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PCTI > SEC Filings for PCTI > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for PC TEL INC

Form 10-Q for PC TEL INC


11-Aug-2014

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, 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.


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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


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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 %


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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.


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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.


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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.


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