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CALAMP CORP. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements Forward looking statements in this Form 10-K which include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "may", "will", "could", "plans", "intends", "seeks", "believes", "anticipates", "expects", "estimates", "judgment", "goal", and variations of these words and similar expressions, are intended to identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance and are subject to certain risks and uncertainties, including, without limitation, product demand, competitive pressures and pricing declines in the Company's wireless and satellite markets, the timing of customer approvals of new product designs, intellectual property infringement claims, interruption or failure of our Internet-based systems used to wirelessly configure and communicate with the tracking and monitoring devices that we sell, our ability to integrate the business of Wireless Matrix and to achieve the operating results management anticipates, and other risks and uncertainties that are set forth under the caption in Part I, Item 1A of this Annual Report on Form 10-K. Such risks and uncertainties could cause actual results to differ materially from historical or anticipated results. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Basis of Presentation The Company uses a 52-53 week fiscal year ending on the Saturday closest to February 28, which for fiscal years 2013, 2012 and 2011 fell on March 2, 2013, February 25, 2012, and February 26, 2011, respectively. In these consolidated financial statements, the fiscal year end for all years is shown as February 28 for clarity of presentation. Fiscal 2013 consisted of 53 weeks, while fiscal years 2012 and 2011 each consisted of 52 weeks. 16 --------------------------------------------------------------------------------Overview The Company is a leading provider of wireless communications solutions for a broad array of applications to customers globally. The Company's business activities are organized into our Wireless DataCom and Satellite business segments. WIRELESS DATACOM The Company's Wireless DataCom segment offers solutions to address the markets for Machine-to-Machine, or M2M, communications, Mobile Resource Management, or MRM, applications and other emerging applications that require anytime and everywhere connectivity. The Company's M2M and MRM solutions enable customers to optimize their operations by collecting, monitoring and efficiently reporting business-critical data and desired intelligence from high-value remote assets. The Company's extensive portfolio of intelligent communications devices, scalable cloud services platforms, and targeted software applications streamline otherwise complex M2M or MRM deployments for its customers. The Company is focused on delivering solutions globally in our core vertical markets in Energy, Government and Transportation. In addition, the Company anticipates significant future opportunities for adoption of its M2M and MRM solutions in Construction, Mining and Usage-Based Automobile Insurance vertical markets, as well as other emerging applications in additional markets. SATELLITE The Company's satellite products are sold primarily to Echostar, an affiliate of Dish Network, for incorporation into complete subscription satellite television systems. Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon the Company'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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments are made include, but are not limited to, the allowance for doubtful accounts, inventory valuation, product warranties, the deferred tax asset valuation allowance, and the valuation of long-lived assets. Actual results could differ materially from these estimates. Allowance for Doubtful Accounts The Company establishes an allowance for estimated bad debts based upon a review and evaluation of specific customer accounts identified as known and expected collection problems, based on historical experience, or due to insolvency or other collection issues. As further described in Note 1 to the accompanying consolidated financial statements, the Company's customer base is concentrated, with one customer accounting for approximately 22% of the Company's fiscal 2013 consolidated revenues. Changes in either a key customer's financial position, or the economy as a whole, could cause actual write-offs to be materially different from the recorded allowance amount. Inventories The Company evaluates the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices. To the extent that estimated selling prices do not exceed the associated carrying values, inventory carrying amounts are written down. In addition, the Company generally treats inventory on hand or committed with suppliers, that is not expected to be sold within the next 12 months, as excess and thus appropriate write-downs of the inventory carrying amounts are established through a charge to cost of revenues. Estimated usage in the next 12 months is based on firm demand represented by orders in backlog at the end of the quarter and management's estimate of sales beyond existing backlog, giving consideration to customers' forecasted demand, ordering patterns and product life cycles. Significant reductions in product pricing, or changes in technology and/or demand may necessitate additional write-downs of inventory carrying value in the future. 17 --------------------------------------------------------------------------------Warranty The Company initially provides for the estimated cost of product warranties at the time revenue is recognized. While it engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from management's estimates, revisions to the estimated warranty liability would be required. Deferred Income Tax and Uncertain Tax Positions Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence that includes historical operating performance and the Company's forecast of future operating performance. The Company evaluates the realizability of its deferred income tax assets and a valuation allowance is provided, as necessary. During this evaluation, the Company reviews its forecasts of income in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is needed. Pursuant to the evaluation conducted for fiscal 2013, the Company eliminated substantially all of the valuation allowance for deferred income tax assets at the end of fiscal 2013, resulting in an income tax benefit of $29.2 million for the year. In 2007, the Company adopted an accounting pronouncement related to Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 740, "Income Taxes" (formerly FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48")) which established a framework for determining the appropriate level of tax reserves to maintain for "uncertain tax positions". ASC Topic 740 uses a two-step approach in which a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured as the highest tax benefit that is greater than 50% likely to be realized upon settlement. At February 28, 2013, the Company had unrecognized tax benefits for uncertain tax positions of $1.1 million. Impairment Assessments of Purchased Intangible Assets and Other Long-Lived Assets At February 28, 2013, the Company had $5.7 million in net intangible assets and $2.8 million in net property and equipment and improvements on its consolidated balance sheet. The Company believes the valuation of its long-lived assets is a "critical accounting estimate" because if circumstances arose that led to a decrease in the valuation of such assets, it could have a material impact on the Company's results of operations. The Company makes judgments about the recoverability of intangible assets and other long-lived assets whenever events or changes in circumstances indicate that an impairment in the remaining value of the assets recorded on the balance sheet may exist. In order to estimate the fair value of long-lived assets, the Company typically makes various assumptions about the future prospects for the business that the asset relates to, considers market factors specific to that business and estimates future cash flows to be generated by that business. These assumptions and estimates are necessarily subjective and based on management's best estimates based on the information available at the time such estimates are made. Based on these assumptions and estimates, the Company determines whether it needs to record an impairment charge to reduce the value of the asset stated on the balance sheet to reflect its estimated fair value determined by a discounted cash flow analysis. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company's business strategy and its internal forecasts. Although management believes the assumptions and estimates that have been made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact the Company's reported financial results. More conservative assumptions of the anticipated future benefits from these businesses could result in impairment charges in the statement of operations, and lower asset values on the balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges. Stock-Based Compensation Expense The Company measures stock-based compensation expense at the grant date, based on the fair value of the award, and recognizes the expense over the employee's requisite service (vesting) period using the straight-line method. The measurement of stock-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate and forfeiture rate. Certain of these inputs are subjective to some degree and are determined based in part on management's judgment. The Company recognizes the compensation expense on a straight-line basis for its graded-vesting awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. However, the cumulative compensation expense recognized at any point in time must at least equal the portion of the grant-date fair value of the award that is vested at that date. As used in this context, the term "forfeitures" is distinct from "cancellations" or "expirations", and refers only to the unvested portion of the surrendered equity awards. 18 --------------------------------------------------------------------------------Revenue Recognition The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection of the sales price is reasonably assured. In cases where terms of sale include subjective customer acceptance criteria, revenue is deferred until the acceptance criteria are met. Critical judgments made by management related to revenue recognition include the determination of whether or not customer acceptance criteria are perfunctory or inconsequential. The determination of whether or not the customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of revenue recognized. Critical judgments also include estimates of warranty reserves, which are established based on historical experience and knowledge of the product. The Company defers revenues from products that are sold with data communication services because the services are essential to the functionality of the products, and accordingly, the associated product costs are recorded as deferred costs. These deferred amounts are recognized over the minimum contractual term of one year on a straight-line basis. Revenues from renewals of the services after the initial one year term are recognized when services are performed. In certain instances where customers prepay the renewals, such amounts are recorded as deferred revenues and are recognized over future periods in accordance with the renewal term. The Company also undertakes projects that include the design, development and manufacture of communication systems used in the public safety and transportation sectors that are specially customized to customers' specifications or that involve fixed site construction. Sales under such contracts are recorded under the percentage-of-completion method. Estimated revenues and costs are recorded as work is performed based on the percentage that incurred costs bear to estimated total costs utilizing the most recent estimates of costs. If the current contract estimate indicates a loss, provision is made for the total anticipated loss in the current period. Critical estimates made by management related to revenue recognition under the percentage-of-completion method include the estimation of costs at completion. Results of Operations, Fiscal Years 2011 Through 2013 The following table sets forth, for the periods indicated, the percentage of revenues represented by items included in the Company's consolidated statements of operations: Year Ended February 28, 2013 2012 2011 Revenues 100.0 % 100.0 % 100.0 % Cost of revenues 68.5 69.7 74.1 Gross profit 31.5 30.3 25.9 Operating expenses: Research and development 7.9 8.2 9.7 Selling 7.0 8.0 9.2 General and administrative 6.7 7.9 7.7 Intangible asset amortization 1.0 0.9 1.0 Operating income (loss) 8.9 5.3 (1.7 ) Other expense, net (0.3 ) (1.5 ) (1.3 ) Income (loss) before income taxes 8.6 3.8 (3.0 ) Income tax benefit 16.2 - 0.2 Net income (loss) 24.8 % 3.8 % (2.8 %) 19 -------------------------------------------------------------------------------- The Company's revenue, gross profit and operating income (loss) by business segment for the last three years are as follows: REVENUE BY SEGMENT Year ended February 28, 2013 2012 2011 % of % of % of $000s Total $000s Total $000s Total Segment Wireless DataCom $ 139,503 77.3 % $ 99,121 71.4 % $ 78,434 68.6 % Satellite 41,076 22.7 % 39,607 28.6 % 35,899 31.4 % Total $ 180,579 100.0 % $ 138,728 100.0 % $ 114,333 100.0 % GROSS PROFIT BY SEGMENT Year ended February 28, 2013 2012 2011 % of % of % of $000s Total $000s Total $000s Total Segment Wireless DataCom $ 50,005 87.9 % $ 38,632 91.9 % $ 27,922 94.5 % Satellite 6,888 12.1 % 3,387 8.1 % 1,636 5.5 % Total $ 56,893 100.0 % $ 42,019 100.0 % $ 29,558 100.0 % OPERATING INCOME (LOSS) BY SEGMENT Year ended February 28, 2013 2012 2011 % of % of % of Total Total Total $000s Revenue $000s Revenue $000s Revenue Segment Wireless DataCom $ 16,844 9.3 % $ 11,564 8.3 % $ 4,218 3.7 % Satellite 3,111 1.7 % (292 ) (0.2 %) (2,903 ) (2.5 %) Corporate expenses (3,975 ) (2.2 %) (3,902 ) (2.8 %) (3,375 ) (3.0 %) Total $ 15,980 8.8 % $ 7,370 5.3 % $ (2,060 ) (1.8 %) Fiscal Year 2013 compared to Fiscal Year 2012 Revenue Wireless DataCom revenue increased by $40.4 million, or 41%, to $139.5 million in fiscal 2013 compared to the fiscal 2012. These improvements were due primarily to increased demand for the Company's MRM products. Satellite revenue increased by $1.5 million, or 4%, to $41.1 million in fiscal 2013 from $39.6 million last year primarily due to the introduction of new products in the latter part of fiscal 2012. 20 -------------------------------------------------------------------------------- Gross Profit and Gross Margins Wireless DataCom gross profit increased by $11.4 million to $50.0 million in fiscal 2013 compared to $38.6 million last year due mainly to increased MRM hardware revenue, and gross margin decreased to 35.8% in fiscal 2013 from 39.0% in fiscal 2012 due primarily to the fact that fiscal 2012 included revenue of $3.0 million from a patent sale for which there was no associated cost of revenue. Excluding the effects of the fiscal 2012 patent sale, the Wireless DataCom gross margin in fiscal 2013 was down 1.3 points year-over-year due primarily to a higher percentage of MRM product sales. The Satellite segment had gross profit of $6.9 million in fiscal 2013, compared with gross profit of $3.4 million last year. Satellite gross margin was 16.8% for fiscal 2013, compared to 8.6% last year. These increases are due to higher revenue, change in product mix, and the conversion to a variable cost operating model in which substantially all of the satellite products are now manufactured by off-shore subcontractors. See also Note 13 to the accompanying consolidated financial statements for additional operating data by business segment. Operating Expenses Consolidated research and development ("R&D") expense increased by $3.0 million to $14.3 million in fiscal 2013 from $11.3 million in fiscal 2012. This increase is due primarily to increased salaries expense from additional R&D personnel in the MRM business and higher consulting and outside services. Consolidated selling expenses increased by $1.6 million to $12.7 million this year from $11.1 million last year. This increase is due primarily to higher payroll expense as a result of additional sales personnel and higher sales commission expense. Consolidated general and administrative expenses ("G&A") increased by $1.2 million to $12.2 million this year from $11.0 million last year due to higher stock-based compensation, consulting and outside service expenses. Stock-based compensation expense increased by $389,000 in fiscal 2013 due primarily to the remeasurement and acceleration of expense recognition of the equity awards held by the Company's former CEO. Amortization of intangibles increased from $1,277,000 last year to $1,743,000 this year. These increases are attributable to the current year amortization expense related to the intangibles acquired pursuant to the Navman Wireless Asset Purchase Agreement, partially offset by the effect of some intangible assets that became fully amortized in fiscal 2012. Non-operating Expense, Net Non-operating expense decreased from $2.1 million last year to $0.5 million this year. This decrease is attributable to lower interest expense in the current year due to lower debt balances and borrowing rates, and the fact that last year's non-operating expense included $0.8 million of cumulative foreign currency translation account losses related to the Company's investment in its French subsidiary that were written off as a result of the decision to shut down this subsidiary and a $0.5 million write-off of the remaining unamortized debt discount and issue costs on the 12% subordinated notes payable that were repaid during fiscal 2012. Income Tax Provision During fiscal 2013 the Company reversed a portion of its deferred tax asset valuation allowance corresponding to the amount of NOLs utilized to offset taxable income. In addition, pursuant to the fiscal 2013 evaluation of the future utilizability of deferred tax assets, the Company reversed substantially all of the remaining valuation allowance at the end of fiscal 2013, resulting in an income tax benefit of $29.2 million for the year. Beginning in fiscal 2014, the Company expects that its effective income tax rate will revert to a more typical level of around 40% based on full federal and state statutory tax rates. 21 --------------------------------------------------------------------------------Fiscal Year 2012 compared to Fiscal Year 2011 Revenue Wireless DataCom revenue increased by $20.7 million, or 26%, to $99.1 million in fiscal 2012 compared to fiscal 2011. The MRM business contributed significantly to the increased revenue through the addition of new customers and growth in orders from existing customers. The remaining Wireless DataCom revenue increase was attributable to higher sales of the Wireless Networks business with significant contribution from a Positive Train Control project, which accounted for $3.3 million of the year-over year revenue increase, and revenue of $3.0 million from the sale of patents in the second quarter of fiscal 2012. Satellite revenue increased by $3.7 million, or 10%, to $39.6 million in fiscal 2012 compared to fiscal 2011. This increase was attributable in part to the launch of a new home video and data networking product that the Company began shipping to its key satellite customer in the fourth quarter of fiscal 2012. Gross Profit and Gross Margins Wireless DataCom gross profit increased by $10.7 million to $38.6 million in fiscal 2012 compared to $27.9 million in fiscal 2011, and gross margin improved to 39.0% in fiscal 2012 from 35.6% in fiscal 2011 due primarily to increased absorption of fixed manufacturing costs on higher revenue and revenue of $3.0 million from the sale of patents in fiscal 2012 for which there was no corresponding cost of revenues. Satellite gross profit increased by $1.8 million to $3.4 million in fiscal 2012 compared to $1.6 million in fiscal 2011. Gross margin of the Satellite business increased to 8.6% in fiscal 2012 from 4.6% in fiscal 2011 as a result of the Company's transition in fiscal 2012 to a variable cost operating model in which substantially all of the satellite products are manufactured by off-shore subcontractors. Operating Expenses Consolidated R&D expense increased 2% to $11.3 million in fiscal 2012 from $11.1 million in fiscal 2011 due to severance costs arising from personnel reductions in the Satellite business ($116,000) and higher 401(k) plan employer contribution expense ($91,000) due to reinstatement of 401(k) employer matching contributions in January 2011 following a period of approximately 21 months during which matching contributions were suspended. Consolidated selling expenses increased from $10.5 million in fiscal 2011 to $11.1 million in fiscal 2012 due primarily to higher payroll expense as a result of additional sales personnel. Consolidated G&A expense increased by $2.1 million to $11.0 million in fiscal 2012 due to higher payroll and legal expenses. Higher G&A payroll expense was primarily due to incentive expenses recorded in fiscal 2012 as a result of the Company's improving profitability and hiring additional personnel. Legal expense was higher in fiscal 2012 because legal expense in fiscal 2011 was reduced by $230,000 due to an indemnification settlement entered into with another company involving defense costs, and also due to legal expense incurred in fiscal 2012 in connection with the shut-down of the Company's French subsidiary. Amortization of intangibles increased from $1.1 million in fiscal 2011 to $1.3 million in fiscal 2012. The increase was attributable to the amortization of the Dataradio tradename asset over a period of seven years commencing in fiscal 2012. Previously this tradename asset was classified as an indefinite-lived asset and accordingly it was not being amortized prior to fiscal 2012. Non-operating Expense, Net Non-operating expense increased from $1.4 million in fiscal 2011 to $2.1 million in fiscal 2012 due to cumulative foreign currency translation account losses of $0.8 million related to the Company's investment in its French subsidiary that were written off in the second quarter of fiscal 2012 as a result of the decision to dissolve this subsidiary. Income Tax Provision No income tax provision was recorded during fiscal 2012, other than minimum state and federal income taxes, because of the existence of net operating loss carryforwards that offset pretax income. The tax benefit of $172,000 in fiscal 2011 was related to the carryback of net operating losses of the Company's French subsidiary. 22 --------------------------------------------------------------------------------Liquidity and Capital Resources On March 1, 2013, the Company and Square 1 Bank entered into the Eighth Amendment (the "Eighth Amendment") to the Loan and Security Agreement dated as of December 22, 2009 (as amended by the Eighth Amendment, the "Amended Loan Agreement"). The Eighth Amendment increased the maximum credit limit of the facility from $12 million to $15 million, lowered the interest rate on outstanding borrowings from prime plus 1.0% to prime, and extended the facility maturity date from August 15, 2014 to March 1, 2017. The Eighth Amendment provided for a new $5 million term loan (the "New Term Loan") that was fully funded on March 4, 2013, which was just after the end of fiscal 2013. Concurrent with funding the New Term Loan, the pre-existing term loan with an outstanding principal balance of $1.8 million was retired. Principal of the New Term Loan is repayable at the rate of $83,333 per month beginning April 2013, with a $1.1 million principal payment due at maturity. The revolver portion of the Amended Loan Agreement has a borrowing limit equal to the lesser of (a) $15 million minus the term loan principal outstanding at any point in time, or (b) 85% of eligible accounts receivable. There were no borrowings outstanding on the revolver at the end of fiscal 2013 or 2012. Interest is payable on the last day of each calendar month. The Company agreed to pay loan fees to Square 1 Bank in connection with the Eighth Amendment of $7,500 on the first anniversary and $37,500 on each of the next three anniversaries of the New Term Loan. The Amended Loan Agreement contains financial covenants that require the Company to maintain a minimum level of earnings before interest, income taxes, depreciation, amortization and other noncash charges ("EBITDA") and a minimum debt coverage ratio, both measured monthly beginning March 2013 on a rolling 12-month basis. At and subsequent to February 28, 2013, the Company was in compliance with its debt covenants under the credit facility. The Company's primary sources of liquidity are its cash and cash equivalents and the revolving line of credit with Square 1 Bank. During fiscal 2013, cash and cash equivalents increased by $57.5 million. During this period, cash was provided by operations in the amount of $14.4 million, net proceeds from the sale of common stock of $44.8 million, proceeds from exercise of stock options and warrants of $2.8 million and collections on a note receivable of $0.5 million, partially offset by $1.0 million cash paid pursuant to the Navman Wireless Asset Purchase Agreement, debt repayments of $1.7 million, capital expenditures of $1.9 million and payment of employee withholding taxes on the net share settlement of vested equity awards of $2.6 million. On March 4, 2013, the Company completed the acquisition of all outstanding capital stock of Wireless Matrix. Under the terms of the agreement, the Company acquired Wireless Matrix for a cash payment of $52.9 million, subject to adjustment. The assets acquired by the Company included cash of approximately $6 million. The Company funded the purchase price from the net proceeds of its recently completed equity offering of $44.8 million, the net proceeds from the New Term Loan, and cash on hand. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of the Securities and Exchange Commission Regulation S-K. Contractual Obligations Following is a summary of the Company's contractual cash obligations as of February 28, 2013 (in thousands): Payments Due by Period More Less than than 5 Contractual Obligations 1 year 1-3 years 3-5 years years Total Bank term loan $ 917 $ 883 $ - - 1,800 Note payable to Navman 1,407 2,058 - - 3,465 Operating leases 1,087 1,751 404 - 3,242 Purchase obligations 32,853 - - - 32,853 Total contractual obligations $ 36,264 $ 4,692 $ 404 $ - $ 41,360 Purchase obligations consist primarily of inventory purchase commitments. 23-------------------------------------------------------------------------------- |