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PC TEL INC - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2012 contained in our Annual Report on Form 10-K filed on April 2, 2013. 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 second quarter 2013 revenues increased by $6.7 million, or 34%, to $26.7 million compared the same period in 2012, due to the acquisition of TelWorx in July 2012, and increased revenue across all established product lines. We recorded an operating income of $0.3 million compared to operating income of $0.7 million in the same period last year. This quarter's results include a $0.4 million restructuring charge related to the integration and consolidation of the TelWorx operations. The Company's TelWorx operations are in the process of being integrated into our operations as well as our total control and evaluation process. The integration is expected to be complete by September 30, 2013. The TelWorx acquisition has been challenging. Subsequent to the acquisition, accounting irregularities in the operations were discovered which we believe were either at the direction of or with the knowledge of senior management of the TelWorx operations. We conducted an investigation and as a result, accepted the resignation of the general manager of the TelWorx operations and separated other personnel involved in the accounting irregularities from the Company, declared that the historical pre-acquisition TelWorx financial statements filed pursuant to Regulation S-X should not be relied upon, and concluded, as of December 31, 2012, that we had a material weakness in our disclosure controls related to the Telworx accounting irregularities. Additionally, unrelated to the accounting irregularities, we determined that the projected revenue, anticipated margins, and future cash flows of the TelWorx business were significantly lower at the annual goodwill test date of October 31, 2012 than at the acquisition date. The decline resulted in the impairment in the fourth quarter of 2012 of all of the $12.5 million of goodwill associated with the business. Before the effect of restructuring costs, the June 30, 2013 year to date operating results for the TelWorx reporting unit are consistent with the forecast of cash flows used in the annual goodwill test date of October 31, 2012. On a year to date basis, the reporting unit, which is contained in the Connected Solutions segment, has contributed slightly above breakeven operating results before restructuring charges of $0.2 million. The kitting and order fulfillment operations in North Carolina are being consolidated into our Bloomingdale, Illinois facility. That decision was made in March 2013. Compared to the beginning of 2013, the restructuring is expected to yield operating cost savings of approximately $0.4 million per quarter going forward when completed in September 2013. At that point in time the operation will cease to be an identifiable reporting unit as all of its operating results and cash flows will be completely integrated and comingled with the rest of the Connected Solutions segment operations. See Footnote 8 related to the acquisition of TelWorx Communications LLC, and Footnote 11 related to restructuring, and Item 4: Controls and Procedures, and management's discussion and analysis of liquidity and working capital resources for more details. 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. Effective January 1, 2013, we operate in two new 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. 33 -------------------------------------------------------------------------------- Table of Contents We manage our balance sheet and cash flows centrally at the corporate level, with the exception of trade accounts receivable and inventory which is managed at the segment level. Each of the segment managers reports to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment. As of January 1, 2013 our chief operating decision maker uses the profit and loss results through operating profit and identified assets for the Connected Solutions and RF Solutions segments to make operating decisions. The segment information presented in the financial statements restates history for the new Connected Solutions and RF Solution segments on a consistent basis with the current period. On April 30, 2013, the Company divested all of the 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 intellectual property, and complete development responsibility for the security products. At the closing of the divestiture, we received no upfront cash payment, but we 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. Under the agreement, royalties are capped at $10.0 million in the aggregate. In accordance with accounting rules for discontinued operations, the consolidated financial statements separately reflect the results of PCTEL Secure as discontinued operations for all periods presented. The prior period results have been retrospectively restated to reflect this accounting treatment. Results of Operations for Continuing Operations Three and six months Ended June 30, 2013 and 2012 (in thousands) Revenues Three Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 19,199 $ 14,821 $ 4,378 29.5 % RF Solutions $ 7,602 $ 5,206 2,396 46.0 % Consolidating ($ 55 ) ($ 34 ) (21 ) not meaningful Total $ 26,746 $ 19,993 $ 6,753 33.8 % Six Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 38,555 $ 27,988 $ 10,567 37.8 % RF Solutions $ 13,374 $ 9,204 4,170 45.3 % Consolidating ($ 111 ) ($ 38 ) (73 ) not meaningful Total $ 51,818 $ 37,154 $ 14,664 39.5 % Revenues increased 33.8% for the three months ended June 30, 2013 and increased 39.5% for the six months ended June 30, 2013 compared to the same periods in 2012. For the three and six months ended June 30, 2013, the addition of revenues from the TelWorx acquisition accounted for approximately 22% and 23% of the percentage increase, respectively. For the three months ended June 30, 2013, Connected Solutions revenues increased 29.5% due to the addition of revenues from the TelWorx acquisition. For the six months ended June 30, 2013, Connected Solutions revenues increased 37.8% primarily due to the addition of revenues from the TelWorx acquisition and also because of higher antenna product revenues. Revenues for RF Solutions increased 46.0% and 45.3% for the three and six months ended June 30, 2013, respectively compared to the same periods in 2012 due to higher revenues for both services and scanning receiver products. The increase in RF Solutions revenue is attributed to carrier spending increasing from a low point in 2012. The services revenue growth is attributed to the rapid growth of in-building wireless network expansion. 34 -------------------------------------------------------------------------------- Table of Contents Gross Profit Three Months Ended June 30, 2013 % of Revenues 2012 % of Revenues Connected Solutions $ 5,662 29.5 % $ 5,104 34.4 % RF Solutions 4,876 64.1 % 3,556 68.3 % Consolidating 10 not meaningful 10 not meaningful Total $ 10,548 39.4 % $ 8,670 43.4 % Six Months Ended June 30, 2013 % of Revenues 2012 % of Revenues Connected Solutions $ 11,673 30.3 % $ 9,503 34.0 % RF Solutions 8,457 63.2 % 6,318 68.6 % Consolidating 16 not meaningful 27 not meaningful Total $ 20,146 38.9 % $ 15,848 42.7 % The gross profit percentage of 39.4% for the three months ended June 30, 2013 was 3.3% lower than the comparable period in fiscal 2012, and the gross profit percentage of 38.9% for the six months ended June 30, 2013 was 3.8% lower than the comparable period in fiscal 2012, primarily because of the addition of lower margin revenues from the TelWorx business. For the three and six months ended June 30, 2013, the gross margins percentage for Connected Solutions declined due to the addition of lower margin revenues from the TelWorx business and due to the expense for inventory disposals related to the restructuring of the TelWorx business. During the three months ended June 30, 2013, we disposed of $0.3 million of TelWorx inventory that was not compatible with our Bloomingdale facility or Bloomingdale operations. For the three and six months ended June 30, 2013, the gross margin percentage for RF Solutions declined primarily because of higher mix of lower margin service business. Research and Development Three Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 1,166 $ 1,042 $ 124 11.9 % RF Solutions 1,517 1,173 344 29.3 % Total $ 2,683 $ 2,215 $ 468 21.1 % Research and Development expense as % of Revenues 10 % 11 % Six Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 2,302 $ 2,119 $ 183 8.6 % RF Solutions 2,931 2,412 519 21.5 % Total $ 5,233 $ 4,531 $ 702 15.5 % Research and Development expense as % of Revenues 10 % 12 % Research and development expenses increased approximately $0.5 million and $0.7 million for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. Research and development expenses increased by $0.3 million and $0.5 million for RF Solutions in the three and six months ended June 30, 2013, respectively compared to the prior periods primarily due to development expense for new scanning receiver products. Research and development expenses increased by $0.1 million and $0.2 million for Connected Solutions in the three and six months ended June 30, 2013, respectively compared to the prior periods primarily due to expenses for the TelWorx business. 35-------------------------------------------------------------------------------- Table of Contents Sales and Marketing Three Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 2,147 $ 1,543 $ 604 39.1 % RF Solutions 907 1,030 (123 ) -11.9 % Total $ 3,054 $ 2,573 $ 481 18.7 % Sales and Marketing expense as % of Revenues 11 % 13 % Six Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 4,339 $ 3,099 $ 1,240 40.0 % RF Solutions 1,736 1,983 (247 ) -12.5 % Total $ 6,075 $ 5,082 $ 993 19.5 % Sales and Marketing expense as % of Revenues 12 % 14 % 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 $0.5 million and $1.0 million for the three and six months ended June 30, 2013, respectively compared to the same periods in 2012. Sales and marketing expenses increased $0.6 million and $1.2 million for Connected Solutions for the three and six months ended June 30, 2013, respectively, compared to the same period in fiscal 2012 primarily due to expenses related to the TelWorx business. Sales and marketing expenses for RF Solutions decreased $0.1 million and $0.2 million for the three and six months ended June 30 2013, respectively, compared to the prior periods primarily because of lower sales headcount. General and Administrative Three Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 457 $ 244 $ 213 87.3 % RF Solutions 170 118 52 44.1 % Centralized expenses 3,198 2,294 904 39.4 % Total $ 3,825 $ 2,656 $ 1,169 44.0 % General and administrative expense as % of Revenues 14 % 13 % Six Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 885 $ 470 $ 415 88.3 % RF Solutions 329 259 70 27.0 % Centralized expenses 7,242 4,660 2,582 55.4 % Total $ 8,456 $ 5,389 $ 3,067 56.9 % General and administrative expense as % of Revenues 16 % 15 % 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 $1.2 million for the three months ended June 30, 2013 and increased $3.1 million for the six months ended June 30, 2013 compared to the same period in fiscal 2012. General and administrative expenses for Connected Solutions increased $0.2 million and $0.4 million for the three and six months ended June 30, 2013 compared to the prior periods in 2012 primarily due to the addition of expenses for the TelWorx business acquired in July 2012. Within our centralized expenses, the increase of $2.6 million is primarily because we incurred $1.8 million of professional fees associated with the TelWorx investigation. See Footnote 11 to the consolidated financial statements for more information related to the TelWorx investigation. 36-------------------------------------------------------------------------------- Table of Contents Amortization of Other Intangible Assets Three Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 394 $ 321 $ 73 22.7 % RF Solutions 210 221 (11 ) -5.0 % Total $ 604 $ 542 $ 62 11.4 % Amortization expense of intangible assets as % of Revenues 2 % 3 % Six Months Ended June 30, 2013 2012 $ Change % Change Connected Solutions $ 790 $ 643 $ 147 22.9 % RF Solutions 419 441 (22 ) -5.0 % Total $ 1,209 $ 1,084 $ 125 11.5 % Amortization expense of intangible assets as % of Revenues 2 % 3 % Amortization increased $0.1 million during the three and six months ended June 30, 2013 compared to the same period in 2012, primarily because of higher amortization for intangible assets attributed to the Connected Solutions segment. Amortization expense increased for Connected Solutions due to the acquisition of the TelWorx assets in July 2012. Restructuring Charges Three Months Ended June 30, 2013 2012 $ Change Connected Solutions $ 124 $ 0 $ 124 RF Solutions 0 0 0 Total $ 124 $ 0 $ 124 Restructuring expense as % of Revenues 0 % 0 % Six Months Ended June 30, 2013 2012 $ Change Connected Solutions $ 225 $ 0 $ 225 RF Solutions 0 0 0 Total $ 225 $ 0 $ 225 Restructuring expense as % of Revenues 0 % 0 % We are in process of integrating the TelWorx business with the antenna products business in our Connected Solutions segment. The kitting and order fulfillment operations in North Carolina are being consolidated into our Bloomingdale, Illinois facility. As part of the integration, we announced the separation of 17 PCTelWorx employees in March 2013 and one additional employee in June 2013. Fifteen employees were separated during the six months ended June 30, 2013 and three additional employees will be separated by September 30, 2013. The restructuring expense of $0.2 million during the three and six months ended June 30, 2013 consisted of employee related costs and asset disposals. We disposed of assets that were not compatible with our Bloomingdale facility or our Bloomingdale operations. We anticipate that the restructuring will be complete by September 30, 2013 and we will record additional restructuring expense of $0.1 million during the three months ended September 30, 2013. 37-------------------------------------------------------------------------------- Table of Contents Other Income, Net Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2013 June 30, 2012 June 30, 2013 June 30, 2012 Other income, net $ 57 $ 39 $ 4,389 $ 73 Percentage of revenues 0.2 % 0.2 % 8.5 % 0.2 % Other income, net consists of interest income, foreign exchange gains and losses, and other income. In the six months ended June 30, 2013 we recorded other income of $4.3 million which represents the net gain related to the TelWorx settlement. In the three months ended June 30, 2013 and 2012, we recorded interest income of $20 and $40, respectively. In the six months ended June 30, 2013 and 2012, we recorded interest income of $39 and $83, respectively. In the three months ended June 30, 2013 and 2012, we recorded foreign exchange losses of $5 and $7, respectively. In the six months ended June 30, 2013 and 2012, we recorded foreign exchange losses of $16 and $17, respectively. During the six months ended June 30, 2013, we recorded $4.3 million in other income related to the Scronce settlement for the TelWorx acquisition. Benefit for Income Taxes Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2013 June 30, 2012 June 30, 2013 June 30, 2012 Expense (benefit) for income taxes $ 128 $ 278 $ 1,198 ($ 54 ) Effective tax rate 40.6 % 38.5 % 35.9 % 32.7 % The effective tax rate for the six months ended June 30, 2013 differed from the statutory rate of 34% by approximately 1.9% primarily because of state income taxes. The effective tax rate for the six months ended June 30, 2012 differed from the statutory rate of 34% by approximately 1.3%. We maintain valuation allowances due to uncertainties regarding realizability. At June 30, 2013 and December 31, 2012, we had a $0.7 million valuation allowance on our deferred tax assets. The valuation allowance primarily relates to deferred tax assets in tax jurisdictions in which we no longer have significant operations. On a regular basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance. Our long-term forecasts continue to support the realization of our deferred tax assets. Our domestic deferred tax assets have a ratable reversal pattern over 15 years. The carry forward rules allow for up to a 20 year carry forward of net operating losses ("NOL") to future income that is available to realize the deferred tax assets. The combination of the deferred tax asset reversal pattern and carry forward period yields a 27.5 year average period over which future income can be utilized to realize the deferred tax assets. We regularly evaluate our estimates and judgments related to uncertain tax positions and when necessary, establish contingency reserves to account for our uncertain tax positions. As we obtain more information via the settlement of tax audits and through other pertinent information, these projections and estimates are reassessed and may be adjusted accordingly. These adjustments may result in significant income tax provisions or provision reversals. Discontinued Operations Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2013 June 30, 2012 June 30, 2013 June 30, 2012 Net loss from discontinued operations ($ 22 ) ($ 774 ) ($ 109 ) ($ 1,098 ) The net loss from discontinued operations for the three and six months ended June 30, 2013 includes operating expenses of PCTEL Secure, net of income taxes. The net loss for the three and six months ended June 30, 2012 includes operating expenses and the noncontrolling interest of PCTEL Secure, net of income taxes, as well as the adjustments to the redemption value of redeemable equity. 38-------------------------------------------------------------------------------- Table of Contents Stock-based compensation expense 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 condensed consolidated statements of operations include $0.9 million and $1.6 million of stock compensation expense for the three and six months ended June 30, 2012, respectively. Stock compensation expense for the three months ended June 30, 2012 consists of $0.8 million for restricted stock awards, and $0.1 million for stock option and stock purchase plan expenses. Stock compensation expense for the six months ended June 30, 2012 consists of $1.5 million for restricted stock awards, and $0.1 million for stock option and stock purchase plan expenses. 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, 2013 2012 2013 2012 Cost of revenues $ 107 $ 99 $ 191 $ 203 Research and development 178 147 322 287 Sales and marketing 154 128 261 257 General and administrative 660 567 947 891 Total continuing operations 1,099 941 1,721 1,638 Discontinued operations (1 ) 2 1 2 Total $ 1,098 $ 943 $ 1,722 $ 1,640 Liquidity and Capital Resources Six Months Ended June 30, 2013 2012 Net income (loss) $ 2,030 ($ 1,209 ) Charges for depreciation, amortization, stock-based compensation, and other non-cash items 4,611 3,767 Changes in operating assets and liabilities (3,670 ) (1,079 ) Net cash provided by operating activities 2,971 1,479 Net cash provided by (used in) investing activities (835 ) 8,559 Net cash used in financing activities (1,341 ) (803 ) Cash flows from discontinued operations (16 ) (863 ) June 30, December 31, 2013 2012 Cash and cash equivalents at the end of period $ 18,330 $ 17,543 Short-term investments at the end of period 33,151 33,596 Working capital at the end of period $ 77,071 $ 74,486 Liquidity and Capital Resources Overview At June 30, 2013, our cash and investments were approximately $51.5 million and we had working capital of $77.1 million. Our cash and investments were approximately $0.5 million lower at June 30, 2013 compared to December 31, 2012 because we received the $4.3 million settlement related to the TelWorx acquisition, offsetting cash used with the contraction of our current liabilities on our balance sheet, dividends, and stock buybacks, and capital expenditures. We used $1.3 million of cash for capital expenditures, $0.4 million for repurchase of stock and $1.3 million of cash for payment of dividends, offsetting $0.4 million from issuance of common stock. 39-------------------------------------------------------------------------------- Table of Contents 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, 2013 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. On March 13, 2013 the Company disclosed on Form 8-K/A that it had discovered accounting irregularities in the TelWorx pre-acquisition audited financial statements for the years ended December 31, 2010 and 2011, as well as the unaudited pro-forma financial statements for the three month periods ending March 31, 2012 and June 30, 2012. The Company concluded that those financial statements could no longer be relied upon. The audited financial statements are required under Rule 3-05 of Regulation S-X and the pro-forma financial statements are required under Article 11 of Regulation S-X. Until such time as the Company is able to file restated pre-acquisition financial statements for the periods required, or through the passage of the appropriate period of time during which the TelWorx operations are included in the Company's financial statements, the Company will not be in a position to have the SEC declare effective any new registration statements or post-effective amendments. It may take an extended period of time for the Company to comply with the requirements and during that time the Company would be unable to raise capital through the issuance of common stock to fund its operations and acquisitions. This inability could adversely affect the Company's liquidity, results of operations and the funding of acquisitions using common shares. The Company currently has open an S-8 registration statement covering its employee stock plan. There are no other open registration statements and management has no plans at this time to pursue a registration statement once the matter is resolved. Management believes that the Company's current financial position, which includes $51.5 million in cash and investments, and no debt, combined with its historic ability to generated free cash flow (cash flow from operations less capital spending) provide adequate liquidity and working capital to support its operations as well as funding for potential acquisitions through at least 2014. Operating Activities: Operating activities provided $3.0 million of cash during the six months ended June 30, 2013 as we generated approximately $6.7 million of cash from our income statement but used $3.7 million of cash within our balance sheet. We used $0.9 million for payroll taxes related to stock-based compensation. The tax payments related to our stock issued for restricted stock awards and performance shares. On the balance sheet, we used cash of $4.8 million because of reductions in accounts payable. Payables declined due to reductions in inventories and due to the timing of vendor purchases in the quarter ended June 30, 2013 compared to the quarter ended December 31, 2012. We also used $1.6 million during the six months ended June 30, 2013 for payments for sales commissions and accrued inventory purchases. We generated cash of $1.5 million from reductions in RF Solutions inventories. Operating activities provided $1.5 million of cash during the six months ended June 30, 2012 as we generated $2.6 million in cash from our income statement activities and used $1.1 million of cash from our balance sheet activities. We used $1.2 million for payroll taxes related to stock-based compensation. The tax payments related to the Company's stock issued for restricted stock awards and performance shares. On the balance sheet, we used cash primarily due to payments for accrued liabilities. The $2.6 million decrease in other accruals consisted of payments for cash bonuses, sales commissions, and accrued inventory purchases. In March 2012, we used $2.2 million of cash for bonuses under the 2011 Short Term Incentive Plan ("STIP"). Cash bonuses were only $0.9 million for the same period in 2011. Cash bonuses paid in 2012 for the 2011 STIP were higher compared to cash bonuses paid in 2011 for the 2010 STIP because operating results were better in 2011 and because bonuses to executives under the 2010 STIP were paid 50% in cash and 50% in stock. During the six months ended June 30, 2012, cash was provided by a decrease in prepaid expenses and an increase in accounts payable. Prepaid expenses and other assets decreased $0.8 million during the six months ended June 30, 2012 primarily because we received income tax refunds. Our accounts payable increased $0.4 million during the six ended June 30, 2012 due to timing of inventory purchases. 40-------------------------------------------------------------------------------- Table of Contents Investing Activities: Our investing activities used $0.8 million of cash during the six months ended June 30, 2013 as we generated $0.4 million of cash from net maturities of investments and used $1.3 million for capital expenditures. Redemptions and maturities of our investments in short-term bonds during the six months ended June 30, 2013 provided $39.2 million in funds. We rotated $38.8 million of cash into new short-term and long-term bonds during the six months ended June 30, 2013. Our investing activities provided $8.6 million of cash during the six months ended June 30, 2012. Redemptions and maturities of our investments in short-term bonds during the six months ended June 30, 2012 provided $37.5 million in funds. We rotated $26.3 million of cash into new short-term and long-term bonds during the six months ended June 30, 2012. Beginning in the second quarter 2012, we invested the funds from maturing short-term investments into money market funds so that we had available cash for acquisitions. For the six months ended June 30, 2012, our capital expenditures were $1.7 million, including $1.1 million for our ERP project. We completed the ERP project in the third quarter 2012. We also purchased an additional 19% membership interest in PCTEL Secure for $0.9 million in May 2012. In July 2012, we purchased the remaining 30% of PCTEL Secure for $0.8 million. Financing Activities: We used $1.3 million in cash for financing activities during the six months ended June 30, 2013. We paid $1.3 million for a cash dividend paid in February 2013 and May 2013 and we received $0.4 million in proceeds from the purchase of shares through our ESPP and the exercise of stock options. We used $0.4 million to repurchase shares in the stock repurchase program. We used $0.8 million in cash for financing activities during the six months ended June 30, 2012. We paid $1.1 million for cash dividends paid in February 2012 and May 2012 and we received $0.3 million in proceeds from the purchase of shares through our ESPP and the exercise of stock options. Contractual Obligations and Commercial Commitments As of June 30, 2013, we had operating lease obligations of approximately $4.1 million through 2020. Operating lease obligations consist of $4.0 million for facility lease obligations and $0.1 million for equipment leases. Our lease obligations were $4.9 million at December 31, 2012. During the first quarter 2013, we extended the lease for our Pryor, Oklahoma facility through April 2015 and we extended the lease for our Beijing design center through June 2016. In May 2013, we gave notice of early termination of our facility lease in Lexington, North Carolina. The termination is effective October 2013. In July 2013, we signed a new lease for office space in Lexington. The new five-year lease is effective August 1, 2013. We had purchase obligations of $9.2 million and $9.9 million at June 30, 2013 and December 31, 2012, respectively. These obligations are for the purchase of inventory, as well as for other goods and services in the ordinary course of business, and exclude the balances for purchases currently recognized as liabilities on the balance sheet. We had a liability of $1.4 million related to income tax uncertainties at June 30, 2013 and December 31, 2012, respectively. We do not know when this liability will be satisfied. Critical Accounting Policies and Estimates We use certain critical accounting policies as described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" of our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012 (the "2012 Annual Report on Form 10-K"). There have been no material changes in any of our critical accounting policies since December 31, 2012. See Note 2 in the Notes to the Condensed Consolidated Financial Statements for discussion on recent accounting pronouncements. |