures; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; risks of governmental regulations, including regulations of our products by the United States Consumer Product Safety Commission, regulation of our products as a "crime control" product by the Federal government, state and local government regulation and foreign regulation; our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; our ability to protect our intellectual property; intellectual property infringement claims and relating litigation costs; competition in foreign countries relating to foreign patents; our successful identification of existing intellectual property rights that might infringe on our developments; the adverse effects that could result from our products being classified as firearms by the United States Bureau of Alcohol and Firearms or any state; product defects; rapid technological change; our dependence on third party suppliers for key components of our products; component shortages; our dependence on foreign suppliers for key components; rising costs of raw materials and transportation relating to petroleum prices; catastrophic events; outages and disruptions relating to our EVIDENCE.com service; fluctuations in quarterly operating results; foreign currency fluctuations; counterparty risks relating to cash balances held in excess of FDIC insurance limits; employee retention risks and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2011 under the caption "Risk Factors."

Overview

TASER International, Inc.'s (the "Company", "TASER", "we" or "our") core mission is to protect life, protect truth through technologies that make communities safer. We are the market leader in the development, manufacture and sale of advanced Electronic Control Devices ("ECDs") designed for use in law enforcement, military, corrections, private security and personal defense. Since our inception in 1993, we have remained committed to providing solutions to violent confrontation by developing devices with proprietary technology to incapacitate dangerous, combative, or high-risk subjects who pose a risk to law enforcement officers, innocent citizens, or themselves in a manner that is generally recognized as a safer alternative to other uses of force.

TASER solutions deliver significant results to our customers and to communities in which they are deployed. There are over 300 published studies on the effects of TASER ECDs. Just as importantly, there are eight published independent epidemiological studies covering a total of 48,228 subjects. The 2008 Eastman study found that 5.4% of conductive electronic weapons use "clearly prevented the use of lethal force by police." The largest epidemiological study was the 2009 MacDonald study of 24,380 uses of force. In addition, the papers of Taylor (13,983 subjects), Mesloh (4,303 subjects), Mumola (2,686 subjects), Smith (1,645 subjects), Butler (562 subjects) and White (243 subjects) show a significant reduction in both officer and suspect injuries with TASER ECD usage. Further, most reporting agencies demonstrate overall decreases in use of force and decreases in suspect and officer injuries resulting from conflict. Reducing uses of force and gaining compliance by use of a TASER ECD has provided significant reductions in worker's compensation expenses and claims for excessive use of force for agencies and ultimately, taxpayers.


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Our mission to protect life has also been extended to protect truth. We have learned that bringing a subject into custody is not the end of the challenge for law enforcement. In fact, it is typically just the beginning since a significant number of incidents that start as a physical conflict transition into a legal conflict. Whether it's prosecuting and convicting the individual arrested, or responding to excessive use of force allegations, the post-incident legal process is a considerable part of the challenge that law enforcement faces on a continual basis and can often take years and millions of litigation dollars to resolve in the courtroom. To help law enforcement address this challenge, we have developed a fully integrated hardware and software solution that will provide our law enforcement customers the capabilities to capture, store, manage, share and analyze video and other digital evidence. Finally, the optimum situation is to have prevented the conflict from ever escalating. TASER ECDs and AXON on-officer video have a measured and positive effect on better suspect and officer behavior as well as achieving compliance without escalation of force.

Central to our strategy, we conduct research and develop advanced technologies for both the creation of new, and the enhancement of existing, hardware and software products and services. We believe that delivering breakthrough innovation and high-value solutions through our various product platforms is the key to delivering compelling value propositions to meet our customers' needs and to drive our future growth. We place the highest level of importance on the safety and appropriate use of our products and have established industry leading training services to provide our users a comprehensive overview of the legal, policy, medical information and risk mitigation issues relating to our ECDs and the use of force. Our products are sold through a network of distribution channels developed for selling and marketing our products and services to law enforcement agencies, primarily in North America, with continuing focus and effort placed on expanding these programs in international, military and other markets. In order to facilitate sales and provide customer service to our European customers in 2010, we established TASER International Europe SE, a wholly-owned subsidiary.

In the fourth quarter of 2011, the AXON portion of our Video business was determined to be a separate segment, whereas in prior years the business primarily resided in the research and development stage in anticipation of eventual product launch. Senior management discussed at length the best way to present and report the Video business as it continued to iterate on different ways to separate the business into distinct product segments. As the Company analyzed the business in that manner, it became apparent that due to the support that the software business had to provide to the video hardware to ensure the seamless integration of hardware and software, it made sense to include AXON hardware in the Video segment, and not just the results of our EVIDENCE.com software-as-a-service product ("SaaS"). Further, because TASER Cam uses EVIDENCE.com to store videos and the developers of EVIDENCE.com had to contribute to the upload and storage of TASER Cam videos, we concluded that the Video segment should ultimately include sales and expenses for AXON hardware and accessories, EVIDENCE.com SaaS and TASER Cam. Based on this evaluation, during the fourth quarter of 2011, management determined that its operations are comprised of two reportable segments: the sale of ECDs, accessories and other products and services (the "ECD segment"); and the Video business, which includes the TASER Cam, AXON Video products and EVIDENCE.com (the "Video segment").

Only those costs directly attributable to the Video segment are included in that segment. The CODM wants to understand the true investment in the Video business, and that result is delivered by allocating only costs directly associated with the Video segment. By leaving the remainder of costs not directly associated with the Video segment in the ECD segment, the Company is able to compare the ECD segment to historical results (where the majority of the business was only that segment) to gauge relative efficiency of the ECD operation versus historical norms. Further information about our reportable segments and sales by geographic region is included in footnotes 1(b) and Note 12 of the unaudited condensed consolidated financial statements included elsewhere herein.


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Results of Operations

Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011

The following table sets forth, for the periods indicated, our unaudited
consolidated statements of operations as well as the percentage relationship to
total net sales of items included in our consolidated statements of operations
(dollars in thousands):



                                                 Three Months Ended Sept 30,                  Increase / (Decrease)
                                                2012                      2011                  $                %
Net sales                               $ 28,773       100.0 %    $ 24,383       100.0 %    $    4,390            18.0 %
Cost of products sold and services
delivered                                 11,970        41.6        11,280        46.3             690             6.1

Gross margin                              16,803        58.4        13,104        53.7           3,699            28.2
Sales, general and administrative
expenses                                   9,540        33.2         9,478        38.9              62             0.7
Research and development expenses          1,986         6.9         2,363         9.7            (377 )         (16.0 )
Loss on impairment                            -           -              3         0.0              (3 )             *
Loss on write down / disposal of
property and equipment                        -           -             48         0.2             (48 )             *

Income from operations                     5,277        18.3         1,212         5.0           4,065           335.4
Interest and other income, net                11         0.0            15         0.1              (4 )         (26.7 )

Income before provision for income
taxes                                      5,289        18.4         1,227         5.0           4,062           331.1
Provision for income taxes                 1,612         5.6            91         0.4           1,521               *

Net income                              $  3,677        12.8 %    $  1,136         4.7 %    $    2,541           223.7 %

Note: Table may not foot due to rounding differences.

* Not meaningful

Net Sales

Net sales by product line were as follows (dollars in thousands):



                                          Three Months Ended Sept 30,
                                         2012                      2011
             ECD segment:
             TASER X26           $  7,434        25.8 %    $  8,659        35.5 %
             Single Cartridges      9,729        33.8         7,631        31.3
             TASER X2               6,326        22.0         3,697        15.2
             TASER C2                 721         2.5           578         2.4
             ADVANCED TASER           620         2.2           724         3.0
             TASER X3                  52           *             6           *
             XREP                      18           *            74           *
             Other                  2,185         7.6         1,992         8.2

             ECD segment           27,085        94.1 %      23,361        95.8 %

             Video segment:
             TASER Cam                317         1.1 %         706         2.9 %
             TASER CamHD              423         1.5            -            *
             AXON/EVIDENCE.com        878         3.1           181           *
             Other                     70           *           135           *

             Video segment          1,688         5.9 %       1,022         4.2 %

             Total net sales     $ 28,773       100.0 %    $ 24,383       100.0 %

* less than 1%


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Net sales to the United States and other countries are summarized as follows:

                                      Three Months Ended Sept 30,
                                      2012                   2011
                United States               81 %                   81 %
                Other Countries             19                     19

                Total                      100 %                  100 %

Net sales were $28.8 million and $24.4 million for the three months ended September 30, 2012 and 2011, respectively, an increase of $4.4 million, or 18.0%. The increase in net sales for the third quarter of 2012 compared to 2011 was primarily driven by the continued adoption of the TASER X2, which contributed $6.3 million of sales for the third quarter of 2012 compared to $3.7 million for the same period in the previous year. In addition, cartridges increased in the third quarter of 2012 when compared to the prior year as a result of increased distribution restocking orders. Sales of our X26 ECDs decreased $1.2 million for the third quarter of 2012 when compared to the same period in the previous year as a result of the upgrade cycle to the X2 ECD. Sales relative to our Video segment increased $0.7 million to $1.7 million for the three months ended September 30, 2012. During the second quarter of 2012, we began shipments of our AXON Flex on-officer camera, with our EVIDENCE.com SaaS. We continue to generate traction with a number of new agencies adopting the platform, including upgrades from the first generation AXON camera.

International sales for the third quarter of 2012 and 2011 represented approximately $5.4 million, or 19%, and $4.6 million, or 19%, of total net sales, respectively.

Cost of Products Sold and Services Delivered

Cost of products sold and services delivered were $12.0 million and $11.3 million for the three months ended September 30, 2012 and 2011, respectively, an increase of $0.7 million, or 6%. As a percentage of net sales, cost of products sold and services delivered decreased to 41.6% in the third quarter of 2012 compared to 46.3% in the third quarter of 2011. The decrease in overall cost of products sold as a percentage of sales was driven by improvements to our ECD segment margins, which relates to additional leverage provided from the increased sales in the ECD segment. Cost of products sold for our ECD segment were $9.7 million for the three months ended September 30, 2012, or 36% of ECD segment sales, compared to $9.4 million for the three months ended September 30, 2011, or 40% of ECD segment sales. These improvements primarily relate to manufacturing efficiencies, increased leverage resulting from increased sales levels, and a favorable change in product mix.

Cost of products sold and services delivered for the Video segment were $2.3 million and $1.8 million for the three months ended September 30, 2012 and 2011, respectively. The overall increase in costs for our Video segment for the third quarter of 2012 relates to the increase in sales for the Video segment.

Gross Margin

Gross margin was $16.8 million and $13.1 million for the three months ended September 30, 2012 and 2011, respectively, an increase of $3.7 million, or 28.2%. Our gross margin percent increased to 58.4% for the third quarter of 2012 compared to 53.7% for the third quarter of 2011, a result of the factors discussed above under cost of products sold and services delivered.


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Sales, General and Administrative Expenses

For the three months ended September 30, 2012 and 2011, sales, general and
administrative expenses were comprised of the following (dollars in thousands):



                                                            Three Months Ended Sept 30,
                                                                                $             %
                                                  2012          2011         Change        Change
Salaries, benefits and bonus                     $ 2,919       $ 2,678       $   241           9.0 %
Legal, professional and accounting fees            1,312         1,752          (440 )       -25.1
Travel and meals                                     718           739           (21 )        -2.8
Stock-based compensation                             658           519           139          26.8
Consulting and lobbying                              490           663          (173 )       -26.1
Depreciation and amortization                        384           489          (105 )       -21.5
Sales and marketing                                1,133           650           483          74.3
D&O and liability insurance                          510           451            59          13.1
Other                                              1,416         1,537          (121 )        -7.9

Total                                            $ 9,540       $ 9,478       $    62           0.7

Sales, general and administrative as a % of
net sales                                           33.2 %        38.9 %

Sales, general and administrative ("SG&A") expenses were $9.5 million for each of the three months ended September 30, 2012 and 2011. As a percentage of net sales, SG&A decreased to 33.2% for the third quarter of 2012 compared to 38.9% for the third quarter of 2011. The small net increase in SG&A includes fluctuations in various categories that are largely offsetting. Sales and marketing expenses increased year-over-year due in part to increased tradeshow expenses of approximately $0.2 million due to the time of the year in which the Company participated in the annual International Association of Chiefs of Police tradeshow. In addition, variable selling expenses such as distributor commissions increased as a result of higher direct sales. Personnel costs also increased as the Company made some strategic hires as well as granted annual salary merit increases. Year-over-year decreases include a reduction in legal fees (combined with professional and accounting fees above) as a result of fewer cases.

Research and Development Expenses

Research and development expenses were $2.0 million and $2.4 million for the three months ended September 30, 2012 and 2011, respectively, a decrease of $0.4 million, or 16.0%. The decrease was primarily attributable to the continued reduction in professional and consulting fees and personnel costs of $0.5 million. These decreases were partially offset by an increase in expenses relating to medical research and travel of approximately $0.1 million.

Provision for Income Taxes

The provision for income taxes was $1.6 million and $0.1 million for the three months ended September 30, 2012 and 2011, respectively. Our effective tax rate for the third quarter of 2012 was 30.5%, which is below the statutory rate due to the impact of a favorable return to provision adjustment as well as a favorable effective tax rate true-up in the third quarter of 2012. These items reduced the provision for income tax expenses by $0.5 million in the third quarter of 2012. Our estimated full year effective tax rate for 2012, before discrete period adjustments, is approximately 39.6%.

Net Income

Our net income increased to $3.7 million, or $0.07 per basic and diluted share, for the third quarter of 2012 compared to net income of $1.1 million, or $0.02 per basic and diluted share, for the third quarter of 2011.


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Nine months Ended September 30, 2012 Compared to the Nine months Ended September 30, 2011

The following table sets forth, for the periods indicated, our unaudited consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statements of operations (dollars in thousands):

                                                   Nine Months Ended Sept 30,                   Increase / (Decrease)
                                                2012                       2011                    $                %
Net sales                               $ 82,637        100.0 %    $ 68,698        100.0 %    $    13,939           20.3 %
Cost of products sold and services
delivered                                 34,090         41.3        31,145         45.3            2,945            9.5

Gross margin                              48,547         58.7        37,553         54.7           10,994           29.3
Sales, general and administrative
expenses                                  26,799         32.4        27,887         40.6           (1,088 )         (3.9 )
Research and development expenses          6,157          7.5         7,908         11.5           (1,751 )        (22.1 )
Litigation judgment (recovery)
expense                                   (2,200 )       -2.7         3,301          4.8           (5,501 )            *
Loss on impairment                            -            -          1,354          2.0           (1,354 )            *
Loss on write down / disposal of
property and equipment                        -            -            796          1.2             (796 )            *

Income (loss) from operations             17,791         21.5        (3,694 )       -5.4           21,485              *
Interest and other income, net                26          0.0         1,303          1.9           (1,277 )        (98.0 )

Income (loss) before provision for
income taxes                              17,817         21.6        (2,391 )       -3.5           20,208              *
Provision (benefit) for income taxes       6,894          8.3        (1,252 )       -1.8            8,146              *

Net income (loss)                       $ 10,923         13.2 %    $ (1,139 )       -1.7 %    $    12,062              *

Note: Table may not foot due to rounding differences.

* Not meaningful

Net Sales

Net sales by product line were as follows (dollars in thousands):



                                           Nine Months Ended Sept 30,
                                         2012                      2011
             ECD segment:
             TASER X26           $ 26,774        32.4 %    $ 28,993        42.2 %
             Single Cartridges     24,754        30.0        19,778        28.8
             TASER X2              16,602        20.1         5,111         7.4
             TASER C2               2,270         2.7         2,359         3.4
             ADVANCED TASER         1,081         1.3         2,733         4.0
             TASER X3                  99           *           310           *
             XREP                     264           *           237           *
             Other                  6,931         8.4         6,504         9.5

             ECD segment           78,775        95.3 %      66,025        96.1 %

             Video segment:
             TASER Cam                889         1.1 %       1,853         2.7 %
             TASER CamHD            1,267         1.5            -            *
             AXON/EVIDENCE.com      1,506         1.8           508           *
             Other                    200           *           312           *

             Video segment          3,862         4.7 %       2,673         3.9 %

             Total net sales     $ 82,637       100.0 %    $ 68,698       100.0 %

* less than 1%


Table of Contents

Net sales to the United States and other countries are summarized as follows:

                                      Nine Months Ended Sept 30,
                                      2012                   2011
                United States               83 %                   78 %
                Other Countries             17                     22

                Total                      100 %                  100 %

Net sales were $82.6 million and $68.7 million for the nine months ended September 30, 2012 and 2011, respectively, an increase of $13.9 million, or 20.3%. The increase in net sales for the first nine months of 2012 compared to 2011 was primarily driven by the continued adoption of the TASER X2, which contributed $16.6 million of sales for the first nine months of 2012 and benefited from the extended upgrade program. In addition, cartridge sales increased in the nine months ended September 30, 2012 when compared to the same period in the prior year due to distribution restocking orders that took . . .

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