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PCTI > SEC Filings for PCTI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for PC TEL INC


9-Nov-2012

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 2011 contained in our Annual Report on Form 10-K filed on March 15, 2012. 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.

Introduction

PCTEL is a global leader in propagation and optimization solutions for the wireless industry. PCTEL designs, develops, and distributes a wide range of antennas, site solutions, scanning receivers and engineered services, for both public and private networks.

Antennas and Site Solutions

PCTEL is a leading supplier of antennas for private network, public safety and government applications, and site solutions for both private and public network, data, and communications applications. Our MAXRAD®, Bluewave™ and Wi-Sys™ antenna solutions include high-value YAGI, land mobile radio ("LMR"), WiFi, GPS, In Tunnel, Subway, and Broadband antennas (parabolic and flat panel). PCTEL Connected Solutions™ includes specialized towers, enclosures, fiber optic panels, and fiber jumper cables that are engineered into site solutions. The vertical markets into which the antenna and site solutions are sold include supervisory control and data acquisition ("SCADA"), health care, energy, smart grid, precision agriculture, indoor wireless, telemetry, offloading, and wireless backhaul. Growth for antenna and site solutions is primarily driven by the increased use of wireless communications in these vertical markets. Our antenna and site solutions are primarily sold through distributors, value added reseller, and original equipment manufacturer ("OEM") providers.

We established our current antenna and site solutions product portfolio with a series of acquisitions. In 2004 we acquired MAXRAD, Inc. ("MAXRAD"), as well as certain product lines from Andrew Corporation ("Andrew"), which established its core product offerings in WiFi, LMR and GPS. Over the next several years we added additional capabilities within those product lines and additional served markets with the acquisition of certain assets from Bluewave Antenna Systems, Ltd ("Bluewave") in 2008, and the acquisitions of Wi-Sys Communications, Inc ("Wi-Sys") in 2009, Sparco Technologies, Inc. ("Sparco") in 2010, and certain assets of TelWorx Communications LLC Telworx U.K. Limited, TowerWorx LLC, and Tower Worx International, Inc. in July 2012.

Through our wholly-owned subsidiary PCTelWorx, Inc. ("PCTelWorx"), we completed the acquisition of substantially all of the assets and assumption of certain specified liabilities of TelWorx Communications LLC, TelWorx U.K. Limited, TowerWorx LLC and TowerWorx International, Inc., pursuant to an Asset Purchase Agreement dated as of July 9, 2012 among the Company, PCTelWorx, TelWorx and Tim and Brenda Scronce, the principal owners of these entities. The business operations associated with the purchased assets are collectively referred to as "TelWorx" in this Form 10-Q. See footnote 8 of the financial statements for more information on the acquisition of the assets of Telworx.

Scanning Receivers and Engineering Services

PCTEL is a leading supplier of high-speed, multi-standard, demodulating receivers and test and measurement solutions to the wireless industry worldwide. Our SeeGull® scanning receivers, receiver-based products and CLARIFY ® interference management solutions are used to measure, monitor and optimize cellular networks. Our network engineering services ("NES") Group provides value-added analysis of measured data collected during the optimization process. Revenue growth for these products and services is driven by the deployment of products based on new wireless technology and the need for wireless networks to be tuned and reconfigured on a regular basis. We develop and support scanning receivers for LTE, EVDO, CDMA, WCDMA, GSM, TD-SCDMA, and WiMAX networks. Our scanning receiver products are sold primarily through test and measurement value added resellers and, to a lesser extent, directly to network operators. The engineering services are sold primarily to network infrastructure providers and cellular carriers.


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We established our scanning receiver product portfolio in 2003 with the acquisition of certain assets of Dynamic Telecommunications, Inc. In 2009 we acquired the scanning receiver business of Ascom Network Testing, Inc ("Ascom") as well as the exclusive distribution rights and patented technology for Wider Network LLC's ("Wider") network interference products. In 2011 we acquired certain assets of Envision Wireless Inc.

Secure applications

On January 5, 2011, we formed PCTEL Secure LLC ("PCTEL Secure"), a joint venture limited liability company, with Eclipse Design Technologies, Inc. ("Eclipse"). PCTEL Secure designs Android-based, secure communication products. We contributed $2.5 million in cash in return for 51% ownership of the joint venture and Eclipse contributed $2.4 million of intangible assets in return for 49% ownership of the joint venture. In May 2012, we paid Eclipse $0.9 million for an additional 19% membership interest, and in July 2012 we paid Eclipse $0.8 million for the remaining 30% membership interest.

Segment Reporting

We operate in two segments for reporting purposes. Beginning with the formation of PCTEL Secure in January 2011, we report the financial results of PCTEL Secure as a separate operating segment. Our chief operating decision maker uses the profit and loss results and the assets of the segments in deciding how to allocate resources and assess performance between the segments. We did not report segment information for PCTEL Secure in this section because PCTEL Secure has been in the development stage during 2011 and the nine months ended September 30, 2012.

Results of Operations

Three and Nine Months Ended September 30, 2012 and 2011

(in thousands)

Revenues



                                        Three  Months         Three  Months          Nine Months           Nine Months
                                            Ended                 Ended                 Ended                 Ended
                                        September 30,         September 30,        September  30,        September  30,
                                            2012                  2011                  2012                  2011
Revenue                                $        25,853       $        19,494       $        63,007       $        56,837
Percent change from year ago period               32.6 %                12.6 %                10.9 %                12.1 %

Revenues increased 32.6% in the three months ended September 30, 2012 and increased 10.9% in the nine months ended September 30, 2012 compared to the same period in 2011. For the three months ended September 30, 2012 versus the comparable period in the prior year, approximately 25% was attributable to revenues from the businesses we acquired from Envision in October 2011 and TelWorx in July 2012 and approximately 14% was attributable to increased antenna and site solution product revenues, offsetting approximately 7% from lower scanning receiver and engineering services revenues. For the nine months ended September 30, 2012 versus the comparable period in the prior year, approximately 10% was attributable to revenues from the businesses we acquired from Envision in October 2011 and TelWorx in July 2012 and approximately 18% was attributable to increased antenna product and site solution revenues, offsetting approximately 7% from lower scanning receiver and engineering services revenues. Antenna and site solution product revenues were higher than the same periods last year across both distribution and OEM channels. Scanning receiver and engineering services revenue was lower than the same periods last year due to carrier spending delays.


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Gross Profit



                                   Three  Months          Three Months           Nine Months            Nine Months
                                       Ended                  Ended                 Ended                  Ended
                                   September 30,          September 30,        September  30,         September  30,
                                       2012                   2011                  2012                   2011
Gross profit                      $        10,040        $         9,354       $        25,888        $        26,579
Percentage of revenue                        38.8 %                 48.0 %                41.1 %                 46.8 %
Percent of revenue change from
year ago period                              (9.2 %)                 7.5 %                (5.7 %)                 2.7 %

The gross profit percentage of 38.8% for the three months ended September 30, 2012 was 9.2% lower than the comparable period in fiscal 2011. The gross profit percentage of 41.1% for the nine months ended September 30, 2012 was 5.7% lower than the comparable period in fiscal 2011. The lower gross profit percentage reflects the addition of lower margin product lines from the businesses we acquired from Envision in October 2011 and TelWorx in July 2012 as well as a decrease in revenue mix of our scanning receiver and engineering services products, with their higher margins relative to antennas and site solution products. For the three months ended September 30, 2012, the recently acquired businesses negatively impacted the gross margin percentage by 5.3%. For all other products, negative product mix of 4.4% offset higher product margins of 0.5% for the three months ended September, 30, 2012. For the nine months ended September 30, 2012, the recently acquired businesses negatively impacted the gross margin percentage by 3.1%. For all other products, negative product mix of 3.3% offset higher product margins of 0.7% for the nine months ended September 30, 2012.

Research and Development



                                         Three  Months           Three  Months           Nine Months              Nine Months
                                             Ended                   Ended                  Ended                    Ended
                                         September 30,           September 30,          September  30,           September  30,
                                             2012                    2011                    2012                     2011
Research and development                $         2,858         $         3,035        $          8,454         $          8,991
Percentage of revenues                             11.1 %                  15.6 %                  13.4 %                   15.8 %
Percent change from year ago period                (5.8 %)                  2.7 %                  (6.0 %)                  (1.5 %)

Research and development expenses decreased approximately $0.2 million for the three months ended September 30, 2012 compared to the comparable period in 2011 primarily due to the completion of several projects in scanning receiver development. Research and development expenses decreased approximately $0.5 million for the nine months ended September 30, 2012 compared to the comparable period in 2011. For the nine months ended September 30, 2012, research and development expenses declined by $1.0 million primarily due to the completion of several projects in scanning receiver development, offsetting an increase in expenses of $0.5 million related to PCTEL Secure.

Sales and Marketing



                               Three  Months           Three  Months            Nine Months              Nine Months
                                   Ended                   Ended                   Ended                    Ended
                               September 30,           September 30,           September  30,           September  30,
                                   2012                    2011                     2012                     2011
Sales and marketing           $         2,811         $         2,643         $          7,907         $          7,853
Percentage of revenues                   10.9 %                  13.6 %                   12.5 %                   13.8 %
Percent change from year
ago period                                6.4 %                   3.7 %                    0.7 %                    7.1 %

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 $0.2 million for the three months ended September 30, 2012 compared to the same period in fiscal 2011 and increased approximately $0.1 million for the nine months ended September 30, 2012, compared to the same period in fiscal 2011. The increases were primarily due to the sales expenses associated with the business acquired from the TelWorx acquisition.


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General and Administrative



                                  Three Months            Three Months             Nine Months              Nine Months
                                      Ended                   Ended                   Ended                    Ended
                                  September 30,           September 30,           September 30,            September  30,
                                      2012                    2011                    2012                      2011
General and administrative       $         2,647         $         2,520         $         8,054          $          8,236
Percentage of revenues                      10.2 %                  12.9 %                  12.8 %                    14.5 %
Percent change from year
ago period                                   5.0 %                  16.1 %                  (2.2 %)                    7.7 %

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.

General and administrative expenses increased approximately $0.1 million for the three months ended September 30, 2012 and decreased approximately $0.2 million for the nine months ended September 30, 2012 compared to the same period in fiscal 2011. The increases were primarily due to expenses associated with the business acquired from the TelWorx acquisition. The decreases were because we have not recorded any expense for our short-term incentive plan during 2012.

Amortization of Other Intangible Assets



                                Three Months            Three Months             Nine Months             Nine Months
                                    Ended                   Ended                   Ended                   Ended
                                September 30,           September 30,           September 30,           September 30,
                                    2012                    2011                    2012                    2011
Amortization of other
intangible assets              $         1,120         $           661         $         2,610         $         1,995
Percentage of revenues                     4.3 %                   3.4 %                   4.1 %                   3.5 %

Amortization increased approximately $0.5 million and $0.6 million during the three and nine months ended September 30, 2012 compared to the same period in 2011. Amortization expense increased due to the amortization of intangible assets acquired from Telworx in July 2012, the acquisition of assets from Envision in October 2011 and amortization for in-process research and development for PCTEL Secure, offsetting lower amortization because certain intangible assets for antenna product acquisitions became fully amortized in 2011.

Restructuring Charges



                                 Three  Months             Three Months              Nine Months              Nine Months
                                     Ended                    Ended                     Ended                    Ended
                                 September 30,            `September 30,            September 30,            September 30,
                                     2012                      2011                     2012                     2011
Restructuring charges           $           156          $            125          $           156          $           125
Percentage of revenues                      0.6 %                     0.6 %                    0.2 %                    0.2 %

During the three months ended September 30, 2012, we eliminated twelve positions in our Bloomingdale manufacturing organization. During the three and nine months ended September 30, 2012 we incurred restructuring expense of $0.2 million, which consisted of severance and payroll related benefits.

During the third quarter 2011, we reduced the headcount in our Germantown, Maryland engineering organization due to the completion of several projects for scanning receivers. The restructuring plan consisted of the elimination of six positions. During the three and nine months ended September 30, 2011 we incurred restructuring expense of $0.1 million, which consisted of severance and payroll related benefits.

Other Income, Net



                                Three Months             Three  Months             Nine Months              Nine Months
                                    Ended                    Ended                    Ended                    Ended
                                September 30,            September 30,            September 30,            September  30,
                                    2012                     2011                     2012                      2011
Other income, net              $            11          $            64          $           125          $            266
Percentage of revenues                     0.0 %                    0.3 %                    0.2 %                     0.5 %


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Other income, net consists of interest income, foreign exchange gains and losses, and investment income. In the three months ended September 30, 2012 we recorded net interest income of $20 and foreign exchange losses of $9 and for the nine months ended September 30, 2012, we recorded net interest income of $111, investment income of $39, and foreign exchange losses of $25. In the three months ended September 30, 2011 we recorded net interest income of $40, investment income of $31, and foreign exchange losses of $24 and for the nine months ended September 30, 2011, we recorded net interest income of $200, investment income of $93, and foreign exchange losses of $27.

Provision (Benefit) for Income Taxes



                                Three  Months            Three  Months             Nine Months               Nine Months
                                    Ended                    Ended                    Ended                     Ended
                                September 30,            September 30,            September  30,            September  30,
                                    2012                     2011                      2012                      2011
Provision (benefit) for
income taxes                   $           187          $           216          ($           192 )        ($            13 )
Effective tax rate                        40.7 %                   49.8 %                    16.4 %                     3.7 %

The effective tax rate for the nine months ended September 30, 2012 differed from the statutory rate of 34% by approximately 17%, respectively, primarily because of the noncontrolling interest of PCTEL Secure.

The effective tax rate for the nine months ended September 30, 2011 differed from the statutory rate of 34% by approximately 30%, respectively, primarily because of the noncontrolling interest of PCTEL Secure, as well as a rate change for deferred taxes recorded as a discrete item in the first quarter of 2011.

We maintain valuation allowances due to uncertainties regarding realizability. At September 30, 2012 and December 31, 2011, we had a $0.7 million valuation allowance 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. While we recorded a net loss during the nine months ended September 30, 2012, our long-term forecasts continue to support the realization of our deferred tax assets. 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 27.5 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.

Net Loss Attributable to Noncontrolling Interests



                                 Three Months            Three Months              Nine Months              Nine Months
                                     Ended                   Ended                    Ended                    Ended
                                 September 30,           September 30,            September 30,            September 30,
                                     2012                    2011                     2012                     2011
Net loss attributable to
noncontrolling interests        $             0         ($          274 )        ($          687 )        ($          740 )

For all of 2011 and through May 2012, we owned 51% of PCTEL Secure. On May 29, 2012, we purchased an additional 19% membership interest and on July 2, 2012 we purchased the remaining 30% membership in PCTEL Secure from Eclipse. Because we owned 100% of the membership interests in PCTEL Secure during the third quarter 2012, there was no noncontrolling interest. The net loss attributable to noncontrolling interests represents 49% of the net loss of PCTEL Secure for the three and nine months ended September 30, 2011 and the pro-rata percentage ownership of PCTEL Secure during nine months ended September 30, 2012.

Stock-based compensation expense

The condensed consolidated statements of operations include $0.7 million and $2.3 million of stock compensation expense for the three and nine months ended September 30, 2012, respectively. Stock compensation expense for the three months ended September 30, 2012 consists of $0.6 million for restricted stock awards, and $0.1 million for stock option and stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2012 consists of $2.1 million for restricted stock awards, and $0.2 million for stock option and stock purchase plan expenses.

The condensed consolidated statements of operations include $0.7 million and $2.5 million of stock compensation expense for the three and nine months ended September 30, 2011, respectively. Stock compensation expense for the three months ended September 30, 2011 consists of $0.6 million for restricted stock awards and $0.1 million for performance share awards, stock option and stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2011 consists of $2.1 million for restricted stock awards, $0.2 million for performance share awards, and $0.2 million for stock option and stock purchase plan expenses.


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We did not capitalize any stock-based compensation expense during the three and nine months ended September 30, 2012 or 2011.

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

                                      Three Months Ended           Nine Months Ended
                                         September 30,               September 30,
                                     2012            2011           2012         2011
      Cost of revenues             $      99       $      67     $      302     $   204
      Research and development           153             139            442         451
      Sales and marketing                141             155            398         494
      General and administrative         302             351          1,193       1,374

      Total                        $     695       $     712     $    2,335     $ 2,523

Liquidity and Capital Resources



                                                          Nine Months Ended September 30,
                                                        2012                           2011
Net loss                                        ($               976 )          ($              342 )
Charges for depreciation, amortization,
stock-based compensation, and other
non-cash items                                                 5,562                          5,300
Changes in operating assets and
liabilities                                                   (3,435 )                       (1,185 )

Net cash provided by operating activities                      1,151                          3,773
Net cash used in investing activities                         (2,446 )                       (4,156 )
Net cash used in financing activities                         (1,078 )                       (1,990 )
. . .
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