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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, 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 2014, 2013 and 2012 fell on March 1, 2014, March 2, 2013 and February 25, 2012, respectively. In these consolidated financial statements, the fiscal year end for all years is shown as February 28 for clarity of presentation. Fiscal 2014 and 2012 each consisted of 52 weeks, while fiscal year 2013 consisted of 53 weeks. 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. 17 --------------------------------------------------------------------------------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 has some degree of concentration, with one customer accounting for approximately 20.7% of the Company's fiscal 2014 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. 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. 18 -------------------------------------------------------------------------------- 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, 2014, the Company had unrecognized tax benefits for uncertain tax positions of $1.0 million. Impairment Assessments of Goodwill, Purchased Intangible Assets and Other Long-Lived Assets At February 28, 2014, the Company had $15.4 million in goodwill, $29.1 million in other intangible assets and $4.8 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 goodwill, other 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. The Company performs its goodwill impairment test in the fourth quarter of each year. The Company did not recognize any impairment charges related to goodwill during 2014 and 2013. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill would be evaluated for impairment between annual tests. 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. 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. 19 -------------------------------------------------------------------------------- The Company provides Software as a Service (SaaS) subscriptions for its fleet management and vehicle finance applications in which customers are provided with the ability to wirelessly communicate with monitoring devices installed in vehicles via a software application hosted by the Company. The Company defers the recognition of revenue for the monitoring device products that are sold with application subscriptions because the application services are essential to the functionality of the products, and accordingly, the associated product costs are recorded as deferred costs in the balance sheet. The deferred product revenue and deferred product cost amounts are amortized to application subscriptions revenue and cost of revenue on a straight-line basis over the minimum contractual service periods of one year to three years. Revenues from renewals of data communication services after the initial one year term are recognized as application subscriptions revenue when the services are provided. When customers prepay application subscription renewals, such amounts are recorded as deferred revenues and are recognized over the renewal term. Results of Operations, Fiscal Years 2012 Through 2014 The following table sets forth, for the periods indicated, the percentage of revenues represented by items included in the Company's consolidated statements of income: Year Ended February 28, 2014 2013 2012 Revenues 100.0 % 100.0 % 100.0 % Cost of revenues 66.1 68.5 69.7 Gross profit 33.9 31.5 30.3 Operating expenses: Research and development 8.9 7.9 8.2 Selling 8.4 7.0 8.0 General and administrative 6.1 6.7 7.9 Intangible asset amortization 2.7 1.0 0.9 Operating income 7.8 8.9 5.3 Non-operating expense, net (0.2 ) (0.3 ) (1.5 ) Income before income taxes 7.6 8.6 3.8 Income tax benefit (provision) (2.6 ) 16.2 - Net income 5.0 % 24.8 % 3.8 % The Company's revenue, gross profit and operating income by business segment for the last three years are as follows: REVENUE BY SEGMENT Year ended February 28, 2014 2013 2012 % of % of % of $000s Total $000s Total $000s Total Segment Wireless DataCom $ 187,012 79.3 % $ 139,503 77.3 % $ 99,121 71.4 % Satellite 48,891 20.7 % 41,076 22.7 % 39,607 28.6 % Total $ 235,903 100.0 % $ 180,579 100.0 % $ 138,728 100.0 % 20 -------------------------------------------------------------------------------- GROSS PROFIT BY SEGMENT Year ended February 28, 2014 2013 2012 % of % of % of $000s Total $000s Total $000s Total Segment Wireless DataCom $ 70,114 87.7 % $ 50,005 87.9 % $ 38,632 91.9 % Satellite 9,817 12.3 % 6,888 12.1 % 3,387 8.1 % Total $ 79,931 100.0 % $ 56,893 100.0 % $ 42,019 100.0 % OPERATING INCOME BY SEGMENT Year ended February 28, 2014 2013 2012 % of % of % of Total Total Total $000s Revenue $000s Revenue $000s Revenue Segment Wireless DataCom $ 16,324 6.9 % $ 16,844 9.3 % $ 11,564 8.3 % Satellite 5,642 2.4 % 3,111 1.7 % (292 ) (0.2 %) Corporate expenses (3,623 ) (1.5 %) (3,975 ) (2.2 %) (3,902 ) (2.8 %) Total $ 18,343 7.8 % $ 15,980 8.8 % $ 7,370 5.3 % Fiscal Year 2014 compared to Fiscal Year 2013 Revenue Wireless DataCom revenue increased by $47.5 million, or 34%, to $187.0 million in fiscal 2014 compared to $139.5 million last year. These increases were due primarily to the revenue contribution of the newly acquired Wireless Matrix business and strong demand for the Company's MRM products on the part of fleet management and asset tracking customers. The Company's Wireless Networks business, which comprises the remainder of the Wireless DataCom segment, benefitted from strength in the Energy vertical. Satellite revenue increased by $7.8 million, or 19%, to $48.9 million in fiscal 2014 compared to $41.1 million last year. These increases were due primarily to the introduction of new home networking products that were launched in fiscal 2013. Gross Profit and Gross Margins Wireless DataCom gross profit increased 40% to $70.1 million in fiscal 2014 from $50.0 million last year. Wireless DataCom gross margin increased to 37.5% in fiscal 2014 from 35.8% last year. These improvements were primarily due to higher margins for the application subscriptions revenue of Wireless Matrix, which was acquired at the beginning of fiscal 2014, compared to the rest of the Wireless DataCom revenues. Satellite gross profit increased by $2.9 million to $9.8 million in fiscal 2014 compared to $6.9 million last year. Satellite's gross margin increased to 20.1% in fiscal 2014 from 16.8% last year. These improvements are attributable to changes in product mix and product cost reductions. See also Note 14 to the accompanying consolidated financial statements for additional operating data by business segment. 21 -------------------------------------------------------------------------------- Operating Expenses Consolidated research and development ("R&D") expense increased to $21.1 million in fiscal 2014 from $14.3 million last year due primarily to the Wireless Matrix acquisition, which accounted for $5.0 million of the increase. Expansion of the Company's MRM business accounted for $2.0 million of the increase. Consolidated selling expenses increased by $7.1 million to $19.8 million in fiscal 2014 from $12.7 million in fiscal 2013. The Wireless Matrix acquisition accounted for $5.2 million of the increase. The MRM and Wireless Networks other businesses accounted for the remaining increases due to higher payroll expense as a result of additional sales and marketing personnel. Consolidated general and administrative expenses ("G&A") increased by $2.2 million to $14.4 million in fiscal 2014 compared to $12.2 million in fiscal 2013. The Wireless Matrix acquisition accounted for $1.5 million of the increase. The remaining increase is attributable primarily to higher information technology expense. Amortization of intangibles increased to $6.3 million in fiscal 2014 from $1.7 million last year. This increase is attributable to the Navman product line acquisition in May 2012, the Wireless Matrix acquisition in March 2013 and the Radio Satellite Integrators acquisition in December 2013. Non-operating Expense, Net Non-operating expense, net decreased by $100,000 to $432,000 in fiscal 2014 compared to $532,000 in fiscal 2013 due primarily to decreased interest expense of $80,000 on the lower balance of the Navman note outstanding this year compared to last year. Income Tax Provision The effective income tax rate was 34.1% in fiscal 2014. The Company's effective tax rate is lower than the combined U.S. statutory federal and state income tax rate of approximately 41% due primarily to research and development tax credits and because no foreign taxes were provided for certain foreign earnings that are sheltered by foreign net operating loss carryforwards for which no tax benefit was previously recognized. See comments below regarding the income tax benefit for fiscal 2013. 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 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 in fiscal 2012 primarily due to the introduction of new products in the latter part of fiscal 2012. 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 in fiscal 2012 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 in fiscal 2012. Satellite gross margin was 16.8% for fiscal 2013, compared to 8.6% in fiscal 2012. 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. 22 -------------------------------------------------------------------------------- See also Note 14 to the accompanying consolidated financial statements for additional operating data by business segment. Operating Expenses Consolidated 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 in fiscal 2013 from $11.1 million in fiscal 2012. This increase is due primarily to higher payroll expense as a result of additional sales personnel and higher sales commission expense. Consolidated G&A increased by $1.2 million to $12.2 million in fiscal 2013 from $11.0 million in fiscal 2012 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 in fiscal 2012 to $1,743,000 in fiscal 2013. This increase is attributable to amortization expense related to the intangibles acquired pursuant to the Navman product line acquisition in May 2012, 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 in fiscal 2012 to $0.5 million in fiscal 2013. This decrease is attributable to lower interest expense in fiscal 2013 due to lower debt balances and borrowing rates, and the fact that fiscal 2012'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 unamortized debt discount and issue costs on subordinated notes payable that were repaid during fiscal 2012. Income Tax Provision (Benefit) 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. 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. 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. Interest is payable on the last day of each calendar month. The Eighth Amendment provided for a new $5 million term loan (the "New Term Loan") that was fully funded on March 4, 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 was repayable at the rate of $83,333 per month beginning April 2013. The Company repaid the term loan in full in October 2013. 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 February 28, 2014. 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 February 28, 2014, the Company was in compliance with its debt covenants under the credit facility. 23 -------------------------------------------------------------------------------- The Company's primary sources of liquidity are its cash, cash equivalents, marketable securities and the revolving line of credit with Square 1 Bank. During fiscal 2014, cash of $22.8 million was provided by operations, cash of $64.2 million was used in investing activities, consisting of net cash used of $53.0 million for two business acquisitions, purchases of marketable securities of $9.0 million and capital expenditures of $2.1 million, and cash of $2.5 million was used in financing activities, consisting of net repayment of bank term loan of $1.8 million, principal payments of the acquisition-related note and contingent consideration to Navman of $1.6 million and taxes paid related to the net share settlement of vested equity awards of $3.0 million, partially offset by proceeds of $3.9 million from exercise of stock options. 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, 2014 and excludes amounts already recorded on the consolidated balance sheets except for long-term debt (in thousands): Future Estimated Cash Payments Due by Period More than Contractual Obligations 1 year 2-3 years 4-5 years 5 years Total Note payable to Navman $ 1,275 $ 882 $ - $ - $ 2,157 Operating leases 1,687 3,877 3,084 819 9,467 Purchase obligations 44,204 - - - 44,204 Total contractual obligations $ 47,166 $ 4,759 $ 3,084 $ 819 $ 55,828 Purchase obligations consist primarily of inventory purchase commitments. |