pcti-10k_20171231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           

Commission File Number 000-27115

 

PCTEL, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

77-0364943

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

471 Brighton Drive,

Bloomingdale IL

 

60108

(Address of Principal Executive Office)

 

(Zip Code)

 

(630) 372-6800

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.001 Par Value Per Share

 

The NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes     No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No

Indicate by checkmark whether the registrant has submitted electronically and posted on the Company’s website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ((§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was acquired to submit and post such files)).    Yes     No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer”, "accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

Emerging growth company                  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes     No

As of June 30, 2017, the last business day of the registrant's most recently completed second fiscal quarter, there were 17,791,498 shares of the registrant's common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2017) was approximately $125,963,806. Shares of the registrant's common stock held by each executive officer and director and by each entity that owns 5% or more of the registrant's outstanding common stock have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purposes.

18,138,543 shares of common stock were issued and outstanding as of March 15, 2018.

Documents Incorporated by Reference

Certain sections of the registrant's definitive proxy statement relating to its 2018 Annual Stockholders' Meeting to be held on June 5, 2018 are incorporated by reference into Part III of this Annual Report on Form 10-K.  The Company intends to file its proxy statement within 120 days after the end of its fiscal year end to which this report relates.

 

 

 

 


PCTEL, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2017

TABLE OF CONTENTS

 

PART I

 

 

 

Item 1

Business

 

3

Item 1A

Risk Factors

 

6

Item 1B

Unresolved Staff Comments

 

10

Item 2

Properties

 

10

Item 3

Legal Proceedings

 

10

Item 4

Mine Safety Disclosures

 

10

 

 

 

 

PART II

 

 

 

Item 5

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

11

Item 6

Selected Financial Data

 

12

Item 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

14

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

 

25

Item 8

Financial Statements and Supplementary Data

 

27

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

66

Item 9A

Controls and Procedures

 

66

Item 9B

Other Information

 

66

 

 

 

 

PART III

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

 

67

Item 11

Executive Compensation

 

67

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

67

Item 13

Certain Relationships and Related Transactions, and Director Independence

 

67

Item 14

Principal Accountant Fees and Services

 

67

 

 

 

 

PART IV

 

 

 

Item 15

Exhibits and Financial Statement Schedules

 

68

Item 16

Form 10-K Summary

 

68

 

Schedule II - Valuation and Qualifying Accounts

 

68

 

Index to Exhibit

 

69

 

Signatures

 

72

 

 

 

 

 

 

 

 

 

2


PART I

Item 1:  Business

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, among other things, statements concerning our future operations, financial condition and prospects, and business strategies. The words “believe”, “expect”, “anticipate” and other similar expressions generally identify forward-looking statements. Investors in our common stock are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, or results of operations to differ materially from the historical results or currently anticipated results. Investors should carefully review the information contained in Item 1A Risk Factors and elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K.  Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While we believe that the forward-looking statements in this Annual Report on Form 10-K are reasonable, investors should not place undue reliance on any forward-looking statements. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

PCTEL, Inc. (“PCTEL”, the “Company”, “we”, “ours”, and “us”) delivers Performance Critical TELecom technology solutions to the wireless industry. We are a leading global supplier of antennas and wireless network testing solutions. PCTEL Connected Solutions segment designs and manufactures precision antennas. PCTEL antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in network equipment and devices for the Industrial Internet of Things (“IIoT”). PCTEL RF Solutions segment provides test tools that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks.

PCTEL was incorporated in California in 1994 and reincorporated in Delaware in 1998.  Our principal executive offices are located at 471 Brighton Drive, Bloomingdale, Illinois 60108.  Our telephone number at that address is (630) 372-6800 and our website is www.pctel.com.  The information within, or that can be accessed through, our website, is not part of this report.

Segment Reporting

PCTEL operates in two segments for reporting purposes, Connected Solutions and RF Solutions.  Our chief operating decision maker uses operating profits and identified assets for the Connected Solutions and RF Solutions segments for resource allocations.  Each segment has its own segment manager as well as its own engineering, business development, 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. We manage the 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.

Connected Solutions Segment

PCTEL’s Connected Solutions segment designs and manufactures precision antennas. Our antennas are deployed primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the IIoT. We offer in-house design, testing, radio integration, and manufacturing capabilities for our antenna customers.  Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity occurring in these markets. Our antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

Competition in the antenna markets addressed by Connected Solutions is fragmented. Competitors include Airgain, Amphenol, Laird, Pulse, and Taoglas. We seek out product applications that command a premium for product performance and customer service, and we avoid commodity markets.

PCTEL maintains expertise in several technology areas in order to be competitive in the antenna market.  These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

3


RF Solutions Segment

PCTEL’s RF Solutions segment provides test tools that improve the performance of wireless networks globally, with a focus on LTE, public safety, and emerging 5G technologies.  Network operators, neutral hosts, and equipment manufacturers rely on our scanning receivers and testing solutions to analyze, design, and optimize their networks. Revenue growth is driven by the implementation and roll out of new wireless technology standards (i.e. 3G to 4G, 4G to 5G). Our test equipment is sold directly to wireless carriers or to OEMs who integrate our products into their solutions which are then sold to wireless carriers.

Competitors for our test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

PCTEL maintains expertise in several technology areas in order to be competitive in the test tool market. These include radio frequency engineering, digital signal process (“DSP”) engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

Discontinued Operations

During the quarter ended June 30, 2017, we approved a plan to sell our Network Engineering Service business (Engineering Services”) and shift our focus toward research and development driven radio frequency (“RF”) products. On July 31, 2017, we sold substantially all of the assets of our Engineering Services business to Gabes Construction Co., Inc. (“Gabe’s”) for a purchase price of $1.45 million in cash. The Engineering Services business provided design, testing, commissioning, optimization, and consulting services for cellular, Wi-Fi and public safety networks, and was a reporting unit within the RF Solutions segment. We classified assets of the Engineering Services reporting unit as held for sale at December 31, 2016 and reported the results of its operations as discontinued operations for the years ended December 31, 2017, 2016, and 2015, respectively. The financial information presented in this Form 10-K has been restated to reflect the historical results of Engineering Services as discontinued operations. See Note 4 in the notes to the financial statements for more information on discontinued operations.

Major Customers

The following table represents the customer that accounted for 10% or more of revenues during the years ended December 31, 2017, 2016 and 2015:

 

 

 

Years Ended December 31,

 

Revenues

 

2017

 

 

2016

 

 

2015

 

Customer A

 

9%

 

 

11%

 

 

3%

 

The following table represents customers that accounted for 10% or more of total trade accounts receivable at December 31, 2017 and 2016 are as follows:

 

 

 

As of December 31,

 

Trade Accounts Receivable

 

2017

 

 

2016

 

Customer A

 

7%

 

 

17%

 

Customer B

 

12%

 

 

8%

 

International Activities

The following table shows the percentage of revenues by geographic location during the last three fiscal years:

 

 

 

Years Ended December 31,

 

Region

 

2017

 

 

2016

 

 

2015

 

Asia Pacific

 

17%

 

 

22%

 

 

9%

 

Europe, Middle East, & Africa

 

9%

 

 

9%

 

 

11%

 

Other Americas

 

5%

 

 

6%

 

 

6%

 

Total Foreign sales

 

31%

 

 

37%

 

 

26%

 

Total Domestic sales

 

69%

 

 

63%

 

 

74%

 

 

 

100%

 

 

100%

 

 

100%

 

 

See Note 11 of the consolidated financial statements for further information by geographical location.

4


Backlog

Sales of our products are generally made pursuant to standard purchase orders, which are officially acknowledged according to standard terms and conditions.  The backlog is useful for scheduling production but is not necessarily a meaningful indicator of future product revenues as the order to ship cycle is short.

Research and Development

We recognize that a strong technology base is essential to our long-term success and we have made a substantial investment in engineering, research and development.  We will continue to devote substantial resources to product development and patent submissions.  The patent submissions are primarily for defensive purposes, rather than for potential license revenue generation.  We monitor changing customer needs and work closely with our customers, consultants and market research organizations to track changes in the marketplace, including emerging industry standards.

Research and development expenses include costs for hardware and related software development, prototyping, certification and pre-production costs.  We spent approximately $11.1 million, $10.2 million, and $11.2 million in the fiscal years 2017, 2016, and 2015, respectively, in research and development.

Sales, Marketing and Support

We supply our products to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers (“VARs”) and OEMs.  PCTEL’s direct sales force is technologically sophisticated and sales executives have strong industry domain knowledge.  Our direct sales force supports the sales efforts of our distributors and OEM resellers.

Our marketing strategy is focused on building market awareness and acceptance of our new products.  The marketing organization also provides a wide range of programs, materials and events to support the sales organization.  We spent approximately $12.6 million, $12.7 million, and $13.0 million in fiscal years 2017, 2016, and 2015, respectively, for sales and marketing support.

Manufacturing

We do final assembly of most of our antenna products and all of our OEM receiver and interference management product lines.  We also have arrangements with several contract manufacturers but are not dependent on any specific contract manufacturer.  If any of our contract manufacturers are unable to provide satisfactory services for us, other contract manufacturers are available, although engaging a new contract manufacturer could cause delays and additional costs.  We have no material guaranteed supply contracts or long-term agreements with any of our suppliers. We do have open purchase orders with our suppliers.  See the contractual obligations and commercial commitments section of Item 7 for information on purchase commitments.

Employees

As of December 31, 2017, we had 484 full-time equivalent employees, consisting of 342 in operations, 56 in research and development, 49 in sales and marketing, and 37 in general and administrative functions.  Total full-time equivalent employees were 430 and 403 at December 31, 2016 and 2015, respectively.  Headcount increased by 54 at December 31, 2017 from December 31, 2016 primarily due to production employees.  None of our employees are represented by a labor union.  We consider employee relations to be good.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (the “SEC”).  Our website is located at the following address: www.pctel.com.  The information within, or that can be accessed through, our website is not part of this Annual Report on Form 10-K.  Further, any materials we file with the SEC may be read and copied by the public at the SEC’s Public Reference Room, located at 100 F Street, N.E., Room 1580, Washington D.C. 20549.  Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1(800) SEC-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

5


Item 1A:  Risk Factors

Factors That May Affect Our Business, Financial Condition and Future Operations

Risks Related to Our Business

Our business model depends upon our ability to recognize significant emerging technologies in a timely manner and to innovate to solve the engineering problems presented by such emerging technologies.

Our strength is solving complex network engineering problems through our products and solutions.  In order to provide solutions to complex engineering problems, the Company has to anticipate which technologies are promising and will be adopted by its customers and potential customers, and we need to be engaged early in the development of these new technologies and products. If we expend resources on the wrong technologies or are not included in the development phase of new technologies that are widely adopted in our industry, we may miss the opportunity for meaningful participation or revenue generation.  Missed opportunities like these could have a negative impact on the Company’s long-term competitiveness.

To innovate and solve complex network engineering problems, the Company has to offer highly competitive compensation in order to attract and retain specific types of engineers and other skilled professionals.  In addition, the Company must create intellectual property or obtain it from third parties when necessary. Failure to accomplish these tasks while managing the costs thereof will result in difficulty in distinguishing our Company from its competitors and may result in a significant loss of business or diminishing margin on our products.

Mobile operators, who drive demand for our products, may decrease their capital expenditures on their mobile networks.

Mobile operators engage in a variety of businesses and must allocate their capital expenditure budget across these businesses.  They may limit their capital expenditures allocated to improvement of their network or adoption of new technologies. Our business depends upon their demand for our solutions and products.

Competition within the wireless product industry is intense and could result in decreased margins on our products or loss of key customers.  Failure to compete successfully could materially harm our prospects and financial results.

Competition in our industry can result from the following:

 

a competitor significantly reducing prices on their products causing disruption to our customer relationships;

 

customers demanding lower prices and requiring suppliers like us to engage in auctions and other forms of competitive bidding for purchase orders;

 

entrance of a significant competitor in the markets for our products, either from a new participant or as a result of a merger of existing competitors; and

 

potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products and delivery of their services.  These competitors may succeed in establishing technology standards or strategic alliances in the connectivity products markets, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage.  

Conducting business in foreign countries involves additional financial, operating, and regulatory risks.

A substantial portion of our manufacturing, research and development, and sales activities is conducted outside the United States, primarily in China.  There are a number of risks inherent in doing business in foreign countries, including: (i) fluctuations in the value of the U.S. dollar relative to other currencies, and in particular the impact of a re-valuation of the Chinese Yuan; (ii) impact of tariffs or trade wars among the countries in which we do business; (iii) difficulties in repatriation of earnings; (iv) disruption to our supply chain, including our ability to import materials and export products;  (v) nationalist sentiment creating advantages for our competitors in their home countries; (vi) impact of labor unrest; (vii) unexpected legal or regulatory changes, particularly changes to environmental, labor or manufacturing regulations; (vii) lack of sufficient protection for intellectual property rights; (viii) difficulties in recruiting and retaining personnel and managing international operations;(ix) less developed infrastructure; and (x) other unfavorable political or economic factors which could include nationalization of the wireless communications or related industries..  If we are unable to manage successfully these and other risks pertaining to our international activities, our operating results, cash flows and financial position could be materially and adversely affected.

6


Disruption in our manufacturing and supply chains could adversely impact our sales and reputation.

We have limited manufacturing capability.  For some product lines we outsource the manufacturing, assembly, and testing of printed circuit board subsystems.  For other product lines, we purchase completed hardware platforms and add our proprietary software.  While there is no unique capability with these suppliers, any failure by these suppliers to meet delivery commitments would cause us to delay shipments and potentially be unable to accept new orders for product.

In addition, in the event that these suppliers discontinued the manufacture of materials used in our products, we would be forced to incur the time and expense of finding a new supplier or to modify our products in such a way that such materials were not necessary.  Either of these alternatives could result in increased manufacturing costs and increased prices of our products.

We assemble our antenna products in our facilities located in Illinois and China and scanning receivers at our facility in Maryland.  We may experience delays, disruptions, capacity constraints or quality control problems at our assembly facilities, which could result in lower yields or delays of product shipments to our customers.  In addition, a number of our antenna products are manufactured in China via contract manufacturers.  Any disruption of our own or contract manufacturers' operations could cause us to delay product shipments, which would negatively impact our sales, competitive reputation and position.  In addition, if we do not accurately forecast demand for our products, we will have excess or insufficient parts to build our products, either of which could materially affect our operating results.

In summary, in order to be successful, the Company must manage its operations to limit the cost of product production, accurately forecast demand for its products, avoid excess production and inventory that results in waste or obsolescence, dual source critical materials to avoid shortages and delays in shipping, build for manufacturability and avoid excessive quality issues.

Future acquisitions and investments may not yield their intended benefits.  Our failure to successfully integrate acquisitions into our existing operations could adversely affect our business. We may in the future make acquisitions of, or large investments in, businesses that offer products, and technologies that we believe would complement our products, including wireless products and technology.  We may also make acquisitions of or investments in, businesses that we believe could expand our distribution channels.  Even if we were to announce an acquisition, we may not be able to complete it.  Additionally, any future acquisition or substantial investment would present numerous risks, including:

 

difficulty in integrating the technology, operations, internal accounting controls or work force of the acquired business with our existing business,

 

disruption of our on-going business,

 

difficulty in realizing the potential financial or strategic benefits of the transaction,

 

difficulty in maintaining uniform standards, controls, procedures and policies,

 

tax, employment, logistics, and other related issues unique to international organizations and assets we acquire,

 

possible impairment of relationships with employees and customers as a result of integration of new businesses and management personnel, and

 

impairment of assets related to resulting goodwill, and reductions in our future operating results from amortization of intangible assets.

We expect that future acquisitions may be paid in cash, shares of our common stock, or a combination of cash and our common stock.  If consideration for a transaction is paid in common stock, this would further dilute our existing stockholders. We may also incur debt to pay for an acquisition which could impose restrictive covenants on how we conduct our business.

Our gross profit may vary based on the mix of sales of our products, and these variations may cause our net income to decline.

Depending on the mix of our products sold, our gross profit could vary significantly from quarter to quarter.  Generally, antenna products have a lower profit margin than scanning receiver products, creating the variance in gross profits related to profit mix.  A decline in our gross profit could have a negative impact on our financial results and cause our net income to decline.

7


Any delays in our sales cycles could result in customers canceling purchases of our products.

Sales cycles for our products with major customers can be lengthy, often lasting nine months or longer.  In addition, it can take an additional nine months or more before a customer commences volume production of equipment that incorporates our products.  Sales cycles with our major customers are lengthy for a number of reasons, including:

 

our OEM customers and carriers usually complete a lengthy technical evaluation of our products, over which we have no control, before placing a purchase order, and

 

the development and commercial introduction of products incorporating new technologies frequently are delayed.

A significant portion of our operating expenses is relatively fixed and is largely based on our forecasts of volume and timing of orders.  The lengthy sales cycles make forecasting the volume and timing of product orders difficult.  In addition, the delays inherent in lengthy sales cycles raise additional uncertainty that customers may decide to cancel or change product phases.  If customer cancellations or product changes were to occur, this could result in the loss of anticipated sales without sufficient time for us to reduce our operating expenses.

 

A failure in our information technology systems could negatively impact our business.

We rely on information technology to record and process transactions, manage our business and maintain the financial accuracy of our records. Our computer systems are subject to damage or interruption from various sources, including power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, catastrophic events and human error. Interruptions of our computer systems could disrupt our business and could result in the loss of business and cause us to incur additional expense.

Information technology security threats are increasing in frequency and sophistication. Our information technology systems could be breached by unauthorized outside parties or misused by employees or other insiders intent on extracting sensitive information, corrupting information or disrupting business processes. Such unauthorized access could compromise confidential information, disrupt our business, harm our reputation, result in the loss of assets, customer confidence and business and have a negative impact on our financial results.

Additional income tax expense or exposure to additional income tax liabilities could have a negative impact on our financial results.

 

We are subject to income tax laws and regulations in the United States and various foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision and accruals for these taxes. Our income tax liabilities are dependent upon the location of earnings among these different jurisdictions. Our income tax provision and income tax liabilities could be adversely affected by the jurisdictional mix of earnings, changes in valuation of deferred tax assets and liabilities and changes in tax laws and regulations. In the ordinary course of our business, we are also subject to continuous examinations of our income tax returns by tax authorities. Although we believe our tax estimates are reasonable, the final results of any tax examination or related litigation could be materially different from our related historical income tax provisions and accruals. Adverse developments in an audit, examination, litigation related to previously filed tax returns, or in the relevant jurisdiction’s tax laws, regulations, administrative practices, principles and interpretations could have a material effect on our results of operations and cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods.

Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. The Company is in the process of determining the impact to the financial statements of all aspects of the Act and will reflect the impact of such reform in the financial statements during the period in which such amounts can be reasonably estimated. The Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018, which will result in a blended federal tax rate for fiscal year 2018. There are also provisions that may partially offset the benefit of such rate reduction, such as the repeal of the deduction for domestic production activities. The Act also includes international provisions, which generally establish a territorial-style system for taxing foreign-source income of domestic multinational corporations. Financial statement impacts will include adjustments for the re-measurement of deferred tax assets (liabilities) and the accrual for deemed repatriation tax on unremitted foreign earnings and profits. While there are benefits, there is also substantial uncertainty regarding the details of the Act. The intended and unintended consequences of the Act on our business and on holders of our common shares is uncertain and could be adverse. The Company anticipates that the impact of the Act may be material to the income tax expense in our consolidated financial statements.

8


Risks Related to our Common Stock

The trading price of our stock price may be volatile based on a number of factors, many of which are not under our control.

Our stock can experience significant changes in price on a percentage basis.  The closing price on the NASDAQ Global Select Market fluctuated between a high of $8.18 and a low of $5.18 in 2017.  Our stock price can be subject to wide fluctuations in response to a variety of factors, many of which are out of our control, including:

 

adverse changes in domestic or global economic conditions,

 

new products offered by us or our competitors,

 

actual or anticipated variations in quarterly operating results,

 

changes in financial estimates by securities analysts,

 

announcements of technological innovations,

 

our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments,

 

conditions or trends in our industry,

 

additions or departures of key personnel,

 

mergers and acquisitions, and

 

sales of common stock by our stockholders or us or repurchases by us.

In addition, these fluctuations often have been unrelated or disproportionate to the operating performance of the Company.

Provisions in our charter documents may inhibit a change of control or a change of management, which may cause the market price for our common stock to decline and may inhibit a takeover or change in our control that a stockholder may consider favorable.

Provisions in our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction that our stockholders may favor.  Specifically, our charter documents do not permit stockholders to act by written consent, do not permit stockholders to call a stockholders meeting, and provide for a classified board of directors, which means stockholders can only elect, or remove, a limited number of our directors in any given year.  These provisions could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts and may prevent stockholders from reselling their shares at or above the price at which they purchased their shares.  These provisions may also prevent changes in our management that our stockholders may favor.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series.  The board of directors can fix the price, rights, preferences, privileges and restrictions of this preferred stock without any further vote or action by our stockholders.  The rights of the holders of our common stock will be affected by, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.  Further, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders.  As a result, the market price of our common stock may decline.

If we are unable to successfully maintain processes and procedures required by the Sarbanes-Oxley Act of 2002 to achieve and maintain effective internal control over our financial reporting, our ability to provide reliable and timely financial reports could be harmed and our stock price could be adversely affected.

We must comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002.  Section 404 requires an annual management report assessing the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing this assessment.

While we are expending significant resources in maintaining the necessary documentation and testing procedures required by Section 404, we cannot be certain that the actions we are taking to achieve and maintain our internal control over financial reporting will be adequate.  If the processes and procedures that we implement for our internal control over financial reporting are inadequate, our ability to provide reliable and timely financial reports, and consequently our business and operating results, could be harmed.  This in turn could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial reports, which could cause the market price of our common stock to decline.

9


Item 1B:  Unresolved Staff Comments

None.

Item 2:  Properties

The following table lists our main facilities:

 

 

 

 

 

 

 

 

 

Lease Term

 

 

Location

 

Square feet

 

 

Owned/Leased

 

Beginning

 

Ending

 

Segment

Bloomingdale, Illinois

 

 

75,517

 

 

Owned

 

N/A

 

N/A

 

Connected Solutions and Corporate

Tianjin, China

 

 

44,289

 

 

Leased

 

2012

 

2020

 

Connected Solutions

Germantown, Maryland

 

 

20,704

 

 

Leased

 

2012

 

2020

 

RF Solutions

Beijing, China

 

 

11,270

 

 

Leased

 

2016

 

2020

 

Connected Solutions

Akron, Ohio

 

 

5,977

 

 

Leased

 

2018

 

2025

 

Connected Solutions

Lexington, North Carolina

 

 

5,630

 

 

Leased

 

2013

 

2019

 

Connected Solutions

 

Facility Changes

In August 2017, we entered into a new seven-year lease for 5,977 square feet of office space in Akron, Ohio for antenna product development. The total lease obligation pursuant to the agreement was $0.7 million.  We assumed occupancy of this office in March 2018.

In April 2017, we renewed the first-floor space of the Tianjin facility for 22,120 square feet of leased space. The total lease obligation pursuant to the agreement is $46 annually and expires on April 11, 2018. This lease will be renewed during the second quarter 2018.  We expect the lease term to be extended to the same date as the other facility lease in Tianjin.

In June 2016, we entered into a new four-year lease for our Beijing Design Center, and in January 2017 we signed a new lease for additional space at the same location. With the expansion, the Company has 11,270 square feet in its Beijing Design Center. The total lease obligation for the Beijing Design Center is $0.2 million annually. The Beijing Design Center has an engineering department for antenna development as well as sales and marketing for the China market.

During the first quarter 2016, we vacated our Colorado office lease in order to consolidate facility space related to our Engineering Services reporting unit. In May 2017, the Company signed a sublease with a term through the lease termination date.  The lease expires on October 31, 2020.  See Note 6 in the notes to the financial statements for more information on the Colorado lease.

All properties are in good condition and are suitable for the purposes for which they are used.  We believe that we have adequate space for our current needs.

Item 3:  Legal Proceedings

We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. In our opinion, as of December 31, 2017, there were no claims or litigation pending that would be reasonably likely to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Item 4:  Mine Safety Disclosures

Not applicable.

10


PART II

Item 5:  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock and Dividends

PCTEL’s common stock has been traded on the NASDAQ Global Select Market under the symbol PCTI since our initial public offering on October 19, 1999.  The following table shows the high and low closing prices of our common stock as reported by the NASDAQ Global Select Market for the periods indicated and the frequency and amounts of dividends declared on PCTEL’s common stock during those periods.

 

 

 

2017

 

 

2016

 

 

 

Market Price

 

 

 

 

 

 

Market Price

 

 

 

 

 

 

 

High

 

 

Low

 

 

Dividends per Share

 

 

High

 

 

Low

 

 

Dividends per Share

 

Fourth Quarter

 

$

7.83

 

 

$

6.30

 

 

$

0.055

 

 

$

5.68

 

 

$

4.86

 

 

$

0.050

 

Third Quarter

 

$

7.50

 

 

$

5.87

 

 

$

0.055

 

 

$

5.62

 

 

$

4.62

 

 

$

0.050

 

Second Quarter

 

$

8.18

 

 

$

6.31

 

 

$

0.050

 

 

$

4.95

 

 

$

4.36

 

 

$

0.050

 

First Quarter

 

$

7.12

 

 

$

5.18

 

 

$

0.050

 

 

$

6.00

 

 

$

4.38

 

 

$

0.050

 

 

 

 

 

 

 

 

 

 

 

$

0.210

 

 

 

 

 

 

 

 

 

 

$

0.200

 

 

The closing sale price of our common stock as reported on the NASDAQ Global Select Market on March 15, 2018 was $6.90 per share.  As of that date there were 36 holders of record of the common stock.  A substantially greater number of holders of the common stock are in “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.

11


Five-Year Cumulative Total Return Comparison

The following graph compares the annual percentage change in the cumulative return to our stockholders with the cumulative return of the NASDAQ Composite Index and the S&P Information Technology Index for the period beginning December 31, 2012 and ending December 31, 2017.  Returns for the indices are weighted based on market capitalization at the beginning of each measurement point.  Note that historic stock price performance is not necessarily indicative of future stock price performance.

 

Sales of Unregistered Equity Securities

None.

Issuer Purchases of Equity Securities

All share repurchase programs are authorized by our Board of Directors and are announced publicly.  On April 20, 2015, our Board of Directors authorized an additional repurchase of 500,000 shares of stock under an existing share repurchase program.  Additionally, on August 10, 2015, our Board of Directors authorized repurchase of an additional 1,300,000 shares under the existing share repurchase programs, for a total of 2,726,000 shares.  Under these repurchase programs, we repurchased 1,942,788 shares at an average price of $6.22 during the year ended December 31, 2015 and we repurchased 783,212 shares at an average price of $5.23 during the year ended December 31, 2016.  At December 31, 2017, the Company had no shares remaining that could be repurchased under previously approved programs.

Item 6:  Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.  The statement of operations data for the years ended

12


December 31, 2017, 2016, and 2015 and the balance sheet data as of December 31, 2017 and 2016 are derived from audited financial statements included elsewhere in this Annual Report on Form 10-K.  The statement of operations data for the years ended December 31, 2014 and 2013 and the balance sheet data as of December 31, 2015, 2014, and 2013 are derived from audited financial statements not included in this Annual Report on Form 10-K.

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

 

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

91,437

 

 

$

85,006

 

 

$

90,533

 

 

$

96,346

 

 

$

97,722

 

Cost of revenues

 

 

52,626

 

 

 

50,595

 

 

 

55,405

 

 

 

55,813

 

 

 

57,387

 

Gross profit

 

 

38,811

 

 

 

34,411

 

 

 

35,128

 

 

 

40,533

 

 

 

40,335

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,142

 

 

 

10,158

 

 

 

11,205

 

 

 

11,736

 

 

 

11,064

 

Sales and marketing

 

 

12,630

 

 

 

12,716

 

 

 

12,972

 

 

 

12,437

 

 

 

12,121

 

General and administrative

 

 

13,110

 

 

 

11,905

 

 

 

11,920

 

 

 

12,766

 

 

 

15,570

 

Amortization of intangible assets

 

 

496

 

 

 

531

 

 

 

1,905

 

 

 

1,798

 

 

 

2,231

 

Restructuring expenses

 

 

0

 

 

 

234

 

 

 

1,609

 

 

 

0

 

 

 

256

 

Total operating expenses

 

 

37,378

 

 

 

35,544

 

 

 

39,611

 

 

 

38,737

 

 

 

41,242

 

Operating income (loss)

 

 

1,433

 

 

 

(1,133

)

 

 

(4,483

)

 

 

1,796

 

 

 

(907

)

Other income, net

 

 

105

 

 

 

112

 

 

 

3,287

 

 

 

1,666

 

 

 

5,378

 

Income (loss) before income taxes

 

 

1,538

 

 

 

(1,021

)

 

 

(1,196

)

 

 

3,462

 

 

 

4,471

 

Expense (benefit) for income taxes

 

 

(2,471

)

 

 

11,776

 

 

 

(462

)

 

 

287

 

 

 

1,875

 

Net income (loss) from continuing operations

 

 

4,009

 

 

 

(12,797

)

 

 

(734

)

 

 

3,175

 

 

 

2,596

 

Net income (loss) from discontinued operations, net of tax expense (benefit)

 

 

(187

)

 

 

(4,884

)

 

 

(834

)

 

 

1,437

 

 

 

655

 

Net income (loss)

 

$

3,822

 

 

$

(17,681

)

 

$

(1,568

)

 

$

4,612

 

 

$

3,251

 

Net income (loss) per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

 

$

(0.79

)

 

$

(0.04

)

 

$

0.17

 

 

$

0.14

 

Diluted

 

$

0.24

 

 

$

(0.79

)

 

$

(0.04

)

 

$

0.17

 

 

$

0.14

 

Net income (loss) per share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

(0.30

)

 

$

(0.05

)

 

$

0.08

 

 

$

0.04

 

Diluted

 

$

(0.01

)

 

$

(0.30

)

 

$

(0.05

)

 

$

0.08

 

 

$

0.04

 

Net income (loss)per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

 

$

(1.09

)

 

$

(0.09

)

 

$

0.25

 

 

$

0.18

 

Diluted

 

$

0.23

 

 

$

(1.09

)

 

$

(0.09

)

 

$

0.25

 

 

$

0.18

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,626

 

 

 

16,151

 

 

 

17,737

 

 

 

18,159

 

 

 

17,797

 

Diluted

 

 

16,913

 

 

 

16,151

 

 

 

17,737

 

 

 

18,389

 

 

 

18,184

 

Cash dividends per share

 

$

0.21

 

 

$

0.20

 

 

$

0.20

 

 

$

0.16

 

 

$

0.14

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

38,058

 

 

$

33,311

 

 

$

31,783

 

 

$

60,009

 

 

$

57,895

 

Working capital

 

$

58,091

 

 

$

55,152

 

 

$

59,041

 

 

$

88,573

 

 

$

83,585

 

Total assets

 

$

96,466

 

 

$

92,166

 

 

$

113,710

 

 

$

131,669

 

 

$

127,432

 

Total stockholders' equity

 

$

83,319

 

 

$

78,525

 

 

$

100,397

 

 

$

115,515

 

 

$

112,052

 

 

13


Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following commentary presents a discussion and analysis of the Company’s financial condition and results of operations by its management. The review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 2017 and 2016.  Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance investor understanding of the accompanying tables and charts, the consolidated financial statements, notes to financial statements, and financial statistics appearing elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management’s insights with respect to known events and trends that have or may reasonably be expected to have a material effect on the Company’s operations and financial condition.

Introduction

PCTEL operates in two segments for reporting purposes, Connected Solutions and RF Solutions.  Our chief operating decision maker uses operating profits and identified assets for the Connected Solutions and RF Solutions segments for resource allocations.  Each segment has its own segment manager as well as its own engineering, business development, 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. 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.

Our 2017 revenues increased by $6.4 million (7.6%), compared to 2016 because revenues increased 18.5% for RF Solutions and 4.3% for Connected Solutions.  We recorded operating income of $1.4 million in 2017, compared to an operating loss of $1.1 million in 2016 as the gross margin impact of higher revenues offset higher operating expenses. The increase in operating expenses during 2017 includes research and development investments for Connected Solutions and expenses for our short-term incentive plan.  

Connected Solutions Segment

PCTEL’s Connected Solutions segment designs and manufactures precision antennas. PCTEL antennas are deployed primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial Internet of Things (“IIoT”). We offer in-house design, testing, radio integration, and manufacturing capabilities for our antenna customers.  Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity trends occurring in these markets. PCTEL antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

Competition in the antenna markets addressed the Connected Solutions segment is fragmented. Competitors include Airgain, Amphenol, Laird, Pulse, and Taoglas.  We seek out product applications that command a premium for product performance and customer service and we avoid commodity markets.

PCTEL maintains expertise in several technology areas in order to be competitive in the antenna market.  These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

RF Solutions Segment

PCTEL’s RF Solutions segment provides test tools that improve the performance of wireless networks globally with a focus on LTE, public safety, and emerging 5G technologies.  Network operators, neutral hosts, and equipment manufacturers rely on our scanning receivers and testing solutions to analyze, design, and optimize their networks. Revenue growth is driven by the implementation and roll out of new wireless technology standards (i.e. 3G to 4G, 4G to 5G). PCTEL test equipment is sold directly to wireless carriers or to OEM providers who integrate our products into their solutions which are then sold to wireless carriers.

Competitors for PCTEL’s test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

PCTEL maintains expertise in several technology areas in order to be competitive in the test tool market. These include radio frequency engineering, digital signal processing (“DSP”) engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

During the quarter ended June 30, 2017, we approved a plan to sell our Network Engineering Service business (Engineering Services”) and shift our focus toward research and development driven radio frequency (“RF”) products. On July 31, 2017, we sold

14


substantially all of the assets of our Engineering Services business to Gabes Construction Co., Inc. (“Gabe’s”) for a purchase price of $1.45 million. The Engineering Services business provided design, testing, commissioning, optimization, and consulting services for cellular, Wi-Fi and public safety networks was a reporting unit within the RF Solutions segment. We classified assets of the Engineering Services reporting unit as held for sale at December 31, 2016 and reported the results of its operations as discontinued operations for the years ended December 31, 2017, 2016, and 2015, respectively. The financial information presented in this Form 10-K has been restated to reflect the historical results of Engineering Services as discontinued operations. See Note 4 in the notes to the financial statements for more information on discontinued operations.

Results of Operations for Continuing Operations

Years ended December 31, 2017, 2016, and 2015

(All amounts in tables, other than percentages, are in thousands)

REVENUES BY SEGMENT

 

 

 

 

 

 

 

2017 compared to 2016

 

 

 

 

 

 

2016 compared to 2015

 

 

 

 

 

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2015

 

Connected Solutions

 

$

68,612

 

 

$

2,849

 

 

 

4.3

%

 

$

65,763

 

 

$

(3,816

)

 

 

-5.5

%

 

$

69,579

 

RF Solutions

 

 

23,019

 

 

 

3,600

 

 

 

18.5

%

 

 

19,419

 

 

 

(1,754

)

 

 

-8.3

%

 

 

21,173

 

Corporate

 

 

(194

)

 

 

(18

)

 

not meaningful

 

 

 

(176

)

 

 

43

 

 

not meaningful

 

 

 

(219

)

Total

 

$

91,437

 

 

$

6,431

 

 

 

7.6

%

 

$

85,006

 

 

$

(5,527

)

 

 

-6.1

%

 

$

90,533

 

 

Revenues were approximately $91.4 million for the year ended December 31, 2017, an increase of 7.6% from the prior year.  Revenues increased by $3.6 million (18.5%) for the RF Solutions segment due to the addition of new OEM partners and increased demand from U.S. operators.  Revenues for the Connected Solutions segment increased $2.8 million (4.3%) due the growing sales of our antenna products in our core vertical markets, including fleet, industrial, small cells, and enterprise Wi-Fi.  

Revenues were approximately $85.0 million for the year ended December 31, 2016, a decrease of 6.1% from the prior year.  Revenues declined by $1.8 million (8.3%) for the RF Solutions segment due to the acquisition of one of our large OEM customers.  Revenues for the Connected Solutions segment decreased $3.8 million (5.5%) primarily due to lower kitting revenues and due to the exit from the mobile tower product line.  Approximately 42% of the revenue decline during 2016 was due to our exit from the mobile tower product line.

GROSS PROFIT BY SEGMENT

 

 

 

2017

 

 

% of Revenues

 

 

2016

 

 

% of Revenues

 

 

2015

 

 

% of Revenues

 

Connected Solutions

 

$

22,439

 

 

 

32.7

%

 

$

20,706

 

 

 

31.5

%

 

$

20,426

 

 

 

29.4

%

RF Solutions

 

 

16,354

 

 

 

71.0

%

 

 

13,690

 

 

 

70.5

%

 

 

14,670

 

 

 

69.3

%

Corporate

 

 

18

 

 

not meaningful

 

 

 

15

 

 

not meaningful

 

 

 

32

 

 

not meaningful

 

Total

 

$

38,811

 

 

 

42.4

%

 

$

34,411

 

 

 

40.5

%

 

$

35,128

 

 

 

38.8

%

 

Gross profit was 42.4% for the year ended December 31, 2017, an increase of 1.9% compared to 2016.  The RF Solutions segment’s gross profit increased 0.5% to 71.0%.  The Connected Solutions segment’s gross profit was 32.7%, an increase of 1.2% compared to 2016.  The margin improvement was primarily due to increased efficiencies in the supply chain as well as leveraging the fixed cost of goods sold against increased revenues.

Gross profit was 40.5% for the year ended December 31, 2016, an increase of 1.7% compared to 2015.  The RF Solutions segment’s gross profit increased 1.2% to 70.5% due to more favorable customer mix.  The Connected Solutions segment’s gross profit was 31.5%, an increase of 2.1% compared to 2015.  The margin improvement was primarily due to more favorable product mix with a higher proportion of antenna revenues, less kitting revenues and the exit from the mobile tower product line.

15


CONSOLIDATED OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Revenues

 

 

 

2017

 

 

Change

 

 

2016

 

 

Change

 

 

2015

 

 

2017

 

 

2016

 

 

2015

 

Research and development

 

$

11,142

 

 

$

984

 

 

$

10,158

 

 

$

(1,047

)

 

$

11,205

 

 

 

12.2

%

 

 

11.9

%

 

 

12.4

%

Sales and marketing

 

 

12,630

 

 

 

(86

)

 

 

12,716

 

 

 

(256

)

 

 

12,972

 

 

 

13.8

%

 

 

15.0

%

 

 

14.3

%

General and administrative

 

 

13,110

 

 

 

1,205

 

 

 

11,905

 

 

 

(15

)

 

 

11,920

 

 

 

14.3

%

 

 

14.0

%

 

 

13.2

%

Amortization of intangible assets

 

 

496

 

 

 

(35

)

 

 

531

 

 

 

(1,374

)

 

 

1,905

 

 

 

0.5

%

 

 

0.6

%

 

 

2.1

%

Restructuring expenses

 

 

0

 

 

 

(234

)

 

 

234

 

 

 

(1,375

)

 

 

1,609

 

 

 

0.0

%

 

 

0.3

%

 

 

1.8

%

 

 

$

37,378

 

 

$

1,834

 

 

$

35,544

 

 

$

(4,067

)

 

$

39,611

 

 

 

40.9

%

 

 

41.8

%

 

 

43.8

%

 

RESEARCH AND DEVELOPMENT

Research and development expenses increased by $1.0 million from 2016 to 2017 due to an increase of $1.6 million for the Connected Solutions segment offset by a decrease of $0.6 million for the RF Solutions segment.  The increase for Connected Solutions was due to investments in headcount to increase our capabilities in key vertical markets.  The decrease of $0.6 million for RF Solutions was primarily driven by headcount reductions for certain product development areas and lower stock compensation expense.  

Research and development expenses decreased $1.0 million from 2015 to 2016 due to reductions in expenses of $0.9 million for the RF Solutions segment and $0.3 million for the Connected Solutions segment, offset by an increase of $0.2 million for stock compensation.  The decrease in RF Solutions was due to headcount reductions in the third quarter 2015 for scanning receivers and in the first quarter 2016 for analytics.  

We had 56, 49, and 61 full-time equivalent employees in research and development at December 31, 2017, 2016, and 2015, respectively.

SALES AND MARKETING

Sales and marketing expenses include costs associated with the sales and marketing employees, sales representatives, product line management, and trade show expenses.

Sales and marketing expenses decreased $0.1 million from 2016 to 2017 as expenses declined by $0.7 million within the Connected Solutions segment and increased by $0.6 million within the RF Solutions segment. The decrease for Connected Solutions was due to headcount reductions in marketing and sales.  The increase for RF Solutions was primarily driven by sales investments to support an increase in the number of direct customers.

Sales and marketing expenses decreased $0.3 million from 2015 to 2016 as expenses declined by $0.7 million within Connected Solutions, offset by an increase of $0.4 million for stock compensation. The decrease for Connected Solutions was primarily due to headcount reductions in marketing and site solution sales.

We had 49, 53, and 55 full-time equivalent employees in sales and marketing at December 31, 2017, 2016, and 2015, respectively.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include costs associated with the general management, finance, human resources, information technology, legal, public company costs, and other operating expenses to the extent not otherwise allocated to other functions.

General and administrative expenses increased $1.2 million from 2016 to 2017. The increase was due to increased expense of $0.5 million for the Company’s short-term incentive plan, $0.4 million for costs related to the CEO transition, $0.1 million for legal expenses, and $0.2 million for other corporate expenses.

General and administrative expenses were approximately the same in 2016 compared to 2015 as decreases in Nexgen related expenses and other corporate expenses offset higher stock compensation expenses.  In 2015, we incurred $1.3 million in expenses related to the Nexgen acquisition and $0.1 million in legal expenses related to the TelWorx SEC investigation that did not reoccur in 2016.  Stock compensation expense was $1.5 million higher in 2016 compared to 2015 because of higher expense for service-based restricted stock of $1.0 million, expense for stock bonuses of $0.4 million, and because 2015 included a credit of $0.1 million related to performance awards that did not vest.  

We had 37, 35, and 35 full-time equivalent employees in general and administrative functions at December 31, 2017, 2016, and 2015, respectively.

16


AMORTIZATION OF INTANGIBLE ASSETS

Amortization expense within operating expenses was approximately $0.5 million for both the years ended December 31, 2017 and 2016.  Amortization expense decreased by approximately $1.4 million in 2016 compared to 2015.  The decrease was attributable to certain assets being fully amortized in 2015.  Amortization expense declined by $0.8 million because certain Connected Solutions intangible assets were fully amortized in 2015 and amortization expense declined by $0.6 million because assets for the RF Solutions segment were fully amortized in 2015.  

RESTRUCTURING CHARGES

No restructuring expenses were recorded for the year ended December 31, 2017.  We incurred restructuring expense of $0.2 million and $1.6 million for the years ended December 31, 2016 and 2015, respectively.  

During the first quarter 2016, we reduced headcount in our RF Solutions segment related to analytics and incurred $0.2 million of expenses related to severance and other employee benefits.

In 2015, we reduced U.S. headcount and exited from the mobile towers product line.  To lower operating and production costs, we reduced headcount in engineering related to scanning receivers, in U.S. operations for the Connected Solutions segment, and related to the mobile tower product line.  We terminated 51 employees between June and December 2015 and recorded severance and other employee benefits of $1.2 million.  We also recorded a charge of $0.4 million related to write-off of intangible assets related to the mobile towers product line.  Our mobile towers were primarily sold into the oil and gas exploration market in North America. The mobile towers were used to primarily provide a communications link to an oil drilling site or lighting for a site under construction. The decline in oil prices caused a decline in related mobile tower sales. We made the decision to exit the mobile tower product line due to the anticipated long-term effect on revenue from depressed oil prices, and one of our two tower suppliers filing for Chapter 7 bankruptcy in June 2015 as a result of the decline in sales. Mobile towers were not a key element of our antenna business within the Connected Solutions segment.  Our exit from the mobile tower product line did not meet the accounting guidance for discontinued operations.  The exit from mobile towers did not constitute a strategic shift in our operations.  

OPERATING PROFIT (LOSS) BY SEGMENT

 

 

 

2017

 

 

% of Revenues

 

 

2016

 

 

% of Revenues

 

 

2015

 

 

% of Revenues

 

Connected Solutions

 

$

8,304

 

 

 

12.1

%

 

$

7,804

 

 

 

11.9

%

 

$

5,040

 

 

 

7.2

%

RF Solutions

 

 

4,177

 

 

 

18.1

%

 

 

1,042

 

 

 

5.4

%

 

 

975

 

 

 

4.6

%

Corporate

 

 

(11,048

)

 

not meaningful

 

 

 

(9,979

)

 

not meaningful

 

 

 

(10,498

)

 

not meaningful

 

Total

 

$

1,433

 

 

 

1.6

%

 

$

(1,133

)

 

 

-1.3

%

 

$

(4,483

)

 

 

-5.0

%

 

Total operating income increased $2.6 million for the year ended December 31, 2017 compared to 2016 as higher operating profits for the RF Solutions and Connected Solutions segment offset higher corporate expenses.   The operating profit for RF Solutions increased by $3.1 million primarily due to the gross profit from higher revenues.  The operating profit for Connected Solutions increased by $0.5 million due to the higher gross profits offsetting higher operating expenses.  Higher gross profit was attributable to higher revenues and a higher gross margin percentage.  Operating expenses were higher due to investments in research and development.  Within the corporate function, expenses were $1.0 million higher in 2017 compared to 2016 due to a $0.5 million increase in short-term incentive plan expenses, $0.4 million related to the CEO transition, and $0.1 million for other corporate expenses.

Total operating loss declined $3.4 million for the year ended December 31, 2016 compared to 2015. The decline is largely attributed to an increase in operating profit for the Connected Solutions segment of $2.8 million and lower corporate expenses of $0.5 million.

OTHER INCOME, NET

 

 

 

2017

 

 

2016

 

 

2015

 

Interest income

 

$

270

 

 

$

100

 

 

$

55

 

Income from legal settlements

 

 

0

 

 

 

0

 

 

 

3,160

 

Insurance proceeds

 

 

0

 

 

 

5

 

 

 

102

 

Foreign exchange (losses) gains

 

 

(139

)

 

 

13

 

 

 

(33

)

Other, net

 

 

(26

)

 

 

(6

)

 

 

3