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LOJN > SEC Filings for LOJN > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for LOJACK CORP


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The following information should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012. Safe Harbor Regarding Forward Looking Statements The Private Securities Litigation Reform Act of 1995 and other securities laws contain certain safe harbors regarding forward-looking statements. From time to time, information provided by us or statements made by our employees may contain "forward-looking" information which involves risks and uncertainties. Any statements in this report and accompanying materials that are not statements of historical fact are forward-looking statements (including, but not limited to, statements concerning the characteristics and growth of our markets and customers, our expected capital expenditures, our strategic initiatives, objectives and plans for future operations and products, our ability to sell products to our Argentine licensee, and our expected liquidity, revenue, profit and capital expenditures and resources). Such forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties, and accordingly, actual results could differ materially. Factors that may cause such differences include, but are not limited to: (i) the continued and future acceptance of our products and services, including our pre-install program; (ii) our ability to obtain financing from lenders; (iii) the outcome of ongoing litigation involving the Company; (iv) the failure to receive final court approval of the settlement agreement in the California wage and hour litigation in a timely manner or at all and final resolution of the settlement; (v) the rate of growth in the industries of our customers; (vi) the presence of competitors with greater technical, marketing, and financial resources; (vii) our customers' ability to access the credit markets, including changes in interest rates; (vii) our ability to promptly and effectively respond to technological change to meet evolving customer needs; (ix) our ability to successfully expand our operations, including through the introduction of new products and services; (x) changes in general economic or geopolitical conditions, including the European debt crisis; (xi) conditions in the automotive retail market and our relationships with dealers, licensees, partners and agents; (xii) the expected timing of purchases by our customers; (xiii) our ability to achieve the expected benefits from our strategic alliance with TomTom and (xiv) trade tensions and governmental regulation and restrictions on imports that may affect sales to our licensees. For a further discussion of these and other significant factors to consider in connection with forward-looking statements concerning us, reference is made to Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by Item 1A "Risk Factors" in Part II of this Quarterly Report, and in our other periodic filings with the Securities and Exchange Commission. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. Except as required by law, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We are a leading global provider of technology products and services for the tracking and recovery of valuable mobile assets and the rescue of people with cognitive conditions such as autism or Alzheimer's who are at risk of wandering. Our proprietary technology, wireless network and unique integration with law enforcement agencies provide an effective means for the tracking and recovery of stolen vehicles, construction equipment, motorcycles, cargo and people at risk of wandering, or people at risk.
We have three separately managed and reported business segments: North America, International and All Other. Our North America segment is comprised of our domestic operation, which sells products and services that operate in 28 states and the District of Columbia in the United States, as well as our wholly owned subsidiary, Boomerang, a provider of stolen vehicle recovery products in Canada. Our International segment sells products, licenses or owns and operates LoJack proprietary vehicle recovery technology in approximately 30 countries and territories throughout Europe, Africa and Latin America and through our wholly owned subsidiary in Italy, LoJack Italia, SRL, or LoJack Italia. Our All Other segment includes LoJack SafetyNet and SCI, which are providers of technology for the tracking and rescue or recovery of people at risk and of valuable cargo and business information, respectively.
North America Segment
Our revenue in the United States is derived primarily from the sale of LoJack Units, LoJack Early Warning, and extended warranty products to consumers. Approximately 84% of our sales in the United States market are made through a distribution network consisting of dealers of new and used automobiles. We believe that we have strong consumer brand awareness in the United States. The price paid by the consumer for a LoJack Unit includes installation. We maintain a workforce that performs these installations, and we supplement our installation capacity by contracting with and certifying select dealers and other third parties to install our products. We continually seek to minimize the fixed costs related to the installation of a LoJack Unit by increasing


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our installation capacity with certified dealers and other third parties. We monitor the quality of these installations through the use of an expanded quality control process.
We offer warranty products at the point of sale to new customers and through direct sales efforts to our existing customers.
We record additions to deferred revenue for the monitoring service related to our LoJack Early Warning product and for certain warranty products for which we are the primary obligor of the underlying contract. We typically receive full payment within 60 days of the transaction, but recognition of the deferred revenue is prorated over the estimated life of the product or service. During the last quarter of 2011, we transferred the servicing and liability obligations for the majority of our extended warranty contracts originated in 2010 to a third party, eliminating any additional services or liability exposure as the primary obligor for those contracts. During the first quarter of 2012, we transferred the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to the third party and, beginning in 2012, substantially all servicing and liability obligations associated with new contracts sold are transferred to the third party upon purchase by the consumer. As such, for the majority of extended warranty contracts originated after 2011, we recognize revenue upon delivery as opposed to deferring the revenue and recognizing it over the life of the contract.
Our revenue in Canada is derived primarily from the service contracts related to Boomerang Espion, Boomerang Espion Alert, Boomerang, Boomerang2 and BoomerangXpress Units. Customers who purchased a Boomerang Unit (prior to the transition from Boomerang Units to LoJack Units during 2011) were required to enter into a service contract. The terms of the service contracts offered ranged from 12 to 60 months and were generally payable in full upon the activation of the related unit or renewal of a previous service contract. Customers were also offered a month-to-month option. Beginning in 2011, we introduced the LoJack technology in Canada in the province of Quebec and the business model and product offerings are now similar to those of the United States. In January of 2012, the LoJack technology was introduced in Ontario. Purchasers of LoJack Units in Canada are not required to enter into a service contract; however, the tracking and recovery of LoJack Units in Canada is still performed internally and thus we continue to recognize service revenue for a portion of each sale. Many insurance companies based in Quebec offer rebates to customers who install a LoJack Unit in their vehicles, and in some instances, insurance companies require installation of a LoJack Unit in such vehicles. International Segment
Internationally, our stolen vehicle recovery technology is operational in approximately 30 countries and territories around the world. We have existing licensees in South America, Mexico, Central America, the Caribbean, Africa and Europe. Revenue from this segment consists of product and infrastructure sales to our licensees, royalties and license fees.
We record additions to deferred revenue for international license fees and recognize the revenue over the term of the license (generally ten years). Royalty revenue is recognized when earned.
Italy is the only country outside of North America where we own and operate a stolen vehicle recovery network. Consumers who purchase LoJack Units in Italy are also required to enter into a service contract with LoJack Italia. The terms of service contracts offered range from 12 to 84 months and are payable in full either upon activation of the related unit or renewal of the stolen vehicle recovery service or on a monthly basis. Service revenue from these contracts is deferred and recognized over the term of the service contract. All Other Segment
Our All Other segment revenue is derived from our SCI and LoJack SafetyNet operations. SCI revenue is derived from the sale of cargo and business information tracking devices as well as subscription fees for monitoring service alerts and activity reporting.
LoJack SafetyNet revenue is primarily comprised of the sale of Personal Locator Units, or PLUs, replacement parts and related service contracts. Key Economic Factors and Trends and our Business Economic and market data and industry statistics and forecasts used throughout this report are based upon management's review of independent industry publications, reports by market research firms and other independent and publicly available sources. Although we believe that these third-party sources are reliable, we do not guarantee the accuracy or completeness of this information and have not independently verified this information.
During 2012, global economic growth slowed to approximately 3.2% as a result of the economic issues in the Eurozone and slowing economic growth in several key newly-developed and emerging markets. The impact on the light vehicle automotive market was varied, with European Union light vehicle sales down approximately 8% and our major licensee markets of Brazil, South Africa, and Mexico all growing in the 6% to 10% range. Argentina experienced a slight decline from the prior year. The U.S. light vehicle automotive market posted growth of 13% in 2012 compared with the prior year.


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During 2013, global economic growth is expected to increase by approximately 3.3%, with solid growth expected in the newly industrialized Asian economies, central and Eastern Europe, China, India and Brazil. The United States is expected to realize moderate growth, while Euro area economies are expected to decline slightly. International automotive growth for 2013 is estimated to continue to be varied. Car sales in Europe are expected to decline by approximately 7% over the full year, with risk of more significant weakness in France, Italy and Spain. Our key emerging market licensee territories of Brazil, South Africa, and Mexico are expected to experience growth of approximately 1%, 2% and 6%, respectively. The Argentine market is expected to decline by approximately 7%. U.S. retail automotive growth in 2013 is expected to continue to outpace the U.S. economy, with analysts estimating growth between 4% and 7%. North America Segment
Our focus on the U.S. automotive business resulted in significant performance improvement during 2012, with unit sales in the dealer channel increasing 11% as compared to the prior year. In the first quarter of 2013, our unit sales to dealers exceeded retail market performance by 8.1 percentage points, or 17% growth. This growth in unit volume was offset by an 8% decrease in average revenue per unit, as our domestic pre-install business has continued to gain traction. In the first quarter of last year, pre-installed units made up 31% of our U.S. unit sales, while in the first quarter of 2013 that percentage was up to 44% of installed units.
The U.S. automotive industry continued its solid growth in 2012, remaining one of the more positive stories in the U.S. economy, with 2012 growth significantly exceeding that of the U.S. economy as a whole. Retail vehicle sales grew 14%, with total light vehicle sales increasing 13%. Factors which contributed to this strong industry performance included pent-up consumer demand for new vehicles, an average vehicle age of almost 11 years, an annual scrappage rate of close to 13 million vehicles, historically low interest rates, increasing credit availability, adequate inventories of new vehicles, and new vehicle models being added to manufacturers' product lines. These factors, in addition to limited used vehicle inventories and higher used car prices, combine to make new car purchases an attractive option for consumers. There continued to be variability in growth rates and changes in market share among vehicle brands, the most impactful being Toyota and Honda who regained market share lost in 2011 due the effects of the tsunami.
Industry experts are projecting 2013 automotive industry growth to continue to significantly outperform the U.S. economy, with growth in the 4% to 7% range. Although all of the 2012 growth factors are expected to remain factors into 2013, economic uncertainty in the United States and in Europe has weakened growth expectations as compared to 2012.
Two key factors positively impacted demand for our product in 2012. The first factor is the strong and sustained auto demand experienced during 2012. The 2012 fiscal year was the third year in a row of solid U.S. automotive industry growth and 2013 is projected to remain strong. The second factor is the increasing need for profitable, value-add products within Financing and Insurance departments at automotive dealers. Decreased vehicle margins resulting from price transparency and increased brand competition have put pressure on dealerships to increase profit contributions in other areas of the dealership. Our well-known brand and long history of delivering on our consumer value proposition, coupled with a strong value proposition for the dealer, make the LoJack Stolen Vehicle Recovery system an attractive alternative to other after-market products available to the dealership. These two factors have contributed to increased dealer receptivity to our pre-install programs and increased volumes within selling dealers during 2012. Sluggish U.S. employment growth, lackluster GDP growth, and European economic headwinds continue to be obstacles to sustaining this industry optimism.
Demand for our commercial product remained strong throughout 2012, and there has been a high level of interest in our recently announced ruggedized self-powered product, which was recently recognized as one of Equipment Today's 2012 Contractors' Top 50 New Products. Construction spending increased approximately 8% in 2012. Construction starts are expected to outpace economic growth in 2013 at 6%. As the rebound in the construction market continues, rental revenue for construction and industrial equipment is forecast to grow approximately 9% in 2013 and accelerate, resulting in a compounded annual growth rate of almost 13% from 2012 to 2016.
International Segment

Our international business increased in the first quarter of 2013 compared to the same period last year as a result of increased shipments to a number of our licensees, with the largest increase experienced in shipments to our licensee in South Africa. In the past, we have experienced quarterly fluctuations in purchases in the International segment, with sales in many of our international markets tending to be higher in the fourth quarter of the year as licensees seek to achieve lower pricing with higher annual unit purchases. We also are experiencing downward pricing pressure and reductions in unit volumes in a number of our markets due to a variety of factors that vary from country to country. Those factors include the relative maturity of the stolen vehicle recovery market in certain highly developed territories, re-use of our products in certain territories, declining theft rates in certain territories and increasing competitive pressures by both Radio Frequency, or RF, and GPS based tracking systems. We also are faced with


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uncertainty regarding developing governmental regulations in Argentina that have affected, and may continue to affect sales to our licensee in that country, as well as uncertainty regarding the timing and potential impact of the Brazilian regulation mandating installation of tracking devices using GPS positioning and mobile communications technologies.
In Argentina, recently implemented controls and restrictions on the importation of goods and the exchange of Argentine Pesos for U.S. Dollars have made the exportation of goods from any country to Argentina more difficult. On February 1, 2012, Argentine authorities began requiring all importers to request and receive approval from the Argentine Tax and Customs Authority, or AFIP, prior to each import transaction. While the official processing time is 15 days for such requests, some requests have been put on hold for indefinite periods of time for review. In some cases, importers have been asked to match imports on a dollar-for-dollar basis with exports prior to receiving authorization from AFIP to import goods. Several states and governmental bodies, including the U.S., Japan and the European Union, have submitted complaints and formal requests for the World Trade Organization, or WTO, to establish a Panel to rule on the legality of Argentina's trade measures. Should the WTO Panel rule in favor of these complainants, Argentina could be ordered to remove the restrictions, or possibly face punitive tariffs from its foreign trading partners. Currently, it is unclear whether these proceedings with the WTO will result in changes to Argentina's trade policies that are favorable to our business.
We understand that our Argentine licensee did not receive permission to import our products following adoption of the pre-approval requirement in February 2012. As a result, we have not shipped any units to Argentina since January 2012. Our Argentine licensee has informed us that it and its affiliates have developed several commodity export programs with the expectation that our licensee will be permitted to import a dollar amount of goods approximately equivalent to the dollar amount of exports our licensee and its affiliates generate. We have been informed that our Argentine licensee has completed initial exports of commodities and that it anticipates restarting imports of our products this year. We have agreed in principle on a market-based volume program with our Argentine licensee for this year, subject to the ability of our licensee to import our products. If our Argentine licensee and its affiliates are unable to generate significant exports or if the government changes its policies, we may not be able to ship products to Argentina at all or in volumes consistent with prior years.
In Brazil, our licensee did not purchase any units during the first five months of 2012, but restarted purchases in June 2012 and continued to purchase units during the first quarter of 2013. We are in communication with our Brazilian licensee to determine the level of demand for 2013, however our sales in 2013 could be impacted by the results of our legal dispute (see Part 1, Item 3, "Legal Proceedings" for detail on the Brazilian licensee litigation). Certain of our European territories are experiencing an economic downturn deepened by government wage and pension reductions, rising unemployment and tight consumer credit availability. These conditions have led to declines in consumer spending and are adversely affecting the sale of new vehicles. For the quarter ending March 2013, certain European automobile industry trade associations have indicated that light vehicle sales in Europe declined by approximately 10%. The effect of lower vehicle sales has been mitigated in part by a positive market response to our new self-powered product.
Our business in Italy continued to grow in terms of subscribers during the first quarter of 2013, but our revenues declined by 5% compared to the same period last year primarily due to fewer sales of new units. We entered 2013 with approximately 27,900 subscribers in Italy, and continued growing the number of subscribers, adding approximately 1,250 net new subscribers in Italy during the first quarter for a total of approximately 29,100 subscribers as of March 31, 2013. While we continue to grow our subscriber base in Italy, our overall performance is slower than planned in part due to the overall weakness in the Italian economy, tightened access to credit by both our channel partners and consumers and the continuing decline in new vehicle registrations. During 2012, new car registrations are reported to have declined by 21% as compared to the same period in 2011. This negative trend continued during the first quarter of 2013 as Italian new car registrations are reported to have declined by 13% as compared to the same period in 2012.
All Other Segment
During the year, the incidents of cargo theft continued to trend upward along with commodity product line value increases and reported loss amounts. As a result of this trend, combined with the true direct and indirect replacement costs of lost shipments and increased regulatory emphasis on shipping condition integrity, brand owners and manufacturers continue to seek the type of visibility, risk reduction, prevention, control and recovery capability that SCI provides, both in the U.S. and for the international segments of its clients' supply chains. Supply chain extension into global markets is a trend that continues to build and we believe that SCI is positioned to capitalize on this trend.
Key Factors of our Business
We embarked upon a critical evaluation of our business during 2011 and developed a strategy designed to stabilize the business financially and to control growth. During 2012, we improved our internal processes and continued to explore opportunities to expand our core businesses in the United States and internationally. Our focus on the U.S. automotive business resulted in significant improvement in performance during 2012, with unit sales in the dealer channel increasing 11% as compared to the prior year, and unit sales in the fourth quarter exceeding retail market performance by 9.5 percentage points, or 21% growth. In


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our international business we face a number of challenges. In particular, during 2012 the Argentine government imposed significant trade restrictions on imports that have precluded our licensee in that country from purchasing product from us. Our European business has also been impacted by ongoing recessionary pressures. We continue to explore opportunities to expand into new territories and to meet the demand for our products in our existing markets.
We believe that our continued focus on executing our strategic goals for 2013 will enable us to continue our diversification efforts and:
Build on the momentum established in 2012 to restore our domestic and Canadian businesses to profitable growth;

Grow our existing core licensee business while identifying new territories for international expansion;

Increase our investment in those businesses which we view as potential significant sources of future revenue and profit;

Streamline and simplify our business processes to improve the overall experience for our customers and continue to aggressively manage our cost structure and discretionary spending;

Develop and maintain highly differentiated products and services in each line of our business while broadening our knowledge of the industry, current markets and potential new markets to pursue going forward; and

Expand our products and service offerings through our strategic alliances, the first of which is with TomTom.

Critical Accounting Policies and Estimates We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies and estimates which management believes are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition and deferred revenue, accounts receivable, valuation of investments, and income taxes. See the section entitled "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion of our critical accounting policies and estimates.
Recently Adopted Accounting Guidance
See Note 1 to the accompanying condensed unaudited consolidated financial statements for accounting standards adopted recently. Accounting Guidance Issued But Not Yet Adopted See Note 1 to the accompanying condensed unaudited consolidated financial statements for accounting standards issued but not yet adopted.
Results of Operations for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012
Revenue
Revenue for the three months ended March 31, 2013 decreased by $3,082,000 as compared to the same period in 2012. The following table presents revenue by our segments (in thousands):

Three Months Ended
                       March 31,            Percentage Change
                    2013         2012         2013 vs. 2012
North America   $    23,553    $ 27,123            (13 )%
International         6,551       6,275              4  %
All Other             1,116         904             23  %
Total revenue   $    31,220    $ 34,302             (9 )%

Revenue related to our North America segment decreased by $3,570,000 for the three months ended March 31, 2013, as compared to the same period in 2012. Revenue in the North America segment from our dealer channel in the United States decreased 13% when compared to the same period in 2012. Revenue in the North America segment from our heavy equipment, or commercial, channel in the United States increased 12% over the same period in 2012. Our motorcycle and direct distribution channels in the United States market saw revenue declines of 49% and 18%, respectively, as compared to the same period in 2012. Revenue in the North America segment from our Canadian business saw a decrease of 20% as compared to the same period in 2012.
The activity that resulted in a 13% decrease in our North America segment revenue for the three months ended March 31, 2013 as compared to the same period in 2012 was primarily attributable to:


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A decrease of $3,729,000, or 65%, in revenue from our warranty products, which was primarily due to the recognition in the first quarter of 2012 of . . .

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