ITEM 1. FINANCIAL
STATEMENTS
CALAMP
CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par
value)
(Unaudited)
|
|
August
31,
|
|
February
28,
|
Assets
|
|
2017
|
|
2017
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
126,636
|
|
|
$
|
93,706
|
|
Short-term marketable
securities
|
|
|
4,002
|
|
|
|
6,722
|
|
Accounts receivable, net
|
|
|
64,492
|
|
|
|
67,403
|
|
Inventories
|
|
|
31,103
|
|
|
|
29,279
|
|
Prepaid expenses and other current
assets
|
|
|
11,770
|
|
|
|
9,595
|
|
Total current assets
|
|
|
238,003
|
|
|
|
206,705
|
|
|
Property, equipment and improvements,
net
|
|
|
20,935
|
|
|
|
21,162
|
|
Deferred income tax
assets
|
|
|
38,270
|
|
|
|
27,504
|
|
Goodwill
|
|
|
72,980
|
|
|
|
72,980
|
|
Other intangible assets,
net
|
|
|
59,790
|
|
|
|
67,223
|
|
Other assets
|
|
|
16,013
|
|
|
|
12,565
|
|
|
|
$
|
445,991
|
|
|
$
|
408,139
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
34,721
|
|
|
$
|
30,266
|
|
Accrued payroll and employee
benefits
|
|
|
6,748
|
|
|
|
7,955
|
|
Deferred revenue
|
|
|
15,804
|
|
|
|
14,662
|
|
Other current
liabilities
|
|
|
30,235
|
|
|
|
24,958
|
|
Total current liabilities
|
|
|
87,508
|
|
|
|
77,841
|
|
|
1.625% convertible senior
unsecured notes
|
|
|
150,506
|
|
|
|
146,827
|
|
Other non-current liabilities
|
|
|
21,766
|
|
|
|
20,229
|
|
Total liabilities
|
|
|
259,780
|
|
|
|
244,897
|
|
|
Commitments and contingencies (see Note
14)
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 3,000 shares
authorized; no shares issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value;
80,000 shares authorized; 35,601 and 35,330 shares issued and outstanding
at August 31, 2017 and February 28, 2017, respectively
|
|
|
356
|
|
|
|
353
|
|
Additional paid-in capital
|
|
|
213,021
|
|
|
|
211,187
|
|
Accumulated deficit
|
|
|
(26,497
|
)
|
|
|
(47,757
|
)
|
Accumulated other comprehensive loss
|
|
|
(669
|
)
|
|
|
(541
|
)
|
Total stockholders'
equity
|
|
|
186,211
|
|
|
|
163,242
|
|
|
|
$
|
445,991
|
|
|
$
|
408,139
|
|
See accompanying notes to
condensed consolidated financial statements.
3
CALAMP
CORP.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share
amounts)
(Unaudited)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August
31,
|
|
August
31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
74,517
|
|
|
$
|
75,984
|
|
|
$
|
145,637
|
|
|
$
|
152,405
|
|
Application subscriptions and other
services
|
|
|
15,250
|
|
|
|
14,495
|
|
|
|
32,211
|
|
|
|
29,221
|
|
Total revenues
|
|
|
89,767
|
|
|
|
90,479
|
|
|
|
177,848
|
|
|
|
181,626
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
44,641
|
|
|
|
45,486
|
|
|
|
87,066
|
|
|
|
94,375
|
|
Application subscriptions and other
services
|
|
|
8,288
|
|
|
|
7,379
|
|
|
|
16,501
|
|
|
|
14,803
|
|
Total cost of revenues
|
|
|
52,929
|
|
|
|
52,865
|
|
|
|
103,567
|
|
|
|
109,178
|
|
Gross profit
|
|
|
36,838
|
|
|
|
37,614
|
|
|
|
74,281
|
|
|
|
72,448
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,725
|
|
|
|
5,885
|
|
|
|
12,557
|
|
|
|
11,976
|
|
Selling and marketing
|
|
|
12,515
|
|
|
|
12,683
|
|
|
|
25,186
|
|
|
|
23,991
|
|
General and administrative
|
|
|
10,756
|
|
|
|
11,284
|
|
|
|
27,166
|
|
|
|
27,267
|
|
Intangible asset amortization
|
|
|
3,710
|
|
|
|
3,856
|
|
|
|
7,568
|
|
|
|
7,346
|
|
Total operating expenses
|
|
|
33,706
|
|
|
|
33,708
|
|
|
|
72,477
|
|
|
|
70,580
|
|
Operating income
|
|
|
3,132
|
|
|
|
3,906
|
|
|
|
1,804
|
|
|
|
1,868
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
396
|
|
|
|
455
|
|
|
|
729
|
|
|
|
908
|
|
Interest expense
|
|
|
(2,567
|
)
|
|
|
(2,474
|
)
|
|
|
(5,085
|
)
|
|
|
(4,898
|
)
|
Gain
on legal settlement (see Note 14)
|
|
|
15,032
|
|
|
|
-
|
|
|
|
15,032
|
|
|
|
-
|
|
Other income (expense)
|
|
|
314
|
|
|
|
(130
|
)
|
|
|
431
|
|
|
|
413
|
|
|
|
|
13,175
|
|
|
|
(2,149
|
)
|
|
|
11,107
|
|
|
|
(3,577
|
)
|
|
Income (loss) before income taxes and equity in
net loss of affiliate
|
|
|
16,307
|
|
|
|
1,757
|
|
|
|
12,911
|
|
|
|
(1,709
|
)
|
Income tax benefit (provision)
|
|
|
(3,699
|
)
|
|
|
(864
|
)
|
|
|
(2,619
|
)
|
|
|
255
|
|
Income (loss) before equity in net loss of
affiliate
|
|
|
12,608
|
|
|
|
893
|
|
|
|
10,292
|
|
|
|
(1,454
|
)
|
Equity in net loss of affiliate
|
|
|
(376
|
)
|
|
|
(372
|
)
|
|
|
(713
|
)
|
|
|
(684
|
)
|
Net
income (loss)
|
|
$
|
12,232
|
|
|
$
|
521
|
|
|
$
|
9,579
|
|
|
$
|
(2,138
|
)
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.01
|
|
|
$
|
0.27
|
|
|
$
|
(0.06
|
)
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.01
|
|
|
$
|
0.27
|
|
|
$
|
(0.06
|
)
|
Shares used in computing earnings (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,204
|
|
|
|
36,390
|
|
|
|
35,136
|
|
|
|
36,425
|
|
Diluted
|
|
|
36,021
|
|
|
|
36,849
|
|
|
|
35,973
|
|
|
|
36,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
12,232
|
|
|
$
|
521
|
|
|
$
|
9,579
|
|
|
$
|
(2,138
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
(260
|
)
|
|
|
(109
|
)
|
|
|
(179
|
)
|
|
|
(624
|
)
|
Unrealized gain (loss) on equity investment in
French licensee, net of tax
|
|
|
10
|
|
|
|
(16
|
)
|
|
|
51
|
|
|
|
(8
|
)
|
Total comprehensive income (loss)
|
|
$
|
11,982
|
|
|
$
|
396
|
|
|
$
|
9,451
|
|
|
$
|
(2,770
|
)
|
See accompanying notes to
condensed consolidated financial statements.
4
CALAMP
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
|
Six Months Ended
|
|
|
August
31,
|
|
|
2017
|
|
2016
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
9,579
|
|
|
$
|
(2,138
|
)
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
3,983
|
|
|
|
4,032
|
|
Intangible assets amortization expense
|
|
|
7,568
|
|
|
|
7,346
|
|
Stock-based compensation expense
|
|
|
4,044
|
|
|
|
3,605
|
|
Tax
benefits on vested and exercised equity awards
|
|
|
241
|
|
|
|
-
|
|
Amortization of convertible debt issue costs and
discount
|
|
|
3,679
|
|
|
|
3,460
|
|
Unrealized foreign currency transaction gains
|
|
|
(385
|
)
|
|
|
(460
|
)
|
Deferred tax assets, net
|
|
|
669
|
|
|
|
(1,091
|
)
|
Equity in net loss of affiliate
|
|
|
713
|
|
|
|
684
|
|
Impairment of internal use software
|
|
|
-
|
|
|
|
1,364
|
|
Other
|
|
|
55
|
|
|
|
14
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
516
|
|
|
|
1,814
|
|
Inventories
|
|
|
(1,440
|
)
|
|
|
2,043
|
|
Prepaid expenses and other assets
|
|
|
(3,034
|
)
|
|
|
2,818
|
|
Accounts payable
|
|
|
4,335
|
|
|
|
1,929
|
|
Accrued liabilities
|
|
|
4,648
|
|
|
|
(6,864
|
)
|
Deferred revenue
|
|
|
838
|
|
|
|
760
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
36,009
|
|
|
|
19,316
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from maturities of marketable securities
|
|
|
7,268
|
|
|
|
66,419
|
|
Purchases of marketable securities
|
|
|
(4,548
|
)
|
|
|
-
|
|
Capital expenditures
|
|
|
(3,713
|
)
|
|
|
(3,527
|
)
|
Acquisition of LoJack, net of cash acquired
|
|
|
-
|
|
|
|
(116,982
|
)
|
Advances to affiliate
|
|
|
(650
|
)
|
|
|
(737
|
)
|
Other
|
|
|
(135
|
)
|
|
|
(36
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(1,778
|
)
|
|
|
(54,863
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
-
|
|
|
|
(8,451
|
)
|
Taxes paid related to net share settlement of vested equity
awards
|
|
|
(2,335
|
)
|
|
|
(1,416
|
)
|
Proceeds from exercise of stock options
|
|
|
128
|
|
|
|
780
|
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
|
(2,207
|
)
|
|
|
(9,087
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
906
|
|
|
|
(49
|
)
|
Net
change in cash and cash equivalents
|
|
|
32,930
|
|
|
|
(44,683
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
93,706
|
|
|
|
139,388
|
|
Cash
and cash equivalents at end of period
|
|
$
|
126,636
|
|
|
$
|
94,705
|
|
See accompanying notes to
condensed consolidated financial statements.
5
CALAMP
CORP.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED
AUGUST 31, 2017 AND 2016
NOTE 1 - DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CalAmp Corp. (referred to
herein as CalAmp, the Company, we, our, or us) is
a
telematics pioneer
leading
a
transformation in a global connected economy. We help reinvent
businesses and improve lives around the globe with technology solutions that
streamline complex Internet of Things (IoT) deployments and bring intelligence
to the edge. Our software applications, scalable cloud services, and intelligent
devices collect and assess business-critical data from mobile assets, in-transit
cargo, companies, state and local governments and people. CalAmp is a global
organization that is headquartered in Irvine, California. In March 2016, we
acquired LoJack Corporation (LoJack), which provides us a vast U.S. auto
dealer channel as well as an established international licensee
network.
Historically, our business
activities were organized into two reportable segments Wireless DataCom and
Satellite. Effective August 31, 2016, we ceased operations of the Satellite
business and up through the first quarter of fiscal 2018 reported under one
reportable segment: Wireless DataCom. In the quarter ended August 31, 2017, in
order to streamline our operations and product line development resources, we
realigned our operations and we now operate under two reportable segments:
Telematics Systems and Software & Subscription Services.
Certain notes and other
information included in the audited financial statements in our Annual Report on
Form 10-K for the year ended February 28, 2017 are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with our
2017 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange
Commission on May 15, 2017.
In the opinion of our
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly our financial position at August 31, 2017
and our results of operations for the three and six months ended August 31, 2017
and 2016. The results of operations for such periods are not necessarily
indicative of results to be expected for the full fiscal year.
All intercompany
transactions and accounts have been eliminated in consolidation.
Revenue Recognition
We recognize 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. For product sales that are not bundled with an
application service or for which we have no continuing service obligations, the
revenue recognition criteria are generally met at the time product is shipped or
installed by the end customer. For product shipments made on the basis of FOB
Destination terms, revenue is recorded when the shipment reaches the customer.
Customers generally do not have a right of return except for defective products
returned during the warranty period. We record estimated commitments related to
customer incentive programs as reductions of revenues.
In addition to product
sales, we provide Software-as-a-Service (SaaS) and Platform-as-a-Service
(PaaS) subscriptions for our fleet management, vehicle finance and certain
other applications through which customers are provided with the ability to
wirelessly communicate with monitoring devices installed in vehicles and other
mobile or remote assets via software applications hosted by us. We also enter
into arrangements which combine various hardware devices as well as installation
and notification services that are provided over a stipulated service period.
These arrangements represent multiple element arrangements under ASC 605
Subtopic 25 entitled
Revenue
Recognition: Multiple-Element Arrangements
. Generally, we defer the recognition of revenue
for the products that are sold with application subscriptions and other services
because the products are not functional without the application services, and
they do not represent a separate basis of accounting under the applicable
accounting guidance. In such circumstances, 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, respectively, on a straight-line basis over minimum
contractual subscription or service periods of one to five years. Revenues from
renewals of data communication services after the initial contract term are
recognized as application subscriptions revenue over the period the services are
provided. When customers prepay application subscription renewals, such amounts
are recorded as deferred revenues and are recognized ratably over the renewal
term.
6
Revenue from the sales of
products to international licensees is recognized when shipment of the products
to the licensee has occurred and collection is reasonably assured.
We offer extended warranty
contracts in the United States related to certain products for which an
independent third party insurer is the primary obligor. Although we are not the
primary obligor, we have reviewed the criteria in ASC 605
Revenue Recognition
(ASC 605)
:
and have determined that
gross revenue recognition is appropriate in these transactions. Accordingly, we
recognize gross revenue at the time of the sale of the extended warranty with
related costs being included in cost of goods sold.
Cash and Cash
Equivalents
We consider all highly
liquid investments with remaining maturities at date of purchase of three months
or less to be cash equivalents.
Accounts receivable, net
Accounts receivable, net,
consists of trade receivables and other receivables offset by allowance for
doubtful accounts. We reserve for the estimated accounts receivable that will
not be collected based on an analysis of historical bad debts, customer
concentrations, customer creditworthiness, current economic trends and changes
in the customers payment terms and their economic condition. Collection of
accounts receivable may be affected by changes in economic or other industry
conditions and may, accordingly, impact our overall credit risk. The allowance
for doubtful accounts totaled $0.9 million and $1.0 million as of August 31,
2017 and February 28, 2017, respectively.
Fair Value
Measurements
We apply fair value
accounting for all financial assets and liabilities and non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements. We define fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly manner in an
arms-length transaction between market participants at the measurement date.
Fair value is estimated by using the following hierarchy:
Level 1
Quoted prices in active markets for identical
assets or liabilities.
Level 2
Observable inputs other than quoted prices in
active markets for identical assets and liabilities, quoted prices for identical
or similar assets or liabilities in inactive markets, or other inputs that are
observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
Level 3
Inputs that are generally unobservable and
typically reflect managements estimate of assumptions that market participants
would use in pricing the asset or liability.
In accordance with the fair
value accounting requirements, companies may choose to measure eligible
financial instruments and certain other items at fair value. We have elected the
fair value option for our investments in marketable securities on a
contract-by-contract basis at the time each contract is initially recognized in
the financial statements or upon an event that gives rise to a new basis of
accounting for the items.
Recently Issued
Accounting Standards
In March 2016, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update
2016-09,
Compensation Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting
(ASU 2016-09). This
update was intended to simplify the accounting for share-based payment
transactions, including the accounting for income taxes, forfeitures, and
statutory tax withholding requirements, as well as classification in the
statement of cash flows. We adopted this standard during the quarter ended May
31, 2017 and effective March 1, 2017, we recorded a cumulative adjustment
benefit of $11.7 million for the excess tax benefit from the exercise of stock
options and vesting of restricted stock awards and restricted stock units that
occurred in prior fiscal years as an increase in deferred income tax assets and
a reduction of the accumulated deficit. For the six months ended August 31,
2017, we
recorded $241,000
of excess tax benefits on vested and exercised
equity awards. The excess tax benefits recognized on stock-based compensation
expense are classified as an operating activity in our consolidated statements
of cash flows. Upon adoption of ASU 2016-09, we also elected to account for
forfeitures as they occur, rather than estimating expected forfeitures over the
course of a vesting period.
7
In May 2017, the FASB issued Accounting Standards
Update 2017-09,
Compensation Stock
Compensation: Scope of Modification Accounting
(ASU 2017-09). The amendments in ASU 2017-09 provide
guidance about which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting in ASC 718
Compensation Stock Compensation
. The adoption of ASU 2017-09, which will become
effective for annual periods beginning after December 15, 2017, is not expected
to have a material impact on our consolidated financial statements.
In January 2017, the FASB
issued Accounting Standards Update 2017-04,
Simplifying the Test for Goodwill
Impairment
. The new guidance
eliminates Step 2 from the goodwill impairment test and instead requires that an
entity measure the impairment of goodwill assigned to a reporting unit if the
carrying value of assets and liabilities assigned to the reporting unit,
including goodwill, exceed the reporting unit's fair value. The new guidance
must be adopted for annual and interim goodwill tests in fiscal years beginning
after December 15, 2019. After the adoption of this standard, which will be
applied prospectively, we will follow a one-step model for goodwill impairment.
We do not anticipate this pronouncement will have a significant impact on our
consolidated financial statements upon adoption.
In February 2016, the FASB
issued Accounting Standards Update 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires
a lessee to record a ROU asset and a lease liability on the balance sheet for
all leases with terms longer than 12 months. Leases will be classified as either
finance or operating, with the classification affecting the pattern of expense
recognition in the income statement. The new standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those
fiscal years. A modified retrospective transition approach is required for
capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements at the
time of adoption, with certain practical expedients available. Early adoption is
permitted. We have not completed the assessment of the impact on our
consolidated financial statements, but we do expect to record an asset and lease
liability upon adoption.
In January 2016, the FASB
issued Accounting Standards Update 2016-01,
Financial InstrumentsOverall: Recognition and
Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01). This standard revises an entitys
accounting related to (1) the classification and measurement of investments in
equity securities and (2) the presentation of certain fair value changes for
financial liabilities measured at fair value. It also amends certain disclosure
requirements associated with the fair value of financial instruments. Under the
new guidance, entities will have to measure equity investments that do not
result in consolidation and are not accounted for under the equity method at
fair value and recognize any changes in fair value in net income unless the
investments qualify for a new practicality exception. ASU 2016-01 is effective
for financial statements issued for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. We are currently evaluating
the impact of this standard on our consolidated financial statements.
In May 2014, the FASB
issued Accounting Standards Update 2014-09,
Revenue from Contracts with
Customers
. The new revenue
recognition standard (ASC 606) provides a five-step analysis of transactions
to determine when and how revenue is recognized. The core principle is that a
company should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The two
permitted transition methods under the new standard are the full retrospective
method or the modified retrospective method. The new standard is effective for
annual reporting periods beginning after December 15, 2017, and accordingly we
are required to adopt this standard effective March 1, 2018, the beginning of
our fiscal 2019. We have
developed
our plan for the implementation
of ASC 606 and have reviewed it with,
and will
periodically report
the status against that plan
to
our Audit Committee. We
have established a cross functional project steering committee and
implementation team to identify potential differences that would result from
applying the requirements of the new standard to our revenue contracts and
related expense line items. We have identified the various revenue streams,
including product revenues, service revenues, installation and training, that
could be impacted by ASC 606 and have started to review individual customer
contracts related to these revenue streams to determine if any material
differences exist between the current revenue standard, ASC 605, and ASC 606. We
also began reviewing the additional disclosure requirements of the new standard
and the potential impact on
our
internal control structure and revenue
recognition policy. We have not completed our assessment of the new revenue
recognition standard and have not yet determined the impact
of adoption
on our consolidated
financial statements. We anticipate that we will complete our assessment of the
new standard and our potential financial impact by the end of fiscal year 2018.
8
NOTE 2 CASH, CASH
EQUIVALENTS AND INVESTMENTS
The following tables
summarize our financial instrument assets (in thousands):
|
|
As of August 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
of Fair
Value
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Cash and
|
|
Short-Term
|
|
|
|
|
|
Adjusted
|
|
Gains
|
|
Fair
|
|
Cash
|
|
Marketable
|
|
Other
|
|
|
Cost
|
|
(Losses)
|
|
Value
|
|
Equivalents
|
|
Securities
|
|
Assets
|
Cash
|
|
$
|
40,262
|
|
$
|
-
|
|
|
$
|
40,262
|
|
$
|
40,262
|
|
$
|
-
|
|
$
|
-
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
5,709
|
|
|
-
|
|
|
|
5,709
|
|
|
5,709
|
|
|
-
|
|
|
-
|
Mutual funds (1)
|
|
|
5,504
|
|
|
(19
|
)
|
|
|
5,485
|
|
|
-
|
|
|
-
|
|
|
5,485
|
Equity investment in French licensee
|
|
|
296
|
|
|
30
|
|
|
|
326
|
|
|
-
|
|
|
-
|
|
|
326
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
57,100
|
|
|
-
|
|
|
|
57,100
|
|
|
57,100
|
|
|
-
|
|
|
-
|
Corporate bonds
|
|
|
27,572
|
|
|
(5
|
)
|
|
|
27,567
|
|
|
23,565
|
|
|
4,002
|
|
|
-
|
|
Total
|
|
$
|
136,443
|
|
$
|
6
|
|
|
$
|
136,449
|
|
$
|
126,636
|
|
$
|
4,002
|
|
$
|
5,811
|
|
|
|
As of February 28,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
of Fair
Value
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Cash and
|
|
Short-Term
|
|
|
|
|
|
Adjusted
|
|
Gains
|
|
Fair
|
|
Cash
|
|
Marketable
|
|
Other
|
|
|
Cost
|
|
(Losses)
|
|
Value
|
|
Equivalents
|
|
Securities
|
|
Assets
|
Cash
|
|
$
|
39,322
|
|
$
|
-
|
|
|
$
|
39,322
|
|
$
|
39,322
|
|
$
|
-
|
|
$
|
-
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
3,406
|
|
|
-
|
|
|
|
3,406
|
|
|
3,406
|
|
|
-
|
|
|
-
|
Mutual funds (1)
|
|
|
5,429
|
|
|
372
|
|
|
|
5,801
|
|
|
-
|
|
|
-
|
|
|
5,801
|
Equity investment in French licensee
|
|
|
296
|
|
|
(54
|
)
|
|
|
242
|
|
|
-
|
|
|
-
|
|
|
242
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
24,000
|
|
|
-
|
|
|
|
24,000
|
|
|
24,000
|
|
|
-
|
|
|
-
|
Corporate bonds
|
|
|
33,708
|
|
|
(8
|
)
|
|
|
33,700
|
|
|
26,978
|
|
|
6,722
|
|
|
-
|
Total
|
|
$
|
106,161
|
|
$
|
310
|
|
|
$
|
106,471
|
|
$
|
93,706
|
|
$
|
6,722
|
|
$
|
6,043
|
(1)
|
Amounts represent
various equity, bond and money market mutual funds that are held in a
Rabbi Trust and are restricted for payment obligations to
non-qualified deferred compensation
plan
participants.
|
9
NOTE 3 - INVENTORIES
Inventories consist of the
following (in thousands):
|
|
August 31,
|
|
February 28,
|
|
|
2017
|
|
2017
|
Raw
materials
|
|
$
|
15,683
|
|
$
|
15,822
|
Work
in process
|
|
|
414
|
|
|
294
|
Finished goods
|
|
|
15,006
|
|
|
13,163
|
|
|
$
|
31,103
|
|
$
|
29,279
|
NOTE 4 OTHER
INTANGIBLE ASSETS
Other intangible assets are
comprised as follows (in thousands):
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
Useful
|
|
Feb. 28,
|
|
Addi-
|
|
Aug. 31
|
|
Feb. 28,
|
|
|
|
Aug. 31
|
|
Aug. 31
|
|
Feb. 28,
|
|
|
Life
|
|
2017
|
|
tions
|
|
2017
|
|
2017
|
|
Expense
|
|
2017
|
|
2017
|
|
2017
|
Supply contract
|
|
5
years
|
|
$
|
2,220
|
|
$
|
-
|
|
$
|
2,220
|
|
$
|
2,112
|
|
$
|
108
|
|
$
|
2,220
|
|
$
|
-
|
|
$
|
108
|
Developed technology
|
|
2-7
years
|
|
|
22,280
|
|
|
-
|
|
|
22,280
|
|
|
10,323
|
|
|
1,980
|
|
|
12,303
|
|
|
9,977
|
|
|
11,957
|
Tradenames
|
|
7-10
years
|
|
|
37,643
|
|
|
54
|
|
|
37,697
|
|
|
5,226
|
|
|
1,926
|
|
|
7,152
|
|
|
30,545
|
|
|
32,417
|
Customer lists
|
|
4-7
years
|
|
|
22,950
|
|
|
-
|
|
|
22,950
|
|
|
15,018
|
|
|
2,319
|
|
|
17,337
|
|
|
5,613
|
|
|
7,932
|
Dealer relationships
|
|
7
years
|
|
|
16,850
|
|
|
-
|
|
|
16,850
|
|
|
2,308
|
|
|
1,206
|
|
|
3,514
|
|
|
13,336
|
|
|
14,542
|
Covenants not to compete
|
|
5
years
|
|
|
170
|
|
|
-
|
|
|
170
|
|
|
162
|
|
|
8
|
|
|
170
|
|
|
-
|
|
|
8
|
Patents
|
|
5
years
|
|
|
347
|
|
|
81
|
|
|
428
|
|
|
88
|
|
|
21
|
|
|
109
|
|
|
319
|
|
|
259
|
|
|
|
|
$
|
102,460
|
|
$
|
135
|
|
$
|
102,595
|
|
$
|
35,237
|
|
$
|
7,568
|
|
$
|
42,805
|
|
$
|
59,790
|
|
$
|
67,223
|
Estimated future
amortization expense as of August 31, 2017 is as follows (in thousands):
2018
(remainder)
|
|
$
|
7,440
|
2019
|
|
|
11,686
|
2020
|
|
|
9,679
|
2021
|
|
|
7,856
|
2022
|
|
|
6,219
|
Thereafter
|
|
|
16,910
|
|
|
$
|
59,790
|
NOTE 5 OTHER ASSETS
Other assets consist of the
following (in thousands):
|
|
August 31,
|
|
February 28,
|
|
|
2017
|
|
2017
|
Deferred compensation plan assets
|
|
$
|
5,485
|
|
$
|
5,801
|
Investment in international licensees
|
|
|
2,366
|
|
|
2,282
|
Equity investment in and loan to ThinxNet
GmbH
|
|
|
2,674
|
|
|
-
|
Equity investment in and loans to UK
affiliate
|
|
|
2,534
|
|
|
2,402
|
Other
|
|
|
2,954
|
|
|
2,080
|
|
|
$
|
16,013
|
|
$
|
12,565
|
10
Our investment in
international licensees at August 31, 2017 consists principally of a 12.5%
equity interest in a Mexican licensee of $1.7 million as well as other smaller
interests
in Benelux
and French licensees. The investment in these licensees
are accounted for using the cost method of accounting and carried at cost as we
do not exercise significant influence over these investees.
In September 2015, we
invested £1,400,000 for a 49% minority ownership interest in Smart Driver Club
Limited (Smart Driver Club), a technology and insurance startup company
located in the United Kingdom. This investment is accounted for under the equity
method since we have significant influence over the investee. Our equity in the
net loss of Smart Driver Club amounted to $713,000 and $684,000 in the six
months ended August 31, 2017 and 2016, respectively.
To date we have
made loans aggregating
£2,500,000, of which £500,000 was made in July 2017, to Smart Driver Club
bearing interest at an annual interest rate of 8%, with all principal and all
unpaid interest due in 2020. The foreign currency translation adjustment for
this equity investment and loans amounted to $108,000 as of August 31, 2017 and
is included as a component of Accumulated Other Comprehensive Loss in the
consolidated balance sheet as of that date.
Effective August 24, 2017,
we acquired an ownership interest valued at $1.4 million in ThinxNet GmbH, a
company headquartered in Munich, Germany (ThinxNet). ThinxNet is an early
stage company focused on commercializing cloud-based mobile device and
applications in the automotive sector throughout Europe. This represents a cost
basis investment as we cannot exercise significant influence over the business.
Contemporaneously, we executed an unsecured convertible note receivable for
$1.27 million with an interest rate of 6% which has a fixed term of 12 months,
after which the loan can be converted to equity in ThinxNet or a loan payable on
demand at our option. The equity investment and note receivable were
consideration we received
in
exchange for
our
outstanding accounts receivable
from ThinxNet.
No
gain or loss was recorded on this exchange. The assets received in this exchange
are included in Other Assets in the consolidated balance sheet as of August 31,
2017.
Our investments in the aforementioned licensees are included in other assets on our condensed consolidated balance sheet and are carried at cost, which represents their fair value as measured on the date of the acquisition of LoJack, and adjusted only for other-than-temporary declines in fair value. We have concluded that there are no indicators of impairment to the fair value of these investments for all periods presented.
NOTE 6 CONVERTIBLE
SENIOR UNSECURED NOTES
As of August 31, 2017, we
had outstanding $172.5 million aggregate principal amount of convertible senior
unsecured notes (Notes). The Notes are senior unsecured obligations and bear
interest at a rate of 1.625% per year payable in cash on May 15 and November 15
of each year. The Notes mature on May 15, 2020 unless earlier converted or
repurchased in accordance with their terms. We may not redeem the Notes prior to
their stated maturity date and they will be convertible into cash, shares of our
common stock or a combination of cash and shares of common stock, at our
election, based on an initial conversion rate of 36.2398 shares of common stock
per $1,000 principal amount. This ratio is equivalent to an initial conversion
price of $27.594 per share of common stock, subject to customary adjustments.
Holders may convert their Notes at their option at any time prior to November
15, 2019 upon the occurrence of certain events in the future, as defined in the
indenture agreement dated May 6, 2015 (the Indenture). During the period from
November 15, 2019 to May 13, 2020, holders may convert all or any portion of
their Notes regardless of the foregoing conditions. Our intent is to settle the
principal amount of the Notes in cash upon conversion. If the conversion value
exceeds the principal amount, we would deliver shares of common stock in respect
to the remainder of the conversion obligation in excess of the aggregate
principal amount (the conversion spread). The shares associated with the
conversion spread, if any, would be included in the denominator for the
computation of diluted earnings per share, with such shares calculated using the
average closing price of our common stock during each period. As of August 31,
2017, the conditions allowing holders of the Notes to convert have not been met.
If we undergo a fundamental
change (as defined in the Indenture), holders of the Notes may require us to
repurchase their Notes at a repurchase price of 100% of the principal amount,
plus any accrued and unpaid interest, if any, up to but not including the
fundamental change repurchase date. In addition, following certain corporate
events that occur prior to maturity, we will increase the conversion rate for a
holder who elects to convert its Notes in connection with such a corporate event
in certain circumstances. In such event, an aggregate of up to 2.5 million
additional shares of common stock could be issued upon conversions in connection
with such corporate events, subject to adjustment in the same manner as the
conversion rate.
Balances attributable to
the Notes consist of the following (in thousands):
|
|
August 31,
|
|
February 28,
|
|
|
2017
|
|
2017
|
Principal
|
|
$
|
172,500
|
|
|
$
|
172,500
|
|
Less: Unamortized debt discount
|
|
|
(19,507
|
)
|
|
|
(22,770
|
)
|
Unamortized debt issuance costs
|
|
|
(2,487
|
)
|
|
|
(2,903
|
)
|
Net
carrying amount of the Notes
|
|
$
|
150,506
|
|
|
$
|
146,827
|
|
11
The Notes are carried at
their principal amount, net of unamortized debt discount and issuance costs, and
are not adjusted to fair value each period. The issuance date fair value of the
liability component of the Notes in the amount of $138.9 million was determined
using a discounted cash flow analysis, in which the projected interest and
principal payments were discounted back to the issuance date at a market
interest rate for nonconvertible debt of 6.2%, which represents a Level 3 fair
value measurement. The debt discount of $33.6 million is being amortized to
interest expense using the effective interest method with an effective interest
rate of 6.2% over the period from the issuance date through the contractual
maturity date of May 15, 2020. The approximate fair value of the Notes as of
August 31, 2017 was $169.5 million, which was estimated on the basis of inputs
that are observable in the market and which is considered a Level 2 measurement
method in the fair value hierarchy.
NOTE 7 - INCOME TAXES
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. We evaluate the realizable nature of our deferred income tax assets
and the need for a valuation allowance, as we deem necessary. In assessing this
valuation allowance, we review historical and future expected operating results
and other factors, including recent cumulative earnings experience, expectations
of future taxable income by taxing jurisdiction and the carryforward periods
available for tax reporting purposes, to determine whether it is more likely
than not that deferred tax assets are realizable.
We file income tax returns
in the U.S. federal jurisdiction, various U.S. states and Puerto Rico, Canada,
Ireland, Italy, the United Kingdom, the Netherlands, Brazil and New Zealand.
Certain income tax returns for fiscal years 2012 through 2016 remain open to
examination by U.S. federal and state tax authorities. However, to the extent
allowed by law, the tax authorities may have the right to examine prior periods
in which net operating losses or tax credits were generated and carried forward,
and to make adjustments up to the net operating loss or tax credit carryforward
amount. Most of our foreign subsidiaries tax returns for 2013 to present remain
open for examination by the tax authorities in the countries in which they are
filed. In Italy and the Netherlands, tax returns filed from 2011 to present
remain open for examination. In Ireland, tax returns filed from 2010 to the
present remain open.
As previously described, on
June 9, 2017, we entered into a settlement agreement with EVE and its
controlling shareholder EVE Holdings Limited to resolve
an arbitration tribunal damage award. Pursuant to this settlement agreement,
EVE Holdings Limited
agreed to
make payments to us in the aggregate
approximate
amount of $46
million, which is net of attorneys fees and insurance subrogation payment. The
settlement amount is scheduled to be received in four installments, the first of which was received in June 2017, and
is split between the US and foreign subsidiaries pursuant to IRC code
section 482 and is subject to taxation in multiple jurisdictions.
The effective income tax
rate was 20.3% in the six months ended August 31, 2017 compared to
14.9%
in the
same period prior year. This increase in the effective tax rate is primarily
attributable to the aforementioned settlement for which over half was
apportioned to the US. The effective tax rate is lower than the statutory U.S.
federal income tax rate of 35% due primarily to certain undistributed foreign
earnings, a substantial portion of which was generated by our Ireland
subsidiary, for which no U.S. taxes are provided because such earnings are
intended to be indefinitely reinvested outside the U.S.
NOTE 8 - EARNINGS PER
SHARE
Basic earnings per share is
computed by dividing net income for the period by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed by dividing net income for the period by the weighted average number of
common shares outstanding during the period, plus the dilutive effect of
outstanding stock options and restricted stock-based awards using the treasury
stock method.
12
The calculation of the
basic and diluted income (loss) per share of common stock is as follows (in
thousands, except per share value):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August
31,
|
|
August
31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
12,232
|
|
$
|
521
|
|
$
|
9,579
|
|
$
|
(2,138
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average
number of common shares outstanding
|
|
|
35,204
|
|
|
36,390
|
|
|
35,136
|
|
|
36,425
|
|
Effect of stock options and restricted stock
units computed on treasury stock method
|
|
|
817
|
|
|
459
|
|
|
837
|
|
|
-
|
|
Diluted weighted average
number of common shares outstanding
|
|
|
36,021
|
|
|
36,849
|
|
|
35,973
|
|
|
36,425
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
$
|
0.01
|
|
$
|
0.27
|
|
$
|
(0.06
|
)
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.01
|
|
$
|
0.27
|
|
$
|
(0.06
|
)
|
All outstanding options and
restricted stock units for the six months ended August 31, 2016 were excluded
from the computation of diluted earnings per share because we reported a net
loss for this period presented and the effect of inclusion would be
antidilutive.
As described in Note 6, we
have the option to pay cash, issue shares of common stock or any combination
thereof for the aggregate amount due upon conversion of the Notes. Our intent is
to settle the principal amount of the Notes in cash upon conversion. As a
result, only the shares issuable for the conversion value, if any, in excess of
the principal amount of the Notes would be included in diluted earnings per
share. From the time of the issuance of Notes, the average market price of our
common stock has been less than the initial conversion price, and consequently
no shares have been included in diluted earnings per share for the conversion
value of the Notes.
NOTE 9 STOCK-BASED
COMPENSATION
Stock-based compensation
expense is included in the following captions of the condensed consolidated
statements of comprehensive income (loss) (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August
31,
|
|
August
31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost
of revenues
|
|
$
|
141
|
|
$
|
68
|
|
$
|
279
|
|
$
|
132
|
Research and development
|
|
|
384
|
|
|
356
|
|
|
618
|
|
|
537
|
Selling and marketing
|
|
|
547
|
|
|
403
|
|
|
933
|
|
|
698
|
General and administrative
|
|
|
1,155
|
|
|
794
|
|
|
2,214
|
|
|
2,238
|
|
|
$
|
2,227
|
|
$
|
1,621
|
|
$
|
4,044
|
|
$
|
3,605
|
13
Changes in our outstanding
stock options during the six months ended August 31, 2017 were as follows
(options in thousands):
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average
|
|
|
Options
|
|
Exercise
Price
|
Outstanding at February 28, 2017
|
|
955
|
|
|
$
|
8.60
|
Granted
|
|
165
|
|
|
|
19.31
|
Exercised
|
|
(45
|
)
|
|
|
2.85
|
Forfeited or expired
|
|
-
|
|
|
|
-
|
Outstanding at August 31, 2017
|
|
1,075
|
|
|
$
|
10.48
|
Exercisable at August 31, 2017
|
|
685
|
|
|
$
|
6.79
|
The weighted average
remaining contractual term and the aggregate intrinsic value of outstanding
options as of August 31, 2017 was 4.0 years and $8.8 million,
respectively.
Changes in our outstanding
restricted stock shares, performance stock units (PSUs) and restricted stock
units (RSUs) during the six months ended August 31, 2017 were as follows
(restricted shares, PSUs and RSUs in thousands):
|
|
Number of
|
|
|
|
|
|
Restricted
|
|
Weighted
|
|
|
Shares,
PSUs
|
|
Average
Grant
|
|
|
and RSUs
|
|
Date Fair Value
|
Outstanding at February 28, 2017
|
|
1,239
|
|
|
$
|
15.94
|
Granted
|
|
679
|
|
|
|
19.24
|
Vested
|
|
(360
|
)
|
|
|
15.74
|
Forfeited
|
|
(101
|
)
|
|
|
17.44
|
Outstanding at May 31, 2017
|
|
1,457
|
|
|
$
|
17.43
|
During the six months ended
August 31, 2017 and 2016, we retained 156,731 and 97,267 shares of the vested
restricted shares, RSUs and PSUs,
respectively, to satisfy the minimum required statutory amount of employee
withholding taxes.
As of August 31, 2017,
there was $26.4 million of total unrecognized stock-based compensation cost
related to outstanding nonvested equity awards that is expected to be recognized
as expense over a weighted-average remaining vesting period of 3.1 years.
NOTE 10 - CONCENTRATION
OF RISK
One customer in the heavy
equipment industry accounted for 12% and 11% of our consolidated revenue for the
three and six months ended August 31, 2017, and 16% and 12% of our consolidated
accounts receivable at August 31, 2017 and February 28, 2017,
respectively.
We have contract
manufacturing arrangements with electronic manufacturing service providers for
Mobile Resource Management (MRM) devices, LoJack Stolen Vehicle Recovery
(SVR) products, certain other products, transmission towers and certain
components and subassemblies. One supplier accounted for 32% and 31% of our
total inventory purchases in the three and six months ended August 31, 2017 and
37% and 41% in the three and six months ended August 31, 2016, respectively. As
of August 31, 2017, this supplier accounted for 41% of our total accounts
payable. Another supplier accounted for 14% and 16% of our total inventory
purchases in the three and six months ended August 31 2017 and 13% and 11% in
the three and six months ended August 31, 2016, respectively, and 14% of our
total accounts payable as of August 31, 2017. A third supplier accounted for 13%
and 11% of our total inventory purchases in the three and six months ended
August 31, 2017 and 11% and 10% in the three and six months ended August 31,
2016, respectively. This supplier accounted for 10% of our total accounts
payable as of August 31, 2017. Some of our products and subassemblies are
purchased from sole source suppliers.
14
NOTE 11 - PRODUCT
WARRANTIES
We generally provide a
warranty for
our products against defects over periods ranging from 12
to 24 months, depending upon the product. An accrual for estimated future costs
relating to products returned under warranty is recorded as an expense when
products are shipped. At the end of each fiscal quarter, we adjust our liability
for warranty claims based on actual warranty claims experience as a percentage
of revenues for the preceding one to two years, and we also consider the impact
of known operational issues that may have a greater or lesser impact than
historical trends. The warranty reserve is included in Other Current Liabilities
in the consolidated balance sheets. Activity in the accrued warranty costs
liability is as follows (in thousands):
|
|
Six Months Ended
|
|
|
August
31,
|
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
6,518
|
|
|
$
|
1,892
|
|
Assumed from acquisition of LoJack
|
|
|
-
|
|
|
|
1,883
|
|
Charged to costs and expenses
|
|
|
688
|
|
|
|
530
|
|
Deductions
|
|
|
(1,158
|
)
|
|
|
(1,075
|
)
|
Balance at end of period
|
|
$
|
6,048
|
|
|
$
|
3,230
|
|
NOTE 12 OTHER
FINANCIAL INFORMATION
Supplemental Balance
Sheet Information
Other current liabilities
consist of the following (in thousands):
|
|
August 31,
|
|
February 28,
|
|
|
2017
|
|
2017
|
Warranty reserves
|
|
$
|
6,048
|
|
$
|
6,518
|
Litigation reserve
|
|
|
16,831
|
|
|
10,144
|
Other
|
|
|
7,356
|
|
|
8,296
|
|
|
$
|
30,235
|
|
$
|
24,958
|
Other non-current
liabilities consist of the following (in thousands):
|
|
August 31,
|
|
February 28,
|
|
|
2017
|
|
2017
|
Deferred compensation plan liability
|
|
$
|
5,488
|
|
$
|
5,825
|
Deferred revenue
|
|
|
13,998
|
|
|
12,257
|
Deferred rent
|
|
|
264
|
|
|
378
|
Acquisition-related contingent consideration
|
|
|
693
|
|
|
636
|
Other
|
|
|
1,323
|
|
|
1,133
|
|
|
$
|
21,766
|
|
$
|
20,229
|
15
Supplemental Statement
of Operations Information
Investment income consists
of the following (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August
31,
|
|
August
31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Investment income on cash equivalents and
marketable securities
|
|
$
|
215
|
|
$
|
153
|
|
$
|
375
|
|
$
|
329
|
Investment income on deferred compensation
plan
|
|
|
120
|
|
|
188
|
|
|
242
|
|
|
465
|
Dividend income
|
|
|
61
|
|
|
114
|
|
|
112
|
|
|
114
|
Total investment income
|
|
$
|
396
|
|
$
|
455
|
|
$
|
729
|
|
$
|
908
|
Interest expense consists
of the following (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August
31,
|
|
August
31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest expense on convertible senior
unsecured notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated interest at 1.625% per annum
|
|
$
|
704
|
|
$
|
701
|
|
$
|
1,405
|
|
$
|
1,402
|
Amortization of note discount
|
|
|
1,653
|
|
|
1,562
|
|
|
3,263
|
|
|
3,069
|
Amortization of debt issue costs
|
|
|
210
|
|
|
199
|
|
|
416
|
|
|
391
|
|
|
|
2,567
|
|
|
2,462
|
|
|
5,084
|
|
|
4,862
|
Other interest expense
|
|
|
-
|
|
|
12
|
|
|
1
|
|
|
36
|
Total interest expense
|
|
$
|
2,567
|
|
$
|
2,474
|
|
$
|
5,085
|
|
$
|
4,898
|
Supplemental Cash Flow
Information
Net cash provided by
operating activities includes cash payments for interest expense and income
taxes as follows (in thousands):
|
|
Six Months Ended
|
|
|
August
31,
|
|
|
2017
|
|
2016
|
Interest expense paid
|
|
$
|
1,442
|
|
$
|
1,447
|
Income tax paid
|
|
$
|
733
|
|
$
|
979
|
The following is the
supplemental schedule of non-cash investing and financing activities (in
thousands):
|
|
Six Months Ended
|
|
|
August
31,
|
|
|
2017
|
|
2016
|
Equity investment in and loan to ThinxNet (see
Note 5)
|
|
$
|
2,674
|
|
$
|
-
|
16
NOTE 13 - SEGMENT
INFORMATION AND GEOGRAPHIC DATA
Historically, our business
activities were organized into two reportable segments Wireless DataCom and
Satellite. Effective August 31, 2016, we ceased operations of the Satellite
business and reported through the first quarter of fiscal 2018 under one
reportable segment: Wireless DataCom. In the quarter ended August 31, 2017, we
realigned our operations and now operate under two reportable segments:
Telematics Systems and Software & Subscription Services. Our organizational
structure is based on a number of factors that our CEO, the Chief Operating
Decision Maker (CODM), uses to evaluate and operate the business, which
include, but are not limited to, customer base, homogeneity of products, and
technology. We have recast the first quarter of our current fiscal year and
certain prior period amounts to conform to the way we internally manage and
monitor segment performance.
The Telematics Systems
segment offers a portfolio of wireless data communications products which
includes asset tracking units, mobile telematics devices, fixed and mobile
wireless gateways and routers. These wireless networking devices underpin a wide
range of our own and third party software and service solutions worldwide and
are critical for applications demanding secure, reliable and business-critical
communications.
The Software &
Subscription Services segment offers cloud-based, application enablement and
telematics service platforms that facilitate integration of our own
applications, as well as those of third parties, through open Applications
Programing Interfaces (APIs) to deliver full-featured IoT solutions to a wide
range of customers and markets. Our scalable proprietary SaaS offerings enable
rapid and cost-effective deployment of high-value solutions for customers all
around the globe.
Segment information for the
three and six months ended August 31, 2017 and 2016 is as follows (in
thousands):
|
|
Three Months Ended
August 31, 2017
|
|
Three Months Ended
August 31, 2016
|
|
|
Operating
Segments
|
|
|
|
|
|
|
|
|
Operating
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Software &
|
|
|
|
|
|
|
|
|
|
|
|
Software &
|
|
|
|
|
|
|
|
|
|
|
|
|
Telematics
|
|
Subscription
|
|
Corporate
|
|
|
|
|
Telematics
|
|
Subscription
|
|
|
|
|
Corporate
|
|
|
|
|
|
Systems
|
|
Services
|
|
Expenses
|
|
Total
|
|
Systems
|
|
Services
|
|
Satellite
|
|
Expenses
|
|
Total
|
Revenues
|
|
$
|
74,070
|
|
$
|
15,697
|
|
|
|
|
|
$
|
89,767
|
|
$
|
68,851
|
|
$
|
14,956
|
|
|
$
|
6,672
|
|
|
|
|
|
$
|
90,479
|
Adjusted EBITDA
|
|
$
|
11,505
|
|
$
|
2,050
|
|
$
|
(1,254
|
)
|
|
$
|
12,301
|
|
$
|
13,484
|
|
$
|
(363
|
)
|
|
$
|
794
|
|
$
|
(1,062
|
)
|
|
$
|
12,853
|
|
|
Six Months Ended
August 31, 2017
|
|
Six Months Ended
August 31, 2016
|
|
|
Operating
Segments
|
|
|
|
|
|
|
|
|
Operating
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Software &
|
|
|
|
|
|
|
|
|
|
|
|
Software &
|
|
|
|
|
|
|
|
|
|
|
|
|
Telematics
|
|
Subscription
|
|
Corporate
|
|
|
|
|
Telematics
|
|
Subscription
|
|
|
|
|
Corporate
|
|
|
|
|
|
Systems
|
|
Services
|
|
Expenses
|
|
Total
|
|
Systems
|
|
Services
|
|
Satellite
|
|
Expenses
|
|
Total
|
Revenues
|
|
$
|
146,066
|
|
$
|
31,782
|
|
|
|
|
|
$
|
177,848
|
|
$
|
135,974
|
|
$
|
30,583
|
|
$
|
15,069
|
|
|
|
|
|
$
|
181,626
|
Adjusted EBITDA
|
|
$
|
24,325
|
|
$
|
3,271
|
|
$
|
(2,114
|
)
|
|
$
|
25,482
|
|
$
|
24,938
|
|
$
|
680
|
|
$
|
2,409
|
|
$
|
(1,445
|
)
|
|
$
|
26,582
|
17
The amount shown for each period in the “Corporate Expenses” column above consists of expenses that are not allocated to the business segments. These non-allocated corporate expenses include salaries and benefits of certain corporate staff and expenses such as audit fees, investor relations, stock listing fees, director and officer liability insurance, and director fees and expenses.
The Company’s CODM evaluates each segment based on Adjusted EBITDA, and we therefore consider Adjusted EBITDA to be a primary measure of operating performance of our operating segments. We define Adjusted EBITDA as earnings before investment income, interest expense, taxes, depreciation, amortization and stock-based compensation, gain on legal settlement and other adjustments as identified below. The adjustments to our results prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) to calculate Adjusted EBITDA are itemized below (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August
31,
|
|
August
31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net
income (loss)
|
|
$
|
12,232
|
|
|
$
|
521
|
|
|
$
|
9,579
|
|
|
$
|
(2,138
|
)
|
Investment income
|
|
|
(396
|
)
|
|
|
(455
|
)
|
|
|
(729
|
)
|
|
|
(908
|
)
|
Interest expense
|
|
|
2,567
|
|
|
|
2,474
|
|
|
|
5,085
|
|
|
|
4,898
|
|
Income tax provision (benefits)
|
|
|
3,699
|
|
|
|
864
|
|
|
|
2,619
|
|
|
|
(255
|
)
|
Depreciation
|
|
|
1,958
|
|
|
|
2,211
|
|
|
|
3,983
|
|
|
|
4,032
|
|
Amortization of intangible assets
|
|
|
3,710
|
|
|
|
3,856
|
|
|
|
7,568
|
|
|
|
7,346
|
|
Stock-based compensation
|
|
|
2,227
|
|
|
|
1,621
|
|
|
|
4,044
|
|
|
|
3,605
|
|
Equity in net loss of affiliate
|
|
|
376
|
|
|
|
372
|
|
|
|
713
|
|
|
|
684
|
|
Acquisition and integration expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,539
|
|
Non-cash COGS from inventory fair value write-up
|
|
|
-
|
|
|
|
309
|
|
|
|
-
|
|
|
|
4,319
|
|
Legal expenses for LoJack battery performance issue
|
|
|
430
|
|
|
|
1,080
|
|
|
|
927
|
|
|
|
1,460
|
|
Litigation
provision
|
|
|
411
|
|
|
|
-
|
|
|
|
6,486
|
|
|
|
-
|
|
Gain
on legal settlement
|
|
|
(15,032
|
)
|
|
|
-
|
|
|
|
(15,032
|
)
|
|
|
-
|
|
Other
|
|
|
119
|
|
|
|
-
|
|
|
|
239
|
|
|
|
-
|
|
Adjusted EBITDA
|
|
$
|
12,301
|
|
|
$
|
12,853
|
|
|
$
|
25,482
|
|
|
$
|
26,582
|
|
It is not practicable for
the Company to report identifiable assets by segment because these businesses
share resources, functions and facilities.
Revenues by geographic area
are as follows (in thousands):
|
|
Six Months Ended
|
|
|
August
31,
|
|
|
2017
|
|
2016
|
United States
|
|
$
|
129,744
|
|
$
|
136,751
|
Europe, Middle East and Africa
|
|
|
22,536
|
|
|
25,566
|
South America
|
|
|
5,779
|
|
|
5,737
|
Canada
|
|
|
7,561
|
|
|
4,143
|
Asia
and Pacific Rim
|
|
|
6,120
|
|
|
3,425
|
All
other
|
|
|
6,108
|
|
|
6,004
|
|
|
$
|
177,848
|
|
$
|
181,626
|
Revenues by geographic area
are based upon the country of billing. The geographic location of distributors
and OEM customers may be different from the geographic location of the ultimate
end users of the products and services provided by the Company. No single
non-U.S. country accounted for more than 10% of the Companys revenue in the
three and six months ended August 31, 2017 and 2016.
NOTE 14 LEGAL
PROCEEDINGS
EVE battery claim
On October 27, 2014, LoJack
and LoJack Equipment Ireland DAC (LJEI), a wholly owned subsidiary of LoJack,
commenced arbitration proceedings against EVE Energy Co., Ltd. (EVE). LoJack
and LJEI alleged that EVE breached representations and warranties made in supply
agreements relating to the quality and performance of battery packs supplied by
EVE. On June 2, 2017, we were notified that the Hong Kong International
Arbitration Centre rendered a decision and awarded damages to us (the Damage
Award) for EVEs breach of contract.
18
On June 9, 2017, we entered
into a settlement agreement with EVE and its controlling shareholder EVE
Holdings Limited to resolve the Damage Award by having EVE Holdings Limited, the
parent company of EVE, make payments to us in the aggregate amount of
approximately $46 million, which amount is net of attorneys fees and insurance
subrogation payment (the Settlement). These amounts are to be reported as
other non-operating income in our consolidated statement of income upon receipt.
In June 2017, we received approximately $15 million of the $46 million net
amount, which is reported as other non-operating income in our consolidated
statement of income for the three and six month periods ended August 31, 2017.
Pursuant to the Settlement, there are three remaining installments due to be
received by us on October 31, 2017, February 28, 2018 and June 7, 2018 of
approximately $13 million, $13 million and $5 million, respectively.
There have been no material
developments in the claims by Omega and Tracker, each as reported in our
Quarterly Report on Form 10-Q for the quarter ended May 31, 2017 that was filed
with the U.S. Securities and Exchange Commission on June 27, 2017.
In addition to the
foregoing matters, from time to time as a normal consequence of doing business,
various claims and litigation may be asserted or commenced against us. In
particular, in the ordinary course of business, we may receive claims concerning
contract performance, or claims that our products or services infringe the
intellectual property of third parties. While the outcome of any such claims or
litigation cannot be predicted with certainty, management does not believe that
the outcome of any of such matters existing at the present time would have a
material adverse effect on our consolidated results of operations, financial
condition and cash flows.
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussion and analysis
of financial condition and results of operations are based upon our 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 our 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 Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) under Part II, Item 7 of our
Annual Report on Form 10-K for the year ended February 28, 2017, as filed with
the U.S. Securities and Exchange Commission on May 15, 2017, and include the
following areas:
●
|
Allowance for doubtful accounts;
|
●
|
Inventory write-downs;
|
●
|
Product warranties;
|
●
|
Deferred income tax assets and uncertain tax positions;
|
●
|
Impairment assessments of goodwill, purchased intangible assets and other long-lived assets;
|
●
|
Stock-based compensation expense; and
|
●
|
Revenue recognition.
|
There have been no
significant changes to these accounting policies as of August 31, 2017.
RESULTS OF OPERATIONS
OUR COMPANY
We are a telematics pioneer
leading a transformation in a global connected economy. We help reinvent
businesses and improve lives around the globe with technology solutions that
streamline complex Internet of Things (IoT) deployments and bring intelligence
to the edge. Our software applications, scalable cloud services, and intelligent
devices collect and assess business-critical data from mobile assets, in-transit
cargo, companies, state and local governments and people. Prior to fiscal 2018,
our business was organized into two reportable segments Wireless Datacom and
Satellite. The Satellite business ceased operations in August 2016 at which time
we began reporting under one reportable segment: Wireless DataCom.
19
In the quarter ended August
31, 2017, we realigned our operations and now we operate under two reportable
segments for financial reporting purposes Telematics Systems and Software
& Subscription Services. Our organizational structure is based on a number
of factors that our CEO, the Chief Operating Decision Maker, uses to evaluate
and operate the business, which include, but are not limited to, customer base,
homogeneity of products, and technology within these two segments. A description
of the reportable business segments as follows:
TELEMATICS
SYSTEMS
Our Telematics Systems
reportable segment offers a series of Mobile Resource Management (MRM)
telematics products and applications for the broader IoT market, which enable
customers to optimize their operations by collecting, monitoring and effectively
reporting business-critical information and desired intelligence from high-value
remote and mobile assets. Our telematics products include asset tracking units,
mobile telematics devices, fixed and mobile wireless gateways and multi-mode
wireless routers. These wireless networking devices underpin a wide range of our
own and third party solutions worldwide, and are ideal for applications
demanding secure, reliable and business-critical communications.
SOFTWARE &
SUBSCRIPTION SERVICES
Our Software &
Subscription Services reportable segment offers cloud-based, application
enablement and telematics service platforms that facilitate integration of our
own applications, as well as those of third parties, through open Applications
Programming Interfaces (APIs) to deliver full-featured IoT solutions to a wide
range of customers and markets. Our scalable proprietary SaaS offerings enable
rapid and cost-effective development of high-value solutions for customers all
around the globe.
OPERATING
RESULTS
Three months ended
August 31, 2017 compared to three months ended August 31, 2016
Revenue by Segment
|
|
Three Months Ended
August 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
(In thousands)
|
|
$
|
|
Revenue
|
|
$
|
|
Revenue
|
|
$
Change
|
|
%
Change
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telematics Systems
|
|
$
|
74,070
|
|
82.5
|
%
|
|
$
|
68,851
|
|
76.1
|
%
|
|
$
|
5,219
|
|
|
7.6
|
%
|
Software & Subscription Services
|
|
|
15,697
|
|
17.5
|
%
|
|
|
14,956
|
|
16.5
|
%
|
|
|
741
|
|
|
5.0
|
%
|
Satellite
|
|
|
-
|
|
0.0
|
%
|
|
|
6,672
|
|
7.4
|
%
|
|
|
(6,672
|
)
|
|
(100.0
|
%)
|
Total
|
|
$
|
89,767
|
|
100.0
|
%
|
|
$
|
90,479
|
|
100.0
|
%
|
|
$
|
(712
|
)
|
|
(0.8
|
%)
|
Telematics Systems revenue
increased by $5.2 million, or 7.6%, for the three months ended August 31, 2017
compared to the same period last year. The increase was due to an increase in
sales volume for our MRM telematics product as demand from our top customers
increased due to more favorable conditions in the fleet management and asset
tracking markets.
Software & Subscription
Services revenue increased by $0.7 million or 5.0% for the three months ended
August 31, 2017 compared to the same period last year. The increase was
primarily driven by an increase in subscriber base, especially in Italy, along
with a favorable Euro to U.S. Dollar exchange rate compared to the same prior
fiscal period.
The Satellite business,
which generated $6.7 million in revenues for the three months ended August 31,
2016, ceased operations effective on that date.
20
Cost of Revenues and
Gross Profit
|
|
Three Months Ended
August 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
(In thousands)
|
|
$
|
|
Revenue
|
|
$
|
|
Revenue
|
|
$
Change
|
|
%
Change
|
Revenues
|
|
$
|
89,767
|
|
100.0
|
%
|
|
$
|
90,479
|
|
100.0
|
%
|
|
$
|
(712
|
)
|
|
(0.8
|
%)
|
Cost
of revenues
|
|
|
52,929
|
|
59.0
|
%
|
|
|
52,865
|
|
58.4
|
%
|
|
|
(64
|
)
|
|
(0.1
|
%)
|
Gross profit
|
|
$
|
36,838
|
|
41.0
|
%
|
|
$
|
37,614
|
|
41.6
|
%
|
|
$
|
(776
|
)
|
|
(2.1
|
%)
|
Consolidated gross profit
decreased by $0.8 million or 2.1% for the three months ended August 31, 2017
compared to the same period prior year. The decrease was primarily as a result
of the shutdown of the Satellite business effective August 31, 2016, which
generated $1.4 million of gross profit for the three months ended August 31,
2016. Excluding the Satellite business, our gross profit increased $0.6 million
or 1.7% for the three months ended August 31, 2017 compared to the same period
in prior year. The increase was due to higher MRM revenue. Consolidated gross
margin declined to 41.0% for the three months ended August 31, 2017 from 41.6%
for the same period prior year. This decline was primarily due to lower gross
margin on LoJack Stolen Vehicle Recovery products.
Operating Expenses
|
|
Three Months Ended
August 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
(In thousands)
|
|
$
|
|
Revenue
|
|
$
|
|
Revenue
|
|
$
C
hange
|
|
%
Change
|
Research and development
|
|
$
|
6,725
|
|
7.5
|
%
|
|
$
|
5,885
|
|
6.5
|
%
|
|
$
|
(840
|
)
|
|
(14.3
|
%)
|
Selling and marketing
|
|
|
12,515
|
|
13.9
|
%
|
|
|
12,683
|
|
14.0
|
%
|
|
|
168
|
|
|
1.3
|
%
|
General and administrative
|
|
|
10,756
|
|
12.0
|
%
|
|
|
11,284
|
|
12.5
|
%
|
|
|
528
|
|
|
4.7
|
%
|
Intangible asset amortization
|
|
|
3,710
|
|
4.1
|
%
|
|
|
3,856
|
|
4.3
|
%
|
|
|
146
|
|
|
3.8
|
%
|
Total
|
|
$
|
33,706
|
|
37.5
|
%
|
|
$
|
33,708
|
|
37.3
|
%
|
|
$
|
2
|
|
|
0.0
|
%
|
Consolidated research and
development expense increased by $0.8 million or 14.3% for the three months
ended August 31, 2017 compared to the same period last year. The increase was
primarily driven by increased employee compensation and benefits due to
increased headcount despite the shutdown of the Satellite business in fiscal
year 2017. Consolidated research and development expense as a percentage of
revenues increased to 7.5% for the three months ended August 31, 2017 compared
to 6.5% in the same period last year. We are investing in research and
development of new products and technologies to be sold through the U.S. and
international SVR channels that we acquired last year with the purchase of
LoJack, as well as our pre-existing sales channels.
Consolidated selling and
marketing expense decreased by $0.2 million or 1.3% for the three months ended
August 31, 2017 compared to the same period last year. The decrease was
primarily driven by decline in employee benefits expenses as we reduced
headcount in this area, which was partially offset by an increase in
professional services and web design costs as we continue our CalAmp and LoJack
brand refresh initiatives through this fiscal year.
Consolidated general and
administrative (G&A) expenses decreased by $0.5 million or 4.7% for the
three months ended August 31, 2017 compared to the same period last year. The
decrease was attributable primarily to the shutdown of the Satellite business
effective August 31, 2016.
Amortization of intangibles
decreased by $0.1 million or 3.8% for the three months ended August 31, 2017
compared to the same period prior year. The decrease was due to completion of
amortization on various certain older intangible assets.
Non-operating Income
(Expense), Net
Investment income decreased
by $0.1 million to $0.4 million for the three months ended August 31, 2017 from
$0.5 million for the three months ended August 31, 2016. The decrease was due
primarily to a decline in investment income on Rabbi Trust assets that serve to
informally fund the non-qualified deferred compensation plan.
21
Interest expense increased
by $0.1 million to $2.6 million for the three months ended August 31, 2017 from
$2.5 million for the three months ended August 31, 2016 due to interest expense
associated with the convertible Notes issued in May 2015.
See Note 14 to the
accompanying unaudited condensed consolidated financial statements for
information concerning the $15.0 million gain on the legal Settlement with the
supplier.
Other non-operating income
was $0.3 million for three months ended August 31, 2017 compared to other
expense of $0.1 million for the three months ended August 31, 2016, due to a
favorable fluctuation in foreign exchange rates, primarily Euros, to US dollars.
Overall Profitability
Measures
GAAP-basis net income in
the three months ended August 31, 2017 and 2016 was $12.2 million and $0.5
million, respectively. The increase is primarily the result of the $15.0 million
non-operating gain from the legal Settlement with a supplier recognized in the
latest quarter. Partially offsetting the effects of this non-operating gain were
lower gross profit of $0.8 million due primarily to the closure of the Satellite
business last year and higher GAAP-basis income tax expense of $2.8 million
current year. The higher income tax expense is primarily due to U.S. and foreign
taxes on the $15.0 million gain recognized on the legal Settlement.
Telematics Systems Adjusted
EBITDA in the three months ended August 31, 2017 decreased $1.9 million compared
to the same period prior year due to higher research and development expenses
and higher selling and marketing expenses, while Adjusted EBITDA for Software
and Subscription Services increased $2.4 million compared to the same period in
prior year due primarily to lower selling and marketing expenses and lower
general and administrative expenses.
See Note 13 for information
related to Adjusted EBITDA by reportable segments.
Six months ended August
31, 2017 compared to six months ended August 31, 2016
Revenue by Segment
|
|
Six Months Ended
August 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
(In thousands)
|
|
$
|
|
Revenue
|
|
$
|
|
Revenue
|
|
$
Change
|
|
%
Change
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telematics Systems
|
|
$
|
146,066
|
|
82.1
|
%
|
|
$
|
135,974
|
|
74.9
|
%
|
|
$
|
10,092
|
|
|
7.4
|
%
|
Software & Subscription Services
|
|
|
31,782
|
|
17.9
|
%
|
|
|
30,583
|
|
16.8
|
%
|
|
|
1,199
|
|
|
3.9
|
%
|
Satellite
|
|
|
-
|
|
0.0
|
%
|
|
|
15,069
|
|
8.3
|
%
|
|
|
(15,069
|
)
|
|
(100.0
|
%)
|
Total
|
|
$
|
177,848
|
|
100.0
|
%
|
|
$
|
181,626
|
|
100.0
|
%
|
|
$
|
(3,778
|
)
|
|
(2.1
|
%)
|
Telematics Systems revenue
increased by $10.1 million or 7.4%, and Software & Subscription Services
revenue increased by $1.2 million or 3.9%, for the six months ended August 31,
2017 compared to the same period last year. Each of these increases is due to
the same reasons cited above for such segment for the three months ended August
31, 2017.
The Satellite business,
which generated $15.1 million in revenues for the six months ended August 31,
2016, ceased operations effective on that date.
Cost of Revenues and
Gross Profit
|
|
Six Months Ended August
31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
(In
thousands)
|
|
$
|
|
Revenue
|
|
$
|
|
Revenue
|
|
$ Change
|
|
% Change
|
Revenues
|
|
$
|
177,848
|
|
100.0
|
%
|
|
$
|
181,626
|
|
100.0
|
%
|
|
$
|
(3,778
|
)
|
|
(2.1
|
%)
|
Cost of revenues
|
|
|
103,567
|
|
58.2
|
%
|
|
|
109,178
|
|
60.1
|
%
|
|
|
5,611
|
|
|
5.1
|
%
|
Gross profit
|
|
$
|
74,281
|
|
41.8
|
%
|
|
$
|
72,448
|
|
39.9
|
%
|
|
$
|
1,833
|
|
|
2.5
|
%
|
22
Consolidated gross profit
increased by $1.8 million or 2.5% for the six months ended August 31, 2017
compared to the same period last year. The increase was due to a $6.0 million
increase in gross profit on MRM telematics products on higher revenue, partially
offset by the Satellite gross profit in the prior year, which did not recur in
the current year due to the shutdown of that business. Gross margin increased to
41.8% for the six months ended August 31, 2017 from 39.9% for the same period of
the prior year primarily due to the presence of the lower margin Satellite
business in the prior year.
Operating
Expenses
|
|
Six Months Ended
August 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
(In thousands)
|
|
$
|
|
Revenue
|
|
$
|
|
Revenue
|
|
$
Change
|
|
%
Change
|
Research and development
|
|
$
|
12,557
|
|
7.1
|
%
|
|
$
|
11,976
|
|
6.6
|
%
|
|
$
|
(581
|
)
|
|
(4.9
|
%)
|
Selling and marketing
|
|
|
25,186
|
|
14.2
|
%
|
|
|
23,991
|
|
13.2
|
%
|
|
|
(1,195
|
)
|
|
(5.0
|
%)
|
General and administrative
|
|
|
27,166
|
|
15.3
|
%
|
|
|
27,267
|
|
15.0
|
%
|
|
|
101
|
|
|
0.4
|
%
|
Intangible asset amortization
|
|
|
7,568
|
|
4.3
|
%
|
|
|
7,346
|
|
4.0
|
%
|
|
|
(222
|
)
|
|
(3.0
|
%)
|
Total
|
|
$
|
72,477
|
|
40.9
|
%
|
|
$
|
70,580
|
|
38.8
|
%
|
|
$
|
(1,897
|
)
|
|
(2.7
|
%)
|
Consolidated research and
development expense increased by $0.6 million or 4.9% for the six months ended
August 31, 2017 compared to the same period last year. The increase was
attributable to an increase in employee compensation and benefits due to
increased headcount, partially offset by a decline in consulting and outside
services expenses. Consolidated research and development expense as a percentage
of revenue increased to 7.1% for the six months ended August 31, 2017 compared
to 6.6% in the same period prior year for the same reason cited above for the
three months ended August 31, 2017.
Consolidated selling and
marketing expense increased by $1.2 million or 5.0% for the six months ended
August 31, 2017 compared to the same period last year. The increase was due to
an increase in professional services and web design costs as we continue our
CalAmp and LoJack brand refresh initiatives through this fiscal year. These
initiatives also account for the increase in consolidated selling and marketing
expense as a percentage of revenues to 14.2% for the six months ended August 31,
2017 compared to 13.2% in the same period prior year.
Consolidated general and
administrative expenses decreased by $0.1 or 0.4% for the six months ended
August 31, 2017 compared to the same period last year. The decrease was due to a
reduction in professional service fees, employee compensation and benefits
expense as well as reduced headcount in this area. The decline in these expense
was partially offset by higher legal expenses as we work to address existing
legal matters.
Amortization of intangibles
increased $0.2 million or 3.0% for the six months ended August 31, 2017 compared
to the same period last year. These increases were due to the amortization of
new intangibles associated with the acquisition of LoJack in March
2016.
Non-operating Income
(Expense), Net
Investment income was $0.7
million for the six months ended August 31, 2017 as compared to investment
income of $0.9 million for the six months ended August 31, 2016. The decline was
due primarily to a reduction in investment income on Rabbi Trust
assets.
Interest expense increased
to $5.1 million for the six months ended August 31, 2017 as compared to $4.9
million for the six months ended August 31, 2016 due to interest expense
associated with the convertible Notes issued in May 2015.
See Note 14 to the
accompanying unaudited condensed consolidated financial statements for
information concerning the $15.0 million gain on the legal Settlement with the
supplier.
Other non-operating income
remained consistent at $0.4 million year over year.
23
Overall Profitability
Measures
GAAP-basis net income in
the six months ended August 31, 2017 was $9.6 million, compared to a net loss of
$2.1 million in the same period of the prior year. The $11.7 million higher net
income in the latest six-month period is primarily attributable to the $15.0
million non-operating gain from the legal Settlement with a supplier, partially
offset by higher GAAP-basis income tax expense of $2.9 million.
Telematics Systems Adjusted
EBITDA in the six months ended August 31, 2017 was $24.3 million, decreased $0.6
million from the same period prior year due to higher operating expenses
partially offset by higher gross profit, while Adjusted EBITDA for Software and
Subscription Services was $3.3 million, increased $2.6 million from the same
period prior year due primarily to lower selling and marketing expenses and
lower general and administrative expenses.
See Note 13 for information
related to Adjusted EBITDA by reportable segments.
Income Tax Provision
The Company evaluates its
estimated annual effective tax rate (ETR) on a quarterly basis based on
current and forecasted operating results. The relationship between the Companys
income tax provision or benefit and its pretax book income or loss can vary
significantly from period to period considering, among other factors, the
overall level of pretax book income or loss and changes in the blend of income
or loss that is taxed at high effective rates domestically versus pretax book
income or loss that is taxed at low effective rates internationally.
Consequently, the Companys ETR may fluctuate significantly period to period and
may make quarterly comparisons less than meaningful.
The effective income tax
rate was 20.3% in the six months ended August 31, 2017 compared to 14.9% in the
same period prior year. The effective tax rate is lower than the statutory U.S.
federal income tax rate of 35% due primarily to certain undistributed foreign
earnings, a substantial portion of which was generated by the Companys Ireland
subsidiary, for which no U.S. taxes are provided because such earnings are
intended to be indefinitely reinvested outside the U.S. The
higher
effective tax
rate
during first
six months of fiscal 2018 as compared
to the same periods in fiscal 2017 is due primarily to
the aforementioned Settlement for which over half was apportioned to the US.
LIQUIDITY AND CAPITAL
RESOURCES
In May 2015, the Company
issued $172.5 million aggregate principal amount of 1.625% convertible senior
unsecured Notes due May 15, 2020. The Company has used, and expects to continue
to use, the remaining net proceeds from the offering of the convertible Notes
for general corporate purposes including, but not limited to, acquisitions or
other strategic transactions and working capital.
The Companys primary
sources of liquidity are its cash, cash equivalents and marketable securities.
During the six months ended August 31, 2017, cash and cash equivalents increased
by $32.9 million. The increase was primarily driven by the $15.0 million net
cash received related to the EVE legal Settlement in June 2017, $21.0 million in
other cash provided by operations, $2.7 million in net proceeds from marketable
securities and partially offset by $3.7 million used for capital expenditures
and $2.3 million for taxes paid related to net share settlement of vested equity
awards.
As of August 31, 2017, we
have $130.6 million of cash, cash equivalents and marketable securities, of
which
$27.8
million is located outside of the U.S. Amounts outside the U.S. are
used to support the operations of our international subsidiaries and to fund
potential future investments.
The Company expects to
receive three additional installments from the EVE legal Settlement on October
31, 2017, February 28, 2018 and June 7, 2018 of which we will receive net
amounts of approximately $13 million, $13 million and $5 million,
respectively.
We believe that our cash,
cash equivalents, potential cash flows from operations, and our marketable
securities will be sufficient to satisfy our currently anticipated cash
requirements through at least the next 12 months.
Contractual Cash
Obligations
During the second quarter
of fiscal 2018, there were no significant changes to our estimates of future
payments under our fixed contractual obligations and commitments as presented in
Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, included in our Annual Report on Form 10-K for our fiscal
year ended February 28, 2017 as filed with the Securities and Exchange
Commission on May 15, 2017.
24
FORWARD LOOKING
STATEMENTS
Forward looking statements
in this Form 10-Q which include, without limitation, statements relating to our
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 our current views with respect to future
events and financial performance and are subject to certain risks and
uncertainties that are difficult to predict, including, without limitation,
product demand, competitive pressures and pricing declines in our 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 collect the remaining installments under the Settlement with Eve Holdings Limited,
and other risks and uncertainties that are set forth in Part I,
Item 1A of the Annual Report on Form 10-K for the year ended February 28, 2017
as filed with the U.S. Securities and Exchange Commission on May 15, 2017. Such
risks and uncertainties could cause actual results to differ materially from
historical or anticipated results. Although we believe the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, we can give no assurance that our expectations will be attained. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.