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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 period ended January 31, 2003
|_| 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 (I.R.S. Employer
of 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 March 6, 2003, the number of outstanding shares of Common
Stock, par value $.10 per share, of the Registrant was 7,562,637.
COMTECH TELECOMMUNICATIONS CORP.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2003 (Unaudited)
and July 31, 2002 2
Consolidated Statements of Operations - Three Months and Six Months Ended
January 31, 2003 and 2002 (Unaudited) 3
Consolidated Statements of Cash Flows - Six Months Ended January 31, 2003
and 2002 (Unaudited) 4
Notes to Consolidated Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
Certifications 17-18
1
PART I
FINANCIAL INFORMATION
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, July 31,
Item 1. 2003 2002
------------- -------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 27,301,000 15,510,000
Accounts receivable, less allowance for doubtful accounts of $852,000 at
January 31, 2003 and $795,000 at July 31, 2002 33,833,000 27,435,000
Inventories, net 28,153,000 33,996,000
Prepaid expenses and other current assets 1,405,000 1,407,000
Deferred tax asset - current 2,492,000 2,492,000
------------- -------------
Total current assets 93,184,000 80,840,000
Property, plant and equipment, net 11,882,000 11,889,000
Goodwill and other intangibles with indefinite lives 17,726,000 17,726,000
Other intangibles with definite lives, net 11,925,000 12,902,000
Other assets, net 497,000 661,000
Deferred tax asset - non-current 2,568,000 2,568,000
------------- -------------
Total assets $ 137,782,000 126,586,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 1,983,000 --
Current installments of capital lease obligations 1,043,000 1,062,000
Accounts payable 9,895,000 9,529,000
Accrued expenses and other current liabilities 9,776,000 9,686,000
Customer advances and deposits 8,373,000 2,173,000
Deferred service revenue 5,048,000 4,343,000
Income taxes payable 3,798,000 2,470,000
------------- -------------
Total current liabilities 39,916,000 29,263,000
Long-term debt, less current installments 26,700,000 28,683,000
Capital lease obligations, less current installments 779,000 1,294,000
Other long-term liabilities 4,000 58,000
------------- -------------
Total liabilities 67,399,000 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
7,656,387 shares at January 31, 2003 and 7,602,921 shares at July 31, 2002 766,000 760,000
Additional paid-in capital 68,182,000 67,883,000
Retained earnings (accumulated deficit) 1,827,000 (825,000)
------------- -------------
70,775,000 67,818,000
Less:
Treasury stock (93,750 shares) (185,000) (185,000)
Deferred compensation (207,000) (345,000)
------------- -------------
Total stockholders' equity 70,383,000 67,288,000
------------- -------------
Total liabilities and stockholders' equity $ 137,782,000 126,586,000
============= =============
Commitments and contingencies
See accompanying notes to consolidated financial statements.
2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
January 31, January 31,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 42,326,000 30,525,000 73,599,000 61,570,000
Cost of sales 28,783,000 21,406,000 48,379,000 41,646,000
------------ ------------ ------------ ------------
Gross profit 13,543,000 9,119,000 25,220,000 19,924,000
------------ ------------ ------------ ------------
Expenses:
Selling, general and administrative 6,372,000 5,304,000 12,700,000 10,877,000
Research and development 3,296,000 2,712,000 6,312,000 5,360,000
Amortization of intangibles 526,000 370,000 1,052,000 731,000
------------ ------------ ------------ ------------
10,194,000 8,386,000 20,064,000 16,968,000
------------ ------------ ------------ ------------
Operating income 3,349,000 733,000 5,156,000 2,956,000
Other expense (income):
Interest expense 686,000 683,000 1,377,000 1,656,000
Interest income (62,000) (98,000) (121,000) (280,000)
------------ ------------ ------------ ------------
Income before provision for income taxes 2,725,000 148,000 3,900,000 1,580,000
Provision for income taxes 872,000 -- 1,248,000 530,000
------------ ------------ ------------ ------------
Net income $ 1,853,000 148,000 2,652,000 1,050,000
============ ============ ============ ============
Net income per share:
Basic $ 0.25 0.02 0.35 0.14
============ ============ ============ ============
Diluted $ 0.23 0.02 0.34 0.13
============ ============ ============ ============
Weighted average number of common shares
outstanding-basic 7,536,000 7,440,000 7,523,000 7,439,000
Potential dilutive common shares 389,000 453,000 326,000 499,000
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares outstanding
assuming dilution - diluted 7,925,000 7,893,000 7,849,000 7,938,000
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
January 31
-----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 2,652,000 1,050,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,108,000 2,646,000
Provision for (reduction of) bad debt allowance 142,000 (165,000)
Provision for inventory reserves 823,000 323,000
Changes in operating assets and liabilities, net of effect
of acquisition:
Accounts receivable (6,540,000) 797,000
Inventories 4,790,000 4,383,000
Prepaid expenses and other current assets (163,000) 478,000
Other assets (9,000) 140,000
Accounts payable 366,000 (3,050,000)
Accrued expenses and other current liabilities 49,000 (2,591,000)
Customer advances and deposits 6,200,000 1,130,000
Deferred service revenue 705,000 1,019,000
Income taxes payable 1,328,000 292,000
Other liabilities (54,000) (54,000)
------------ ------------
Net cash provided by operating activities 13,397,000 6,398,000
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,853,000) (1,557,000)
Purchase of technology license (75,000) (91,000)
Cash received (payments made) in connection with business acquisitions 551,000 (14,000)
------------ ------------
Net cash used in investing activities (1,377,000) (1,662,000)
------------ ------------
Cash flows from financing activities:
Prepayment of principal under loan agreement -- (19,217,000)
Principal payments on capital lease obligations (534,000) (612,000)
Proceeds from issuance of stock 305,000 242,000
------------ ------------
Net cash used in financing activities (229,000) (19,587,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 11,791,000 (14,851,000)
Cash and cash equivalents at beginning of period 15,510,000 36,205,000
------------ ------------
Cash and cash equivalents at end of period $ 27,301,000 21,354,000
============ ============
See accompanying notes to consolidated financial statements.
4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
The accompanying consolidated financial statements for the three months
and six months ended January 31, 2003 and 2002 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) Reclassifications
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. The purchase price
was subject to adjustment based on AHA's net tangible assets as of July
31, 2002. During the three months ended January 31, 2003, the purchase
price adjustment was finalized and the Company received $551,000, net of
related costs. 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 amortized over six months.
The Company's operating results for the three and six months ended January
31, 2003 include AHA.
(4) Accounts Receivable
Accounts receivable consist of the following:
January 31, July 31,
2003 2002
----------- -----------
Accounts receivable from commercial customers $14,679,000 15,424,000
Unbilled receivables (including retainages) on contracts-in-progress 16,065,000 9,304,000
Amounts receivable from the United States government and its agencies 3,941,000 3,502,000
----------- -----------
34,685,000 28,230,000
Less allowance for doubtful accounts 852,000 795,000
----------- -----------
Accounts receivable, net $33,833,000 27,435,000
=========== ===========
The amount of retainages included in unbilled receivables was $64,000 and
$778,000 at January 31, 2003 and July 31, 2002, respectively. In the
opinion of management, substantially all of the unbilled balances will be
billed and collected within one year.
5
(5) Inventories
Inventories consist of the following:
January 31, July 31,
2003 2002
----------- -----------
Raw materials and components $15,693,000 15,920,000
Work-in-process and finished goods 16,562,000 21,365,000
----------- -----------
32,255,000 37,285,000
Less:
Reserve for anticipated losses on contracts and inventory
reserves 4,102,000 3,289,000
----------- -----------
Inventories, net $28,153,000 33,996,000
=========== ===========
Inventories directly related to long-term contracts were $4,704,000 and
$8,461,000 at January 31, 2003 and July 31, 2002, respectively.
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
January 31, July 31,
2003 2002
----------- -----------
Accrued wages and benefits $ 3,051,000 2,918,000
Accrued commissions 1,336,000 1,125,000
Accrued warranty 2,775,000 2,975,000
Other 2,614,000 2,668,000
----------- -----------
$ 9,776,000 9,686,000
=========== ===========
Changes in the Company's product warranty liability during the six months
ended January 31, 2003 and 2002 were as follows:
Six months ended January 31,
----------------------------
2003 2002
----------- -----------
Balance at beginning of period $ 2,975,000 4,336,000
Provision for warranty obligations 375,000 485,000
Charges incurred (575,000) (847,000)
----------- -----------
Balance at end of period $ 2,775,000 3,974,000
=========== ===========
(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 antenna and over-the-horizon
microwave communications products and systems. RF Microwave Amplifiers
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.
6
Unallocated assets consist principally of cash, deferred tax assets and
intercompany receivables. Unallocated losses result from such corporate
expenses as legal, accounting and executive. Corporate management defines
and reviews segment profitability based on the same allocation methodology
as presented in the segment data tables. Inter-segment sales for the three
and six months ended January 31, 2003, by the telecommunications
transmission segment to the RF microwave amplifiers segment were $1.1
million and $1.9 million, respectively. Inter-segment sales for the three
and six months ended January 31, 2003 by the telecommunications
transmission segment to the mobile data communications services segment
were $0.9 million in both periods. Inter-segment sales for the three and
six months ended January 31, 2002, by the telecommunications transmission
segment to the RF microwave amplifiers segment were $0.6 million and $1.4
million, respectively. Inter-segment sales are excluded from the sales
amounts in the tables below. Sales to one customer in the three and six
months ended January 31, 2003 represented $6.9 million or 16.3% of total
net sales and $8.2 million or 11.1% of total net sales, respectively.
These sales were from our telecommunications transmission and mobile data
communications services segments. All of the Company's long-lived assets
are located in the United States.
Three months ended
January 31, 2003
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications
Transmission Amplifiers Services Unallocated Total
------------ ---------- -------- ----------- -----
Net sales $22,283 6,306 13,737 -- 42,326
Operating income (loss) 2,463 569 1,305 (988) 3,349
Interest income 2 1 -- 59 62
Interest expense 464 222 -- -- 686
Depreciation and
amortization 1,133 270 81 85 1,569
Expenditures for long-lived
assets, including intangibles 657 22 319 7 1,005
Total assets 58,406 21,270 24,870 33,236 137,782
Three months ended
January 31, 2002
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications
Transmission Amplifiers Services Unallocated Total
------------ ---------- -------- ----------- -----
Net sales $19,903 5,542 5,080 -- 30,525
Operating income (loss) 1,045 427 66 (805) 733
Interest income 31 1 2 64 98
Interest expense 456 227 -- -- 683
Depreciation and
amortization 933 302 50 19 1,304
Expenditures for long-lived
assets, including intangibles 381 21 59 1 462
Total assets 58,891 25,151 15,347 26,039 125,428
7
Six months ended
January 31, 2003
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications
Transmission Amplifiers Services Unallocated Total
------------ ---------- -------- ----------- -----
Net sales $44,101 12,831 16,667 -- 73,599
Operating income (loss) 4,561 1,292 1,199 (1,896) 5,156
Interest income 7 1 -- 113 121
Interest expense 932 445 -- -- 1,377
Depreciation and
amortization 2,265 540 159 144 3,108
Expenditures for long-lived
assets, including intangibles 1,314 223 398 15 1,950
Total assets 58,406 21,270 24,870 33,236 137,782
Six months ended
January 31, 2002
(in thousands)
Mobile Data
Telecommunications RF Microwave Communications
Transmission Amplifiers Services Unallocated Total
------------ ---------- -------- ----------- -----
Net sales $40,154 12,142 9,274 -- 61,570
Operating income (loss) 3,785 737 114 (1,680) 2,956
Interest income 68 2 2 208 280
Interest expense 1,201 455 -- -- 1,656
Depreciation and
amortization 1,850 661 99 36 2,646
Expenditures for long-lived
assets, including intangibles 1,059 422 374 6 1,861
Total assets 58,891 25,151 15,347 26,039 125,428
(9) Accounting for Business Combinations, Goodwill and Other Intangible Assets
Intangibles with definite lives as of January 31, 2003 are as follows:
Gross Carrying Accumulated Net
Amount Amortization Book Value
----------- ------------ -----------
Existing technologies $11,850,000 3,409,000 8,441,000
Core technologies 1,315,000 73,000 1,242,000
Technology licenses 2,229,000 152,000 2,077,000
Trade name 175,000 10,000 165,000
Order backlog 88,000 88,000 --
----------- ----------- -----------
Total $15,657,000 3,732,000 11,925,000
=========== =========== ===========
The aggregate amortization expense for the six months ended January 31,
2003 and 2002 was $1,052,000 and $731,000, respectively. The estimated
amortization expense for the twelve months ending January 31, 2004, 2005,
2006, 2007 and 2008 is $1,943,000, $1,943,000, $1,943,000, $1,943,000 and
$1,120,000, respectively.
Intangibles with indefinite lives by reporting unit as of January 31, 2003
are as follows:
Telecommunications transmission $ 7,870,000
RF microwave amplifiers 8,422,000
Mobile data communications services 1,434,000
-----------
$17,726,000
===========
8
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
adoption did not have a material impact on the Company's consolidated
financial statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
certain guarantees to be recorded at fair value regardless of the
probability of the loss. The adoption did not have a material impact on
the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148
provides alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation as
originally provided by SFAS No. 123 "Accounting for Stock-Based
Compensation." Additionally, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 in both annual and interim financial
statements. The disclosure requirements shall be effective for financial
reports for interim periods beginning after December 15, 2002. We will
adopt the disclosure portion of this statement for the fiscal quarter
ending April 30, 2003. The adoption will not have any impact on the
Company's consolidated financial position or results of operations.
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.
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
9
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. The Company has engaged on a continuing basis
in the production and delivery of goods and services under contractual
arrangements for many years. Historically, the Company has demonstrated an
ability to accurately estimate revenues and expenses relating to its long-term
contracts. However, there exist inherent risks and uncertainties in estimating
revenues and expenses, particularly on larger or longer-term contracts. 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.
10
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 January 31, 2003, the Company's intangible assets, including goodwill,
aggregated $29.7 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 JANUARY 31,
2003 AND JANUARY 31, 2002
Net Sales. Consolidated net sales were $42.3 million and $30.5 million for the
three months ended January 31, 2003 and 2002, respectively, representing an
increase of $11.8 million or 38.7%. Sales increased in all of our segments with
the most significant increase from our mobile data communications services
segment. Sales in this segment were $13.7 million for the three months ended
January 31, 2003 as compared to $5.1 million for the three months ended January
31, 2002, representing an increase of $8.6 million or 168.6%. The increase was
due to higher sales of our Movement Tracking System to the U.S. Army and sales
relating to an order we received during fiscal 2003 from a major U.S. prime
contractor that is providing a battle command application to the U.S. Army.
Sales from our telecommunications transmission segment were $22.3 million and
$19.9 million for the three months ended January 31, 2003 and 2002,
respectively, representing an increase of $2.4 million or 12.1%. The increase in
this segment was primarily due to sales from AHA in the fiscal 2003 period.
Sales from our RF microwave amplifier segment were $6.3 million and $5.5 million
for the three months ended January 31, 2003 and 2002, respectively. For the
three months ended January 31, 2003, and 2002, respectively, our mobile data
communications services segment represented 32.4% and 16.8% of total net sales,
our telecommunications transmission segment represented 52.7% and 65.2% of total
net sales and our RF microwave amplifier segment represented 14.9% and 18.0% of
total net sales. International sales represented 37.6% and 46.2%, domestic sales
represented 13.4% and 29.6% and U.S. government sales represented 49.0% and
24.2% of total net sales for the three month periods in fiscal 2003 and 2002,
respectively.
11
Gross Profit. Gross profit was $13.5 million and $9.1 million for the three
months ended January 31, 2003 and 2002, respectively, representing an increase
of $4.4 million. This increase was primarily due to the higher sales level in
the fiscal 2003 period as compared to the fiscal 2002 period. Gross margin, as a
percentage of net sales, was 32.0% and 29.9% for the three months ended January
31, 2003 and 2002, respectively. This increase in the gross margin was primarily
the result of the different product mix in the comparative quarters, as well as
greater overhead absorption.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $6.4 million and $5.3 million for the three months
ended January 31, 2003 and 2002, respectively, representing an increase of $1.1
million. The increase was due to the addition of AHA, as well as higher selling
expenses relating to the higher sales level in the fiscal 2003 period. As a
percentage of sales, selling, general and administrative expenses were 15.1% and
17.4% for the three months ended January 31, 2003 and 2002, respectively.
Research and Development Expenses. Research and development expenses were $3.3
million and $2.7 million, respectively, for the three months ended January 31,
2003 and 2002. 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
January 31, 2003 and 2002, customers reimbursed us $0.6 million and $0.4
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 January 31, 2003 and 2002, 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 January 31, 2003
and 2002 was $3.3 million and $0.7 million, respectively. The increase was the
result of the higher sales and gross profit discussed above, partially offset by
higher operating expenses.
Interest Expense. Interest expense was $0.7 million for both of the three month
periods ended January 31, 2003 and 2002. Our interest expense relates to our
long-term debt and capital lease obligations, all of which are at fixed rates.
Interest Income. Interest income was $62,000 and $98,000 for the three months
ended January 31, 2003 and 2002, respectively. The decrease was primarily the
result of lower interest rates during the three months ended January 31, 2003 as
compared to the same period in fiscal 2002.
Provision for Income Taxes. The provision for income taxes for the three months
ended January 31, 2003 reflects an estimated effective tax rate of 32%. No
provision for income taxes was required for the three months ended January 31,
2002.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31,
2003 AND JANUARY 31, 2002
Net Sales. Consolidated net sales were $73.6 million and $61.6 million for the
six months ended January 31, 2003 and 2002, respectively, representing an
increase of $12.0 million or 19.5%. Sales increased in all of our segments with
the most significant increase from our mobile data communications services
segment. Sales in this segment were $16.7 million and $9.3 million for the six
months ended January 31, 2003 and 2002, respectively, an increase of $7.4
million or 79.6%. The increase was due to higher sales of our Movement Tracking
System to the U.S. Army and sales relating to an order we received during fiscal
2003 from a major U.S. prime contractor that is providing a battle command
application to the U.S. Army. Sales from our telecommunications transmission
segment were $44.1 million and $40.2 million for the six months ended January
31, 2003 and 2002, respectively, representing an increase of $3.9 million or
9.7%. The increase from this segment was primarily due to sales from AHA. Sales
from our RF microwave amplifier segment were $12.8 million and $12.1 million for
the six months ended January 31, 2003 and 2002, respectively. For the six months
ended January 31, 2003 and 2002, respectively, our mobile data communications
services segment represented 22.7% and 15.1% of total net sales, our
telecommunications transmission segment represented 59.9% and 65.3% of total net
sales and our RF microwave amplifier segment represented 17.4% and 19.6% of
total net sales. International sales represented 41.0% and 45.0%, domestic sales
represented 17.6% and 28.3% and U.S. government sales represented 41.4% and
26.7% of total net sales for the six month periods in fiscal 2003 and 2002,
respectively.
Gross Profit. Gross profit was $25.2 million and $19.9 million for the six
months ended January 31, 2003 and 2002, respectively, representing an increase
of $5.3 million. The increase was primarily due to the higher sales level in the
fiscal 2003 period as compared to the fiscal 2002 period. Gross margin, as a
percentage of net sales, was 34.3% and 32.4% for the six
12
months ended January 31, 2003 and 2002, respectively. This increase in the gross
margin was primarily the result of the different product mix in the comparative
periods, as well as greater overhead absorption.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.7 million and $10.9 million for the six months
ended January 31, 2003 and 2002, respectively, representing an increase of $1.8
million. This increase was due to the addition of AHA as well as higher selling
expenses relating to the higher sales level in the fiscal 2003 period. As a
percentage of sales, selling, general and administrative expenses were 17.3% and
17.7% for the six months ended January 31, 2003 and 2002, respectively.
Research and Development Expenses. Research and development expenses were $6.3
million and $5.4 million, respectively for the six months ended January 31, 2003
and 2002. 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 six months ended
January 31, 2003 and 2002, customers reimbursed us $1.2 million and $0.9
million, respectively, which amounts are not reflected in the reported research
and development expenses.
Amortization of Intangibles. Amortization of intangibles was $1.1 million and
$0.7 million for the six months ended January 31, 2003 and 2002, respectively.
The increase was primarily due to 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 six months ended January 31, 2003 and
2002 was $5.2 million and $3.0 million, respectively. The increase was the
result of the higher sales and gross profit discussed above, partially offset by
higher operating expenses.
Interest Expense. Interest expense was $1.4 million and $1.7 million for the six
months ended January 31, 2003 and 2002, respectively. The decrease is the result
of a partial debt prepayment during the first quarter of fiscal 2002. Our
interest expense relates to our long-term debt and capital lease obligations,
all of which are at fixed rates.
Interest Income. Interest income was $121,000 and $280,000 for the six months
ended January 31, 2003 and 2002, respectively. The decrease was primarily the
result of lower interest rates during the six months ended January 31, 2003 as
compared to the same period in fiscal 2002.
Provision for Income Taxes. The provision for income taxes for the six months
ended January 31, 2003 reflects an estimated effective tax rate of 32%. The
estimated effective tax rate used for the six months ended January 31, 2002 was
approximately 33.5%.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased to $27.3 million at January 31, 2003
from $15.5 million at July 31, 2002.
Net cash provided by operating activities was $13.4 million for the six months
ended January 31, 2003. Such amount reflects (i) net income of $2.7 million plus
the impact of depreciation and amortization aggregating $3.1 million; and (ii)
changes in working capital balances, which include an increase of $6.2 million
in customer advances primarily relating to a new $42.3 million contract received
during the six months ended January 31, 2003.
Net cash used in investing activities for the six months ended January 31, 2003
was $1.4 million. Cash of $1.9 million was used for capital expenditures and
$75,000 was used for the purchase of a technology license. These uses of cash
were partly offset by cash of $0.6 million we received in connection with final
adjustments to the purchase price of AHA.
Net cash used in financing activities was $229,000. Principal payments on
capital lease obligations amounted to $534,000. This use of cash was offset by
proceeds from the sale of stock and exercise of stock options aggregating
$305,000.
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 January 31, 2003 will materially adversely
affect our liquidity.
At January 31, 2003 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:
13
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 1,822 528 1,114 180 --
Operating lease commitments 12,396 1,711 5,837 2,439 2,409
------- ------- ------- ------- -------
Total contractual cash obligations $42,901 2,239 35,634 2,619 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 January 31, 2003, the balance of these agreements was $293,000.
We believe that our cash and cash equivalents will be sufficient to meet our
operating cash requirements for at least the next year. 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;
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.
14
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 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Stockholders' Meeting, held on December 10, 2002, Mr.
Gerard R. Nocita and Mr. Ira Kaplan were elected as Directors for a three-year
term. The votes were as follows: Mr. Gerard R. Nocita - votes for 5,960,083;
votes withheld 880,203. Mr. Ira Kaplan - votes for 5,966,846; votes withheld
873,440. Mr. Sol S. Weiner, Mr. Edwin Kantor and Mr. Fred Kornberg continued on
as Directors for terms expiring in two years and Mr. Richard L. Goldberg and Dr.
George Bugliarello for a term expiring in one year.
The stockholders ratified the selection of KPMG LLP as the Company's auditors
for its 2003 fiscal year by a vote of 6,204,356 shares for and 566,152 shares
against, with 69,779 share abstaining.
The stockholders approved the adoption of the amendment to the Company's 2000
Stock Incentive Plan by a vote of 4,608,005 shares for and 1,500,524 shares
against, with 731,757 shares abstaining.
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
15
SIGNATURES
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: March 12, 2003 By: /s/ Fred Kornberg
---------------------------------------------
Fred Kornberg
Chairman of the Board
Chief Executive Officer and President
(Principal Executive Officer)
Date: March 12, 2003 By: /s/ Robert G. Rouse
---------------------------------------------
Robert G. Rouse
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
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: March 12, 2003 By: /s/ Fred Kornberg
-------------------------------------------
Fred Kornberg
Chairman of the Board
Chief Executive Officer and President
(Principal Executive Officer)
17
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: March 12, 2003 By: /s/ Robert G. Rouse
---------------------------------------------
Robert G. Rouse
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
18