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Westell Technologies Inc. Reports Operating Results (10-Q)

February 09, 2009 | About:
10qk

Westell Technologies Inc. (WSTL) filed Quarterly Report for the period ended 2008-12-31.

Westell Technologies Inc. designs manufactures markets and services a broad range of digital and analog products used by telcos to deliver services primarily over existing copper telephone wires that connect end users to a telco's central office. The company also markets its products and services to other telecommunications and information service providers seeking direct access to end-user customers. The company's customersinclude all the Regional Bell Operating Companies as well as GTE and other carriers. Westell Technologies Inc. has a market cap of $22.41 million; its shares were traded at around $0.35 with and P/S ratio of 0.11.

Highlight of Business Operations:

Sales and marketing expense decreased $24,000 in the combined CNS and OSPlant Systems telecom equipment segments in the three months ended December 31, 2008, compared to the same period in fiscal 2008 due primarily to an increase of $267,000 for warranty costs off set by a $196,000 reduction in salary related expense and a $117,000 reduction in outside consulting. Sales and marketing expense in the equipment segments was approximately $1.7 million higher in the nine months ended December 31, 2008 compared to the same period in fiscal 2008. The increase is primarily due to a $2.7 million net gain recorded in the CNS telecom equipment segment for the quarter ended June 30, 2007, related to a recovery of product warranty costs for non-conforming product from a vendor, offset in part by fiscal 2009 cost reductions of $1.0 million. The fiscal 2009 cost reductions were primarily due to a $665,000 reduction in salary related costs, and a $264,000 reduction in trade show expense. Sales and marketing expense decreased in the Companys services segment when comparing the three and nine months ended December 31, 2008, to the same periods last year due primarily to reduced salary related expense. The Company believes that sales and marketing expense in the future will continue to be a significant percent of revenue and will be required to expand its product lines, bring new products to market and service customers.

Research and development expenses in the combined CNS and OSPlant Systems telecom equipment segments decreased by $1.4 million in the quarter ending December 31, 2008, compared to the same period last year. This decrease is primarily due to decreases in personnel related expense of approximately $895,000, engineering software tools expense of $200,000 and product certification expense of $90,000 in the 2008 quarter. Research and development expenses in the equipment segments decreased by $1.4 million in the nine months ending December 31, 2008, compared to the same period in fiscal year 2008. Personnel related expense decreased by approximately $3.4 million in the 2008 quarter, which was offset by a $738,000 increase in outside consulting expense, a $148,000 increase in product certification, a $232,000 increase in engineering software tools and $548,000 of research and development expenses incurred at Contineo, which is part of the CNS equipment segment. Research and development expenses in the Companys services segment were flat in the three and nine months ended December 31, 2008, as compared to the same periods from the prior year.

The $2.0 million decrease in general and administrative expense in the combined CNS and OSPlant Systems telecom equipment segment in the quarter ended December 31, 2008, compared to the same period in fiscal year 2008 is due primarily to a $627,000 reduction in personnel costs, a $436,000 reduction in outside consulting, a $385,000 reduction in legal expense and a $147,000 reduction in G&A expenses at Contineo. General and administrative expense decreased by $1.2 million in the equipment segments in the nine months ended December 31, 2008, when compared to the same period in fiscal year 2008. This decrease is primarily due to a decrease of $1.3 million in personnel costs and a reduction of $1.5 million in outside consulting expense primarily related to costs incurred in the 2007 period to assist the Company to implement its outsourcing strategy. These decreases were offset by $1.4 million of severance and stock based compensation from the accelerated vesting of restricted stock for Mr. Thomas Mader, the former Chief Executive Officer, and a $351,000 increase in legal expense related to the previously announced SEC investigation. The increase in general and administrative expense in the services segment in the three and nine months ended December 31, 2008, compared to the same periods in fiscal year 2008 is due primarily to $373,000 of stock option expense incurred during the quarter ended December 31, 2008 for subsidiary stock options granted to a key employee.

Restructuring The Company initiated an additional reduction in force of 20 employees in October 2008 impacting all three operating segments. As a result of these actions, the Company recorded employee termination costs in the third fiscal quarter ending December 31, 2008 of approximately $169,000 in the telecom services segment and $639,000 in the combined CNS and OSPlant Systems telecom equipment segment The Company recorded restructuring expense of $176,000 and $4.3 million in the three and nine months ended December 31, 2007, respectively, as a result of outsourcing the manufacturing operations from Aurora, Illinois, to offshore suppliers. These charges included personnel costs relating to the termination of 386 employees at Westell, Inc. and related legal and other expenses. A $56,000 reversal was recorded in the nine months ended December 31, 2008 to record a change in estimate for related severance and outplacement expenses.

Income taxes The Company uses an estimated annual effective tax rate based on expected annual income to determine the quarterly provision for income taxes. The impact of discrete items is recorded in the quarter in which they occur. In assessing the realizability of the deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized through the generation of future taxable income. As a result of this assessment, the Company recorded a valuation allowance to fully reserve for tax benefits generated in the three and nine months ended December 31, 2008 and recorded a $62,000 tax benefit and $13,000 tax expense in the three and nine months ended December 31, 2008, respectively, using an effective tax rate of 0.1% based on the projected loss for the year. The Company will continue to reassess realizability of the deferred tax assets going forward. In the three months ended December 31, 2007, the Company recorded tax benefits from continuing operations of $955,000 and $39,000 from discontinued operations. In the nine months ended December 31, 2007, the Company recorded tax benefits from continuing operations of $1,542,000 and $252, 000 from discontinued operations, using a cumulative effective tax rate of 31.3% based on the projected loss for the year.

The Companys operating activities used $17.1 million of cash in the nine months ended December 31, 2008. Cash used by operations resulted primarily from $14.7 million net losses, offset by non-cash depreciation and amortization of $4.4 million, $1.4 million impairment of goodwill and intangibles and stock-based compensation of $2.0 million. Other uses of cash include a $5.7 million reduction in accrued compensation, a $4.0 million increase in inventory and a $2.6 million increase in prepaids and other current assets.

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