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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 third quarter 2013 revenues increased by $0.6 million, or 2.4%, to $26.5 million compared the same period in 2012. We recorded operating income of $0.9 million in the third quarter 2013 compared to operating income of $1.1 million in the same period last year. This quarter's results include a $29 restructuring charge related to the integration and consolidation of the TelWorx operations. The Company's TelWorx operations are fully integrated into our Connected Solutions operations as well as our internal control and evaluation processes as of 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 September 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 $0.3 million. We made the decision in March 2013 to consolidate the kitting and order fulfillment operations in North Carolina into our Bloomingdale, Illinois facility. The consolidation was complete as of September 30, 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. The operation has ceased to be an identifiable reporting unit going forward as all of its operating results and cash flows are now completely integrated and comingled with the rest of the Connected Solutions segment operations. See Footnote 8 to the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, related to the acquisition of TelWorx Communications LLC, and Footnote 11 thereto 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. 32 -------------------------------------------------------------------------------- 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 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 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 nine months ended September 30, 2013 and 2012 (in thousands) Revenues by Segment Three Months September September 30, 2013 2012 $ Change % Change Connected Solutions $ 18,318 $ 19,714 ($ 1,396 ) -7.1 % RF Solutions 8,243 6,182 2,061 33.3 % Consolidating (90 ) (43 ) (47 ) not meaningful Total $ 26,471 $ 25,853 $ 618 2.4 % Nine Months Ended September 30, 2013 2012 $ Change % Change Connected Solutions $ 56,874 $ 47,687 $ 9,187 19.3 % RF Solutions 21,617 15,387 6,230 40.5 % Consolidating (201 ) (67 ) (134 ) not meaningful Total $ 78,290 $ 63,007 $ 15,283 24.3 % Revenues increased $0.6 million (2.4%) for the three months ended September 30, 2013 compared to the same period last year. RF Solutions revenue was up $2.1 million (33%) in the quarter driven by higher carrier scanning receiver spending from a low point in 2012 and the rapid growth of in-building wireless network expansion. Connected Solutions revenue declined $(1.4) million (-7.1%) in the quarter. A focused effort to eliminate unprofitable site solutions business and customers, public safety market contraction, and OEM project rotation contributed to the decline. Revenues increased $15.3 million (24.3%) for the nine months ended September 30, 2013 compared to the same period last year. RF Solutions revenue was up $6.2 million (40.5%) year to date driven by higher carrier scanning receiver spending from a low point in 2012 and the rapid growth of in-building wireless network expansion. Connected Solutions revenue increased $9.2 million (19.3%) for the nine months ended September 30, 2013 compared to the same period last year. Approximately $8.0 million of the increase is a result of having the site solutions products acquired in July 2012 for only one full quarter for the first nine months last year. 33 -------------------------------------------------------------------------------- Table of Contents Gross Profit by Segment Three Months September September 30, 2013 % of Revenues 2012 % of Revenues Connected Solutions $ 5,684 31.0 % $ 5,684 28.8 % RF Solutions 5,090 61.7 % 4,348 70.3 % Consolidating 2 not meaningful 6 not meaningful Total $ 10,776 40.7 % $ 10,038 38.8 % Nine Months Ended September 30, 2013 % of Revenues 2012 % of Revenues Connected Solutions $ 17,352 30.5 % $ 15,186 31.8 % RF Solutions 13,547 62.7 % 10,667 69.3 % Consolidating 18 not meaningful 35 not meaningful Total $ 30,917 39.5 % $ 25,888 41.1 % Gross profit was 40.7% for the three months ended September 30, 2013, an increase of 1.9% as a percent of revenue compared to the same period last year. RF Solutions gross profit was 61.7% in the quarter, a decrease of (8.6) % as a percent of revenue. (6.0%) of the decrease as a percent of revenue reflects the increasing contribution of network engineering services revenue to this segment. Connected Solutions gross profit was 31.0% in the quarter, an increase of 2.2% as a percent of revenue from the same period last year. Eliminating unprofitable site solution business and customers, consolidating the site solutions factory into the Company's Bloomingdale facility, and other supply chain improvements all contributed to the increased margin. Gross profit was 39.5% for the nine months ended September 30, 2013, a decrease of (1.6) % as a percent of revenue compared to the same period last year. RF Solutions gross profit was 62.7% year to date, a decrease of (6.6) % as a percent of revenue. (6.2%) of the decrease as a percent of revenue reflects the increasing contribution of network engineering services revenue to this segment. Connected Solutions gross profit was 30.5% year to date, a decrease of (1.3)% as a percent of revenue from the same period last year. A decline of (2.2) % as a percent of revenue is a result of having the relatively lower margin site solutions products acquired in July 2012 for only one quarter in the first nine months last year. That decline was mitigated 0.9 % as a percent of revenue by eliminating unprofitable site solution business and customers, consolidating the site solutions factory into the Company's Bloomingdale facility, and other supply chain improvements. Operating Profit by Segment Three Months September September 30, 2013 % of Revenues 2012 % of Revenues Connected Solutions $ 1,738 9.5 % $ 1,287 6.5 % RF Solutions 2,098 25.5 % 1,879 30.4 % Consolidating (2,908 ) not meaningful (2,007 ) not meaningful Total $ 928 3.5 % $ 1,159 4.5 % Nine Months Ended September 30, 2013 % of Revenues 2012 % of Revenues Connected Solutions $ 4,872 8.6 % $ 4,471 9.4 % RF Solutions 5,139 23.8 % 3,090 20.1 % Consolidating (10,135 ) not meaningful (6,639 ) not meaningful Total ($ 124 ) -0.2 % $ 922 1.5 % 34 -------------------------------------------------------------------------------- Table of Contents Operating profit declined during the three and nine months ended September 30, 2013 compared to the comparable periods in the prior year. Revenues and gross margins improved, but we recorded higher operating expenses primarily due to legal and professional fees for TelWorx and our short-term incentive plan. Consolidated Operating Expenses Three Months Ended % of Revenues 2013 2012 Change 2013 2012 Research and development $ 2,735 $ 2,348 $ 387 10.3 % 9.1 % Sales and marketing 2,912 2,811 101 11.0 % 10.9 % General and administrative 3,576 2,647 929 13.5 % 10.2 % Amortization of intangible assets 596 917 (321 ) 2.3 % 3.5 % Restructuring charges 29 156 (127 ) 0.1 % 0.6 % $ 9,848 $ 8,879 $ 969 37.2 % 34.3 % Nine Months Ended % of Revenues 2013 2012 Change 2013 2012 Research and development $ 7,963 $ 6,879 $ 1,084 10.2 % 10.9 % Sales and marketing 8,986 7,893 1,093 11.5 % 12.5 % General and administrative 12,034 8,036 3,998 15.4 % 12.8 % Amortization of intangible assets 1,804 2,002 (198 ) 2.3 % 3.2 % Restructuring charges 254 156 98 0.3 % 0.2 % $ 31,041 $ 24,966 $ 6,075 39.6 % 39.6 % Research and Development Research and development expenses increased $0.4 million in the three months ended September 30, 2013 compared to the same period last year. Approximately $0.3 million of the increase is attributed to spending on scanning receiver technology with the remainder attributed to spending on antenna product development. Research and development expenses increased $1.1 million in the nine months ended September 30, 2013 compared to the same period last year. Approximately $0.8 million of the increase is attributed to spending on scanning receiver technology with the remainder attributed to spending on antenna product development. Sales & 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 $0.1 million in the three months ended September 30, 2013 compared to the same period last year. The increase is attributed to higher incentive plan expense on higher revenue. Sales and marketing expenses increased $1.1 million in the nine months ended September 30, 2013 compared to the same period last year. Approximately $0.8 million the result of only having the site solutions products acquired in July 2012 for only one full quarter last year with the remainder from higher incentive plan expense on higher revenue. 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. General and administrative expenses increased $0.9 million in the three months ended September 30, 2013 as compared to the same period last year. The increase is primarily attributed to increased incentive plan expense. Last year the incentive plan accrual was zero. 35-------------------------------------------------------------------------------- Table of Contents General and administrative expenses increased $4.0 million in the nine months ended September 30, 2013 as compared to the same period last year. The increase consists of $2.1 million from legal and professional fees associated with the TelWorx investigation, $1.2 million for incentive plan expenses, $0.2 million associated with segment restructuring, and $0.5 million of other miscellaneous corporate costs. Last year the incentive plan accrual was zero. Amortization of Intangible Assets Amortization decreased $0.3 million and $0.2 million during the three and nine months ended September 30, 2013 compared to the same periods in 2012, primarily because of lower amortization for intangible assets acquired from TelWorx. Amortization expense decreased for the TelWorx assets because the assets were revalued in the fourth quarter 2012. Restructuring Charges During the second and third quarters of 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, Illinois facility. As part of the integration, we separated eighteen employees during the nine months ended September 30, 2013. The restructuring expense of $0.3 million during the nine months ended September 30, 2013 consisted of employee related costs and asset disposals. The Company also recorded $0.3 million in cost of sales for the disposal of TelWorx inventory that was not compatible with the Company's Bloomingdale facility or Bloomingdale operations. Other Income, Net Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2013 September 30, 2012 September 30, 2013 September 30, 2012 Settlement income $ 125 $ 0 $ 4,455 $ 0 Insurance proceeds 264 0 313 0 Interest income 17 20 56 111 Foreign exchange losses (10 ) (9 ) (26 ) (26 ) Other, net (7 ) 1 (20 ) 0 $ 389 $ 12 $ 4,778 $ 85 Percentage of revenues 1.5 % 0.0 % 6.1 % 0.1 % Other income, net consists of interest income, foreign exchange gains and losses, insurance proceeds, and income from legal settlements. For the three months ended September 30, 2013, we recorded $0.3 million in other income for insurance proceeds for our claims related to legal and professional expenses for the TelWorx investigation and $0.1 million related to a settlement with the employer of a former employee of PCTelWorx. For the nine months ended September 30, 2013, other income includes $4.3 million related to the TelWorx settlement we received in the first quarter 2013 and $0.3 million related to insurance proceeds for claims related to legal and professional expenses for the TelWorx investigation. In the three months ended September 30, 2013 and 2012, we recorded interest income of $17 and $20, respectively. In the nine months ended September 30, 2013 and 2012, we recorded interest income of $56 and $111, respectively. In the three months ended September 30, 2013 and 2012, we recorded foreign exchange losses of $10 and $9, respectively. In the nine months ended September 30, 2013 and 2012, respectively, we recorded foreign exchange losses of $26. Provision for Income Taxes Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2013 September 30, 2012 September 30, 2013 September 30, 2012 Provision for income taxes $ 566 $ 483 $ 1,764 $ 430 Effective tax rate 43.0 % 41.2 % 37.9 % 42.7 % The effective tax rate for the nine months ended September 30, 2013 differed from the statutory rate of 34% by approximately 3.9% primarily because of state income taxes. 36 -------------------------------------------------------------------------------- Table of Contents The effective tax rate for the nine months ended September 30, 2012 differed from the statutory rate of 34% by approximately 8.7%. We maintain valuation allowances due to uncertainties regarding realizability. At September 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 Nine Months Ended Nine Months Ended September 30, 2013 September 30, 2012 September 30, 2013 September 30, 2012 Net loss from discontinued operations $ 0 ($ 416 ) ($ 109 ) ($ 1,514 ) The net loss from discontinued operations for the nine months ended September 30, 2013 includes operating expenses of PCTEL Secure, net of income taxes. There has been no activity with PCTEL Secure since the sale of the business in April 2013. The net loss for the three and nine months ended September 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. Stock-based compensation expense The condensed consolidated statements of operations include $0.9 million and $2.6 million of stock compensation expense for the three and nine months ended September 30, 2013, respectively. Stock compensation expense for the three months ended September 30, 2013 consists of $0.5 million for restricted stock awards, and $0.4 million for stock option and stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2013 consists of $1.9 million for restricted stock awards, and $0.7 million for stock option and stock purchase plan expenses. The condensed consolidated statements of operations include $0.7 million and $2.3 million of stock compensation expense for the three and nine months ended September 30, 2012, respectively. Stock compensation expense for the three months ended September 30, 2012 consists of $0.6 million for restricted stock awards, and $0.1 million for stock option and stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2012 consists of $2.1 million for restricted stock awards, and $0.2 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 Nine Months Ended September 30, September 30, 2013 2012 2013 2012 Cost of revenues $ 104 $ 99 $ 294 $ 298 Research and development 182 153 505 442 Sales and marketing 174 141 435 398 General and administrative 437 302 1,384 1,193 Total continuing operations 897 695 2,618 2,331 Discontinued operations 0 0 1 4 Total $ 897 $ 695 $ 2,619 $ 2,335 37 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Nine Months Ended September 30, 2013 2012 Net income (loss) $ 2,781 ($ 937 ) Charges for depreciation, amortization, stock-based compensation, and other non-cash items 7,294 6,423 Changes in operating assets and liabilities (2,902 ) (3,199 ) Net cash provided by operating activities 7,173 2,287 Net cash used in investing activities (5,849 ) (2,446 ) Net cash used in financing activities (1,457 ) (1,078 ) September 30, December 31, 2013 2012 Cash and cash equivalents at the end of period $ 17,420 $ 17,543 Short-term investments at the end of period 37,516 33,596 Working capital at the end of period $ 79,818 $ 74,486 Liquidity and Capital Resources Overview At September 30, 2013, our cash and investments were approximately $54.9 million and we had working capital of $79.8 million. Our cash and investments were approximately $3.8 million higher at September 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 capital expenditures. We used cash of $6.7 million to contract accounts payables, $1.9 million for capital expenditures, and $1.9 million of cash for payment of dividends during the nine months ended September 30, 2013. 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 nine months ended September 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 balances 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. 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 new registration statement once the matter is resolved. Management believes that the Company's current financial position, which includes $54.9 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 as well as funding for potential acquisitions through at least 2014. 38 -------------------------------------------------------------------------------- Table of Contents Operating Activities: Operating activities provided $7.2 million of cash during the nine months ended September 30, 2013 as we generated approximately $10.1 million of cash from our income statement but used $2.9 million of cash within our balance sheet. Within our income statement activities, we used $1.0 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 $6.7 million for the contraction of accounts payable. Accounts payables declined due to reductions in inventories and due to the timing of vendor purchases during the quarter ended September 30, 2013 compared to the quarter ended December 31, 2012. We generated cash of $2.4 million from the reduction of inventories. We managed our RF Solutions inventory down from higher than normal inventory levels at year end 2012. We also lowered our site solutions inventory as a result of the integration of the Lexington business with the operations in Bloomingdale. Operating activities provided $2.3 million of cash during the nine months ended September 30, 2012 as we generated $5.5 million in cash from our income statement activities and used $3.2 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 increases in accounts receivable and inventory. The $5.3 million increase in accounts receivable was a result of increased revenues during the quarter ended September 30, 2012 compared to the revenues during the quarter ended December 31, 2011. In addition, the timing of revenues within the third quarter 2012 negatively impacted the receivable balance. During the nine months ended September 30, 2012, cash was provided by a decrease in prepaid expenses and an increase in accounts payable and other accrued liabilities. Prepaid expenses and other assets decreased $1.0 million during the nine months ended September 30, 2012 primarily because we received income tax refunds. Our accounts payable increased $0.8 million during the nine months ended September 30, 2012 due to timing of inventory purchases. Our other accrued liabilities increased $0.1 million due to increases in executive deferred compensation and deferred revenues. Investing Activities: Our investing activities used $5.8 million of cash during the nine months ended September 30, 2013 as we used $3.9 million of cash from net maturities of investments and used $1.9 million for capital expenditures. Redemptions and maturities of our investments in short-term bonds during the nine months ended September 30, 2013 provided $56.8 million in funds. We rotated $60.7 million of cash into new short-term bonds during the nine months ended September 30, 2013. Our investing activities used $2.4 million of cash during the nine months ended September 30, 2012. We generated $18.4 million from our treasury investing activity during the nine months ended September 30, 2012. Redemptions and maturities of our investments in short-term bonds during the nine months ended September 30, 2012 provided $54.3 million in funds. We rotated $35.9 million of cash into new short-term and long-term bonds during the nine months ended September 30, 2012. Beginning in the second quarter of 2012, we invested the funds from maturing short-term investments into money market funds so that we had available cash for acquisitions. For the nine months ended September 30, 2012, our capital expenditures were $2.6 million, including $1.5 million for our ERP project. The ERP project was substantially completed in the third quarter 2012. During the nine months ended September 30, 2012, we used $1.7 million of funds to purchase the remaining 49% membership interest in PCTEL Secure. In July 2012, we purchased certain assets from TelWorx for $16.0 million in cash paid at closing. Financing Activities: We used $1.4 million in cash for financing activities during the nine months ended September 30, 2013. We paid $1.9 million for quarterly cash dividends and we received $0.9 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 $1.1 million in cash for financing activities during the nine months ended September 30, 2012. We paid $1.6 million for cash dividends paid in February 2012, May 2012 and August 2012 and we received $0.5 million in proceeds from the purchase of shares through our ESPP and the exercise of stock options. Contractual Obligations and Commercial Commitments As of September 30, 2013, we had operating lease obligations of approximately $4.3 million through 2020. Operating lease obligations consist of $4.3 million for facility lease obligations and $48 for equipment leases. Our lease obligations were $4.9 million at December 31, 2012. 39-------------------------------------------------------------------------------- Table of Contents 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 was effective October 31, 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 $8.6 million and $9.9 million at September 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 September 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. |