AXON ENTERPRISE, INC. [AXON] Filings

10-Q 1 axon-20240630x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024 or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-16391

Axon Enterprise, Inc.

(Exact name of registrant as specified in its charter)


Delaware	86-0741227
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

17800 North 85th Street
Scottsdale, Arizona	85255
(Address of principal executive offices)	(Zip Code)

(480) 991-0797

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00001 Par Value	AXON	The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated Filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of July 31, 2024 was 75,574,344.

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AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2024

			Page
Special Note Regarding Forward-Looking Statements			ii

PART I - FINANCIAL INFORMATION			1
	Item 1. Financial Statements (unaudited)		1
		Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023	1
		Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2024 and 2023	2
		Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023	3
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	5
		Notes to Unaudited Condensed Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		44
	Item 4. Controls and Procedures		45
PART II - OTHER INFORMATION			45
	Item 1. Legal Proceedings		45
	Item 1A. Risk Factors		45
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		72
	Item 3. Defaults Upon Senior Securities		72
	Item 4. Mine Safety Disclosures		72
	Item 5. Other Information		72
	Item 6. Exhibits		73
	SIGNATURES		74

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Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; statements related to recently completed acquisitions; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the amounts and benefits of, research and development (“R&D”) investments; the sufficiency of our liquidity and financial resources; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Annual Report on Form 10-K for the year ended December 31, 2023. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; the ability of law enforcement agencies to obtain funding, including based on tax revenues; our ability to design, introduce and sell new products, services or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to win bids through the open bidding process for governmental agencies; our ability to manage our supply chain and avoid production delays, shortages and impacts to expected gross margins; the impacts of inflation, macroeconomic conditions and global events; the impact of catastrophic events or public health emergencies; the impact of stock-based compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity or sentiment regarding our products; the impact of various factors on projected gross margins; defects in, or misuse of, our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the United States and in foreign markets, especially related to the classification of our products by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; our ability to integrate acquired businesses; the impact of declines in the fair values or impairment of our investments, including our strategic investments; our ability to attract and retain key personnel; litigation or inquiries and related time and costs; and counter-party risks relating to cash balances held in excess of federally insured limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. This Quarterly Report on Form 10-Q lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Readers can find them under the heading “Risk Factors” in this Quarterly Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission (“SEC”). Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30,		December 31,
	2024		2023
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	566,452	$	598,545
Marketable securities		107,550		77,940
Short-term investments		402,470		644,054
Accounts and notes receivable, net of allowance of $3,258 and $2,392 as of June 30, 2024 and December 31, 2023, respectively		386,058		417,690
Contract assets, net		343,422		275,779
Inventory		277,753		269,855
Prepaid expenses and other current assets		122,033		112,786
Total current assets		2,205,738		2,396,649
Property and equipment, net		215,324		200,533
Deferred tax assets, net		226,801		229,513
Intangible assets, net		85,571		19,539
Goodwill		307,758		57,945
Long-term notes receivable, net		3,044		2,588
Long-term contract assets, net		107,216		77,710
Strategic investments		363,134		231,730
Other long-term assets		227,784		220,638
Total assets	$	3,742,370	$	3,436,845
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	104,077	$	88,326
Accrued liabilities		141,614		188,230
Current portion of deferred revenue		485,869		491,691
Customer deposits		23,049		21,935
Other current liabilities		11,504		9,787
Total current liabilities		766,113		799,969
Deferred revenue, net of current portion		291,424		281,852
Liability for unrecognized tax benefits		19,008		18,049
Long-term deferred compensation		14,050		11,342
Long-term lease liabilities		41,705		33,550
Convertible notes, net		678,678		677,113
Other long-term liabilities		2,552		2,936
Total liabilities		1,813,530		1,824,811
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively		—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 75,573,214 and 75,301,424 shares issued and outstanding as of June 30, 2024, and December 31, 2023, respectively		1		1
Additional paid-in capital		1,493,716		1,347,410
Treasury stock at cost, 20,220,227 shares as of June 30, 2024 and December 31, 2023		(155,947)		(155,947)
Retained earnings		605,264		431,249
Accumulated other comprehensive loss		(14,194)		(10,679)
Total stockholders’ equity		1,928,840		1,612,034
Total liabilities and stockholders’ equity	$	3,742,370	$	3,436,845

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net sales from products	$	295,185	$	233,474	$	567,233	$	452,863
Net sales from services		208,914		141,131		397,602		264,785
Net sales		504,099		374,605		964,835		717,648
Cost of product sales		145,154		101,192		296,852		208,776
Cost of service sales		55,210		41,292		104,202		72,649
Cost of sales		200,364		142,484		401,054		281,425
Gross margin		303,735		232,121		563,781		436,223
Operating expenses:
Sales, general and administrative		169,427		119,922		322,096		236,489
Research and development		101,434		71,940		192,531		142,867
Total operating expenses		270,861		191,862		514,627		379,356
Income from operations		32,874		40,259		49,154		56,867
Interest income, net		9,782		9,663		20,156		19,329
Other income (loss), net		7,934		(62,031)		147,000		(46,421)
Income (loss) before provision for income taxes		50,590		(12,109)		216,310		29,775
Provision for (benefit from) income taxes		9,793		(24,529)		42,295		(27,784)
Net income	$	40,797	$	12,420	$	174,015	$	57,559
Net income per common and common equivalent shares:
Basic	$	0.54	$	0.17	$	2.31	$	0.78
Diluted	$	0.53	$	0.16	$	2.25	$	0.77
Weighted average number of common and common equivalent shares outstanding:
Basic		75,511		74,224		75,433		73,435
Diluted		77,550		75,780		77,346		74,834
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	40,797	$	12,420	$	174,015	$	57,559
Foreign currency translation adjustments		(2,727)		(557)		(3,528)		1,119
Unrealized gain (loss) on available-for-sale investments		119		(850)		13		(666)
Comprehensive income	$	38,189	$	11,013	$	170,500	$	58,012

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)


											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity
Balance, December 31, 2023	75,301,424	$	1	$	1,347,410	20,220,227	$	(155,947)	$	431,249	$	(10,679)	$	1,612,034
Issuance of common stock under employee plans, net	164,747		—		(2,710)	—		—		—		—		(2,710)
Stock-based compensation	—		—		75,115	—		—		—		—		75,115
Issuance of replacement awards in connection with acquisitions	—		—		1,265	—		—		—		—		1,265
Net income	—		—		—	—		—		133,218		—		133,218
Other comprehensive loss, net	—		—		—	—		—		—		(907)		(907)
Balance, March 31, 2024	75,466,171	$	1	$	1,421,080	20,220,227	$	(155,947)	$	564,467	$	(11,586)	$	1,818,015
Issuance of common stock under employee plans, net	107,043		—		(2,185)	—		—		—		—		(2,185)
Stock-based compensation	—		—		74,821	—		—		—		—		74,821
Net income	—		—		—	—		—		40,797		—		40,797
Other comprehensive loss, net	—		—		—	—		—		—		(2,608)		(2,608)
Balance, June 30, 2024	75,573,214	$	1	$	1,493,716	20,220,227	$	(155,947)	$	605,264	$	(14,194)	$	1,928,840

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											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity
Balance, December 31, 2022	71,474,581	$	1	$	1,174,594	20,220,227	$	(155,947)	$	257,022	$	(7,179)	$	1,268,491
Issuance of common stock	154,500		—		33,650	—		—		—		—		33,650
Issuance of common stock under employee plans, net	335,629		—		(34,841)	—		—		—		—		(34,841)
Stock options exercised	1,901,535		—		54,346	—		—		—		—		54,346
Stock-based compensation	—		—		34,350	—		—		—				34,350
Issuance of common stock for business combination contingent consideration	7,817		—		—	—		—		—		—		—
Net income	—		—		—	—		—		45,139		—		45,139
Other comprehensive income, net	—		—		—	—		—		—		1,860		1,860
Balance, March 31, 2023	73,874,062	$	1	$	1,262,099	20,220,227	$	(155,947)	$	302,161	$	(5,319)	$	1,402,995
Issuance of common stock	313,094		—		61,156	—		—		—		—		61,156
Issuance of common stock under employee plans, net	570,357		—		(62,214)	—		—		—		—		(62,214)
Stock options exercised	5,491		—		157	—		—		—		—		157
Stock-based compensation	—		—		31,891	—		—		—		—		31,891
Net income	—		—		—	—		—		12,420		—		12,420
Other comprehensive loss, net	—		—		—	—		—		—		(1,407)		(1,407)
Balance, June 30, 2023	74,763,004	$	1	$	1,293,089	20,220,227	$	(155,947)	$	314,581	$	(6,726)	$	1,444,998

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net income	$	174,015	$	57,559
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation		149,936		66,241
(Gain) loss on strategic investments and marketable securities, net		(105,386)		46,342
Realized gain on remeasurement of previously held minority interest, net		(42,313)		—
Depreciation and amortization		24,564		14,169
Bond amortization		(8,387)		(8,036)
Deferred income taxes		(7,755)		(37,605)
Noncash lease expense		3,516		2,978
Amortization of debt issuance costs		1,565		1,531
Unrecognized tax benefits		924		2,867
Other noncash items		4,165		1,457
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(60,513)		(102,205)
Inventory		(8,116)		(43,585)
Prepaid expenses and other assets		(4,252)		(49,290)
Accounts payable, accrued and other liabilities		(43,071)		(35,976)
Deferred revenue		(12,067)		69,886
Net cash provided by (used in) operating activities		66,825		(13,667)
Cash flows from investing activities:
Purchases of investments		(414,361)		(246,049)
Proceeds from call, maturity, and sale of investments		664,358		381,082
Purchases of property and equipment		(27,512)		(21,650)
Proceeds from disposal of property and equipment		34		3
Purchases of intangible assets		—		(187)
Strategic investments		(76,628)		(10,917)
Business acquisitions, net of cash acquired		(237,796)		(21,026)
Net cash (used in) provided by investing activities		(91,905)		81,256
Cash flows from financing activities:
Net proceeds from equity offering		—		94,806
Proceeds from options exercised		—		54,503
Income and payroll tax payments for net-settled stock awards		(4,895)		(97,055)
Net cash (used in) provided by financing activities		(4,895)		52,254
Effect of exchange rate changes on cash and cash equivalents		(2,086)		806
Net (decrease) increase in cash and cash equivalents		(32,061)		120,649
Cash and cash equivalents and restricted cash, beginning of period		600,670		355,552
Cash and cash equivalents and restricted cash, end of period	$	568,609	$	476,201

Supplemental disclosures:
Cash and cash equivalents	$	566,452	$	474,203
Restricted cash (Note 1)		2,157		1,998
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	568,609	$	476,201

Cash paid for income taxes, net of refunds	$	47,399	$	25,052

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	5,299	$	750

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Note 1 - Organization and Summary of Significant Accounting Policies

Axon Enterprise, Inc. (“Axon”, the “Company”, “we”, or “us”) is a market-leading provider of public safety technology solutions. Our mission is to protect life in service of promoting peace, justice and strong institutions.

The accompanying unaudited condensed consolidated financial statements include the accounts of Axon Enterprise, Inc. and our subsidiaries. All intercompany accounts, transactions and profits have been eliminated.

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2023, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2023. Our results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

●

revenue recognition,

●

stock-based compensation,

●

business combinations,

●

product warranty reserves,

●

inventory valuation,

●

valuation of goodwill, intangible and long-lived assets,

●

valuation of strategic investments,

●

recognition, measurement and valuation of current and deferred income taxes, and

●

recognition and measurement of contingencies and accrued litigation expense.

The Company believes that estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from those estimates.

Geographic Information and Major Customers / Suppliers

For the three and six months ended June 30, 2024 and 2023, no individual country outside the United States represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three and six months ended June 30, 2024 and 2023, no customer represented more than 10% of total net sales. At June 30, 2024 and December 31, 2023, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off-the-shelf and custom components, including finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components and sub-assemblies from suppliers located in the United States, Taiwan, China, Mexico, Vietnam and the Republic of Korea. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own substantially all injection molded component tooling, designs and test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases. Although we have experienced supply chain disruptions relating to materials and port constraints, we have remained focused on closely managing our supply chain. We continue to bolster our strategic relationships in our supply chain, identifying

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secondary/alternate sourcing, adjusting build plans accordingly, and building in logistic modes in support of our increasing demand while working to minimize disruption to customers. We acquire most of our components on a purchase order basis and do not currently have significant long-term purchase contracts with most component suppliers.

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units (“RSUs”). The effects of outstanding stock options, unvested RSUs, our 0.50% convertible senior notes due 2027 (the “Notes” or “2027 Notes”) and warrants to acquire shares of our common stock (the “Warrants” or “2027 Warrants”) are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Numerator for basic and diluted earnings per share:
Net income	$	40,797	$	12,420	$	174,015	$	57,559
Denominator:
Weighted average shares outstanding		75,511		74,224		75,433		73,435
Dilutive effect of stock-based awards		1,334		1,556		1,289		1,399
Dilutive effect of 2027 Notes		705		—		624		—
Diluted weighted average shares outstanding		77,550		75,780		77,346		74,834

Net income per common share:
Basic	$	0.54	$	0.17	$	2.31	$	0.78
Diluted	$	0.53	$	0.16	$	2.25	$	0.77

Potentially dilutive securities that are not included in the calculation of diluted net income per share because doing so would be antidilutive are as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Stock-based awards		4,777		129		4,778		135
2027 Notes		2,312		3,017		2,393		3,017
2027 Warrants		3,017		3,017		3,017		3,017
Total potentially dilutive securities		10,106		6,163		10,188		6,169

For additional information regarding our 2027 Notes, refer to Note 10.

Warranty Reserves

We warranty our TASER® brand conducted energy devices (“CEDs”), Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. We estimate and record a liability for standard warranty at the time products are sold. The estimates are based on historical experience and reflect management’s best estimates of costs to be incurred over the warranty period. Adjustments may be required when actual or projected costs differ. Variations in component failure rates, repair costs and the point of failure within the product life cycle are key drivers that impact our periodic re-assessment of the warranty liability.

Revenue related to separately priced extended warranties is initially recorded as deferred revenue at its allocated amount and subsequently recognized as net sales on a straight-line basis over the warranty service period. Costs related to extended warranties are charged to cost of product and service sales when the costs become probable and can be reasonably estimated.

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