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, 2011 contained in our Annual Report on Form 10-K filed on March 15, 2012. 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.

Introduction PCTEL is a global leader in propagation and optimization solutions for the wireless industry. PCTEL designs, develops, and distributes a wide range of antennas, site solutions, scanning receivers and engineered services, for both public and private networks.

Antennas and Site Solutions PCTEL is a leading supplier of antennas for private network, public safety and government applications, and site solutions for both private and public network, data, and communications applications. Our MAXRAD®, Bluewave™ and Wi-Sys™ antenna solutions include high-value YAGI, land mobile radio ("LMR"), WiFi, GPS, In Tunnel, Subway, and Broadband antennas (parabolic and flat panel). PCTEL Connected Solutions™ includes specialized towers, enclosures, fiber optic panels, and fiber jumper cables that are engineered into site solutions. The vertical markets into which the antenna and site solutions are sold include supervisory control and data acquisition ("SCADA"), health care, energy, smart grid, precision agriculture, indoor wireless, telemetry, offloading, and wireless backhaul. Growth for antenna and site solutions is primarily driven by the increased use of wireless communications in these vertical markets. Our antenna and site solutions are primarily sold through distributors, value added reseller, and original equipment manufacturer ("OEM") providers.

We established our current antenna and site solutions product portfolio with a series of acquisitions. In 2004 we acquired MAXRAD, Inc. ("MAXRAD"), as well as certain product lines from Andrew Corporation ("Andrew"), which established its core product offerings in WiFi, LMR and GPS. Over the next several years we added additional capabilities within those product lines and additional served markets with the acquisition of certain assets from Bluewave Antenna Systems, Ltd ("Bluewave") in 2008, and the acquisitions of Wi-Sys Communications, Inc ("Wi-Sys") in 2009, Sparco Technologies, Inc. ("Sparco") in 2010, and certain assets of TelWorx Communications LLC Telworx U.K. Limited, TowerWorx LLC, and Tower Worx International, Inc. in July 2012.

Through our wholly-owned subsidiary PCTelWorx, Inc. ("PCTelWorx"), we completed the acquisition of substantially all of the assets and assumption of certain specified liabilities of TelWorx Communications LLC, TelWorx U.K. Limited, TowerWorx LLC and TowerWorx International, Inc., pursuant to an Asset Purchase Agreement dated as of July 9, 2012 among the Company, PCTelWorx, TelWorx and Tim and Brenda Scronce, the principal owners of these entities. The business operations associated with the purchased assets are collectively referred to as "TelWorx" in this Form 10-Q. See footnote 8 of the financial statements for more information on the acquisition of the assets of Telworx.

Scanning Receivers and Engineering Services PCTEL is a leading supplier of high-speed, multi-standard, demodulating receivers and test and measurement solutions to the wireless industry worldwide.

Our SeeGull® scanning receivers, receiver-based products and CLARIFY ® interference management solutions are used to measure, monitor and optimize cellular networks. Our network engineering services ("NES") Group provides value-added analysis of measured data collected during the optimization process.

Revenue growth for these products and services is driven by the deployment of products based on new wireless technology and the need for wireless networks to be tuned and reconfigured on a regular basis. We develop and support scanning receivers for LTE, EVDO, CDMA, WCDMA, GSM, TD-SCDMA, and WiMAX networks. Our scanning receiver products are sold primarily through test and measurement value added resellers and, to a lesser extent, directly to network operators. The engineering services are sold primarily to network infrastructure providers and cellular carriers.

31 -------------------------------------------------------------------------------- Table of Contents We established our scanning receiver product portfolio in 2003 with the acquisition of certain assets of Dynamic Telecommunications, Inc. In 2009 we acquired the scanning receiver business of Ascom Network Testing, Inc ("Ascom") as well as the exclusive distribution rights and patented technology for Wider Network LLC's ("Wider") network interference products. In 2011 we acquired certain assets of Envision Wireless Inc.

Secure applications On January 5, 2011, we formed PCTEL Secure LLC ("PCTEL Secure"), a joint venture limited liability company, with Eclipse Design Technologies, Inc. ("Eclipse").

PCTEL Secure designs Android-based, secure communication products. We contributed $2.5 million in cash in return for 51% ownership of the joint venture and Eclipse contributed $2.4 million of intangible assets in return for 49% ownership of the joint venture. In May 2012, we paid Eclipse $0.9 million for an additional 19% membership interest, and in July 2012 we paid Eclipse $0.8 million for the remaining 30% membership interest.

Segment Reporting We operate in two segments for reporting purposes. Beginning with the formation of PCTEL Secure in January 2011, we report the financial results of PCTEL Secure as a separate operating segment. Our chief operating decision maker uses the profit and loss results and the assets of the segments in deciding how to allocate resources and assess performance between the segments. We did not report segment information for PCTEL Secure in this section because PCTEL Secure has been in the development stage during 2011 and the nine months ended September 30, 2012.

Results of Operations Three and Nine Months Ended September 30, 2012 and 2011 (in thousands) Revenues Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Revenue $ 25,853 $ 19,494 $ 63,007 $ 56,837 Percent change from year ago period 32.6 % 12.6 % 10.9 % 12.1 % Revenues increased 32.6% in the three months ended September 30, 2012 and increased 10.9% in the nine months ended September 30, 2012 compared to the same period in 2011. For the three months ended September 30, 2012 versus the comparable period in the prior year, approximately 25% was attributable to revenues from the businesses we acquired from Envision in October 2011 and TelWorx in July 2012 and approximately 14% was attributable to increased antenna and site solution product revenues, offsetting approximately 7% from lower scanning receiver and engineering services revenues. For the nine months ended September 30, 2012 versus the comparable period in the prior year, approximately 10% was attributable to revenues from the businesses we acquired from Envision in October 2011 and TelWorx in July 2012 and approximately 18% was attributable to increased antenna product and site solution revenues, offsetting approximately 7% from lower scanning receiver and engineering services revenues.

Antenna and site solution product revenues were higher than the same periods last year across both distribution and OEM channels. Scanning receiver and engineering services revenue was lower than the same periods last year due to carrier spending delays.

32 -------------------------------------------------------------------------------- Table of Contents Gross Profit Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Gross profit $ 10,040 $ 9,354 $ 25,888 $ 26,579 Percentage of revenue 38.8 % 48.0 % 41.1 % 46.8 % Percent of revenue change from year ago period (9.2 %) 7.5 % (5.7 %) 2.7 % The gross profit percentage of 38.8% for the three months ended September 30, 2012 was 9.2% lower than the comparable period in fiscal 2011. The gross profit percentage of 41.1% for the nine months ended September 30, 2012 was 5.7% lower than the comparable period in fiscal 2011. The lower gross profit percentage reflects the addition of lower margin product lines from the businesses we acquired from Envision in October 2011 and TelWorx in July 2012 as well as a decrease in revenue mix of our scanning receiver and engineering services products, with their higher margins relative to antennas and site solution products. For the three months ended September 30, 2012, the recently acquired businesses negatively impacted the gross margin percentage by 5.3%. For all other products, negative product mix of 4.4% offset higher product margins of 0.5% for the three months ended September, 30, 2012. For the nine months ended September 30, 2012, the recently acquired businesses negatively impacted the gross margin percentage by 3.1%. For all other products, negative product mix of 3.3% offset higher product margins of 0.7% for the nine months ended September 30, 2012.

Research and Development Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Research and development $ 2,858 $ 3,035 $ 8,454 $ 8,991 Percentage of revenues 11.1 % 15.6 % 13.4 % 15.8 % Percent change from year ago period (5.8 %) 2.7 % (6.0 %) (1.5 %) Research and development expenses decreased approximately $0.2 million for the three months ended September 30, 2012 compared to the comparable period in 2011 primarily due to the completion of several projects in scanning receiver development. Research and development expenses decreased approximately $0.5 million for the nine months ended September 30, 2012 compared to the comparable period in 2011. For the nine months ended September 30, 2012, research and development expenses declined by $1.0 million primarily due to the completion of several projects in scanning receiver development, offsetting an increase in expenses of $0.5 million related to PCTEL Secure.

Sales and Marketing Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Sales and marketing $ 2,811 $ 2,643 $ 7,907 $ 7,853 Percentage of revenues 10.9 % 13.6 % 12.5 % 13.8 % Percent change from year ago period 6.4 % 3.7 % 0.7 % 7.1 % 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 $0.2 million for the three months ended September 30, 2012 compared to the same period in fiscal 2011 and increased approximately $0.1 million for the nine months ended September 30, 2012, compared to the same period in fiscal 2011. The increases were primarily due to the sales expenses associated with the business acquired from the TelWorx acquisition.

33 -------------------------------------------------------------------------------- Table of Contents General and Administrative Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 General and administrative $ 2,647 $ 2,520 $ 8,054 $ 8,236 Percentage of revenues 10.2 % 12.9 % 12.8 % 14.5 % Percent change from year ago period 5.0 % 16.1 % (2.2 %) 7.7 % 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 approximately $0.1 million for the three months ended September 30, 2012 and decreased approximately $0.2 million for the nine months ended September 30, 2012 compared to the same period in fiscal 2011. The increases were primarily due to expenses associated with the business acquired from the TelWorx acquisition. The decreases were because we have not recorded any expense for our short-term incentive plan during 2012.

Amortization of Other Intangible Assets Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Amortization of other intangible assets $ 1,120 $ 661 $ 2,610 $ 1,995 Percentage of revenues 4.3 % 3.4 % 4.1 % 3.5 % Amortization increased approximately $0.5 million and $0.6 million during the three and nine months ended September 30, 2012 compared to the same period in 2011. Amortization expense increased due to the amortization of intangible assets acquired from Telworx in July 2012, the acquisition of assets from Envision in October 2011 and amortization for in-process research and development for PCTEL Secure, offsetting lower amortization because certain intangible assets for antenna product acquisitions became fully amortized in 2011.

Restructuring Charges Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, `September 30, September 30, September 30, 2012 2011 2012 2011 Restructuring charges $ 156 $ 125 $ 156 $ 125 Percentage of revenues 0.6 % 0.6 % 0.2 % 0.2 % During the three months ended September 30, 2012, we eliminated twelve positions in our Bloomingdale manufacturing organization. During the three and nine months ended September 30, 2012 we incurred restructuring expense of $0.2 million, which consisted of severance and payroll related benefits.

During the third quarter 2011, we reduced the headcount in our Germantown, Maryland engineering organization due to the completion of several projects for scanning receivers. The restructuring plan consisted of the elimination of six positions. During the three and nine months ended September 30, 2011 we incurred restructuring expense of $0.1 million, which consisted of severance and payroll related benefits.

Other Income, Net Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Other income, net $ 11 $ 64 $ 125 $ 266 Percentage of revenues 0.0 % 0.3 % 0.2 % 0.5 % 34 -------------------------------------------------------------------------------- Table of Contents Other income, net consists of interest income, foreign exchange gains and losses, and investment income. In the three months ended September 30, 2012 we recorded net interest income of $20 and foreign exchange losses of $9 and for the nine months ended September 30, 2012, we recorded net interest income of $111, investment income of $39, and foreign exchange losses of $25. In the three months ended September 30, 2011 we recorded net interest income of $40, investment income of $31, and foreign exchange losses of $24 and for the nine months ended September 30, 2011, we recorded net interest income of $200, investment income of $93, and foreign exchange losses of $27.

Provision (Benefit) for Income Taxes Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Provision (benefit) for income taxes $ 187 $ 216 ($ 192 ) ($ 13 ) Effective tax rate 40.7 % 49.8 % 16.4 % 3.7 % The effective tax rate for the nine months ended September 30, 2012 differed from the statutory rate of 34% by approximately 17%, respectively, primarily because of the noncontrolling interest of PCTEL Secure.

The effective tax rate for the nine months ended September 30, 2011 differed from the statutory rate of 34% by approximately 30%, respectively, primarily because of the noncontrolling interest of PCTEL Secure, as well as a rate change for deferred taxes recorded as a discrete item in the first quarter of 2011.

We maintain valuation allowances due to uncertainties regarding realizability.

At September 30, 2012 and December 31, 2011, 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.

While we recorded a net loss during the nine months ended September 30, 2012, 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.

Net Loss Attributable to Noncontrolling Interests Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Net loss attributable to noncontrolling interests $ 0 ($ 274 ) ($ 687 ) ($ 740 ) For all of 2011 and through May 2012, we owned 51% of PCTEL Secure. On May 29, 2012, we purchased an additional 19% membership interest and on July 2, 2012 we purchased the remaining 30% membership in PCTEL Secure from Eclipse. Because we owned 100% of the membership interests in PCTEL Secure during the third quarter 2012, there was no noncontrolling interest. The net loss attributable to noncontrolling interests represents 49% of the net loss of PCTEL Secure for the three and nine months ended September 30, 2011 and the pro-rata percentage ownership of PCTEL Secure during nine months ended September 30, 2012.

Stock-based compensation expense 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.

The condensed consolidated statements of operations include $0.7 million and $2.5 million of stock compensation expense for the three and nine months ended September 30, 2011, respectively. Stock compensation expense for the three months ended September 30, 2011 consists of $0.6 million for restricted stock awards and $0.1 million for performance share awards, stock option and stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2011 consists of $2.1 million for restricted stock awards, $0.2 million for performance share awards, and $0.2 million for stock option and stock purchase plan expenses.

35-------------------------------------------------------------------------------- Table of Contents We did not capitalize any stock-based compensation expense during the three and nine months ended September 30, 2012 or 2011.

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, 2012 2011 2012 2011 Cost of revenues $ 99 $ 67 $ 302 $ 204 Research and development 153 139 442 451 Sales and marketing 141 155 398 494 General and administrative 302 351 1,193 1,374 Total $ 695 $ 712 $ 2,335 $ 2,523 Liquidity and Capital Resources Nine Months Ended September 30, 2012 2011 Net loss ($ 976 ) ($ 342 ) Charges for depreciation, amortization, stock-based compensation, and other non-cash items 5,562 5,300 Changes in operating assets and liabilities (3,435 ) (1,185 ) Net cash provided by operating activities 1,151 3,773 Net cash used in investing activities (2,446 ) (4,156 ) Net cash used in financing activities (1,078 ) (1,990 ) September 30, 2012 December 31, 2011 Cash and cash equivalents at the end of period $ 17,061 $ 19,418 Short-term investments at the end of period 30,705 42,210 Long-term investments at the end of period 261 7,177 Working capital at the end of period $ 72,384 $ 80,311 Liquidity and Capital Resources Overview At September 30, 2012, our cash and investments were approximately $48.0 million and we had working capital of $ 72.9 million. The decrease in cash and investments of $20.7 million at September 30, 2012 compared to December 31, 2011 is primarily due to the acquisition of the assets of TelWorx, capital expenditures and payment of dividends. We used $16.0 million of cash for acquisitions of the assets of TelWorx, $2.6 million of cash for capital expenditures, $1.6 million of cash for payment of dividends, $1.7 million for purchase of the remaining membership interest in PCTEL Secure, offsetting $1.8 million generated from operations and $0.6 million from issuance of common stock.

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, 2012 were approximately 4.2% of revenues because we spent $1.5 million of capital related to the implementation of a new ERP system.

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 36-------------------------------------------------------------------------------- Table of Contents supplementing our organic revenue growth with acquisitions of product lines or companies, resulting in significant uses of our cash and short-term investment balance 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. During 2011 we completed the purchases of shares under share repurchase programs previously authorized by the Board of Directors and we are now paying quarterly dividends. 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.

Operating Activities: Operating activities provided $1.1 million of cash during the nine months ended September 30, 2012 as we generated $4.6 million in cash from our income statement activities and used $3.4 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 receivables collections. 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 $1.3 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.

Operating activities provided $3.8 million of cash during the nine months ended September 30, 2011 as we generated $5.0 million in cash from our income statement activities, offsetting $1.2 million of cash used from the balance sheet. We used $1.2 million for payroll taxes related to stock-based compensation. The tax payments related to our stock issued for restricted stock awards, stock bonuses under the 2010 STIP, and performance shares. The tax payments were lower during the same period last year because there were no stock bonuses or performance shares issued in the nine months ended September 30, 2010. Within the balance sheet, inventories increased by $2.9 million due to the purchase of buffer inventory necessary during the implementation of sourcing initiatives and also because more production is being sourced in-house rather than from contract manufacturers. A reduction of prepayments and other receivables provided $1.7 million in cash during the nine months ended September 30, 2011 primarily because we received a federal income tax refund of $1.6 million. The $0.8 million in cash provided by the increase in accounts payable is primarily related to the inventory increase. The $0.6 million decrease in accruals consisted of payments for cash bonuses, sales commissions, and inventory purchases. We used $0.9 million of cash for bonuses under the 2010 STIP during the nine months ended September 30, 2011. The operations of PCTEL Secure used $0.9 million of cash during the nine months ended September 30, 2011.

Investing Activities: Our investing activities used $2.4 million of cash during the nine months ended September 30, 2012. We generated $14.4 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 additional 49% membership interest in PCTEL Secure. In July 2012, we purchased certain assets from TelWorx for $16.0 million in cash paid at closing.

Our investing activities used $4.2 million of cash during the nine months ended September 30, 2011. For the nine months ended September 30, 2011, our capital expenditures were $4.1 million, including $2.7 million for our ERP project. We spent approximately $3.7 million on the ERP project in 2011, consisting of $3.0 million in capital expenditures and $0.7 million in operating expenses. There was no net change in cash from redemptions and maturities of our investments in short-term bonds during the nine months ended September 30, 2011. We rotated $41.2 million of cash from redemption and maturities into new short-term and long-term bonds during the nine months ended September 30, 2011.

37-------------------------------------------------------------------------------- Table of Contents Financing Activities: 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.

Our financing activities used $2.0 million of cash during the nine months ended September 30, 2011. We used $2.6 million to repurchase our common stock under share repurchase programs and we received $0.6 million from shares purchased through the Employee Stock Purchase Plan ("ESPP"). In the quarter ending December 31, 2011, we will use $0.5 million for a quarterly dividend. The dividend will be payable on November 15, 2011 to shareholders of record as of November 8, 2011.

Contractual Obligations and Commercial Commitments As of September 30, 2012, we had operating lease obligations of approximately $5.0 million through 2020. Operating lease obligations consist of $4.9 million for facility lease obligations and $0.1 million for equipment leases. Our lease obligations were $1.2 million at December 31, 2011.

In June 2012, we extended the lease for our Germantown, Maryland facility through 2020. The total lease obligation pursuant to the amendment for the Germantown, Maryland lease was $3.3 million.

In March 2012, we entered into a new five-year lease for our Tianjin, China operations. Under the new lease, we expanded the leased space to approximately 22,000 square feet. The additional space meets the needs of our expanded antenna operations in Tianjin.

With the TelWorx acquisition, we entered into a five-year lease for a warehouse and office facility in Lexington, North Carolina and a one-year lease for an office facility in Pryor, Oklahoma. The total lease obligation pursuant to the Lexington, NC lease was $1.0 million.

We had purchase obligations of $9.0 million and $6.7 million at September 30, 2012 and December 31, 2011, 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 $1.2 million related to income tax uncertainties at September 30, 2012 and December 31, 2011, respectively.

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, 2011 (the "2011 Annual Report on Form 10-K"). There have been no material changes in any of our critical accounting policies since December 31, 2011. See Note 2 in the Notes to the Condensed Consolidated Financial Statements for discussion on recent accounting pronouncements.

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