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| WTT > SEC Filings for WTT > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
INTRODUCTION
Wireless Telecom Group, Inc., and its operating subsidiaries, Boonton Electronics Corporation, Microlab/FXR and Willtek Communications GmbH, (collectively, the "Company"), develop, manufacture and market a wide variety of electronic noise sources, electronic testing and measuring instruments including power meters, voltmeters and modulation meters, high-power passive microwave components and handset production testers for wireless products. The Company's products have historically been primarily used to test the performance and capability of cellular/PCS and satellite communication systems and to measure the power of RF and microwave systems. Other applications include radio, radar, wireless local area network (WLAN) and digital television.
The financial information presented herein includes:
(i) Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited)
and as of December 31, 2007 (ii) Condensed Consolidated Statements of Operations
for the three and nine month periods ended September 30, 2008 (unaudited) and
2007 (unaudited) and (iii) Condensed Consolidated Statements of Cash Flows for
the nine month periods ended September 30, 2008 (unaudited) and 2007
(unaudited).
FORWARD LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "intends," "plans," "may," "will," "should," "anticipates" or "continues" or the negative thereof of other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These statements are based on the Company's current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company's actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, product demand and development of competitive technologies in our market sector, the impact of competitive products and pricing, the loss of any significant customers, the effects of adoption of newly announced accounting standards, the effects of economic conditions and trade, legal and other economic risks, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed from time to time in the Company's filings with the Securities and Exchange Commission, the Company's press releases and in oral statements made by or with the approval of authorized personnel. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the financial condition and results of operations are based upon the Company's condensed 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 the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. The following represents a summary of the Company's critical accounting policies, defined as those policies that the Company believes are: (a) the most important to the portrayal of its financial condition and results of operations, and (b) that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Share-Based Compensation
The Company follows the provisions of SFAS 123(R), "Share-Based Payment". The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. For the performance-based options granted in 2008 and the service-based options granted during 2007, the Company took into consideration guidance under SFAS 123(R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of our shares using weekly price observations over an observation period of three years. The risk-free rate is based on the U.S. treasury yield curve rate in effect at the time of grant for periods similar to the expected option life. Due to the Company's history with respect to forfeitures of incentive stock options, the estimate of expired or canceled options included in the option valuation was zero.
Revenue Recognition
Revenue, including shipping and handling fees, is recognized when products are shipped and title has passed to the customer. If title does not pass until the product reaches the customer's delivery site, then recognition of revenue is deferred until that time. There are no formal sales incentives offered to any of the Company's customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis. There are no special post shipment obligations or acceptance provisions that exist with any sales arrangements.
Valuation of Inventory
Raw material inventories are stated at the lower of cost (first-in, first-out method) or market. Finished goods and work-in-process are valued at average cost of production, which includes material, labor and manufacturing expenses.
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of any of its customers were to decline, additional allowances might be required.
Income Taxes
As part of the process of preparing the condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The process incorporates an assessment of the current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. Such differences result in deferred tax assets and liabilities, which are included within the condensed consolidated balance sheet. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent that recovery is not likely, the Company establishes a valuation allowance. Increases in valuation allowances result in the recording of additional tax expense. Further, if the ultimate tax liability differs from the periodic tax provision reflected in the condensed consolidated statements of operations, additional tax expense may be recorded.
Valuation of Long-lived Assets
In accordance with SFAS No. 142, the Company continues to assess for the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment and estimates regarding future cash flows and forecasts. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge in the future. The Company will perform the required annual impairment test on its long-lived assets in conjunction with its 2008 fiscal year end.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and the notes to those statements included in Part I, Item I of this Quarterly Report on Form 10-Q and in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007.
For the nine months ended September 30, 2008 as compared to the corresponding period of the previous year, net sales decreased to approximately $39,605,000 from approximately $42,395,000 a decrease of approximately $2,790,000 or 7%. For the three months ended September 30, 2008 as compared to the corresponding period of the previous year, net sales decreased to approximately $13,609,000 from approximately $13,992,000 a decrease of approximately $383,000 or 3%. These decreases are primarily due the continued overall softness in the wireless handset market.
Gross profit on net sales for the nine months ended September 30, 2008 was approximately $19,256,000 or 48.6% as compared to approximately $23,419,000 or 55.2% of net sales for the nine months ended September 30, 2007. Gross profit on net sales for the three months ended September 30, 2008 was approximately $6,876,000 or 50.5% as compared to approximately $7,831,000 or 56% of net sales for the three months ended September 30, 2007. Gross profit margins are lower primarily due to decreased revenue volume during the three and nine month periods ended September 30, 2008, particularly in the Company's foreign subsidiary, compounded by relatively fixed labor and direct overhead costs. The Company can experience variations in gross profit based upon the mix of products sold as well as variations due to revenue volume and economies of scale. The Company continues to carefully monitor costs associated with material acquisition, manufacturing and production.
Operating expenses for the nine months ended September 30, 2008 were approximately $20,972,000 or 53% of net sales as compared to approximately $21,143,000 or 50% of net sales for the nine months ended September 30, 2007. Operating expenses for the quarter ended September 30, 2008 were approximately $6,967,000 or 51% as compared to approximately $7,087,000 or 51% of net sales for the quarter ended September 30, 2007. Operating expenses were lower in both research and development expenses and sales and marketing expenses, off-set by an increase in general and administrative expenses. During the first quarter of 2008, the Company implemented a cost reduction plan to bring operations spending more closely in line with near-term market conditions. The increase in general and administrative expenses is attributable to higher professional and consulting fees in 2008, primarily in the third quarter. In conjunction with the continuing execution of management's business strategy, the Company incurred significant, non-recurring professional advisory and outside consultant fees and expenses with respect to the preliminary exploration of potential strategic and financial transactions to enhance stockholder value and accelerate revenue growth. Management will continue to seek to identify and explore, as appropriate, attractive transaction opportunities, if, and when they arise.
For the three and nine month periods ended September 30, 2008, interest income decreased by approximately $9,000 and $5,000, respectively. These decreases were primarily due to lower returns in 2008 in the Company's working capital management account.
For the three and nine months ended September 30, 2008, other income decreased by approximately $548,000 and approximately $559,000, respectively. These decreases were primarily due to the inclusion of a realized gain on foreign currency exchange in the German subsidiary in 2007, partially off-set by non-operating income realized in the second quarter of 2008 relating to the partial recovery of a preferred stock investment previously written-off in a prior period. Additionally, during the third quarter of 2008, the Company recorded a realized loss from the sale of investment securities.
For the nine months ended September 30, 2008, the Company realized a net (loss) of approximately $(2,029,000), or $(.08) per share basic and diluted, as compared to net income of approximately $2,609,000, or $.10 per share basic and diluted for the nine months ended September 30, 2007. For the three months ended September 30, 2008, the Company realized a net (loss) of approximately $(510,000), or $(.02) per share basic and diluted, as compared to net income of approximately $942,000, or $.04 per share basic and diluted for the three months ended September 30, 2007. The explanation of these changes in net income (loss) can be derived from the analysis given above of operations for the three and nine-month periods ending September 30, 2008 and 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's working capital has decreased by approximately $1,258,000 to approximately $24,148,000 at September 30, 2008, from approximately $25,406,000 at December 31, 2007. At September 30, 2008, theCompany had a current ratio of 4.9 to 1, and a ratio of debt to tangible net worth of .7 to 1. At December 31, 2007, the Company had a current ratio of 4.6 to 1, and a ratio of debt to tangible net worth of .7 to 1.
The Company had a cash balance of approximately $11,362,000 at September 30, 2008, compared to approximately $10,387,000 at December 31, 2007. The Company believes its current level of cash is sufficient enough to fund the current operating, investing and financing activities. The Company believes the full benefit of the cost actions taken over the past nine months, along with additional productivity initiatives in process, will further reduce our cost structure and will bring expenses in-line with the near-term market dynamics.
The Company realized cash from operating activities of approximately $1,960,000 for the nine-month period ending September 30, 2008. The primary source of this cash was provided by a decrease in inventory of approximately $2,532,000, a non-cash adjustment for depreciation and amortization of approximately $765,000, a non-cash adjustment for amortization of intangible assets of approximately $660,000, and a decrease in accounts receivable of approximately $462,000, partially off-set by a loss from operations of approximately $2,029,000, a decrease in accounts payable and accrued expenses of approximately $558,000, and a decrease in income taxes payable of approximately $354,000.
The Company has historically been able to collect its account receivables approximately every two months. This average collection period has been sufficient to provide the working capital and liquidity necessary to operate the Company. The Company continues to monitor production requirements and delivery times while maintaining manageable levels of goods on hand.
The Company used cash for operating activities of approximately $762,000 for the nine-month period ending September 30, 2007. The use of this cash was primarily due to a decrease in accounts payable and accrued liabilities of approximately $2,172,000, an increase in inventories of approximately $1,486,000, an increase in prepaid expenses and other assets of approximately $914,000 and a decrease in income taxes payable of approximately $313,000, partially off-set by net income of approximately $2,609,000, a non-cash adjustment for depreciation and amortization of approximately $750,000, and a non-cash adjustment for amortization of intangible assets of approximately $660,000.
Net cash used for investing activities for the nine months ended September 30, 2008 was approximately $442,000. The use of these funds was for the purchase of investment securities of approximately $871,000 and for capital expenditures of approximately $299,000, off-set by proceeds from the sale of investment securities and dispositions of property, plant and equipment of approximately $713,000 and $15,000, respectively. For the nine months ended 2007, net cash used for investing activities was approximately $591,000. The use of these funds was for capital expenditures of approximately $635,000, off-set by proceeds from dispositions of property, plant and equipment of approximately $44,000.
Cash used for financing activities for the nine months ended September 30, 2008 was approximately $518,000. The primary use of these funds was for the acquisition of treasury stock of approximately $478,000 and the payments of a mortgage note. Cash used for financing activities for the nine months ended September 30, 2007 was approximately $4,445,000. The primary use of these funds was due to a decrease in the note payable to Investcorp of approximately $4,621,000 and the payments of a mortgage note, partially offset by proceeds from a bank loan of approximately $214,000.
The Company does not anticipate that its use of cash for operations will adversely impact its ability to meet its financing requirements for at least the next twelve-month period. The Company does not believe it will need to borrow additional funds during the next twelve-month period.
INFLATION AND SEASONALITY
The Company does not anticipate that inflation will significantly impact its business or its results of operations nor does it believe that its business is seasonal.
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