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CALAMP CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 may affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting periods. Actual results could differ materially from these estimates. The critical accounting policies listed below involve the Company's more significant accounting judgments and estimates that are used in the preparation of the consolidated financial statements. These policies are described in greater detail in Management's Discussion and Analysis ("MD&A") under Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended February 28, 2014, as filed with the Securities and Exchange Commission on April 24, 2014, and include the following areas: º Allowance for doubtful accounts; º Inventory write-downs; º Product warranties; º Deferred income tax assets and uncertain tax positions; º Impairment assessments of goodwill, intangible assets and other long-lived assets; º Stock-based compensation expense; and º Revenue recognition. RESULTS OF OPERATIONS OUR COMPANY We are a leading provider of wireless communications solutions for a broad array of applications to customers globally. Our business activities are organized into our Wireless DataCom and Satellite reporting segments. WIRELESS DATACOM Our Wireless DataCom segment offers solutions for Mobile Resource Management (MRM) applications, the broader Machine-to-Machine (M2M) communications space and other emerging markets that require connectivity anytime and anywhere. Our MRM and M2M solutions enable customers to optimize their operations by collecting, monitoring and efficiently reporting business-critical data and desired intelligence from high-value remote and mobile assets. Our extensive portfolio of communications devices, scalable cloud service platforms, and targeted software applications streamline otherwise complex M2M or MRM deployments for our customers. We are focused on delivering products, software services and solutions globally for our Energy, Government, Transportation and Automotive vertical markets. In addition, we anticipate future opportunities for adoption of our MRM products and M2M solutions in Heavy Equipment and various aftermarket telematics applications including Usage-Based Automotive Insurance, as well as other emerging applications and markets. SATELLITE Our Satellite segment develops, manufactures and sells direct-broadcast satellite (DBS) outdoor customer premise equipment and whole home video networking devices for digital and high definition satellite television services. Our satellite products are sold primarily to EchoStar, an affiliate of Dish Network, for incorporation into complete subscription satellite television systems. 13 --------------------------------------------------------------------------------Operating Results by Business Segment The Company's revenue, gross profit and operating income by business segment are as follows: REVENUE BY SEGMENT Three Months Ended August 31, Six Months Ended August 31, 2014 2013 2014 2013 % of % of % of % of $000s Total $000s Total $000s Total $000s Total Segment Wireless DataCom $ 50,204 84.8% $ 47,196 80.3% $ 98,051 83.0% $ 88,061 78.2% Satellite 9,006 15.2% 11,611 19.7% 20,140 17.0% 24,492 21.8% Total $ 59,210 100.0% $ 58,807 100.0% $ 118,191 100.0% $ 112,553 100.0% GROSS PROFIT BY SEGMENT Three Months Ended August 31, Six Months Ended August 31, 2014 2013 2014 2013 % of % of % of % of $000s Total $000s Total $000s Total $000s Total Segment Wireless DataCom $ 18,047 88.1% $ 17,555 88.5% $ 35,362 86.9% $ 33,515 87.5% Satellite 2,449 11.9% 2,284 11.5% 5,353 13.1% 4,805 12.5% Total $ 20,496 100.0% $ 19,839 100.0% $ 40,715 100.0% $ 38,320 100.0% OPERATING INCOME BY SEGMENT Three Months Ended August 31, Six Months Ended August 31, 2014 2013 2014 2013 % of % of % of % of Total Total Total Total $000s Revenue $000s Revenue $000s Revenue $000s Revenue Segment Wireless DataCom $ 4,657 7.9% $ 4,314 7.3% $ 8,325 7.0% $ 6,680 5.9% Satellite 1,300 2.2% 1,228 2.1% 3,156 2.7% 2,776 2.5% Corporate expenses (924 ) (1.6% ) (785 ) (1.3% ) (1,844 ) (1.6% ) (1,822 ) (1.6% ) Total $ 5,033 8.5% $ 4,757 8.1% $ 9,637 8.1% $ 7,634 6.8% Revenue Wireless DataCom revenue increased by $3.0 million, or 6%, to $50.2 million in the second quarter of fiscal 2015 compared to the fiscal 2014 second quarter due to the revenue contribution from Radio Satellite Integrators, Inc. that was acquired in December 2013, and to increased demand from a key customer in the solar energy industry. For the six months ended August 31, 2014, Wireless DataCom revenue increased by $10.0 million, or 11%, to $98.1 million compared to the same period of the prior year due primarily to the aforementioned factors for the three-month periods, as well as increased sales of MRM products into the auto insurance telematics and fleet management markets. Satellite revenue decreased by $2.6 million, or 22%, to $9.0 million in the three months ended August 31, 2014 from $11.6 million for the same period in the previous fiscal year. For the six months ended August 31, 2014, Satellite revenue decreased by $4.4 million, or 18%, to $20.1 million from $24.5 million for the same period of the prior year. These declines are due to fluctuations in product demand on the part of the Satellite segment's principal customer. Gross Profit and Gross Margins Wireless DataCom gross profit increased 3% to $18.0 million in the fiscal 2015 second quarter compared to $17.6 million in the second quarter of last year, and gross margin decreased to 35.9% in the second quarter of fiscal 2015 from 37.2% in the second quarter of fiscal 2014 due to product mix changes. Wireless DataCom gross profit increased 6% to $35.4 million in the six months ended August 31, 2014, compared to $33.5 million for the same period of the prior year primarily due to increased revenues. Wireless DataCom gross margin decreased from 38.1% in the first half of fiscal 2014 to 36.1% in the first half of fiscal 2015 primarily because MRM products, that generally have lower gross profit margins than other Wireless DataCom products and services, comprise a greater proportion of overall Wireless DataCom revenues in the current year. 14 -------------------------------------------------------------------------------- Satellite gross profit increased by $0.2 million to $2.4 million in the fiscal 2015 second quarter compared to the second quarter of last year. Satellite's gross margin increased to 27.2% in the fiscal 2015 second quarter from 19.7% in the second quarter of last year primarily due to changes in product mix. The Satellite segment had gross profit of $5.4 million for the six months ended August 31, 2014, compared to gross profit of $4.8 million for the same period last year. Satellite gross margin was 26.6% for the six months ended August 31, 2014, compared to 19.6% for the same period last year. These increases are attributable to the same factor cited above for the three-month periods. See also Note 12 to the accompanying unaudited consolidated financial statements for additional operating data by business segment. Operating Expenses Consolidated research and development ("R&D") expense decreased by $0.3 million to $5.0 million in the second quarter of fiscal 2015 from $5.3 million in the second quarter of last year. For the six-month year-to-date periods, R&D expense decreased by $0.3 million from $10.4 million last year to $10.1 million due primarily to absorption of engineering time on customer product development and internal-use software projects. Consolidated selling expenses were almost unchanged at $4.9 million in the second quarter of this year compared to last year. For the six-month year-to-date periods, selling expenses increased by $0.2 million to $10.1 million this year from $9.9 million last year due primarily to the sales and marketing expenses of Radio Satellite Integrators, Inc. which was acquired in the fourth quarter of fiscal 2014. Consolidated general and administrative expenses ("G&A") increased by $0.5 million to $3.9 million in the second quarter of this year from $3.4 million last year. For the six-month periods, consolidated G&A increased by $0.3 million to $7.5 million for fiscal 2014 from $7.2 million last year due primarily to higher legal expenses and stock compensation expense. Amortization of intangibles increased from $1.5 million in the second quarter of last year to $1.6 million in the second quarter of this year. For the six-month periods, amortization of intangibles increased to $3.3 million this year from $3.1 million last year. These increases are due to amortization of intangible assets that arose in conjunction with the acquisition of Radio Satellite Integrators, Inc. in December 2013. Non-operating Expense, Net Non-operating expense, net decreased by $77,000 to $4,000 in the second quarter of this year compared to $81,000 in the second quarter of last year due primarily to higher interest income this year compared to last year and lower interest expense this year compared to last year because of the payoff of the bank term loan during the third quarter of last year. Non-operating expense, net was $91,000 in the six months ended August 31, 2014 compared to $250,000 in the six months ended August 31, 2013 due primarily to the same factors cited above for the three month periods. Income Tax Provision The effective income tax rate was 37.5% and 38.7% in the six months ended August 31, 2014 and 2013, respectively. The decline in effective tax rate was primarily due to updated estimates of current year transfer pricing effects. LIQUIDITY AND CAPITAL RESOURCES The Company has a credit facility with Square 1 Bank that provides for borrowings up to $15 million or 85% of eligible accounts receivable, whichever is less. The credit facility expires on March 1, 2017. Borrowings under this line of credit bear interest at the bank's prime rate. There were no borrowings outstanding under this credit facility at August 31, 2014 or February 28, 2014. 15 -------------------------------------------------------------------------------- The Square 1 Bank credit facility 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 on a rolling 12-month basis. At August 31, 2014, the Company was in compliance with its debt covenants under the credit facility. 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 the first half of fiscal 2015, cash and cash equivalents increased by $4.1 million. During this period, cash of $15.8 million was provided by operations, and cash of $7.7 million was used in investing activities, consisting of net purchases of marketable securities of $4.6 million and capital expenditures of $3.1 million. In addition, cash of $4.1 million was used in financing activities, consisting of taxes paid related to net share settlement of vested equity awards of $3.0 million and payment of acquisition-related note and contingent consideration of $1.6 million on the note payable to Navman, partially offset by proceeds of $0.5 million from exercise of stock options. FORWARD LOOKING STATEMENTS Forward looking statements in this Form 10-Q 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 other risks and uncertainties that are set forth in Part II, Item 1A herein and in Part I, Item 1A of the Annual Report on Form 10-K for the year ended February 28, 2014 as filed with the Securities and Exchange Commission on April 24, 2014. 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. |