Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
Form 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31, 2002
|_| 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: 0-7928
COMTECH TELECOMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2139466
(State or other jurisdiction of (I.R.S. Employer
incorporation /organization) Identification Number)
105 Baylis Road, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(631) 777-8900
(Registrant's telephone number, including area code)
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. |X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of December 5, 2002, the number of outstanding shares of Common Stock, par
value $.10 per share, of the Registrant was 7,529,141.
COMTECH TELECOMMUNICATIONS CORP.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 2002 (Unaudited)
and July 31, 2002 2
Consolidated Statements of Operations - Three Months Ended
October 31, 2002 and 2001 (Unaudited) 3
Consolidated Statements of Cash Flows - Three Months Ended
October 31, 2002 and 2001 (Unaudited) 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
Certifications 15-16
1
PART I
FINANCIAL INFORMATION
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Item 1. October 31, 2002 July 31, 2002
---------------- -------------
Assets (Unaudited)
-------------
Current assets:
Cash and cash equivalents $ 20,375,000 15,510,000
Accounts receivable, less allowance for doubtful accounts of $818,000
at October 31, 2002 and $795,000 at July 31, 2002 28,862,000 27,435,000
Inventories, net 32,659,000 33,996,000
Prepaid expenses and other current assets 1,305,000 1,407,000
Deferred tax asset - current 2,492,000 2,492,000
------------- ------------
Total current assets 85,693,000 80,840,000
Property, plant and equipment, net 11,819,000 11,889,000
Goodwill and other intangibles with indefinite lives, net of accumulated
amortization of $1,648,000 17,726,000 17,726,000
Other intangibles with definite lives, net of accumulated amortization of
$3,207,000 at October 31, 2002 and $2,681,000 at July 31, 2002 12,451,000 12,902,000
Other assets, net 548,000 661,000
Deferred tax asset - non-current 2,568,000 2,568,000
------------- ------------
Total assets $ 130,805,000 126,586,000
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capital lease obligations $ 1,064,000 1,062,000
Accounts payable 6,868,000 9,529,000
Accrued expenses and other current liabilities 9,734,000 9,686,000
Customer advances and deposits 7,698,000 2,173,000
Deferred service revenue 4,578,000 4,343,000
Income taxes payable 2,926,000 2,470,000
------------- ------------
Total current liabilities 32,868,000 29,263,000
Long-term debt 28,683,000 28,683,000
Capital lease obligations, less current installments 1,029,000 1,294,000
Other long-term liabilities 31,000 58,000
------------- ------------
Total liabilities 62,611,000 59,298,000
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and
unissued 2,000,000 -- --
Common stock, par value $.10 per share; authorized 30,000,000 shares,
issued 7,612,141 shares at October 31, 2002 and 7,602,921 shares
at July 31, 2002 761,000 760,000
Additional paid-in capital 67,933,000 67,883,000
Accumulated deficit (26,000) (825,000)
------------- ------------
68,668,000 67,818,000
Less:
Treasury stock (93,750 shares) (185,000) (185,000)
Deferred compensation (289,000) (345,000)
------------- ------------
Total stockholders' equity 68,194,000 67,288,000
------------- ------------
Total liabilities and stockholders' equity $ 130,805,000 126,586,000
============= ============
Commitments and contingencies
See accompanying notes to consolidated financial statements.
2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
October 31,
(Unaudited)
-----------------------------
2002 2001
------------ -----------
Net sales $ 31,273,000 31,045,000
Cost of sales 19,596,000 20,240,000
------------ -----------
Gross profit 11,677,000 10,805,000
------------ -----------
Expenses:
Selling, general and administrative 6,328,000 5,573,000
Research and development 3,016,000 2,648,000
Amortization of intangibles 526,000 361,000
------------ -----------
9,870,000 8,582,000
------------ -----------
Operating income 1,807,000 2,223,000
Other expense (income):
Interest expense 691,000 973,000
Interest income (59,000) (182,000)
------------ -----------
Income before provision for income taxes 1,175,000 1,432,000
Provision for income taxes 376,000 530,000
------------ -----------
Net income $ 799,000 902,000
============ ===========
Net income per share:
Basic $ 0.11 0.12
============ ===========
Diluted $ 0.10 0.11
============ ===========
Weighted average number of common shares
outstanding - basic 7,510,000 7,437,000
Potential dilutive common shares 263,000 545,000
------------ -----------
Weighted average number of common and
common equivalent shares outstanding assuming
dilution - diluted 7,773,000 7,982,000
============ ===========
See accompanying notes to consolidated financial statements.
3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
October 31,
(Unaudited)
------------------------------
2002 2001
------------ -----------
Cash flows from operating activities:
Net income $ 799,000 902,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for (reduction of) bad debt allowance 23,000 (71,000)
Provision for inventory reserves 453,000 259,000
Depreciation and amortization 1,539,000 1,342,000
Changes in assets and liabilities:
Accounts receivable (1,450,000) (2,248,000)
Inventories 884,000 2,362,000
Prepaid expenses and other current assets 102,000 530,000
Other assets 96,000 115,000
Accounts payable (2,661,000) (2,285,000)
Accrued expenses and other current liabilities 48,000 (1,717,000)
Customer advances and deposits 5,525,000 1,190,000
Deferred service revenue 235,000 469,000
Income taxes payable 456,000 498,000
Other liabilities (27,000) (27,000)
------------ -----------
Net cash provided by operating activities 6,022,000 1,319,000
------------ -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (870,000) (1,294,000)
Purchase of technology license (75,000) (91,000)
Payment for business acquisitions, net of cash received -- (14,000)
------------ -----------
Net cash used in activities (945,000) (1,399,000)
------------ -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (263,000) (315,000)
Prepayment of principal under loan agreement -- (19,217,000)
Proceeds from issuance of common stock 51,000 124,000
------------ -----------
Net cash used in financing activities (212,000) (19,408,000)
------------ -----------
Net increase (decrease) in cash and cash equivalents 4,865,000 (19,488,000)
Cash and cash equivalents at beginning of period 15,510,000 36,205,000
------------ -----------
Cash and cash equivalents at end of period $ 20,375,000 16,717,000
============ ===========
See accompanying notes to consolidated financial statements.
4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
The accompanying consolidated financial statements at and for the three
months ended October 31, 2002 and 2001 are unaudited. In the opinion of
management, the information furnished reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the results for the unaudited interim periods. The results of operations
for such periods are not necessarily indicative of the results of
operations to be expected for the full year.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements of the Company for the
fiscal year ended July 31, 2002 and the notes thereto contained in the
Company's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, and the Company's other filings with the Securities
and Exchange Commission.
(2) Reclassification
Certain reclassifications have been made to previously reported statements
to conform to the Company's current financial statement format.
(3) Acquisition
On July 31, 2002, the Company acquired certain assets and assumed certain
liabilities of Advanced Hardware Architectures, Inc. ("AHA") for
$6,985,000, including transaction costs of $185,000. In accordance with
the terms of the purchase agreement, the purchase price is subject to
adjustment based on a final determination of AHA's net intangible assets
as of July 31, 2002. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the Company has recorded the assets
purchased and the liabilities assumed based upon the estimated fair values
at the date of acquisition. The excess of the purchase price over the fair
values of the net assets acquired was approximately $6,312,000 of which
$2,192,000 was allocated to in-process research and development and was
expensed as of the acquisition date, $4,032,000 was allocated to existing
and core technology and trade name and is being amortized over nine years
and $88,000 was allocated to order backlog and is being amortized over six
months. The Company's operating results for the three months ended October
31, 2002 include AHA.
(4) Accounts Receivable
Accounts receivable consist of the following:
October 31, July 31,
2002 2002
----------- ----------
Accounts receivable from commercial customers $16,547,000 15,424,000
Unbilled receivables (including retainages) on
contracts-in-progress 9,182,000 9,304,000
Amounts receivable from the United States government
and its agencies 3,951,000 3,502,000
----------- ----------
29,680,000 28,230,000
Less allowance for doubtful accounts 818,000 795,000
----------- ----------
Accounts receivable, net $28,862,000 27,435,000
=========== ==========
5
(5) Inventories
Inventories consist of the following:
October 31, July 31,
2002 2002
----------- ----------
Raw materials and components $15,513,000 15,920,000
Work-in-process and finished goods 21,650,000 21,365,000
----------- ----------
37,163,000 37,285,000
Less:
Progress payments 762,000 --
Reserve for anticipated losses on contracts and inventory
reserves 3,742,000 3,289,000
----------- ----------
Inventories, net $32,659,000 33,996,000
=========== ==========
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
October 31, July 31,
2002 2002
----------- ---------
Accrued wages and benefits $2,936,000 2,918,000
Accrued commissions 1,084,000 1,125,000
Accrued warranty 2,592,000 2,975,000
Other 3,122,000 2,668,000
---------- ---------
$9,734,000 9,686,000
========== =========
(7) Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share". Basic EPS is computed based on the weighted average number of
shares outstanding. Diluted EPS reflects the maximum dilution from
potential common stock issuable pursuant to the exercise of stock options
and warrants, if dilutive, outstanding during each period.
(8) Segment and Principal Customer Information
Reportable operating segments are determined based on the Company's
management approach. The management approach is based on the way that the
chief operating decision-maker organizes the segments within an enterprise
for making operating decisions and assessing performance. While the
Company's results of operations are primarily reviewed on a consolidated
basis, the chief operating decision-maker also manages the enterprise in
three segments: (i) Telecommunications Transmission, (ii) RF Microwave
Amplifiers and (iii) Mobile Data Communications Services.
Telecommunications Transmission products include modems, frequency
converters, satellite VSAT transceivers and antennas and over-the-horizon
microwave communications products and systems. RF Microwave Amplifier
products include high-power amplifier products that use the microwave and
radio frequency spectrums. Mobile Data Communications Services include
two-way messaging links between mobile platforms or remote sites and user
headquarters using satellite, terrestrial microwave or Internet links.
Unallocated assets consist principally of cash, deferred tax assets and
intercompany receivables. Unallocated losses result from such corporate
expenses as legal, accounting and executive. Intersegment sales in the
three months ended October 31, 2002 and 2001, by the telecommunications
transmission segment to the RF microwave amplifiers segment were $863,000
and $741,000, respectively.
6
Three months ended
October 31, 2002
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications
Transmission Amplifiers Services Unallocated Total
------------ ---------- -------- ----------- -----
Net sales $21,818 6,525 2,930 -- 31,273
Operating income (loss) 2,098 723 (106) (908) 1,807
Interest income 5 -- -- 54 59
Interest expense 468 223 -- -- 691
Depreciation and
amortization 1,132 270 78 59 1,539
Expenditures for
long-lived assets,
including intangibles 657 201 79 8 945
Total assets 60,164 25,229 20,175 25,237 130,805
Three months ended
October 31, 2001
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications
Transmission Amplifiers Services Unallocated Total
------------ ---------- -------- ----------- -----
Net sales $20,251 6,600 4,194 -- 31,045
Operating income (loss) 2,740 310 48 (875) 2,223
Interest income 37 1 -- 144 182
Interest expense 745 228 -- -- 973
Depreciation and
amortization 917 359 49 17 1,342
Expenditures for
long-lived assets,
including intangibles 678 401 315 5 1,399
Total assets 66,201 25,179 15,421 19,825 126,626
(9) Accounting for Business Combinations, Goodwill and Other Intangible Assets
Intangibles with definite lives as of October 31, 2002 are as follows:
Gross Carrying Accumulated Net
Amount Amortization Book Value
-------------- ------------ ----------
Existing technology $ 11,851,000 2,996,000 8,855,000
Core technology 1,315,000 36,000 1,279,000
Technology license 2,229,000 126,000 2,103,000
Trade name 175,000 5,000 170,000
Order backlog 88,000 44,000 44,000
------------- --------- ----------
Total $ 15,658,000 3,207,000 12,451,000
============= ========= ==========
7
The aggregate amortization expense for the three months ended October 31,
2002 and 2001 was $526,000 and $361,000, respectively. The estimated
amortization expense for the twelve months ending October 31, 2003, 2004,
2005, 2006 and 2007 is $1,980,000, $1,943,000, $1,943,000, $1,943,000 and
$1,463,000, respectively.
Intangibles with indefinite lives by reporting unit as of October 31, 2002
are as follows:
Telecommunications transmission $ 7,870,000
RF microwave amplifiers 8,422,000
Mobile data communications services 1,434,000
-----------
$17,726,000
===========
The Company performed its annual required impairment test for goodwill and
other intangibles with indefinite lives as of August 1, 2002. Based on
this evaluation, the Company determined that no impairment existed as of
August 1, 2002.
(10) Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Company adopted SFAS No. 144 on August 1, 2002. The adoption
did not have a material impact on the Company's consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The Company adopted SFAS No. 145 on August 1, 2002. The
adoption did not have a material impact on the Company's consolidated
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit
or disposal activities that are initiated after December 31, 2002. The
Company does not expect adoption of SFAS No. 146 will have a material
impact on the Company's consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We design, develop, produce and market sophisticated wireless telecommunications
transmission products and systems and solid state high-power broadband
amplifiers for commercial and government purposes. Our products are used in
point-to-point and point-to-multipoint telecommunication applications such as
satellite communications, over-the-horizon microwave systems, telephone systems
and cable and broadcast television. Our broadband amplifier products are also
used in cellular and PCS instrumentation testing, medical instrumentation and
certain defense systems. Our business consists of three segments:
telecommunications transmission, RF microwave amplifiers and mobile data
communications services.
Our sales are made to domestic and international customers, both commercial and
governmental. International sales (including sales to prime contractors for end
use by international customers) are expected to remain a substantial portion of
our total sales for the foreseeable future due to the worldwide demand for
wireless and satellite telecommunication products and services.
At times, a substantial portion of our sales may be derived from a limited
number of relatively large customer contracts, the timing of which cannot be
predicted. Quarterly sales and operating results may be significantly affected
by one or more of such contracts. Accordingly, we can experience significant
fluctuations in sales and operating results from quarter to quarter.
8
Sales consist of stand-alone products and systems. For the past several years,
we have endeavored to achieve greater product sales as a percentage of total
sales, because product sales generally have higher gross profit margins than
systems sales. In the future, as our installed base of mobile data
communications terminals is established, an increasing amount of our sales may
be attributable to the recurring service revenue component of our mobile data
communications services segment.
We generally recognize income on contracts only when the products are shipped.
However, when the performance of a contract will extend beyond a 12-month
period, income is recognized on the percentage-of-completion method. Profits
expected to be realized on contracts are based on total estimated sales value as
related to estimated costs at completion. These estimates are reviewed and
revised periodically throughout the lives of the contracts, and adjustments to
profits resulting from such revisions are made cumulative to the date of the
change. Estimated losses on long-term contracts-in-progress are recorded in the
period in which such losses become known.
Since our contract with the U.S. Army for the Movement Tracking System is for an
eight-year period, revenue recognition is based on the percentage-of-completion
method. The gross margin is based on the estimated sales and expenses for the
entire eight-year contract. The amount of revenue recognized has been limited to
the amount of funded orders received from the U.S. Army. The portion of such
orders representing service time revenue is being deferred until the service
time is used by the customer. Significant changes in the estimates used to
derive the gross profit margin can materially impact our operating results and
financial condition in future periods (see Critical Accounting Policies below
for more information).
Our gross profit is affected by a variety of factors, including the mix of
products, systems and services sold, production efficiency, price competition
and general economic conditions.
Selling, general and administrative expenses consist primarily of salaries and
benefits for marketing, sales and administrative employees, advertising and
trade show costs, professional fees and amortization of deferred compensation.
Our research and development expenses relate to both existing product
enhancement and new product development. A portion of our research and
development efforts is related to specific contracts and is recoverable under
those contracts because they are funded by the customers. Such customer-funded
expenditures are not included in research and development expenses for financial
reporting purposes, but are reflected in cost of sales.
On July 31, 2002, we acquired certain assets for cash and assumed certain
liabilities of Advanced Hardware Architectures, Inc. ("AHA"). The acquisition
was accounted for under the purchase method of accounting. Accordingly, we
allocated the purchase price to the assets purchased and the liabilities assumed
based upon the estimated fair values at the date of acquisition. The excess of
the purchase price over the fair values of the net assets acquired was
approximately $6.3 million, of which $2.2 million was allocated to in-process
research and development and expensed as of the acquisition date. The results of
operations in our telecommunications transmission segment include the AHA
related business commencing on August 1, 2002.
CRITICAL ACCOUNTING POLICIES
The Company considers certain accounting policies to be critical due to the
estimation process involved in each.
Revenue Recognition on Long-Term Contracts
As discussed above, when the performance of a contract will extend beyond a
12-month period, revenue and related costs are recognized on the
percentage-of-completion method of accounting. Profits expected to be realized
on such contracts are based on total estimated sales for the contract compared
to total estimated costs at completion of the contract. These estimates are
reviewed and revised periodically throughout the lives of the contracts, and
adjustments to profits resulting from such revisions are made cumulative to the
date of the change. Estimated losses on long-term contracts are recorded in the
period in which the losses become known.
Some of the Company's largest contracts, including its contract with the U.S.
Army for the Movement Tracking System, are accounted for using the
percentage-of-completion method. If the Company does not accurately estimate the
total sales and related costs on such contracts, the estimated gross margins may
be significantly impacted or losses may need to be recognized in future periods.
Any such resulting reductions in margins or contract losses could be material to
the Company's results of operations and financial position.
9
The cumulative orders to-date under the Movement Tracking System contract have
been far below the Army's initial requirements. The Company is currently in
active discussions with the Army to address the funding shortfalls experienced
to date on this program. The ultimate resolution of these discussions could
result in, among other things, material changes to the estimates used in
applying the percentage-of-completion method of accounting.
Impairment of Intangible Assets
As of October 31, 2002, the Company's intangible assets, including goodwill,
aggregated $30.2 million. In assessing the recoverability of the Company's
goodwill and other intangibles, the Company must make various assumptions
regarding estimated future cash flows and other factors in determining the fair
values of the respective assets. If these estimates or their related assumptions
change in the future, the Company may be required to record impairment charges
for these assets in future periods. Any such resulting impairment charges could
be material to the Company's results of operations.
Provisions for Excess and Obsolete Inventory
We regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory based on historical and future usage trends.
Several factors may influence the sale and use of our inventories, including our
decisions to exit a product line, technological change and new product
development. These factors could result in a change in the amount of excess and
obsolete inventory on hand. Additionally, our estimates of future product demand
may prove to be inaccurate, in which case we may have understated or overstated
the provision required for excess and obsolete inventory. In the future, if we
determine that our inventory was overvalued, we would be required to recognize
such costs in the Company's financial statements at the time of such
determination. Any such charges could be material to the Company's results of
operations and financial position.
Allowance for Doubtful Accounts
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon customer payment history and current creditworthiness, as determined
by our review of our customers' current credit information. Generally, we will
require cash in advance or payment secured by irrevocable letters of credit
before an order is accepted from an international customer that we do not do
business with regularly. In addition, we have obtained credit insurance for
certain international customers that we have determined could be a credit risk.
We continuously monitor collections and payments from our customers and maintain
an allowance for doubtful accounts based upon our historical experience and any
specific customer collection issues that we have identified. While such credit
losses have historically been within our expectations and the allowances
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Measurement of such losses requires
consideration of historical loss experience, including the need to adjust for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency rates
and financial health of specific customers. Changes to the estimated allowance
for doubtful accounts could be material to the Company's results of operations
and financial position.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31,
2002 AND OCTOBER 31, 2001
Net Sales. Consolidated net sales were $31.3 million and $31.0 million for the
three months ended October 31, 2002 and 2001, respectively, representing an
increase of $0.3 million. Sales from our telecommunications transmission segment
were $21.8 million, or 69.6% of our total net sales for the three months ended
October 31, 2002, as compared to $20.2 million, or 65.2% of our total net sales
for the three months ended October 31, 2001. The increase in sales of $1.6
million in this segment was primarily due to sales from our recently formed
subsidiary, Comtech AHA Corporation, which was formed in connection with the
acquisition on July 31, 2002 of certain assets and liabilities of Advanced
Hardware Architectures, Inc. Sales from our RF microwave amplifier segment were
$6.5 million or 20.8% of total net sales for the three months ended October 31,
2002, as compared to $6.6 million or 21.3% of our total net sales for three
months ended October 31, 2001. Sales from our mobile data communications
services segment were $3.0 million, or 9.6% of total net sales for the three
months ended October 31, 2002, as compared to $4.2 million, or 13.5% of total
net sales for the three months ended October 31, 2001. Sales in this segment for
both fiscal year periods were principally sales of our Movement Tracking System
to the U.S. Army. Quarterly sales relating to the Movement Tracking System
contract can fluctuate significantly based on the timing of orders from the U.S.
Army.
10
International sales represented 45.6% and 43.9% of total net sales for the three
months ended October 31, 2002 and 2001, respectively. Domestic sales represented
23.2% and 27.0% of total net sales for the three months ended October 31, 2002
and 2001, respectively. U.S. government sales represented 31.2% and 29.1% of
total net sales for the three months ended October 31, 2002 and 2001,
respectively.
Gross Profit. Gross profit was $11.7 million and $10.8 million for the three
months ended October 31, 2002 and 2001, respectively. The increase was primarily
due to the higher proportion of sales from our telecommunications transmission
segment, including the Comtech AHA Corporation sales, which generally carry
higher margins than sales from our other two segments. Gross margin, as a
percentage of net sales, was 37.3% and 34.8% for the three months ended October
31, 2002 and 2001, respectively. As mentioned above, this was primarily the
result of a greater proportion of higher margin sales from our
telecommunications transmission segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $6.3 million for the three months ended October 31,
2002 as compared to $5.6 million for the three months ended October 31, 2001.
The increase was largely due to the addition of Comtech AHA Corporation. In
addition, selling expenses were higher due to increased bidding and marketing
activities.
Research and Development Expenses. Research and development expenses were $3.0
million and $2.6 million during the three months ended October 31, 2002 and
2001, respectively. As an investment for the future, we are continually
enhancing our existing products and developing new products and technologies.
Whenever possible, we seek customer funding for research and development to
adapt our products to specialized customer requirements. During the three months
ended October 31, 2002 and 2001, customers reimbursed us $0.6 million and $0.5
million, respectively, which amounts are not reflected in the reported research
and development expenses.
Amortization of Intangibles. Amortization of intangibles was $0.5 million and
$0.4 million for the three months ended October 31, 2002 and 2001, respectively.
The increase was the result of the amortization related to the additional
intangibles with definite lives we acquired in connection with the acquisition
of AHA.
Operating Income. Operating income for the three months ended October 31, 2002
and 2001 was $1.8 million and $2.2 million, respectively. The decrease was
primarily the result of higher operating expenses as discussed above, which more
than offset the increase in gross profit.
Interest Expense. Interest expense was $0.7 million and $1.0 million for the
three months ended October 31, 2002 and 2001, respectively. Interest expense was
lower in the fiscal 2003 period due to the lower amount of debt outstanding
during the three month period ended October 31, 2002, as compared to the amount
of debt outstanding during the three month period ended October 31, 2001.
Interest Income. Interest income was $59,000 and $182,000 for the three months
ended October 31, 2002 and 2001, respectively. The decrease was the result of a
lower level of investable funds during the three months ended October 31, 2002,
as well as lower interest rates.
Provision for Income Taxes. The provision for income taxes for the three months
ended October 31, 2002 reflects an estimated effective tax rate of 32%. The
estimated effective tax rate used in the three months ended October 31, 2001 was
37%. The decrease in the estimated effective tax rate reflects the impact of
research and experimentation tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased to $20.4 million at October 31, 2002
from $15.5 million at July 31, 2002.
Net cash provided by operating activities was $6.0 million for the three months
ended October 31, 2002. Such amount reflects (i) net income of $799,000 plus the
impact of depreciation and amortization aggregating $1.5 million; and (ii)
changes in working capital balances, most notably an increase of $5.5 million in
customer advances relating to a new $42.3 million contract received during the
three months ended October 31, 2002.
Net cash used in investing activities for the three months ended October 31,
2002 was $945,000. Cash of $870,000 was used for capital expenditures and
$75,000 was used for the purchase of a technology license.
Net cash used in financing activities was $212,000. Principal payments on
capital lease obligations amounted to $263,000. This use of cash was offset by
proceeds from the sale of stock and exercise of stock options aggregating
$51,000.
11
In the normal course of business, we routinely enter into binding and
non-binding purchase obligations primarily covering anticipated purchases of
inventory and equipment, and from time to time, technology licenses. We do not
expect that these commitments as of October 31, 2002 will materially adversely
affect our liquidity.
At October 31, 2002 we had contractual cash obligations to repay debt (including
capital lease obligations) and to make payments under operating leases. Payments
due under these long-term obligations are as follows:
Obligations due by fiscal year (in thousands)
Remainder 2004 2006
of and and After
Total 2003 2005 2007 2007
------- ------ ------ ----- -----
Long-term debt $28,683 -- 28,683 -- --
Capital lease obligations 2,093 799 1,114 180 --
Operating lease commitments 13,491 2,610 6,137 2,335 2,409
------- ------ ------ ----- -----
Total contractual cash obligations $44,267 3,409 35,934 2,515 2,409
======= ====== ====== ===== =====
We have entered into standby letter of credit agreements with financial
institutions relating to the guarantee of future performance on certain
contracts. At October 31, 2002, the balance of these agreements was $0.4
million.
We believe that our cash and cash equivalents will be sufficient to meet our
operating cash requirements for at least the foreseeable future. In the event
that we identify a significant acquisition that requires additional cash, we
would seek to borrow additional funds or raise additional equity capital.
FORWARD-LOOKING STATEMENTS
Certain information in this Quarterly Report on Form 10-Q contains
forward-looking statements, including but not limited to, information relating
to the future performance and financial condition of the Company, the plans and
objectives of the Company's management and the Company's assumptions regarding
such performance and plans that are forward-looking in nature and involve
certain significant risks and uncertainties. Actual results could differ
materially from such forward-looking information. The Company's Form 10-K filed
with the Securities and Exchange Commission identifies many of such risks and
uncertainties, which include the following:
o the impact of a continued domestic and foreign economic slow-down on the
demand for our products and services, particularly in the
telecommunications industry;
o risks associated with our mobile data communications business being in an
early stage;
o our potential inability to keep pace with rapid technological changes;
o our backlog being subject to customer cancellation or modification;
o our sales to the U.S. government being subject to funding, deployment and
other risks;
o our fixed price contracts being subject to risks;
o our dependence on component availability, subcontractor availability and
performance by key suppliers;
o the highly competitive nature of our markets;
o our dependence on international sales;
o the adverse effect on demand for our products and services that would be
caused by a decrease in the value of foreign currencies relative to the
U.S. dollar;
o the potential entry of new competitors in all of our segments;
o uncertainty whether the satellite communications industry or
infrastructure will continue to develop and the market will grow;
o uncertainty whether the Internet will continue to grow in international
markets;
o the potential impact of increased competition on prices, profit margins
and market share for the Company's products and services;
12
o the availability of satellite capacity on a leased basis needed to provide
the necessary global coverage for our mobile data communications services;
o whether we can successfully implement our satellite mobile data
communications services and achieve recurring revenues for such services;
and
o whether we can successfully combine and assimilate the operations of
acquired businesses and product lines.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and short-term U.S. treasury securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Item 4. Controls and Procedures
Our principal executive and financial officers have concluded, based on their
evaluation as of a date within 90 days before the filing of this Form 10-Q, that
our disclosure controls and procedures (as defined in SEC Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure
that information we are required to disclose in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. The evaluation included
controls and procedures designed to ensure that information we are required to
disclose in such reports is accumulated and communicated to management,
including our principal executive and financial officers, as appropriate to
allow timely decisions regarding required disclosure.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal
controls.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
(Registrant)
Date: December 10, 2002 By: /s/ Fred Kornberg
---------------------------------------------
Fred Kornberg
Chairman of the Board
Chief Executive Officer and President
(Principal Executive Officer)
Date: December 10, 2002 By: /s/ Robert G. Rouse
---------------------------------------------
Robert G. Rouse
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
CERTIFICATION
I, Fred Kornberg, Chief Executive Officer of Comtech Telecommunications Corp.
(the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comtech
Telecommunications Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report was being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 10, 2002 By: /s/ Fred Kornberg
-------------------------------------
Fred Kornberg
Chairman of the Board
Chief Executive Officer and President
(Principal Executive Officer)
15
CERTIFICATION
I, Robert G. Rouse, Chief Financial Officer of Comtech Telecommunications Corp.
(the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comtech
Telecommunications Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report was being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 10, 2002 By: /s/ Robert G. Rouse
---------------------------------------------
Robert G. Rouse
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16