News Column

PC TEL INC - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations

August 11, 2014

The following information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the consolidated financial statements for the year ended December 31, 2013 contained in our Annual Report on Form 10-K filed on March 14, 2014. Except for historical information, the following discussion contains forward looking statements that involve risks and uncertainties, including statements regarding our anticipated revenues, profits, costs and expenses and revenue mix. These forward-looking statements include, among others, those statements including the words "may," "will," "plans," "seeks," "expects," "anticipates," "intends," "believes" and words of similar meaning. Such statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those projected in these forward-looking statements. Our revenues were lower in both the three and six months ended June 30, 2014, compared to the same periods in 2013 because of lower revenues within our Connected Solutions segment. For the three months ended June 30, 2014, revenues declined $0.6 million, or 2.1%, to $26.2 million compared to the same period in 2013. For the six months ended June 30, 2014, our revenues declined $2.0 million, or 3.8% compared to the same period in 2013. Our recorded operating income improved by $0.3 million for the three months ended June 30, 2014, compared to the same period in 2013 due to the gross margin impact of higher revenues from RF Solutions. Our operating income improved $1.1 million during the six months ended June 30, 2014, compared to the same period in 2013 due to lower legal and professional fees associated with the TelWorx investigation.



Introduction

PCTEL is a global leader in propagation and optimization solutions for the wireless industry. PCTEL develops and distributes innovative antenna and engineered site solutions and designs and develops software-based radios (scanning receivers) and provides related RF engineering services for wireless network optimization.

Revenue growth for antenna products and engineered site solutions is driven by emerging wireless applications in the following markets: public safety, military, and government applications; supervisory control and data acquisition ("SCADA"), health care, energy, smart grid and agricultural applications; indoor wireless, wireless backhaul, and cellular applications. Revenue growth for scanning receiver products, interference management products, and optimization services is driven by the deployment of new wireless technology and the need for wireless networks to be tuned and reconfigured on a regular basis. We have an intellectual property portfolio related to antennas, the mounting of antennas, and scanning receivers. These patents are being held for defensive purposes and are not part of an active licensing program. We operate in two segments for reporting purposes. Our Connected Solutions segment includes our antenna and engineered site solutions. Our RF Solutions segment includes our scanning receivers and RF engineering services. Each of our segments has its own segment manager as well as its own engineering, sales and marketing, and operational general and administrative functions. All of our accounting and finance, human resources, IT and legal functions are provided on a centralized basis through the corporate function. On April 30, 2013, we divested all material assets associated with PCTEL Secure's ProsettaCore™ technology to Redwall Technologies, LLC ("Redwall"), a development organization that specializes in mobile security, military and defense projects and systems, and critical national infrastructure. Under the terms of the agreement, Redwall acquired the server and device software (the "Software"), the underlying IP, and complete development responsibility for the security products. At the closing of the divestiture, we received no upfront cash payment, but have the right to receive a royalty of 7% of the net sale price of each future sale or license of the Software and each provision of services related to the Software, if any. Under the agreement, royalties will not exceed $10.0 million in the aggregate. In accordance with accounting for discontinued operations, the consolidated financial statements separately reflect the results of PCTEL Secure as discontinued operations for the three and six months ended June 30, 2013. 28



--------------------------------------------------------------------------------

Table of Contents

Results of Operations

Three and Six Months Ended June 30, 2014 and 2013

(in thousands) Revenues by Segment Three Months Ended June 30, 2014 2013 $ Change % Change Connected Solutions $ 17,715$ 19,199 ($ 1,484 ) -7.7 % RF Solutions $ 8,574$ 7,602 972 12.8 % Corporate ($ 107 ) ($ 55 ) (52 ) not meaningful Total $ 26,182$ 26,746 ($ 564 ) -2.1 % Six Months Ended June 30, 2014 2013 $ Change % Change Connected Solutions $ 33,712$ 38,555 ($ 4,843 ) -12.6 % RF Solutions $ 16,295$ 13,374 2,921 21.8 % Corporate ($ 170 ) ($ 111 ) (59 ) not meaningful Total $ 49,837$ 51,818 ($ 1,981 ) -3.8 % Revenues decreased 2.1% in the three months ended June 30, 2014 and decreased 3.8% in the six months ended June 30, 2014, compared to the same periods in 2013. For the three months ended June 30, 2014, Connected Solutions revenues decreased 7.7% primarily due to lower revenues for both core antenna and site solution products. The decrease in site solution products is due to the elimination of unprofitable business. For the six months ended June 30, 2014, Connected Solutions revenues decreased 12.6% primarily with lower core antenna revenues. For the three and six months ended June 30, 2014, revenues for RF Solutions increased 12.8% and 21.8% compared to the same periods in 2013 due to higher revenues for both services and scanning receiver products. The increase in RF Solutions revenue is attributed to continued carrier spending increasing from 2013 levels and the rapid growth of in-building wireless network expansion. Gross Profit by Segment Three Months Ended June 30, 2014 % of Revenues 2013 % of Revenues Connected Solutions $ 5,716 32.3 % $ 5,662 29.5 % RF Solutions 5,129 59.8 % 4,876 64.1 % Corporate 6 not meaningful 10 not meaningful Total $ 10,851 41.4 % $ 10,548 39.4 % Six Months Ended June 30, 2014 % of Revenues 2013 % of Revenues Connected Solutions $ 10,832 32.1 % $ 11,673 30.3 % RF Solutions 9,587 58.8 % 8,457 63.2 % Corporate 13 not meaningful 16 not meaningful Total $ 20,432 41.0 % $ 20,146 38.9 % The gross profit percentage of 41.4% for the three months ended June 30, 2014 was 2.0% higher than the comparable period in fiscal 2013 and the gross profit percentage of 41.0% for the six months ended June 30, 2014 was 2.1% higher than the comparable period in fiscal 2013. The higher gross margin percentage was due to increased contribution of higher gross margin RF Solutions revenues and due to increased gross margins for Connected Solutions revenues. The gross profit percentage for Connected Solutions increased 2.8% and 1.8% during the three months and six months ended June 30, 2014, respectively, versus the comparable periods in the prior year. While the segment experienced margin pressure from fixed costs spread over lower revenue, it was more than offset by improvements made through our elimination of unprofitable site solutions products and customers, consolidating the site solutions factory into our Bloomingdale facility, and 29



--------------------------------------------------------------------------------

Table of Contents

other supply chain improvements. The gross profit percentage for RF Solutions declined 4.3% and 4.4% during the three and six months ended June 30, 2014, respectively, versus the comparable periods in the prior year. The decrease is attributed to the increased contribution of our network engineering services revenue with its lower gross profit margin relative to scanners. Revenue in scanners and network engineering services were both higher than last year. Operating Profit by Segment Three Months Ended June 30, 2014 % of Revenues 2013 % of Revenues Connected Solutions $ 1,845 10.4 % $ 1,374 7.2 % RF Solutions 1,645 19.2 % 2,072 27.3 % Corporate (2,945 ) not meaningful (3,188 ) not meaningful Total $ 545 2.1 % $ 258 1.0 % Six Months Ended June 30, 2014 % of Revenues 2013 % of Revenues Connected Solutions $ 3,015 8.9 % $ 3,132 8.1 % RF Solutions 2,659 16.3 % 3,042 22.7 % Corporate (5,551 ) not meaningful (7,226 ) not meaningful Total $ 123 0.2 % ($ 1,052 ) -2.0 % Total operating profit improved by $0.3 million during the three months ended June 30, 2014 and improved by $1.2 million during the six months ended June 30, 2014 compared to 2013. For the three months ended June 30, 2014, our operating profit improved because of higher operating profit for Connected Solutions and lower corporate general and administrative expenses, offsetting lower operating profit for RF Solutions. Operating profit for Connected Solutions improved due to lower operating expenses, and operating profit for RF Solutions declined primarily because of higher operating expenses. For the six months ended June 30, 2014, operating profit improved primarily due to lower operating expenses for legal and professional fees. Within consolidating, legal and professional fee associated with the TelWorx purchase of assets were lower by $1.1 million during the six months ended June 30, 2014 compared to the prior year period.



Consolidated Operating Expenses

Three Months Three Months % of Revenues Ended June 30, Ended June 30, 2014 Change 2013 2014 2013 Research and development $ 3,069 $ 386 $ 2,683 11.7 % 10.0 % Sales and marketing 3,303 249 3,054 12.6 % 11.4 % General and administrative 3,470 (355 ) 3,825 13.3 % 14.3 % Amortization of intangible assets 464 (140 ) 604 1.8 % 2.3 % Restructuring charges 0 (124 ) 124 0.0 % 0.5 % $ 10,306 $ 16 $ 10,290 39.4 % 38.5 % Six Months Ended Six Months % of Revenues June 30, Ended June 30, 2014 Change 2013 2014 2013 Research and development $ 6,311 $ 1,078 $ 5,233 12.7 % 10.1 % Sales and marketing 6,258 183 6,075 12.6 % 11.7 % General and administrative 6,702 (1,754 ) 8,456 13.4 % 16.3 % Amortization of intangible assets 1,038 (171 ) 1,209 2.1 % 2.3 % Restructuring charges 0 (225 ) 225 0.0 % 0.4 % $ 20,309 ($ 889 ) $ 21,198 40.8 % 40.9 % 30



--------------------------------------------------------------------------------

Table of Contents

Research and Development

Research and development expenses increased approximately $0.4 million and $1.1 million for the three and six months ended June 30, 2014 compared to the same periods in 2013. The increases are primarily due to spending for the development of new scanning receiver products.



Sales and Marketing

Sales and marketing expenses include costs associated with the sales and marketing employees, sales agents, product line management, and trade show expenses.

Sales and marketing expenses increased approximately $0.2 million for the three and six months ended June 30, 2014 compared to the same period in fiscal 2013 primarily as a result of sales headcount additions salespeople.



General and Administrative

General and administrative expenses include costs associated with the general management, finance, human resources, information technology, legal, insurance, public company costs, and other operating expenses to the extent not otherwise allocated to other functions. During the three months ended June 30, 2014, general and administrative expenses decreased $0.4 million compared to the same period in 2013 due to lower IT expenses associated with our ERP system and because of the integration of TelWorx functions with our Bloomingdale operations. During the six months ended June 30, 2014, general and administrative expenses decreased $1.8 million compared to the same period in fiscal 2013 primarily due to lower legal and professional fees for the TelWorx settlement and investigation, and also due to lower IT expenses associated with our ERP system, lower expenses for employee bonuses, and because of integration of TelWorx functions with our Bloomingdale operations. For the six months ended June 30, 2014 and 2013, respectively, we incurred $0.6 million and $1.8 million of professional and legal fees associated with the TelWorx settlement and the TelWorx investigation.



Amortization of Intangible Assets

Amortization decreased $0.1 million and $0.2 million during the three and six months ended June 30, 2014 compared to the same periods in 2013 because certain intangible assets related to acquisitions for Connected Solutions became fully amortized during 2013. Restructuring Charges During 2013, we integrated the TelWorx business with our Connected Solutions segment. The kitting and order fulfillment operations in North Carolina were consolidated into our Bloomingdale, IL facility. During the three and six months ended June 30, 2013, we recorded restructuring expense for employee severance benefits. Other Income, Net Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013

Settlement income $ 75 $ 0 $ 75 $ 4,330 Insurance proceeds 252 49 472 49 Interest income 18 20 37 39 Foreign exchange losses (8 ) (5 ) (47 ) (16 ) Other, net (3 ) (7 ) (6 ) (13 ) $ 334 $ 57 $ 531 $ 4,389 Percentage of revenues 1.3 % 0.2 % 1.1 % 8.5 % Other income, net consists of interest income, foreign exchange gains and losses, as well as income from legal settlements and insurance proceeds. For the three and six months ended June 30, 2014, other income, net includes $0.3 million and $0.5 million of insurance proceeds related to the TelWorx SEC investigation and settlement income of $75. For the six months ended June 30, 2013, other income includes $4.3 million related to the TelWorx settlement. See Note 11 to the consolidated financial statements regarding the TelWorx settlement. 31



--------------------------------------------------------------------------------

Table of Contents Expense for Income Taxes Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Expense for income taxes $ 334 $ 128 $ 255 $ 1,198 Effective tax rate 38.0 % 40.6 % 39.0 % 35.9 % The effective tax rate for the six months ended June 30, 2014 differed from the statutory rate of 34% by approximately 5.0% primarily because of state income taxes, and the effective rate for the six months ended June 30, 2013 differed from the statutory rate by 1.9% due to state income taxes offsetting a benefit for research credits. We maintain valuation allowances due to uncertainties regarding realizability. At June 30, 2014 and December 31, 2013, we had a valuation allowance of $0.6 million on our deferred tax assets. The valuation allowance primarily relates to deferred tax assets in tax jurisdictions in which we no longer have significant operations. On a regular basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance. Our domestic deferred tax assets have a ratable reversal pattern over 15 years. The carry forward rules allow for up to a 20 year carry forward of net operating losses ("NOL") to future income that is available to realize the deferred tax assets. The combination of the deferred tax asset reversal pattern and carry forward period yields a 26.0 year average period over which future income can be utilized to realize the deferred tax assets. We regularly evaluate our estimates and judgments related to uncertain tax positions and when necessary, establish contingency reserves to account for our uncertain tax positions. As we obtain more information via the settlement of tax audits and through other pertinent information, these projections and estimates are reassessed and may be adjusted accordingly. These adjustments may result in significant income tax provisions or provision reversals. Discontinued Operations Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013

Net loss from discontinued operations $ 0 ($ 22 ) $ 0 ($ 109 )



The net loss from discontinued operations for the three and six months ended June 30, 2013 includes operating expenses of PCTEL Secure LLC net of income taxes. There has been no activity with PCTEL Secure since the sale of the business in April 2013.

Stock-based compensation expense

The condensed consolidated statements of operations include $1.1 million and $1.8 million of stock compensation expense for the three and six months ended June 30, 2014, respectively. Stock compensation expense for the three months ended June 30, 2014 consists of $0.8 million for restricted stock awards, $0.3 million for stock option expenses and $52 for stock purchase plan expenses. Stock compensation expense for the six months ended June 30, 2014 consists of $1.1 million for restricted stock awards, $0.6 million for stock option expenses and $83 for stock purchase plan expenses. The condensed consolidated statements of operations include $1.1 million and $1.7 million of stock compensation expense for the three and six months ended June 30, 2013, respectively. Stock compensation expense for the three months ended June 30, 2013 consists of $0.8 million for restricted stock awards, and $0.3 million for stock option and stock purchase plan expenses. Stock compensation expense for the six months ended June 30, 2013 consists of $1.3 million for restricted stock awards, and $0.4 million for stock option and stock purchase plan expenses.



The Company did not capitalize any stock compensation expense during the three and six months ended June 30, 2014 or 2013.

32



--------------------------------------------------------------------------------

Table of Contents

Total stock-based compensation is reflected in the condensed consolidated statements of operations as follows:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Cost of revenues $ 117$ 107$ 203$ 191 Research and development 187 178 360 322 Sales and marketing 189 154 336 261 General and administrative 603 660 948 947 Total continuing operations 1,096 1,099 1,847 1,721 Discontinued operations 0 (1 ) 0 1 Total $ 1,096$ 1,098$ 1,847$ 1,722



Liquidity and Capital Resources

Six Months Ended June 30, 2014 2013 Net income $ 399



$ 2,030 Charges for depreciation, amortization, stock-based compensation, and other non-cash items

3,367



4,611

Changes in operating assets and liabilities (3,920 )



(3,670 )

Net cash provided by (used in) operating activities ($ 154 )

$ 2,971 Net cash used in investing activities ($ 4,896 ) ($ 835 ) Net cash used in financing activities ($ 2,640 ) ($ 1,341 ) Cash flows from discontinued operations $ 0 ($ 16 ) June 30, December 31, 2014 2013



Cash and cash equivalents at the end of period $ 14,123

$ 21,790 Short-term investments at the end of period $ 39,771$ 36,105 Working capital at the end of period $ 81,519



$ 83,585

Liquidity and Capital Resources Overview

At June 30, 2014, our cash and investments were approximately $53.9 million and we had working capital of $81.5 million. Our cash and investments were approximately $4.0 million lower at June 30, 2014 compared to December 31, 2013 because we used $1.6 million of cash for stock repurchases, $1.5 million of cash for payment of dividends, and $1.2 million for capital expenditures. Within operating activities, we are historically a net generator of operating funds from our income statement activities and a net user of operating funds for balance sheet expansion. Within investing activities, capital spending historically ranges between 3% and 5% of our revenues and the primary use of capital is for manufacturing and development engineering requirements. Our capital expenditures during the six months ended June 30, 2014 were approximately 2.5% of revenues. We historically have significant transfers between investments and cash as we rotate our large cash balances and short-term investment balances between money market funds, which are accounted for as cash equivalents, and other investment vehicles. We have a history of supplementing our organic revenue growth with acquisitions of product lines or companies, resulting in significant uses of our cash and short-term investment balance from time to time. We expect the historical trend for capital spending and the variability caused by moving money between cash and investments and periodic merger and acquisition activity to continue in the future. Within financing activities, we have historically generated funds from the exercise of stock options and proceeds from the issuance of common stock through the ESPP and have historically used funds to repurchase shares of our common stock through our share repurchase programs. We are now paying quarterly dividends and have also reinstated a stock buyback program to be used later in 2013. Whether this activity results in our being a net user of funds versus a net generator of funds is largely dependent on our stock price during any given year. Management believes that the Company's current financial position which includes $53.9 million in cash and investments, and no debt, combined with its historic ability to generate free cash flow (cash flow from operations less capital spending) provide adequate liquidity and working capital to support its operations. 33



--------------------------------------------------------------------------------

Table of Contents

Operating Activities:

Operating activities used $0.2 million during the six months ended June 30, 2014 as we generated $3.8 million of cash from our income statement activities but used $3.9 million of cash with our balance sheet activities. We used $1.0 million for payroll taxes related to stock-based compensation. The tax payments related to our stock issued for restricted stock awards and performance shares. Within the balance sheet, we used $1.7 million to pay annual 2013 accruals, including short-term incentive plan bonuses and sales commissions. We used $2.4 million on higher inventories, primarily for Connected Solutions. Inventories were higher at June 30, 2014 for Connected Solutions due to purchases to support site solutions business during the third and fourth quarters of 2014. We used cash of $1.7 million from increases in accounts receivable primarily due to the timing of the revenues within the quarter ended June 30, 2014 compared to the quarter ended December 31, 2013. Operating activities provided $3.0 million of cash during the six months ended June 30, 2013 as we generated approximately $6.7 million of cash from our income statement but used $3.7 million of cash within our balance sheet. We used $0.9 million for payroll taxes related to stock-based compensation. The tax payments related to our stock issued for restricted stock awards and performance shares. On the balance sheet, we used cash of $4.8 million because of reductions in accounts payable. Payables declined due to reductions in inventories and due to the timing of vendor purchases in the quarter ended June 30, 2013 compared to the quarter ended December 31, 2012. We also used $1.6 million during the six months ended June 30, 2013 for payments for sales commissions and accrued inventory purchases. We generated cash of $1.5 million from reductions in RF Solutions inventories. Investing Activities: Our investing activities used $4.9 million of cash during the six months ended June 30, 2014 as we used $3.7 million in our investment activity and $1.2 million for capital expenditures. Redemptions and maturities of our short-term investments during the six months ended June 30, 2014 provided $30.4 million in funds. We rotated $34.1 million of cash into new short-term investments during the six months ended June 30, 2014. Our investing activities used $0.8 million of cash during the six months ended June 30, 2013 as we generated $0.4 million of cash from net maturities of investments and used $1.3 million for capital expenditures. Redemptions and maturities of our investments in short-term bonds during the six months ended June 30, 2013 provided $39.2 million in funds. We rotated $38.8 million of cash into new short-term and long-term bonds during the six months ended June 30, 2013. Financing Activities:



We used $2.6 million in cash for financing activities during the six months ended June 30, 2014. We used $1.6 million to repurchase shares in the stock repurchase program and $1.5 million for cash dividends paid in February 2014 and May 2014. We received $0.5 million in proceeds from the purchase of shares through our ESPP and the exercise of stock options.

We used $1.3 million in cash for financing activities during the six months ended June 30, 2013. We paid $1.3 million for a cash dividend paid in February 2013 and May 2013 and we received $0.4 million in proceeds from the purchase of shares through our ESPP and the exercise of stock options. We used $0.4 million to repurchase shares in the stock repurchase program.



Contractual Obligations and Commercial Commitments

As of June 30, 2014, we had operating lease obligations of approximately $4.1 million through 2020, primarily for facility leases. Our lease obligations were $4.2 million at December 31, 2013. We had purchase obligations of $8.2 million and $5.6 million at June 30, 2014 and December 31, 2013, respectively. These obligations are for the purchase of inventory, as well as for other goods and services in the ordinary course of business, and exclude the balances for purchases currently recognized as liabilities on the balance sheet. We had a liability of $1.5 million related to income tax uncertainties at June 30, 2014 and December 31, 2013, respectively. We do not know when this liability will be paid.



Critical Accounting Policies and Estimates

We use certain critical accounting policies as described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" of our Annual Report on Form 10-K filed with the Securities and

34



--------------------------------------------------------------------------------

Table of Contents

Exchange Commission for the year ended December 31, 2013 (the "2013 Annual Report on Form 10-K"). There have been no material changes in any of our critical accounting policies since December 31, 2013. See Note 2 in the Notes to the Condensed Consolidated Financial Statements for discussion on recent accounting pronouncements.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters