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WESTELL TECHNOLOGIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Overview
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. Until fiscal 1994, the Company derived
substantially all of its revenues from its Westell segment products,
particularly the sale of Network Interface Unit ("NIU") products and related
products. The Company introduced its first Customer Networking Solutions ("CNS")
products in fiscal 1993. The Company also provided audio teleconferencing
services from fiscal 1989 until Conference Plus, Inc was sold on December 31,
2011. The Company realizes the majority of its revenues from the North American
market.
On May 15, 2012, the Company acquired certain assets and liabilities of ANTONE
Wireless Corporation, including rights to ANTONE products, for $2.5 million in
cash, subject to an adjustment for working capital, plus contingent cash
consideration of up to $3.5 million. 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, pre-acquisition warranty
claims in excess of $25,000, and other indemnification claims. The acquisition
included inventories, property and equipment, contract rights, intangible
assets, and certain specified operating liabilities that existed at the closing
date. The Company also hired nine of ANTONE's employees. ANTONE products include
high-performance tower-mounted amplifiers, multi-carrier power amplifier
boosters, and cell-site antenna-sharing products. The acquisition qualifies as a
business combination and is accounted for using the acquisition method of
accounting.
On December 31, 2011, the Company sold its wholly owned subsidiary, Conference
Plus, Inc., including Conference Plus Global Services, Ltd., a wholly owned
subsidiary of ConferencePlus (collectively, "ConferencePlus") to Arkadin for
$40.3 million in cash (the "ConferencePlus sale"). Of the total purchase price,
$4.1 million was placed in escrow at closing for one year as security for
certain indemnity obligations of the Company.
On April 15, 2011, the Company sold certain assets and transferred certain
liabilities of the CNS segment to NETGEAR, Inc. ("NETGEAR") for $36.7 million in
cash (the "CNS asset sale"). As part of the CNS asset sale, most of the CNS
segment's customer relationships, contracts and employees were transferred to
NETGEAR. The Company retained one major CNS customer relationship and contract.
As part of the agreement, the Company agreed to indemnify NETGEAR following the
closing of the sale against specified losses in connection with the CNS business
and generally retained responsibility for various legal liabilities that may
accrue. An escrow balance of $3.4 million was established for one year for this
purpose or for other claims. In the quarter ended September 30, 2012, $2.6
million of the escrow was released with the remaining $0.7 million reflected as
Restricted cash on the Condensed Consolidated Balance Sheet as of September 30,
2012. Subsequent to September 30, 2012, but prior to the release of the
financial statements, the Company resolved, through arbitration, a dispute with
NETGEAR regarding an interpretation of the Asset Purchase Agreement covering the
CNS asset sale. As a result, the Company must pay NETGEAR an estimated
$0.9 million which it expects to satisfy through release of the escrow balance
to NETGEAR and an additional payment. The Company previously recorded a
contingency reserve of $0.4 million for this claim and recorded an additional
expense of $0.5 million during the three months ended September 30, 2012. The
Company completed the remaining product shipments under the retained customer
contract in December 2011. In fiscal year 2013, the Company continues 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
expects this activity to abate going forward. The Company also retained within
its CNS division the Homecloud product development program. The Homecloud
product family which is under development aims to provide a new suite of
services into the home, with an initial focus on media and information
management, sharing and delivery, and prospective functionality applicable to
enhanced security; home control; and network management.
In the Westell segment, the Company 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
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Table of Contents
mountings; power distribution products; network interface devices ("NIDs") for
TDM/SONET networks and service demarcation; span powering equipment; remote
monitoring devices; copper/fiber connectivity panels; managed Ethernet switches
for utility and industrial networks; Ethernet extension devices for providing
native Ethernet service handoff in carrier applications; wireless signal
conditioning and monitoring products for 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. Traditional products are sold primarily into wireline markets, but the
Company also is actively moving to generate revenues from wireless
telecommunications products. In the quarter ended September 30, 2012, the
Company completed the relocation of the majority of the power distribution and
remote monitoring products which were designed through the Company's Noran Tel
subsidiary located in Regina, Saskatchewan, Canada, to its location in Aurora,
Illinois. The remaining operations in Canada will be focused on power
distribution product development and sales in Canada of Westell products. The
Company completed this transition during the quarter ended September 30, 2012.
The prices for the products 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 Company's customer base for its products is highly concentrated and
comprised primarily of major telecommunications service providers ("telephone
companies"), independent domestic local exchange carriers and public telephone
administrations located in the U.S. and Canada. 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 up front 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
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 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.
Results of Operations
Below is a table that compares revenue for the three and six months ended
September 30, 2012 and 2011 by segment.
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