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TELULAR CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
(Edgar Glimpses Via Acquire Media NewsEdge) INTRODUCTION
Telular develops products and services that utilize wireless networks to provide
data connectivity among people and machines. Telular's software-as-a-service
("SaaS") offerings are created through Telular's competence in developing
complex software systems and wireless electronics that utilize the data
transport capabilities of today's commercial wireless networks. To enable these
services, Telular is a significant reseller of such commercial wireless
services.
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Telular generates a majority of its revenue through the delivery of M2M services
such as event monitoring and asset tracking services through its Telguard,
SkyBitz and TankLink services. A portion of its revenue comes from the sale of
specialty wireless hardware products designed by Telular for use exclusively
with its M2M services. Telular's operating expense levels are based in large
part on its expectations for its future revenues. If anticipated sales in any
quarter do not occur as expected, expenditure and inventory levels could be
disproportionately high, and Telular's operating results for that quarter, and
potentially for future quarters, could be adversely affected. Certain factors
that could significantly impact expected results are described in "Forward
Looking Information" and in Item 1A, Risk Factors.
The market for Telular's products is primarily in North and South America and
consists of a number of vertical applications including Telguard security alarm
conveyance; SkyBitz asset tracking; and TankLink storage tank monitoring. These
markets are addressed primarily through indirect channels consisting of third
party agents, Value Added Resellers ("VARs") and distributors along with
in-house sales and customer support teams. A direct sales model is utilized for
certain large customers in each line of business. Fabrication of Telular's
products is accomplished through contract manufacturers located in China, Mexico
and the United States.
Telular believes that its future success depends on its ability to continue to
meet customers' needs through product innovation, including the creation of
event monitoring services that can be sold with products. Research and
development activities sponsored by Telular for the years ended September 30,
2012, 2011 and 2010 were $4,139, $2,623 and $3,010, respectively. Telular
anticipates research and development activities to continue at approximately the
same levels as in the past.
The following details areas of product delivery and research during fiscal 2012
and anticipated in fiscal 2013.
Telguard - Telular's engineering team continues to update the Telguard product
and service portfolio through incremental feature development, both in hardware
devices and software functionality. In fiscal 2012, Telular completed and
launched the conversion of the entire Telguard hardware product line to 3G/4G
capability. While most of the development for our 3G/4G conversion was
accomplished in fiscal 2011, we launched the products in 2012 and also modified
and released the TG1X, our largest volume seller, during 2012. Product
innovation within this space is important for the long-term success of Telguard
and we expect to continue to enhance our Telguard software platform and
underlying hardware products going forward. In fiscal 2012, the Telguard Message
Center ("TMC") which contains the underlying core software for the Telguard
service, was enhanced such that Telular can offer service to dealers in Canada.
Furthermore, the architecture of TMC will be updated so that it can support even
more end-user, feature development and increased traffic volumes in the future.
During fiscal 2013 we plan to enhance dramatically the interactive services and
home automation features of our Telguard service line.
SkyBitz - SkyBitz was acquired by Telular on February 1, 2012 and on that same
day, SkyBitz released to the market its newest hardware device, the GTP series,
which for the first time provides global satellite tracking capability via the
Iridium satellite network. Subsequent to the release of the first GTP model,
additional work was undertaken to complete variations of that device that
allowed for GPS location capability; remote antenna mounting; and cargo sensing
capability. For fiscal 2013, we are working on improving SkyBitz's terrestrial
device as well as releasing an updated version of its InSight SaaS application.
TankLink - During fiscal 2012, TankLink introduced its intrinsically safe device
as well as an expanded array of differential pressure sensors which allow the
solution to work in a wider range of applications, including for gasoline,
solvents, and corrosive acids. Telular plans to further enhance all elements of
the TankLink portfolio during fiscal 2013 to update the hardware as well as
support additional customer use cases for the solution.
Other M2M Solutions -Telular continues to evaluate additional M2M markets to
determine the viability of creating or acquiring a product and/or service in
these markets.
OUTLOOK
The statements contained in this outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
Telular expects to expend most of its marketing and product development
resources on the M2M space, including continuing to capitalize on its favorable
market position in the domestic security alarm market by virtue of its
well-regarded Telguard offering, as well as continuing to improve overall
penetration in the asset tracking and tank level monitoring markets through
SkyBitz and TankLink, respectively.
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--------------------------------------------------------------------------------UNIT SALES
During fiscal 2012, Telular sold approximately 133,200 Telguard units, compared
with approximately 90,200 Telguard units for fiscal 2011. We sold approximately
6,500 tank monitoring units in fiscal 2012, as compared to sales of 6,400 tank
monitoring units in fiscal 2011. SkyBitz sold approximately 30,200 asset
tracking units in fiscal 2012. Our Telguard subscriber base increased in fiscal
2012 to approximately 617,500, up from approximately 563,500 subscribers in
fiscal 2011. This increase was a result of the introduction of two new products,
TG1 Express and our PERS unit (personal emergency response system) in addition
to converting our Telguard product line to 3G/4G. TankLink products continued to
see increase market penetration and acceptance. Telular implemented a targeted
pricing discount program and will continue to develop new customer relationships
to maintain sales volumes. The Telguard Advantage Program ("TAP") was
implemented to offer security dealers the opportunity to achieve preferred
pricing for Telguard products. We expect Telguard product sales of between
30,000 and 40,000 units on a quarterly basis throughout fiscal 2013 and
increased unit sales for our asset tracking and tank monitoring products.
SERVICE REVENUE
Service revenues in our event monitoring segment have grown consistently year
over year, increasing to $34,381 in fiscal 2012 from $31,161 in fiscal 2011. In
addition, SkyBitz contributed $12,001 of asset tracking service revenues for
fiscal 2012. Total service subscribers increased, from approximately 586,100
subscribers at the end of fiscal 2011 to approximately 839,800 subscribers at
the end of fiscal 2012. Telular ended fiscal year 2012 with an average revenue
per unit ("ARPU") of $5.29. Service revenue was 58% and 62% of total revenues
for fiscal 2012 and 2011, respectively.
Telguard service ARPU, was $4.34 for fiscal 2012, as compared to $4.14 for
fiscal 2011. The increase in ARPU was due to the combination of adding new
subscribers during the year while eliminating lower ARPU customers as a result
of the account reconciliation project of a major customer.
RECENT DEVELOPMENTS
On November 6, 2012, Telular announced the declaration of an increase in its
quarterly dividend from $0.11 per share to $0.12 per share. The dividend was
paid on November 30, 2012 to shareholders of record at the close of business on
November 20, 2012. The dividend was paid in cash and in additional restricted
stock units ("RSUs"), as required by the restricted stock agreement. The cash
portion of the dividend was $2,036 and was paid to holders of Telular's common
stock on the date of record. Holders of RSUs, on the date of record, received an
additional 5,319 RSUs valued at $52. The effect on Telular's financial
statements was to reduce cash by $2,036, increase non-cash compensation by $52
and decrease equity by $2,088.
RESULTS OF OPERATIONS
(In Thousands, Except Share Data and Unit Data)
Fiscal Year 2012 Compared to Fiscal Year 2011
Revenues and Costs of Sales
Change
2012 2011 Amount Percentage
Revenues by Segment:
Event monitoring $ 57,304 $ 50,498 $ 6,806 13%
Asset tracking 22,543 - 22,543 > 100%
Total revenues $ 79,847 $ 50,498 $ 29,349 58%
Change
2012 2011 Amount Percentage
Revenues
M2M service revenue $ 46,382 $ 31,161 $ 15,221 49%
M2M hardware sales 32,260 16,089 16,171 101%
Subtotal M2M 78,642 47,250 31,392 66%
Other product sales 1,205 3,248 (2,043 ) -63%
Total revenue 79,847 50,498 29,349 58%
Cost of sales
M2M service cost of sales 12,925 10,773 2,152 20%
M2M hardware cost of sales 23,166 11,046 12,120 110%
Subtotal M2M 36,091 21,819 14,272 65%
Other product cost of sales 1,164 3,527 (2,363 ) -67%
Total cost of sales 37,255 25,346 11,909 47%
Gross margin $ 42,592 $ 25,152 $ 17,440 69%
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Segment
EM revenues increased 13% primarily due to an 18% increase in Telguard revenues
and a 21% increase in TankLink revenues offset by a decrease of 63% in terminal
product revenues. Telguard revenues increased primarily as a result of
introduction of new product offerings such as our TG1 Express, PERS and the
conversion of our product lines to 3G/4G technology. TankLink's increase in
revenues is primarily due to a stronger demand for tank monitoring products. The
decrease in our terminal revenues reflects Telular's exit from that line of
business.
Telular purchased SkyBitz on February 1, 2012. There were no revenues in fiscal
2011 for the AT segment.
Type
M2M service revenue increased 49% primarily due to the inclusion of SkyBitz in
fiscal 2012 and an increase in billable units as a result of stronger demand for
new product offerings. Billable units increased to 839,800 at September 30, 2012
from 586,100 at September 30, 2011. Telguard ARPU increased slightly from $4.24
at the end of fiscal 2011 to $4.37 at the end of fiscal 2012. Combined ARPU for
Telguard, TankLink and SkyBitz was $5.47 as of September 30, 2012. Service
revenue represented 58% and 62% of total revenues for fiscal years 2012 and
2011, respectively.
M2M hardware revenues increased 101%. Telular sold approximately 169,800
monitoring and tracking hardware units during fiscal 2012 compared to 96,600 for
fiscal 2011. This increase was primarily due to the inclusion of SkyBitz in
fiscal 2012 and to increased sales of security products as a result of new
product offerings and the conversion of the products in that line of business to
3G/4G technology.
Cost of Sales
M2M service costs increased 20% primarily as a result of including SkyBitz in
fiscal 2012. As a percentage of service revenue, service cost was 28% for fiscal
2012 and 35% for fiscal 2011. This decrease was due to the migration to a
cellular carrier that has reduced rates. The reduction of costs related to this
migration began in the third quarter of fiscal 2011. Gross margin for M2M
services was 72% in fiscal 2012 as compared to 65% in fiscal 2011. This increase
in gross margin is primarily due to an increase in customers with a higher ARPU.
M2M hardware cost of sales increased 110% primarily due to including SkyBitz
sales in fiscal 2012, an increase in sales volume for both Telguard and TankLink
products and a slight increase in per unit costs for the Telguard 3G/4G
products. As a percentage of M2M hardware product revenue, M2M hardware cost of
sales was 72% in fiscal 2012 as compared to 69% in fiscal 2011. Gross margin for
M2M hardware was 28% in fiscal 2012 as compared to 31% in fiscal 2011. This
decrease was primarily due to the increase in unit costs to produce the 3G/4G
products.
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Operating Expenses
Change % of Revenues
2012 2011 Amount Percentage 2012 2011
Engineering and
development $ 7,644 $ 4,580 $ 3,064 67% 9 % 9 %
Selling and marketing 11,073 7,171 3,902 54% 14 % 14 %
General and
administrative 13,531 7,056 6,475 92% 17 % 14 %
$ 32,248 $ 18,807 $ 13,441 40 % 37 %
Engineering and Development
Engineering and development expenses increased $3,064 primarily due to including
SkyBitz expenses in fiscal 2012 of $2,221, and the following increases in
engineering and development expenses for Telular and TankLink:
· $580 of salaries and related benefits attributable to an increase in
personnel;
· $144 in outside services related to increased usage of engineering consultants
for specific projects to augment existing staff;
· $70 of facility costs and expenses for product design and prototype builds;
and,
· $49 of various other expenses including travel and recruitment fees.
Selling and Marketing
Selling and marketing expenses increased $3,902 primarily due to including
SkyBitz expenses in fiscal 2012 of $3,372, and the following increases in
selling and marketing expenses for Telular and TankLink:
· $220 of salaries and related benefits attributable to increases in customer
support staff;
· $274 in third-party services which includes commissions paid to outside agents
as a result of increased sales volumes; and,
· $36 of travel and various other expenses.
General and Administrative (G&A)
G&A expenses increased $6,475 primarily due to including SkyBitz expenses in
fiscal 2012 of $6,370, of which $3,586 was an increase in amortization expense
due to capitalized intangibles related to the acquisition and an increase of
$105 of G&A expenses related to Telular and TankLink. The components of the $105
increase are as follows:
· $327 increase in expenses related to the acquisition of SkyBitz;
· $151 increase in amortization costs related to the intangibles assets
capitalized as part of the acquisition of the SMARTank business unit from
SmartLogix;
· $57 increase in bank fees related to the amortization of the bank loan used
for the acquisition of SkyBitz;
· $45 increase in investor relations expenses and NASDQ fees;
· $254 decrease in legal expenses as Telular was able to successfully resolve a
patent infringement lawsuit in the fourth quarter of fiscal 2011; and
· $221 decrease in salaries and related payroll benefits. In the first quarter
of fiscal 2011, Telular paid a one-time bonus to holders of stock option in
conjunction with the payment of Telular's special dividend. There was no
similar expense recorded in fiscal 2012.
Other (Expense) income
Other (expense) income decreased $696 in fiscal 2012 compared to fiscal 2011.
This decrease was due to the increase in interest expense related to the Second
Amended Loan Agreement with SVB entered into in connections with the purchase of
SkyBitz.
Income Taxes
The provision for income taxes increased $1,558 to $3,850 for fiscal 2012 as
compared to $2,292 for fiscal 2011 primarily due to the increase in taxable
income as a result of non-deductible expenses related to the acquisition of
SkyBitz.
Net Income
Telular recorded net income of $5,899, or $0.34 per fully diluted share for
fiscal 2012 compared to net income of $4,154 or $0.26 per fully diluted share
for fiscal 2011. This represents a 42% increase and is attributable to increased
gross margins while holding operating costs constant as a percentage of
revenues.
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--------------------------------------------------------------------------------Fiscal Year 2011 Compared to Fiscal Year 2010
In fiscal years 2011 and 2010, Telular presented consolidated financial
information under one reportable segment.
Revenues and Costs of Sales
Change
2011 2010 Amount Percentage
Net product sales
Monitoring Equipment $ 16,089 $ 16,300 $ (211 ) -1%
Terminal 3,248 3,595 (347 ) -10%
Total product revenues 19,337 19,895 (558 ) -3%
Service revenues 31,161 27,459 3,702 13%
Total revenues 50,498 47,354 3,144 7%
Cost of sales
Products 14,573 16,413 (1,840 ) -11%
Services 10,773 10,964 (191 ) -2%
25,346 27,377 (2,031 ) -7%
Gross margin $ 25,152 $ 19,977 $ 5,175
Revenues
Product revenues decreased 3% primarily due to decreased sales in Telguard
monitoring equipment and terminal products, partially offset by an increase in
TankLink product revenues. Revenues from sales of our Telguard monitoring
equipment decreased 12% primarily due to lower demand as a result of a change in
pricing terms within agreements between ADT, our largest security dealer
customer and its network of authorized dealers. During the second half of fiscal
2010, the dealer implemented a monthly service charge to the end user for any
system sold by an authorized dealer that included a Telguard product. Due to
this surcharge, the authorized dealers generally opted to choose other security
products over Telguard products which resulted in decreased sales volume;
approximately 90,200 Telguard units were sold in fiscal 2011 compared with
approximately 103,100 for fiscal 2010. Telular has implemented targeted pricing
discount programs and will develop new customer relationships to maintain sales
volumes. The Telguard Advantage Program ("TAP") was implemented to offer
security dealers the opportunity to achieve preferred pricing Telguard products.
Telguard's average selling price remained consistent year-over year. The
decrease in terminal product revenues reflects continued depressed demand in
both the U.S. and in the Central American Latin American ("CALA") regions. Of
the $3,248 of total terminal sales in fiscal 2011, only $283 were from
international sales compared to $3,595 of total terminal sales in fiscal 2010,
of which $491 were from international sales. TankLink product revenues increased
79% to $3,323 in fiscal 2011 from $1,859 in fiscal 2010. This increase is
primarily due to the purchase of the SMARTank business unit from SmartLogix on
January 7, 2011. TankLink is now dealing directly with the end-user customers,
resulting in higher revenues. As a result of dealing directly with the end-user
customers, TankLink's average unit selling price increased 31%. Approximately
6,400 TankLink units were sold in fiscal 2011 compared to approximately 4,600
units in fiscal 2010.
Service revenues increased 13% as a result of increases in the ARPU for new
Telguard and TankLink customers and increased activations for TankLink in fiscal
2011. Telguard experienced a net decrease in subscribers; declining from
approximately 567,800 subscribers at the end of fiscal 2010 to approximately
563,500 subscribers at the end of fiscal 2011. This decrease was a result of
subscribers being deactivated due to an ongoing account reconciliation project
by a major customer. Telguard's ARPU for fiscal 2011 was $4.14, a 4% increase
over fiscal 2010's annual ARPU of $3.97. TankLink's ARPU rose to $11.58 in
fiscal 2011 from $6.75 in fiscal 2010. This increase is primarily due to the
purchase of the SMARTank business unit and being able to bill those customers
directly.
Cost of Sales
The decrease in product cost of sales of 11% is primarily due to reduced
production costs primarily from re-engineering of component parts. Telular
cannot be certain that it will continue to be able to reduce production costs in
the future. Service cost of sales decreased 2% due to a reduction in the cost of
providing monitoring services. Telular has successfully migrated its customer
base to a new carrier that has reduced rates based on volume.
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Product margins, as a percentage of product revenues, increased to 25% in fiscal
2011 from 18% in fiscal 2010. This increase is a result of reduced cost of sales
and increases in the TankLink product average selling price.
Service margins, as a percentage of service revenues, increased to 65% in fiscal
year 2011 from 60% in fiscal year 2010. This increase was primarily due to
reductions in fulfillment costs and higher ARPUs.
Operating Expenses
Change % of Revenues
2011 2010 Amount Percentage 2011 2010
Engineering and
development $ 4,580 $ 4,562 $ 18 0% 9 % 10 %
Selling and marketing 7,171 5,935 1,236 21% 14 % 12 %
General and
administrative 7,056 6,119 937 15% 14 % 13 %
$ 18,807 $ 16,616 $ 2,191 37 % 35 %
Engineering and Development
Engineering and development expenses remained relatively consistent between
fiscal years. The increase of $18 was primarily due to:
· $75 in prototype materials and testing services; and,
· $26 in facility costs primarily due to increased depreciation as a result of
increased purchases of capital assets.
Offsetting these increases was a $36 decrease in payroll expenses resulting from
$231 in decreases in salaries and benefits as a result of reduced headcount,
partially offset by a $195 increase in bonuses as a result of a one-time bonus
paid to holders of stock options in conjunction with the payment of Telular's
special dividend; and, a $47 decrease in consulting expenses as a result of
reduced utilization of contract engineers. Telular expects to fill open
positions in fiscal 2012.
Selling and Marketing
Selling and marketing expenses increased by $1,236 (21%) primarily due to:
· $400 in payroll related expenses as a result of increased sales and marketing
personnel and expenses such as commissions that fluctuate with sales volume
and a one-time bonus paid to holders of stock options in conjunction with the
payment of Telular's special dividend;
· $431 in advertising and tradeshows as Telular increased its marketing efforts;
· $282 in outside services and third party commissions primarily related to a
service agreement with SmartLogix in which Telular appointed SmartLogix as an
exclusive sales representative for the purpose of selling tank monitoring
equipment and services to customers in the fuels and lubricants
market. Telular purchased the SMARTank business unit from SmartLogix on
January 7, 2011; and,
· $123 in travel expenses incurred in conjunction with increased marketing sales
efforts.
General and Administrative (G&A)
G&A expenses increased by $937 (15%) primarily due to the following increases:
· $415 in payroll related expenses primarily as a result of a one-time bonus
paid to holders of stock options in conjunction with the payment of Telular's
special dividend;
· $449 in amortization expense related to the intangibles recorded as a result
of the purchase of the SMARTank business;
· $64 in franchise tax fees related to the State of Delaware; and,
· $60 in investor relations expenses, including increased travel and increased
NASDAQ fees.
Offsetting these increases was a decrease in professional fees of $51, primarily
due to reduced legal fees.
Other Income
Other income decreased by $293 primarily due to a decrease in interest income.
In fiscal 2010 Telular was receiving interest on the outstanding trade
receivable from SmartLogix. This trade receivable, approximately $4,484, was
forgiven as part of the consideration for the purchase of the SMARTank business
unit on January 7, 2011 from SmartLogix.
Income Taxes
Telular recorded a current income tax provision of $299 and a deferred income
tax provision of $1,993 for fiscal year 2011 as compared with a current
provision of $139 and a deferred income tax benefit of $34,505 for fiscal year
2010. The increase in the current provision was primarily due to the increase in
federal and state taxable income in fiscal year 2011. The deferred tax benefit
was due to the reversal of the valuation allowances on net deferred tax assets;
primarily Telular's net operating loss carryforwards.
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Net Income
Telular recorded net income of $4,154 or $0.26 per fully diluted share for
fiscal 2011 compared to net income of $38,121 or $2.49 per fully diluted share
for fiscal year 2010. This decrease was primarily due to the income tax benefit
recorded from the reversal of net deferred tax asset valuation allowances in
fiscal 2010.
LIQUIDITY AND CAPITAL RESOURCES
Management regularly reviews Telular's working capital and available borrowings
in addition to its cash and cash equivalent balance to determine if it has
enough cash to operate the business. On September 30, 2012, Telular had cash and
cash equivalents of $12,676 and net working capital of $16,630, compared to cash
and cash equivalents of $12,642 and net working capital of $15,515 a year
earlier.
On January 22, 2011, Telular executed an Amended and Restated Loan and Security
Agreement (the "Amended Loan Agreement") with Silicon Valley Bank ("SVB"). The
Amended Loan Agreement provided for a two year term with total maximum
borrowings of $10,000. Telular had the option under the Amended Loan Agreement
to have interest calculated on SVB's prime rate (with a floor of 5%) up to a
maximum of prime plus 0.5% or calculated on the current LIBOR rate up to a
maximum of LIBOR plus 3.0%. The Amended Loan Agreement also permitted Telular to
borrow up to $7,000 under a revolving line of credit, with the ability to
convert up to $5,000 of borrowings under the revolver into a three year term
loan. The Amended Loan Agreement required Telular to comply with certain
financial covenants such as maintaining certain levels of assets to liabilities
and minimum levels of cash flow generation. Telular had no outstanding
borrowings under the Amended Loan Agreement as of February 1, 2012, on which
date Telular and SVB amended the Amended Loan Agreement in connection with the
SkyBitz acquisition.
Simultaneous with the acquisition of SkyBitz on February 1, 2012, Telular
executed a Second Amended and Restated Loan and Security Agreement (the "Second
Amended Loan Agreement") with SVB. Under the Second Amended Loan Agreement,
Telular borrowed $30,000 in the form of a term loan that was applied as a
portion of the cash consideration for the acquisition of SkyBitz. The term loan
matures on February 1, 2017, the 5th anniversary of the amendment. The loan
requires quarterly payments of interest and principal, with annual principal
amortization of 10%, 15%, 20%, 20% and 25% in each of the first five years,
respectively, with the final 10% due on the maturity date. At the option of
Telular, interest will be incurred based on a rate ranging from 2.25% to 2.75%
(depending on the calculation of the senior leverage ratio) above the published
LIBOR rates, or at a rate of .25% to .75% above the Prime interest rate. The
interest rate was 3% as of September 30, 2012. The Second Amended Loan Agreement
requires Telular to comply with certain financial covenants such as maintaining
a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The
loan is secured by substantially all of the assets of Telular. At September 30,
2012 the outstanding loan balance was $28,500 and Telular was in compliance with
all financial covenants. As of September 30, 2012, $338 of loan fees and related
costs were paid by Telular and are being amortized over the term of the loan.
Management expects trade accounts receivable and inventory to turn into cash in
short periods of time. As such, given Telular's level of cash and cash
equivalents, trade accounts receivable and inventory, management believes
Telular has adequate resources to fund current and planned operations in a
manner consistent with historical practices. The tables below discuss the
liquidity components of continuing operations for fiscal years 2012 and 2011.
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Fiscal 2012
Telular generated cash of $12,752 from continuing operations during fiscal 2012
compared to cash generated of $14,442 during the same period of fiscal 2011. The
components of the change for fiscal 2012 are as follows:
$ 5,899 Net income; cash provided.
The increase in trade accounts receivable is primarily due to
increased sales and the timing of product sales during the fourth
(2,659 ) quarter of fiscal 2012.
The increase in inventory is due to increased inventory levels in
(2,885 ) long-lead items, primarily in the Asset Tracking segment.
1,667 Trade accounts payable primarily consists of amounts due to
Telular's contract manufacturers and monitoring service
providers. The increase was primarily due to the timing ofreceipt
of invoices from these vendors and their payment and as a result of
additional trade payables due to the acquisition of SkyBitz.
The decrease in accrued liabilities was primarily due to payment of
the earn-out related to the purchase of the SMARTank line of
(200 ) business.
10,029 Non-cash expenses (benefits): $2,504 from the increase in deferred
tax provision related to decrease in net deferred tax assets; $1,489
from stock based compensation; $1,521 from depreciation expense;
$4,481 of amortization expense primarily due to the addition of
$23,500 of intangibles related to the acquisition of SkyBitz; and,
$34 from the loss on disposal of operating assets.
901 Net cash provide by other working capital items is primarily due to
increase in current tax provision and to the increased expenditures
for intangible assets such as patents.
$ 12,752 Total cash provided by continuing operations
Fiscal 2011
The Company generated cash of $14,442 from continuing operations during fiscal
2011 compared to cash generated of $10,883 during the same period of fiscal
2010. The components of the change for fiscal 2011 are as follows:
$ 4,154 Income from continuing operations; cash provided.
1,635 The decrease in trade accounts receivable is due to the timely
collection of outstanding balances, resulting from a more favorable
product mix. Service revenue represents 62% of Telular's total
revenues for the twelve month period ended September 30, 2011. The
accounts receivable associated with this revenue stream are
generally collected within 30 days of invoicing. The timely
collections along with reduced product billings resulted in the
decrease. 2,252 The decrease in inventory reflects the Company's overall inventory
strategy; sell from existing stock while adjusting production levels
to augment the changes in sales levels.
(315 ) Trade accounts payable primarily consists of amounts due to
Telular's contract manufacturers and monitoring service
providers. The decrease was primarily due to the timing of receipt
of invoices from these vendors and their payment. In the prior year,
fiscal 2010, payment was made before year-end to these vendors.
1,228 The increase in accrued liabilities was primarily due to $1,165
increase in the estimated earn-out related to the purchase of the
SMARTank line of business; $351 increase in deferred revenue due to
increased advanced tank monitoring services related to SMARTank
customers; $118 decrease in legal fees related to a patent
infringement lawsuit; and, $170 decrease in variousmiscellaneous
accrued expenses.
5,506 Non-cash expenses (benefits): $1,994 from the increase in deferred
tax provision related to decrease in net deferred tax assets; $1,676
from stock based compensation; $1,045 from depreciation expense;
$742 of amortization expense; and, $49 from the loss on disposal of
operating assets.
(18 ) Net cash used by other working capital items, primarily the
acquisition of intangibles; patents, trademarks, a licensing fee and
the increase in income taxes payable.
$ 14,442 Total cash provided by continuing operations
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Capital expenditures for fiscal years 2012 and 2011 were $1,343 and $1,113,
respectively. The 2012 expenditures were primarily for technical improvements to
Telular's message center and related customer website, production test equipment
and tooling, product certification costs and improvements to Telular's internal
computer network. The 2011 expenditures were for improvements to internal
network equipment, production equipment, such as test stations for new products,
and product certification costs for new products. Telular anticipates funding
future capital additions with cash from operations.
On July 25, 2008, Telular's Board approved a plan to repurchase up to $5,000 of
Telular's common stock on the open market. From August 2008 through March 2010,
Telular repurchased 2,108,490 at a cumulative cost of $3,775. On April 27, 2010,
Telular's Board approved an additional repurchase of $3,775. From May 2010
through September 2010, Telular repurchased an additional 123,816 of Telular's
common stock on the open market at a cost of $412. During fiscal years 2012 and
2011 there were no shares repurchased under the plan. As of September 30, 2012,
the approximate dollar value of shares that may yet be purchased under the plan
is $4,588. Additionally, on June 9, 2009, Telular completed a modified 'Dutch
Auction" tender offer buying back 2,344,857 shares of common stock at a cost of
$5,386. Cumulatively through September 30, 2012, Telular has repurchased
4,577,163 shares at a cost of $9,573.
Telular generally requires its foreign customers to prepay, obtain letters of
credit or qualify for credit. Also, to mitigate the effects of currency
fluctuations on Telular's results of operations, Telular conducts all of its
international transactions in US dollars.
The following table sets forth our total contractual obligations as of September
30, 2012:
Payments Due by Period
Less than
Contractual Cash Obligations Total 1 year 1-3years 4-5 years After 5 years
Operating leases $ 3,733 $ 1,173 $ 2,049 $ 511 $ -
Purchase Commitments 11,540 11,540 - - -Total contractual cash obligations $ 15,273 $ 12,713 $ 2,049 $ 511 $
-
Purchase commitments are for purchases made in the normal course of business to
meet operational requirements, consisting primarily of raw materials and
finished goods inventory. Telular expects to satisfy these commitments primarily
from cash from the revenues generated by the delivery of backlogged orders.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses Telular's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments,
including those related to the net realizable value of inventories and
intangible assets. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect the presentation of Telular's
financial condition and results of operations.
Revenue Recognition
Telular's revenue is primarily generated from three sources:
· The sale of hardware units, under non-recurring agreements;
· The provision of monitoring services, under recurring agreements; and,
· The provision of ancillary services such as installation and non-warranty
repairs and royalty revenue.
Revenue is recognized when persuasive evidence of an agreement exists, the
hardware unit or the service has been delivered, fees and prices are fixed and
determinable and collectability is probable when all other significant
obligations have been fulfilled.
29
--------------------------------------------------------------------------------
Telular recognizes revenue and associated costs from hardware unit sales at the
time of shipment of products which is when title transfers. Hardware unit
discounts are recorded as a reduction in revenue in the same period that the
revenue is recognized. Telular offers customers the right to return hardware
units that do not function properly within a limited time after delivery, see
the section entitled "Reserve for Warranty" below. Telular continuously monitors
and tracks such hardware unit returns and records a provision for the estimated
amount of such future returns, based on historical experience. While such
returns have historically been within expectations, Telular cannot guarantee
that it will continue to experience the same return rates that it has
experienced in the past. Any significant increase in hardware unit failure rates
and the resulting credit returns could have a material adverse impact on
operating results for the period or periods in which such returns materialize.
Monitoring service revenue is recognized at the time the service is
provided. Payments received in advance of providing monitoring services are
deferred and recognized over the period in which the service is delivered. Costs
associated with providing the monitoring service are recorded when the service
is provided.
For those arrangements that include multiple deliverables, Telular follows the
guidance in Accounting Standard Codification ("ASC") Subtopic 605-25, as amended
by Accounting Standards Update ("ASU") 2009-13. ASC Subtopic 605-25 established
criteria for determining if a revenue arrangement has multiple deliverables. ASU
2009-13 amended the multiple-element revenue guidance to (1) modify the
separation criteria by eliminating the criterion that requires objective and
reliable evidence of fair value for the undelivered item, and (2) eliminate the
use of the residual method of allocation and instead required that arrangement
consideration be allocated, at the inception of the arrangement, to all
deliverables based on their relative selling price. Certain multiple-element
revenue arrangements include both product and monitoring services. Telular has
determined that the revenue from multiple-deliverable arrangements has met the
criteria for treating each revenue source as a separate element. Consideration
is allocated to the deliverables at inception of an arrangement using the
relative selling price method, based on Telular's best estimate of selling
price. Key factors that are considered when establishing a selling price are the
industry segment to which the products and services are sold, estimated selling
price of our competitors, where available, and an internally established gross
margin range. Product revenue is billed and recognized upon shipment to the
customer while monitoring services revenue is billed periodically, usually
monthly, and recognized when the service is provided.
Telular recognizes ancillary service revenues when the service is
delivered. Costs associated with these services are recorded in the period the
service is delivered. Royalty revenue, which is based on a percentage of sales
by the licensee, is estimated by Telular, based upon historical data provided by
the licensee, in the period in which management estimated the sales have taken
place. Telular periodically reconciles these estimates to the actual payments
received from the licensee, adjusting revenue accordingly. Historically,
Telular's estimates have not been materially different than the payments
received from the licensee.
Allowance for Doubtful Accounts
Telular maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of customers to make payment for products and
services. Telular evaluates the collectability of customer receivables by
considering the payment history and the financial stability of its customers. If
Telular believes that an account receivable may not be collected, a charge is
recorded to the allowance account. At September 30, 2012 and 2011, the allowance
for doubtful accounts related to trades accounts receivable from continuing
operations was $351 and $39, respectively. The increase in the allowance for
doubtful accounts is attributable to the inclusion of SkyBitz's allowance for
doubtful accounts.
Reserve for Inventory Obsolescence
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Telular generally considers inventory quantities
greater than a one-year supply, based on current year activity, to be excess,
unless that inventory has alternative uses. Telular also provides for the total
value of inventories that are determined to be obsolete based on criteria such
as customer demand and changing technologies. At September 30, 2012 and 2011,
the inventory reserves were $283 and $649, respectively. Changes in strategic
direction, such as discontinuance or expansion of product lines, changes in
technology or changes in market conditions, could result in significant changes
in required reserves. The decrease in the reserve for inventory obsolescence
reflects the disposition of obsolete inventory related to terminal products.
Reserve for Warranty
Telular maintains a reserve for products that are returned within Telular's
warranty period due to inoperability. Telular has different warranty periods for
its different product groups: the security monitoring products has a 24 month
warranty period; the asset tracking and tank monitoring products typically have
a 12 month warranty period. Significant management judgment is required to
determine the warranty reserve. Telular utilizes historical information
regarding units returned within the appropriate warranty period and the costs
incurred to repair returned units. Telular then estimates required warranty
reserves for future products that may be returned. As of September 30, 2012 and
2011, the warranty reserve was $1,542 and $115, respectively. The increase in
the warranty reserve is due to the inclusion of SkyBitz's warranty reserve,
primarily related to five-year warranties offered in past years as a
consideration to certain customers. SkyBitz is no longer offering such
warranties.
30
--------------------------------------------------------------------------------Goodwill and Intangible Assets
Telular evaluates the fair value and recoverability of goodwill, in accordance
with Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other
(Topic 350), ("ASU 350"), at least annually or whenever events or changes in
circumstances indicate the carrying value of goodwill may not be recoverable.
Telular first assesses various qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more
likely than not that the fair value of a reporting unit is less than its
carrying amount. The following are examples, though not all inclusive, of events
and circumstances that shall be considered:
· macroeconomic conditions;
· industry and market conditions such as industry in which the entity operates
and competition;
· product cost factors;
· overall company financial performance and entity-specific events such as
changes in management; and,
· sustained decrease in share price.
If, after assessing the totality of events or circumstances, it is determined
that it is more likely than not that the fair value of a reporting unit is less
than its carrying amount, Telular will then perform impairment tests to
determine the fair value of the reporting unit. In determining fair value and
recoverability, Telular makes projections regarding future cash flows. These
projections are based on assumptions and estimates of:
· growth rates for net revenues, cost of sales and operating expenses for the
monitoring and terminal businesses;
· anticipated future economic conditions;
· the assignment of discount rates relative to risk associated with companies in
similar industries; and,
· estimates of terminal values.
An impairment loss is assessed and recognized in operating earnings when the
fair value of the asset is less than its carrying amount. As of September 30,
2012 and 2011, goodwill was not impaired.
Telular reviews for the impairment of intangible assets whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Telular evaluates recoverability of other intangible assets by
comparing the amount of the intangible asset to future net undiscounted cash
flows generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets calculated using a
discounted cash flow analysis.
Income Taxes
In determining income for financial statement purposes, Telular must make
certain estimates and judgments. These estimates and judgments affect the
calculation of certain tax liabilities and the determination of the
recoverability of certain of the deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenue and
expense.
In evaluating the ability to recover its deferred tax assets, Telular considers
all available positive and negative evidence including its past operating
results, the existence of cumulative losses and its forecast of future taxable
income. In estimating future taxable income, Telular developed assumptions
including the amount of future federal and state pre-tax operating income, the
reversal of temporary differences, the utilization of net operating loss
carryforwards to offset taxable income and the implementation of feasible and
prudent tax planning strategies. These assumptions require significant judgment
about the forecasts of future taxable income and are consistent with the plans
and estimates Telular is using to manage the underlying business.
Telular has recorded significant valuation allowances that are intended to be
maintained until it is more likely than not the deferred tax asset will be
realized. As of September 30, 2012 and 2011, the valuation allowance of $5,711
and $5,612, respectively, is primarily for state net operating losses that will
expire before they can be realized. The realization of the remaining deferred
tax assets is primarily dependent on future taxable income in the appropriate
state jurisdiction. Significant factors that could negatively impact Telular's
determination of the recognition of the net deferred tax assets would be changes
in the ownership of Telular and changes in tax laws and rates. Based on Internal
Revenue Code Section 382 ("Section 382"), changes in the ownership of Telular
may limit the utilization of net operating loss carryforwards. Any Section 382
limitation may require that Telular record an additional valuation allowance
against its deferred tax assets. Management is not aware, at this time, of any
such ownership changes that would have a negative impact on the recognition of
the net deferred tax assets. Any reduction in future taxable income may require
that Telular record an additional valuation allowance against the deferred tax
assets. An increase in the valuation allowance would result in additional income
tax expense in such period and could have a material impact on Telular's future
earnings.
31--------------------------------------------------------------------------------
Changes in tax laws and rates could also affect recorded deferred tax assets and
liabilities in the future. The State of Illinois increased its corporate income
tax rate from 7.3% to 9.5% in January 2011. The State also suspended the use of
net operating losses to offset current taxable income for three years. Telular
implemented a tax strategy that would lower taxable income apportioned to
Illinois, thereby lowering the current state tax payable. This strategy reduced
Telular's estimated use of future net operating losses in Illinois, resulting in
the increase in the valuation allowance against the net deferred tax assets
which increased Telular's deferred tax provision in fiscal 2011.
During fiscal 2010, Telular reversed $37.0 million of valuation allowance after
a comprehensive assessment of deferred tax asset realizability that was
triggered by the achievement of three years of cumulative book income. The
primary rationale for the reversal of the valuation allowance and thus, the
realization of deferred tax assets, is the assumption that Telular will generate
sufficient future taxable income. This conclusion is based on forecasted taxable
income over the period that existing net operating losses are scheduled to
expire. Reasons that there is now sufficient forecasted taxable income include
(1) the exit from the FCP market in fiscal 2007 which had been generating
significant operating losses, and (2) Telular's continued focus in recent years
towards growing its higher margin recurring service. With these key strategic
changes, Telular's current operating model provided the basis upon which it was
reasonable to assume that taxable income would continue. Telular's taxable
income forecast used as the basis for this determination was a conservative
estimate for taxable income growth from 2010 through 2016, and no growth
thereafter. Further, the forecast did not incorporate any new business lines or
depend upon any material transaction such as an acquisition or any other unusual
or non-routine event to achieve the results necessary in order to realize the
estimated taxable income.
Under the uncertain tax position provisions of ASC 740, Income Taxes, Telular
would recognize liabilities for tax issues in the U.S based on Telular's
estimate of whether, and the extent to which, additional taxes will be
due. These tax liabilities would be recorded in income taxes in the Consolidated
Balance Sheets. As of September 30, 2012 and 2011, Telular has no uncertain tax
positions recorded in its financial statements. Telular does not include
interest and penalties related to income tax matters in income tax expense.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The discussion of recently issued accounting pronouncements is hereby
incorporated by reference from Item 8, notes to consolidated financial
statements.
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