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WTT > SEC Filings for WTT > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for WIRELESS TELECOM GROUP INC

Form 10-Q for WIRELESS TELECOM GROUP INC


14-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

Wireless Telecom Group, Inc., and its operating subsidiaries, (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 and high-power passive microwave components 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.

In December 2011, the Company's management reevaluated how it manages and discusses, both internally and with its board of directors, its operations and the operations of its subsidiaries Boonton and Microlab. Therefore, the Company has revised its segment reporting to reflect two reportable segments, test and measurement and network solutions. The test and measurement segment is comprised primarily of the Company's operations and the operations of its subsidiary, Boonton. The network solutions segment is comprised primarily of the operations of the Company's subsidiary, Microlab. Relative prior period information has been revised accordingly. The Company believes the revised segment reporting better reflects how its operating segments are managed and each segment's performance is evaluated. Additional financial information on the Company's reportable segments as of September 30, 2012 and December 31, 2011, as well as for the three and nine-months ended September 30, 2012 and 2011 is included in Note 8 to the Company's condensed consolidated financial statements.

The financial information presented herein includes:
(i) Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and as of December 31, 2011 (ii) Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2012 (unaudited) and 2011 (unaudited) (iii) Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2012 (unaudited) and 2011 (unaudited) and
(iv) Condensed Consolidated Statement of Shareholders' Equity for the nine-month period ended September 30, 2012 (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 or 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, the ability of our management to successfully implement our business plan and strategy, product demand and development of competitive technologies in our market sector, the impact of competitive products and pricing, the loss of any significant customers, our abilities to protect our property rights, 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.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

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 Accounting Standards Codification (ASC) 718, "Share-Based Payment". The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. For any performance-based or service-based options granted, the Company takes into consideration guidance under ASC 718 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. The estimated forfeiture rate included in the option valuation was zero.

Revenue Recognition

Revenue from product shipments, including shipping and handling fees, is recognized once delivery has occurred provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Sales to international distributors are recognized in the same manner. 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 material 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.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A key consideration in estimating the allowance for doubtful accounts has been, and will continue to be, its customers' payment history and aging of its accounts receivable balance. If the financial condition of any of its customers were to decline, additional allowances might be required.

Income Taxes

The Company records deferred taxes in accordance with ASC 740, "Accounting for Income Taxes". This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax asset, a majority of which has been generated by a history of net operating losses and determines the necessity for a valuation allowance. The Company evaluates which portion, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on its use of its net operating loss carry-forwards.

Uncertain Tax Positions

Under ASC 740, the Company must recognize the tax benefit from an uncertain position only if it is more-likely-than-not the tax position will be sustained on examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements attributable to such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate resolution of the position.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

The Company has analyzed its filing positions in all of the Federal and state jurisdictions where it is required to file income tax returns. As of September 30, 2012 and December 31, 2011, the Company has identified its Federal tax return and its state tax return in New Jersey as "major" tax jurisdictions, as defined, in which it is required to file income tax returns. Based on the evaluations noted above, the Company has concluded that there are no significant uncertain tax positions requiring recognition or disclosure in its condensed consolidated financial statements.

Based on a review of tax positions for all open years and contingencies as set out in the Company's notes to the condensed consolidated financial statements, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740 during the periods ended September 30, 2012 and 2011.

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, 2011.

For the nine-months ended September 30, 2012 as compared to the corresponding period of the previous year, net consolidated sales increased to approximately $21,379,000 from approximately $19,614,000, an increase of approximately $1,765,000 or 9.0%. For the three-months ended September 30, 2012 as compared to the corresponding period of the previous year, net consolidated sales increased to approximately $7,385,000 from approximately $7,065,000, an increase of approximately $320,000 or 4.5%. These increases were primarily the result of continuing strong demand for the Company's test and measurement instruments for both commercial and military applications. The Company has experienced an increase in order activity due to commercial infrastructure development in support of the ongoing expansion of upgrade to DAS. Additionally, the Company continues to experience strong demand for its test and measurement instruments from prime U.S. defense contractors and various government and military agencies.

Net sales of the Company's network solutions products for the nine-months ended September 30, 2012 were approximately $9,634,000 as compared to approximately $9,610,000 for the nine-months ended September 30, 2011, an increase of approximately $24,000 or .2%. Net sales of network solutions products accounted for approximately 45% and 49% of net consolidated sales for the nine-month periods ended September 30, 2012 and 2011, respectively. Net sales of the Company's network solutions products for the three-months ended September 30, 2012 were approximately $3,087,000 as compared to approximately $3,714,000 for the three-months ended September 30, 2011, a decrease of approximately $627,000 or 16.9%. Net sales of network solutions products accounted for approximately 42% and 53% of net consolidated sales for the three-month periods ended September 30, 2012 and 2011, respectively. The slight increase in sales for the nine-months ended September 30, 2012 was primarily due to the Company's ongoing participation in DAS deployments through supply of its passive microwave components. The decrease in sales for the three-months ended September 30, 2012 was primarily due to the timing of DAS deployments as certain orders are received on a project specific basis.

Net sales of the Company's test and measurement products for the nine-months ended September 30, 2012 were approximately $11,745,000 as compared to approximately $10,005,000 for the nine-months ended September 30, 2011, an increase of approximately $1,740,000 or 17.4%. Net sales of test and measurement products accounted for approximately 55% and 51% of net consolidated sales for the nine-months ended September 30, 2012 and 2011, respectively. Net sales of the Company's test and measurement products for the three-months ended September 30, 2012 were approximately $4,298,000 as compared to approximately $3,351,000 for the three-months ended September 30, 2011, an increase of approximately $947,000 or 28.3%. Net sales of test and measurement products accounted for approximately 58% and 47% of net consolidated sales for the three-months ended September 30, 2012 and 2011, respectively. The increase in sales was primarily due to increased volume related to the ongoing fulfillment of government contract orders, particularly the Company's supply of peak power meters to the U.S. Navy.

Gross profit on net consolidated sales for the nine-months ended September 30, 2012 was approximately $10,645,000 or 49.8% as compared to approximately $9,001,000 or 45.9% of net consolidated sales for the nine-months ended September 30, 2011. Gross profit on net consolidated sales for the three-months ended September 30, 2012 was approximately $3,700,000 or 50.1% as compared to approximately $3,433,000 or 48.6% of net consolidated sales for the three-months ended September 30, 2011.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

Gross profit margins are higher for the three and nine-months ended September 30, 2012 as compared to the same periods of the previous year primarily due to higher revenue volume being allocated to relatively fixed manufacturing labor and overhead costs and severance costs incurred during the first quarter of 2011 in the amount of approximately $73,000 relating to the implementation of a cost reduction plan which included several manufacturing employees.

Additionally, during the first quarter ended 2011, the Company carried excess inventory in the amount of approximately $270,000 relating to a recently discontinued product line. This inventory was sold in its entirety at cost which negatively impacted gross profit.

The Company's products consist of several models with varying degrees of capabilities which can be customized to meet particular customer requirements. They may be incorporated directly into the electronic equipment concerned or may be stand alone components or devices that are connected to, or used in conjunction with, such equipment from an external site, in the factory or in the field. Prices of products range from approximately $100 to $100,000 per unit, with most sales occurring between approximately $2,000 and $35,000 per unit. The Company can experience variations in gross profit based upon the mix of these products sold as well as variations due to revenue volume and economies of scale. The Company will continue to rigidly monitor costs associated with material acquisition, manufacturing and production.

Operating expenses for the nine-months ended September 30, 2012 were approximately $8,711,000 or 41% of net consolidated sales as compared to approximately $7,792,000 or 40% of net consolidated sales for the nine-months ended September 30, 2011. Operating expenses are higher for the nine-months ended September 30, 2012 primarily due to an increase in general and administrative expenses of approximately $779,000 and an increase in research and development expenses of approximately $216,000, offset by a decrease in sales and marketing expenses of approximately $76,000. Operating expenses for the three-months ended September 30, 2012 were approximately $2,927,000 or 40% of net consolidated sales as compared to approximately $2,734,000 or 39% of net consolidated sales for the three-months ended September 30, 2011. Operating expenses are higher for the three-months ended September 30, 2012 primarily due to an increase in sales and marketing expenses of approximately $105,000 and an increase in research and development expenses of approximately $94,000, offset by a decrease in general and administrative expenses of approximately $7,000.

The increase in general and administrative expenses for the nine-months ended September 30, 2012 is primarily due to a higher bonus accrual of approximately $245,000 and an increase in non-cash stock based compensation charges of approximately $127,000 primarily due to the amortization of the Company's performance-based stock options. Additionally, a specific warranty accrual was reversed during the quarter ended March 31, 2011 in the amount of $240,000 relating to product shipped in 2008. The Company determined that there is a remote likelihood that any of these specific units would be returned and, accordingly, the Company subsequently reversed the warranty accrual. For the nine-months ended September 30, 2012, research and development expenses increased primarily due to the hiring in May of the Company's Vice President of Engineering and increased spending on specific research and development projects. Sales and marketing expenses were lower for the nine-months ended September 30, 2012 primarily due to lower sales and marketing salaries of approximately $137,000 and a decrease in travel and related expenses of approximately $30,000, partially offset by higher, order specific, commissions paid to the Company's external, non-employee sales representatives of approximately $59,000. Additionally, severance was paid during the nine-months ended September 30, 2011 to certain sales and marketing employees in the amount of approximately $124,000 in connection with the cost reduction plan mentioned above.

Interest expense, net of interest income derived from the Company's cash investment account, was relatively unchanged for the three and nine-months ended September 30, 2012, as compared to the corresponding period of the previous year. Substantially all of the Company's cash is invested in money market funds.

Other income, net of other non-operating expense, decreased by approximately $53,000 and $152,000 for the three and nine- months ended September 30, 2012, respectively, as compared to the corresponding periods of the previous year. The decrease in other income is primarily due to a realized gain from the sale of an investment security recorded during the nine-months ended September 30, 2011, partially offset by higher non-operating expense incurred during the three and nine-months ended September 30, 2011 for services relating to the ground water testing being performed at the former site of the Company's subsidiary, Boonton. The Company has been testing the ground water in this site since 1982 in accordance with state regulations. The Company is diligently pursuing efforts to satisfy the requirements of the original remediation plan, in effect since 1982, and receive a new determination from the NJDEP. Management continues to be encouraged by recent test results which support improvements in ground water conditions over time. Overall data from testing in the Spring of 2011 indicates the continuation of a decreasing concentration trend at the site. The overall decrease supports the absence of a continuing source impacting ground water.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

The Company believes that its current practice and plan of groundwater testing will continue until an official notification from NJDEP is obtained and the Company is released from further obligations. While management anticipates that the expenditures in connection with this site will not be substantial in future years, the Company could be subject to significant future liabilities and may incur significant future expenditures if any additional contamination is identified and the NJDEP requires additional remediation.

For the nine-months ended September 30, 2012 and 2011, the Company realized a tax benefit of approximately $249,000 and approximately $369,000, respectively. For the three-months ended September 30, 2012 and 2011, the Company realized a tax benefit of approximately $129,000 and $122,000, respectively. For all periods, the tax benefit was primarily due to a decrease in the Company's deferred tax asset valuation allowance, partially offset by a provision for state income taxes. The Company analyzes its deferred tax asset on a quarterly basis and adjusts the deferred tax asset valuation allowance based on its rolling five year projection of estimated taxable income.

For the nine-months ended September 30, 2012, the Company realized net income of approximately $2,166,000 or $0.09 income per share on a basic and diluted basis, as compared to net income of approximately $1,713,000 or $0.07 income per share on a basic and diluted basis for the corresponding period of the previous year, an increase of approximately $453,000. For the three-months ended September 30, 2012, the Company realized net income of approximately $855,000 or $0.04 income per share on a basic basis or $0.03 income per share on a diluted basis, as compared to net income of approximately $827,000 or $0.03 income per share on a basic and diluted basis for the corresponding period of the previous year, an increase of approximately $28,000. The increases were primarily due to the analysis mentioned above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital has increased by approximately $2,070,000 to approximately $26,629,000 at September 30, 2012, from approximately $24,559,000 at December 31, 2011. At September 30, 2012, the Company had a current ratio of 6.4 to 1, and a ratio of debt to tangible net worth of .15 to 1. At December 31, 2011, the Company had a current ratio of 14.2 to 1, and ratio of debt to tangible net worth of .14 to 1.

The Company had cash and cash equivalents of approximately $12,463,000 at September 30, 2012, compared to approximately $12,090,000 at December 31, 2011. In 2011, the Company repurchased approximately 1,293,000 shares of its outstanding common stock at a cost of approximately $1,135,000. During the nine-months ended September 30, 2012, the Company has repurchased approximately 481,000 shares of its outstanding common stock at a cost of approximately $583,000. The Company believes its current level of cash and cash equivalents is sufficient to fund the current operating, investing and financing activities.

The Company expects to realize tax benefits in future periods due to the available net operating loss carryforwards resulting from the disposition of Willtek Communications GmbH, its former German subsidiary, in 2010. Accordingly, future taxable income is expected to be offset by the utilization of operating loss carryforwards and as a result, will increase the Company's liquidity as cash needed to pay Federal income taxes will be substantially reduced.

The Company has historically been able to turn over its accounts receivable 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's inventory has increased by approximately $833,000 to approximately $8,410,000 at September 30, 2012, from approximately $7,577,000 at December 31, 2011. The Company has increased its raw materials inventory in order to meet increasing demand for the Company's network solutions products.

The Company realized cash from operating activities of approximately $1,305,000 for the nine-month period ending September 30, 2012. The primary source of this cash was due to net income from operations for the nine-month period, as well as, an increase in accounts payable, accrued expenses and other current liabilities, partially offset by an increase in inventory, an increase in accounts receivable and an increase in prepaid expenses and other assets.

The Company used cash for operating activities of approximately $667,000 for the nine-month period ending September 30, 2011. The primary use of this cash was due to an increase in inventory, a decrease in accounts payable, accrued expenses and other current liabilities and an increase in accounts receivable, partially offset by net income from operations and a decrease in prepaid expenses and other assets.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

On July 26, 2012, the Company received notice that its lessee exercised its purchase option under an operating lease with the Company, dated November 17, 2000, to purchase the property owned by the Company and located in Mahwah, New Jersey (the "Mahwah Building"). The purchase price is $3,500,000 of which $350,000 was deposited by the buyer and is being held in escrow until the closing. The closing, which is scheduled to occur on or before August 1, 2013, is subject to customary closing conditions. As a result, as of September 30, 2012 and December 31, 2011, the Mahwah Building is included in Assets Held for Sale in the accompanying condensed consolidated balance sheets at a carrying value of $3,179,003 and $3,245,700, respectively. The Company expects to realize a gain on the sale of the property of approximately $400,000.

Additionally, the Company has a mortgage payable secured by the Mahwah Building. The terms of the mortgage require monthly payments of $23,750 applied to both principal and interest at the annual rate of 7.45%. The mortgage is scheduled to mature in August, 2013, and is expected to be repaid with the proceeds from the Mahwah Building sale in 2013.

Net cash used for investing activities for the nine-months ended September 30, 2012 and 2011 was approximately $294,000 and approximately $336,000, respectively. The use of these funds was for capital expenditures.

Cash used for financing activities for the nine-months ended September 30, 2012 and 2011 was approximately $638,000 and $618,000, respectively. The use of these funds was for the acquisition of treasury stock and the periodic payments of a mortgage note.

The Company maintains a line of credit with its investment bank. The credit facility provides borrowing availability of up to 100% of the Company's money market account balance and 99% of the Company's short-term investment securities . . .

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