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DSP GROUP INC /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This report and certain information incorporated herein by reference contain forward-looking statements, which are provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this report, other than statements that are purely historical in nature, are forward-looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "should," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," or other similar words. Forward-looking statements include statements regarding: ? Our belief that sales of our DECT products will continue to represent a substantial percentage of our revenues for the rest of 2014; ? Our belief that our past research and development investments in new technologies are beginning to materialize; ? Our belief that with the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed-line telephony is declining and will continue to decline, which could reduce our revenues derived from, and unit sales of, cordless telephony products; ? Our belief that the market will remain price sensitive for our traditional cordless telephony products and expect that price erosion and the decrease in the average selling prices of such products to continue; ? Our intention to leverage our strong technology base and customer relationships to maximize growth and revenue opportunities for our new products; ? Our anticipation that annual revenues generated from our new products to increase significantly in 2014 as compared to 2013; ? Our belief that commercial shipments of products incorporating our new products will continue during the rest of 2014; ? Our belief that we are well positioned to achieve our 2014 key design and financial milestones, as well as return to revenue growth in both the fourth quarter and 2015 fiscal year; and ? Our belief that our available cash and cash equivalents at September 30, 2014 should be sufficient to finance our operations for the foreseeable future. 23-------------------------------------------------------------------------------- All forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, our dependence on one primary distributor, our OEM relationships and competition, as well as those risks described in Part II - Item 1A - "Risk Factors" of this Form 10-Q. This Quarterly Report on Form 10-Q includes trademarks and registered trademarks of DSP Group. Products or service names of other companies mentioned in this Quarterly Report on Form 10-Q may be trademarks or registered trademarks of their respective owners. DSP Group, Inc. is referred to in this Quarterly Report as "DSP Group," "we," "us" "our" or "company." Overview The following discussion and analysis is intended to provide investors with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto. Business Overview DSP Group is a leading global provider of wireless chipset solutions for converged communications, delivering system solutions that combine semiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating DECT, Wi-Fi, PSTN and VOIP technologies with state-of-the-art application processors. We also enable converged voice, audio and data connectivity across diverse consumer products - from cordless and VOIP phones to home gateways and connected multimedia screens. A majority of our revenues is derived from products targeted for digital cordless telephony. Such revenues currently represent approximately 79% of our total revenues for the first nine months of 2014. 24 -------------------------------------------------------------------------------- Our total revenues were $36.7 million for the third quarter of 2014, an increase of 4%, in comparison to $35.4 million for the same period in 2013. The increase for the third quarter of 2014 was primarily as a result of increased sales of our VoIP, home gateways and home automation products, offset to some extent by the decrease in sales of our DECT and 2.4GHz cordless telephony products. Our revenues were $105.9 million for the first nine months of 2014, a decrease of 9.0% in comparison to the same period of 2013. The decrease in our revenues for the first nine months of 2014 in comparison to the same period of 2013 was mainly due to a decrease in sales of cordless telephony products for the U.S. and European markets, offset to some extent by an increase in cordless telephony product sales for the Japanese domestic markets and VOIP, home gateways and home automation products sales. Revenues derived from the sale of DECT products represented 82% of our total revenues for the first nine months of 2014, as compared to 83% of our total revenues for the first nine months of 2013. Revenues derived from the sale of cordless telephony products represented 79% of our total revenues for the first nine months of 2014, as compared to 85% of our total revenues for the first nine months of 2013. Our gross margin increased to 40.0% of our total revenues for the first nine months of 2014 from 39.5% for the first nine months of 2013, primary due to (i) an improvement in production yield and direct contribution of certain of our products as a result of lower cost structure for production of such products, and (ii) a change in the mix of products sold and customers. We had no operating income for the first nine months of 2014 as compared to an operating income of $0.4 million for the first nine months of 2013. The decrease in operating income was mainly as a result of the decrease in total revenues for the first nine months of 2014, as compared to the first nine months of 2013, offset to some extent by a decrease in operating expenses and an increase in gross profit during the first nine months of 2014 as compared to the first nine months of 2013. Our operating expenses decreased by 6% to $42.4 million for the first nine months of 2014, as compared to $45.3 million for the first nine months of 2013. Notwithstanding our return to revenue growth in the third quarter of 2014 and our success in reducing our operating expenses, we expect that our financial condition will continue to be challenged by the steady decline of the cordless telephony market and the continuing decline in the average selling prices of cordless telephony products. The cordless telephony market is undergoing a challenging period. With the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed-line telephony will continue to decline, which will continue to reduce our revenues derived from, and unit sales of, cordless telephony products. Furthermore, our business also may be significantly affected by the outcome of the competition between cellular phone operators and fixed-line operators for the provision of residential communication. A significant majority of our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony. If we are unable to develop new technologies to address alternative connectivity methods, our business could be materially adversely affected. Therefore, in order to increase our revenues and offset the steady decline in revenues generated from our cordless telephony products, we need to introduce new products and penetrate new markets. We intend to leverage our strong technology base and customer relationships to maximize growth and revenue opportunities for our new products. We see that our past research and development investments in new technologies are beginning to materialize. We have achieved a number of design wins for our new products. Commercial shipments for some new products have begun with more shipments to occur during the rest of 2014. Aggregate revenues derived from our new products were 21.0% and 14.7% of our total revenues for the first nine months of 2014 and 2013, respectively. Based on a strong pipeline of design wins, our current mix of new products and anticipated commercialization schedules of customers incorporating our new products, we anticipate annual revenues generated from our new products to increase significantly in 2014 as compared to 2013. Moreover, we believe we are well positioned to achieve our 2014 key design and financial milestones, as well as return to revenue growth in both the fourth quarter and 2015 fiscal year. 25 -------------------------------------------------------------------------------- However, we can provide no assurances about our success in introducing new products and penetrating new markets, as well as our predictions regarding market trends. For example, although a number of potential customers have expressed interest, we have not yet achieved a design win for our HDClear product for mobile devices. Furthermore, although new products targeted at the home control & automation and enterprise VOIP solutions are gradually being introduced into the market, market adoption of such products is at early stages and may require us to increase our research and development spending to capitalize on opportunities in these markets. As an example, we expect our research and development spending to increase in the fourth quarter of 2014 as compare to the last three quarters of 2014. Although we have achieved a number of design wins with top-tier OEMs for new products, revenue generated from the commercialization of new products is a measured process as there is generally a long lead time from a design win to commercialization. From initial product design win to volume production, many factors could impact the timing and/or amount of sales actually realized from the design win. In addition to general price sensitive and price erosion in the markets we operate, the introduction of new productions may accelerate price erosion of older products. As a result, we expect the market to remain price sensitive for our traditional cordless telephony products and expect that price erosion and the decrease in the average selling prices of such products to continue. Furthermore, various other factors, including increases in the cost of raw materials and commodities and our suppliers passing such increases onto us, increases in silicon wafer costs and increases in production, assembly and testing costs, and shortage of capacity to fulfill our fabrication, assembly and testing needs, all may decrease our gross profit and harm our ability to grow our revenues in future periods. As of September 30, 2014, our principal source of liquidity consisted of cash and cash equivalents of $14.5 million and marketable securities and short term deposits of $102.5 million, totaling $117.0 million. RESULTS OF OPERATIONS Total Revenues. Our total revenues were $36.7 million for the third quarter of 2014, as compared to $35.4 million for the same period in 2013. Our total revenues were $105.9 million for the first nine months of 2014, as compared to $115.7 million for the same period in 2013. The increase for the third quarter of 2014 was primarily as a result of increased sales of our VoIP, home gateways and home automation products, offset to some extent by the decrease in sales of our DECT and 2.4GHz cordless telephony products. The decrease for the first nine months of 2014 was primarily as a result of decreased sales of our DECT and 2.4GHz cordless telephony products, offset to some extent by increased sales of cordless telephony product for the Japanese domestic markets, and increased sales of VoIP, home gateways and home automation products. Sales of DECT products, which include cordless telephony, home gateways and home automation products for the third quarter of 2014 and 2013 were $29.5 million and $29.4 million, respectively, representing 80% and 83% of our total revenues for the respective periods. Sales of DECT products, which include cordless telephony, home gateways and home automation products, for the first nine months of 2014 and 2013 were $86.4 million and $96.5 million, respectively, representing 82% and 83%, respectively, of our total revenues for the respective periods, representing a decrease of 10% in absolute dollars when comparing sales for the first nine months of 2014 to sales for the first nine months of 2013. The above mentioned decrease in sales of our cordless telephony products for the third quarter and the first nine months of 2014, as compared to the same period in 2013, was mainly attributable to a decline in market demand. Sales of DECT 6.0 products for the U.S. market decreased to $35.6 million for the first nine months of 2014 from $42.9 million for the first nine months of 2013, representing 34% and 37% of our total revenues for the first nine months of 2014 and 2013, respectively. Sales of DECT products for the European market decreased to $38.5 million for the first nine months of 2014 from $44.2 million for the first nine months of 2013, representing 36% and 38% of our total revenues for the first nine months of 2014 and 2013, respectively. 26 -------------------------------------------------------------------------------- The following table shows the breakdown of revenues for all product lines for the periods indicated by geographic location based on the geographic location of our customers (in thousands): Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 United States $ 1,528 $ 805 $ 3,487 $ 3,586 Japan 8,734 9,237 23,742 25,981 Europe 1,529 1,334 4,552 5,263 Hong-Kong 19,140 19,380 58,136 66,664 China 1,381 1,662 4,614 5,349 Taiwan 3,155 1,650 7,416 5,299 Other 1,248 1,313 3,930 3,581 Total revenues $ 36,715 $ 35,381 $ 105,877 $ 115,723 Sales to our customers in Hong Kong decreased for the third quarter and the first nine months of 2014, as compared to the same periods of 2013, representing a 1% and 13% decrease in absolute dollars, respectively. The decrease in our sales to Hong Kong for the first nine months of 2014, as compared to the same periods of 2013, resulted mainly from a decrease in sales to VTech Holdings Ltd. ("VTech"), representing a 9% decrease in absolute dollars and a decrease in sales to CCT Telecom Holdings Ltd. ("CCT Telecom"), representing a 23% decrease in absolute dollars. Sales to our customers in Japan decreased for the third quarter and the first nine months of 2014, as compared to the same periods of 2013, representing a 5% and 9% decrease, respectively, in absolute dollars. The decrease in our sales to Japan for the first nine months, as compared to the same period of 2013, resulted from a decrease in sales to Uniden America Corporation, representing a 65% decrease in absolute dollars. The decrease in our sales to Japan for the third quarter of 2014, as compared to the same period of 2013, resulted from a decrease in sales to Panasonic Communications Co., Ltd. ("Panasonic") and Japan Domestic customers, representing a 3% and 15% decrease in absolute dollars, respectively. As our products are generally incorporated into consumer electronics products sold by our OEM customers, our revenues are affected by seasonal buying patterns of consumer electronics products sold by our OEM customers that incorporate our products. Significant Customers. VTech is a significant OEM customer based in Hong Kong. Sales to VTech represented 34% and 35% of our total revenues for the three months ended September 30, 2014 and 2013, respectively. Sales to VTech represented 36% of our total revenues for both the nine months ended September 30, 2014 and 2013. Revenues derived from sales through our largest distributor, Tomen Electronics Corporation ("Tomen Electronics") accounted for 22% and 24% of our total revenues for the three months ended September 30, 2014 and 2013, respectively. Revenues derived from sales through Tomen Electronics accounted for 21% and 18% of our total revenues for the nine months ended September 30, 2014 and 2013, respectively. 27-------------------------------------------------------------------------------- Tomen Electronics sells our products to a limited number of customers. One customer, Panasonic, has continually accounted for a majority of sales through Tomen Electronics. Sales to Panasonic through Tomen Electronics generated 17% and 18% of our total revenues for the three months ended September 30, 2014 and 2013, respectively. Sales to Panasonic through Tomen Electronics generated 15% and 13% of our total revenues for the nine months ended September 30, 2014 and 2013, respectively. Significant Products. Revenues from our DECT products, which include cordless telephony, home gateways and home automation products, represented 80% and 82% of our total revenues for the three and nine months ended September 30, 2014, respectively. Revenues from our DECT products represented 83% of our total revenues for both the three and nine months ended September 30, 2013. We believe that sales of DECT products will continue to represent a substantial percentage of our revenues for the remainder of 2014. We believe that the rapid deployment of new communication access methods, as well as the lack of growth in fixed-line telephony, will reduce our total revenues derived from, and unit sales of, cordless telephony products, for the short and long term Revenues from our VoIP products represented 12% and 10% of our total revenues for the three and nine months ended September 30, 2014, respectively. Revenues from our VoIP products represented 5% of our total revenues for the both three and nine months ended September 30, 2013. Gross Profit. Gross profit as a percentage of revenues was 39.6% for the third quarter of 2014 and 39.0% for the third quarter of 2013. Gross profit as a percentage of revenues was 40.0% for the first nine months of 2014 and 39.5% for the first nine months of 2013. The increase in our gross profit for the third quarter of 2014 as compared to the third quarter of 2013 was mainly due to (i) an increase in total revenues, (ii) an improvement in the production yield and direct contribution of certain of our products as a result of lower cost structure for production of such products, and (iii) a change in the mix of products sold and customers. The increase in our gross profit for the first nine months of 2014 as compared to the first nine months of 2013 was mainly due to (i) an improvement in the production yield and direct contribution of certain of our products as a result of lower cost structure for production of such products, and (ii) a change in the mix of products sold and customers, offset to some extent by the decrease in total revenues for the first nine months of 2014 as compared to the first nine months of 2013. As gross profit reflects the sale of chips and chipsets that have different margins, changes in the mix of products sold and customers have impacted and will continue to impact our gross profit in future periods. Our gross profit may decrease in the future due to a variety of factors, including the continued decline in the average selling prices of our products, changes in the mix of products sold and customers, our failure to achieve cost reductions, roll-out of new products in any given period, our success in introducing new engineering processes to reduce manufacturing costs, increases in the cost of raw materials such as gold, oil and silicon wafers, and increases in production, assembly and testing costs. Moreover, our suppliers may pass the increase in the cost of raw materials and commodities onto us which would further reduce the gross margins of our products. There are no guarantees that our ongoing efforts in cost reduction and yield improvements will keep pace with the anticipated continuing decline in average selling prices of our products. Cost of goods sold consists primarily of costs of wafer manufacturing and fabrication, assembly and testing of integrated circuit devices and related overhead costs, and compensation and associated expenses related to manufacturing and testing support, inventory obsolesce and logistics personnel. Research and Development Expenses, net. Our research and development expenses, net, were $8.1 million for both the third quarter of 2014 and 2013. Research and development expenses, net, decreased to $24.3 million for the first nine months of 2014 from $26.5 million for the first nine months of 2013. The decrease for the first nine months of 2014 in research and development expenses, net, as compared to the comparable period of 2013, was mainly due to (i) funding received from the Israeli Office of the Chief Scientist ("OCS") in the amount of $2.5 million for the first nine months of 2014, following the receipt of an approval from the OCS during the first quarter of 2014 for the current year research and development programs and some residual funding that was approved in respect to 2013 programs. During the first nine months of 2013, such funding recognized in research and development expenses amounted to $1.3 million. Additionally, the decrease was attributable to: (i) a decrease in projects-related expenses (mainly tape out and IP expenses) in the amount of $1.4 million, and (ii) a decrease in depreciation expenses in the amount of $0.4 million. 28 -------------------------------------------------------------------------------- The above mentioned decreases were offset to some extent by (i) an increase in labor and employee-related expenses in the amount of $0.4 million for the first nine months of 2014, as compared to the same period in 2013, mainly as a result of the devaluation of the U.S. dollar against the NIS, which increased our Israeli employee labor expenses, and (ii) an increase in equity-based compensation expenses in the amount of $0.5 million for the first nine months of 2014, as compared to the same period in 2013. Our research and development expenses, net, as a percentage of our total revenues were 22% and 23% for the three months ended September 30, 2014 and 2013, respectively, and 23% for both the nine months ended September 30, 2014 and 2013. The decrease in research and development expenses, net, as a percentage of our total revenues for the three months ended September 30, 2014 as compared to 2013 was mainly due to the decrease in research and development expenses, net, for the comparable periods, as well as the increase in absolute dollars of our total revenues for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to tape out and mask work, subcontracting, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment and software tools used in research and development, and facilities expenses associated with and allocated to research and development activities. Sales and Marketing Expenses. Our sales and marketing expenses increased to $2.9 million for the third quarter of 2014 from $2.8 million for the third quarter of 2013. Sales and marketing expenses increased to $8.9 million for the first nine months of 2014 from $8.5 million for the first nine months of 2013. The increase in sales and marketing expenses for the third quarter and the first nine months of 2014, as compared to the comparable periods during 2013, was mainly attributable to an increase in labor and employee-related expenses, mainly due to an increase in employee's sales commissions and the devaluation of the U.S. dollar against the NIS, which increased our Israeli employee labor expenses. Our sales and marketing expenses as a percentage of total revenues were 8% for both the three months ended September 30, 2014 and 2013, and 8% and 7% for the nine months ended September 30, 2014 and 2013, respectively. The increase in sales and marketing expenses as a percentage of our total revenues for the nine months ended September 30, 2014 as compared to the same period in 2013 was due to the decrease in total revenues and an increase in absolute dollars of sales and marketing expenses for the first nine months of 2014 as compared to 2013. Sales and marketing expenses consist mainly of sales commissions, payroll expenses to direct sales and marketing employees, travel, trade show expenses, and facilities expenses associated with and allocated to sales and marketing activities. General and Administrative Expenses. Our general and administrative expenses were $2.6 million for both the third quarter of 2014 and 2013. General and administrative expenses decreased to $7.9 million for the first nine months of 2014 from $9.0 million for the first nine months of 2013. The decrease in general and administrative expenses for the first nine months of 2014, as compared to the comparable period of 2013, was mainly due to (i) proxy contest related expenses (mainly legal and shareholder relations related expenses) we incurred during the second quarter of 2013, in the amount of $1.4 million as compared to no such expenses in 2014. The decrease in general and administrative expenses for the first nine months of 2014, as compared to the comparable periods of 2013, was offset to some extent by an increase in equity-based compensation expenses of $0.5 million. 29 -------------------------------------------------------------------------------- General and administrative expenses as a percentage of our total revenues were 7% for both the three months ended September 30, 2014 and 2013, and 8% for both the nine months ended September 30, 2014 and 2013. Our general and administrative expenses consist mainly of payroll expenses for management and administrative employees, accounting and legal fees, expenses related to investor relations as well as facilities expenses associated with general and administrative activities. Description of Segments. We operate under three reportable segments. Our segment information has been prepared in accordance with ASC 280, "Segment Reporting." Operating segments are defined as components of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the company's chief operating decision-maker ("CODM") in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer, who evaluates the Company's performance and allocates resources based on segment revenues and operating income. Our operating segments are as follows: Home, Office and Mobile. The classification of our business segments is based on a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customer base, homogeneity of products and technology. A description of the types of products provided by each business segment is as follows: ? Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits targeted for cordless phones sold in retail or supplied by telecommunication service providers, residential gateway devices supplied by telecommunication service providers which integrate the DECT/CAT-iq functionality and also address home automation applications, as well as fixed-mobile convergence solutions. ? Office - Comprehensive solution for Voice-over-IP (VOIP) office products, including office solutions that offer businesses of all size low-cost VOIP terminals with converged voice and data applications. ? Mobile - Products for the mobile market that provides voice enhancement and far-end noise elimination targeted for mobile phone and mobile headsets. Segment Data. We derive the results of our business segments directly from our internal management reporting system and by using certain allocation methods. The accounting policies we use to derive business segment results are substantially the same as those the Company uses for consolidation of our financial statements. The CODM measures the performance of each business segment based on several metrics, including earnings from operations. CODM uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. We do not allocate to our business segments certain operating expenses, which are managed separately at the corporate level. These unallocated costs include primarily restructuring charges, amortization of purchased intangible assets, equity-based compensation expenses, and certain corporate governance costs. 30 -------------------------------------------------------------------------------- Selected operating results information for each business segment was as follows for the three months ended September 30, 2014 and 2013: Three months ended September 30 Income (loss) from Revenues operations 2014 2013 2014 2013 Home $ 32,292 $ 33,492 $ 5,957 $ 5,381 Office $ 4,353 $ 1,889 $ (252 ) $ (731 ) Mobile $ 70 $ - $ (2,910 ) $ (2,609 ) Total $ 36,715 $ 35,381 $ 2,795 $ 2,041 Selected operating results information for each business segment was as follows for the nine months ended September 30, 2014 and 2013: Nine months ended September 30 Income (loss) from Revenues operations 2014 2013 2014 2013 Home $ 95,492 $ 109,146 $ 16,851 $ 19,650 Office $ 10,315 $ 6,577 $ (985 ) $ (4,321 ) Mobile $ 70 $ - $ (8,865 ) $ (7,369 ) Total $ 105,877 $ 115,723 $ 7,001 $ 7,960 Sales to our customers in the home segment decreased for the third quarter and first nine months of 2014, as compared to the third quarter and first nine months of 2013, representing a decrease of 4% and 13% in absolute dollars, respectively. The decrease in our sales in the home segment for the comparable periods was mainly attributable to a decline in market demands for and a decrease in the average selling prices of, cordless phones over the comparative periods, offset to some extent by an increase in the sales of home gateways and home automation products. Sales to our customers in the office segment increased for the third quarter and first nine months of 2014, as compared to the third quarter and first nine months of 2013, representing an increase of 130% and 57% in absolute dollars, respectively. The increase in our sales in the office segment for the comparable periods was mainly due to an increase in our market share of VoIP products and a general increase in market demand for VoIP products. The reconciliation of segment operating results information to our consolidated financial information is included in Note M to our financial statements. Amortization of Intangible Assets. During both the third quarter of 2014 and 2013, we recorded an expense of $0.4 million, relating to the amortization of intangible assets associated with the acquisition of the CIPT business of NXP B.V. and the acquisition of BoneTone Communications ("BoneTone") in 2011. During the nine months ended September 30, 2014, we recorded an expense of $1.2 million, as compared to $1.3 million for the nine months ended September 30, 2013, relating to the amortization of intangible assets associated with the acquisition of the CIPT business of NXP B.V. and the acquisition of BoneTone in 2011. 31 -------------------------------------------------------------------------------- Financial Income, net. Financial income, net, for the three months ended September 30, 2014 decreased to $0.2 million from $0.5 million for the three months ended September 30, 2013. Financial income, net, for the nine months ended September 30, 2014 decreased to $0.9 million from $1.8 million for the nine months ended September 30, 2013. The decrease in financial income, net, for the first nine months of 2014, as compared to the same period in 2013, was mainly due to (i) fewer gains realized from sales of certain of our marketable securities, and (ii) a lower yield on marketable securities. The decrease in financial income, net, for the third quarter of 2014, as compared to the same period in 2013, was mainly due to (i) fewer gains realized from sales of certain of our marketable securities, (ii) a lower yield on marketable securities, and (iii) exchange rate expenses as a result of the devaluation of the NIS and all other currencies against the U.S. dollar in the third quarter of 2014. Our total cash, cash equivalents, deposits and marketable securities were $117.0 million as of September 30, 2014, compared to $125.1 million as of September 30, 2013. The decrease was mainly due to the repurchase of our common stock in an aggregate amount of $16.0 million since September 30, 2013, offset to some extent by cash generated from operating activities during the period from September 30, 2013 to September 30, 2014. Provision for Income Taxes. During the first nine months of 2014, no tax expenses were recorded, as compared to an income tax benefit of $0.1 million recorded for the first nine months of 2013. The income tax benefit for the first nine months of 2013 was mainly attributed to (i) a reversal of an income tax contingency reserve that was determined to be no longer needed due to the expiration of the applicable statute of limitations in the amount of $0.1 million, and (ii) the amortization of deferred tax liability related to the intangible assets acquired in connection with the BoneTone acquisition in the amount of $0.3 million, offset to some extent by the creation of a provision for current income taxes. In the first nine months of 2014, we recorded income tax benefit in the amount of $0.3 million, which was attributed to the amortization of deferred tax liability related to the intangible assets acquired in connection with the BoneTone acquisition. The above mentioned income tax benefit was fully offset by the creation of a provision for current income taxes. During the three and nine months ended September 30, 2014, we did not record any significant changes to the net deferred tax assets due to our current estimation of future taxable income. LIQUIDITY AND CAPITAL RESOURCES Operating Activities. For the first nine months of 2014, we generated $3.7 million of cash and cash equivalents from our operating activities. Cash generated from operating activities amounted to $5.0 million for the first nine months of 2013. The decrease in cash generated from operating activities for the first nine months of 2014, as compared to the same period in 2013, was mainly as a result of (i) an increase in accounts receivable during the first nine months of 2014 in the amount of $4.0 million, as compared to an increase in the amount of $2.3 million in accounts receivable during the first nine months of 2013, (ii) an increase in inventories in the amount of $1.6 million during the first nine months of 2014, as compared to an increase in inventories in the amount of $0.2 million during the first nine months of 2013, and (iii) a decrease in accrued compensation and benefits during the first nine months of 2014 in the amount of $0.5 million as compared to an increase in the amount of $1.9 million in accrued compensation and benefits during the first nine months of 2013. The above mentioned decreases in cash used for our operating activities during the first nine months of 2014 compared to the first nine months 2013 was offset to some extent by (i) a decrease in other accounts receivable and prepaid expenses of $1.0 million during the first nine months of 2014, as compared to an increase of $0.6 million during the first nine months of 2013, and (ii) an increase in trade payables of $1.3 million during the first nine months of 2014, as compared to a decrease of $0.9 million during the first nine months of 2013. 32 -------------------------------------------------------------------------------- Investing Activities. We invest excess cash in marketable securities of varying maturity, depending on our projected cash needs for operations, capital expenditures and other business purposes. During the first nine months of 2014, we purchased $50.2 million of marketable securities, as compared to $53.3 million purchase of marketable securities during the first nine months of 2013. During the first nine months of 2014 and 2013, $9.9 million and $15.2 million, respectively, of marketable securities matured and were called by the issuers. During the first nine months of 2014 and 2013, $40.8 million and $27.8 million, respectively, of marketable securities were sold. As of September 30, 2014, the amortized cost of our marketable securities and short term deposits was $103.1 million and their stated market value was $102.5 million, representing an unrealized loss of $0.6 million. Our capital equipment purchases for the first nine months of 2014, consisting primarily of research and development software tools, computers and other peripheral equipment, engineering test and lab equipment, leasehold improvements, furniture and fixtures, totaled $1.0 million, as compared to $0.9 million for the first nine months of 2013. Financing Activities. During the first nine months of 2014, we repurchased 1,414,226 shares of our common stock at an average purchase price of $8.83 per share for approximately $12.5 million. During the first nine months of 2013, we did not repurchase any shares of common stock. In addition, during the first nine months of 2014 and 2013, we received $0.5 and $1.8 million upon the exercise of employee stock options, respectively. In November 2013, we entered into a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of our common stock for up to 2.7 million shares. This was in addition to the approximately 308,000 shares that were available for repurchase pursuant to the Board's prior authorizations. At September 30, 2014, 1,203,601 shares of our common stock are available for repurchase under our board authorized share repurchase program. As of September 30, 2014, we had cash and cash equivalents totaling approximately $14.5 million and marketable securities and short term deposits of approximately $102.5 million. Our working capital at September 30, 2014 was approximately $34.4 million, as compared to $45.5 million as of September 30, 2013. The decrease in working capital was mainly due to the repurchase of our common stock in the amount of $16.0 million since September 30, 2013 and the replacement of short term marketable securities and deposits with long term marketable securities. We believe that our current cash, cash equivalents, cash deposits and marketable securities will be sufficient to meet our cash requirements for both the short and long term. In addition, as part of our business strategy, we may evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot assure you that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See the section of the risk factors entitled "We may engage in future acquisitions that could dilute our stockholders' equity and harm our business, results of operations and financial condition." for more detailed information. 33 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. |