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WSTL > SEC Filings for WSTL > Form 10-Q on 4-Feb-2014All Recent SEC Filings




Quarterly Report

The following discussion should be read together with the Condensed Consolidated Financial Statements and the related Notes thereto and other financial information appearing elsewhere in this Form 10-Q. All references herein to the term "fiscal year" shall mean a year ended March 31 of the year specified. The Company commenced operations in 1980 as a provider of telecommunications network transmission products that enable advanced telecommunications services over copper telephone wires. The Company currently has two reportable segments:
Westell and Kentrox.
In the first quarter of fiscal year 2014, the Company discontinued the operations of the former Customer Networking Solutions ("CNS") segment. In fiscal year 2012, the Company completed the CNS asset sale, retained a major CNS customer relationship and contract, and completed the remaining contracted product shipments. In fiscal year 2013, the Company continued to provide warranty services under its contractual obligations and to sell ancillary products and software on a project basis to the retained customer. The Company also retained the Homecloud product development program. By the end of fiscal year 2013, the Homecloud product development and sales were the only remaining activity in the CNS segment other than indemnification obligations that remain with the Company. The Company ceased development and sales of the Homecloud product in the first quarter of fiscal year 2014.
On April 1, 2013, the Company's wholly-owned subsidiary, Westell, Inc. acquired 100% of the outstanding shares of Kentrox, Inc. ("Kentrox") for a purchase price of $30.0 million in cash, plus a $1.3 million working capital adjustment, pursuant to an agreement dated March 15, 2013. The acquisition included cash, inventories, property, intangibles assets, deferred revenue and other operating liabilities. On January 1, 2014, Kentrox was merged with and into Westell, Inc. A description of Kentrox is provided below.
On May 15, 2012, the Company acquired certain assets and liabilities of ANTONE Wireless Corporation ("ANTONE"), including rights to ANTONE products, for $2.5 million cash, subject to an adjustment for working capital, plus contingent cash consideration of up to an additional $3.5 million (the "ANTONE acquisition"). The contingent consideration is based upon profitability of the acquired products for post-closing periods through June 30, 2016, and may be offset by working capital adjustments and indemnification claims. The acquisition included inventories, property and equipment, contract rights, customer relationships, technology, and certain specified operating liabilities that existed at the closing date. ANTONE products include high-performance tower-mounted amplifiers, and cell-site antenna sharing products which are sold through the Company's Westell segment. The acquisition qualified as a business combination and is accounted for using the acquisition method of accounting. The Kentrox segment designs, distributes, markets and services intelligent site management solutions, which provide comprehensive monitoring, management and control of a broad range of devices. The Company's Kentrox products provide a suite of remote monitoring and control devices, which when combined with its Optima management system, provide a comprehensive, bi-directional site management solution. The Kentrox solution addresses customer needs such as power management (generator management, battery, fuel, and rectifier monitoring, tenant power metering, etc.), environmental management (HVAC monitoring, energy monitoring and control, aircraft warning light management, and environmental monitoring), security management (access management, asset tampering, and surveillance), and communications management (microwave and distributed antenna systems management). Customers include major wireless and fixed-line telecommunications carriers, tower providers, cable and broadband network providers, utility companies, and enterprises. Kentrox provides solutions to customers in North and South America, Australia, Africa, and Europe. The prices for the products and services vary based upon volume, customer specifications and other criteria, and they are subject to change for a variety of reasons, including cost and competitive factors. The Kentrox segment business is driven by specific customer projects. The Company believes that two of those customer projects ramped down toward completion in the third quarter of fiscal year 2014 and therefore the Company expects lower revenue from the segment in the fourth quarter of fiscal 2014.

The Westell segment designs, distributes, markets and services a broad range of carrier-class products. The Company's Westell product family consists of indoor and outdoor cabinets, enclosures and mountings; power distribution products; network interface devices ("NIDs") for time-division multiplexing/synchronous optical networks ("TDM/SONET") and service demarcation; span powering equipment; copper/fiber connectivity panels; managed Ethernet switches for utility and industrial networks; Ethernet extension devices for providing native Ethernet service handoff in carrier applications; signal conditioning and monitoring products for distributed antenna systems ("DAS"); wireless signal conditioning and monitoring products for

Table of Contents

cellular networks; tower-mounted amplifiers; multi-carrier power amplifier boosters; cell site antenna-sharing products for cell site optimization; and custom systems integration ("CSI") services. The Westell segment customer base is highly concentrated and comprised primarily of major telecommunications service providers including local exchange carriers ("LECs") ("telephone companies"), independent operating domestic local exchange carriers ("IOCs"), multiple system operators ("MSOs"), and public telephone administrations located in North America.
Due to the stringent quality specifications of its customers and the regulated environment in which its customers operate, the Company must undergo lengthy approval and procurement processes prior to selling most of its products. Accordingly, the Company must make significant upfront investments in product and market development prior to actual commencement of sales of new products. To remain competitive, the Company must continue to invest in new product development and in targeted sales and marketing efforts to launch new product features and lines. Failure to increase revenues from new products, whether due to lack of market acceptance, competition, technological change or otherwise, could have a material adverse effect on the Company's business and results of operations. The Company expects to continue to evaluate new product opportunities and engage in research and development activities.
In view of the Company's reliance on the telecommunications market for revenues and the unpredictability of orders that are often driven by customer specific projects and pricing pressures, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. The Company has historically experienced quarterly fluctuations in customer ordering and purchasing activity that appear to result from seasonal factors, including reductions in order volume and product deliveries for outdoor equipment as colder months approach and occur, and the effects of customer vacation, budgeting and procurement patterns toward the end of the calendar year which may curtail activity. This seasonality can result in weaker revenue in the third quarter of the fiscal year. The seasonal effects do not apply consistently and may not always correlate to financial results. Accordingly, they should not be considered a reliable indicator of our future revenue or results of operations. Results of Operations
Below is a table that compares revenue for the three and nine months ended December 31, 2013, and 2012 by segment.

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