Attached files
Exhibit
99.3
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
We
design, develop, produce and market innovative products, systems and services
for advanced communications solutions. We believe many of our solutions play a
vital role in providing or enhancing communication capabilities when terrestrial
communications infrastructure is unavailable, inefficient or too expensive. We
conduct our business through three complementary operating segments:
telecommunications transmission, mobile data communications and RF microwave
amplifiers. We sell our products to a diverse customer base in the global
commercial and government communications markets. We believe we are a leader in
the market segments that we serve.
Our
telecommunications transmission segment provides sophisticated equipment and
systems that are used to enhance satellite transmission efficiency and that
enable wireless communications in environments where terrestrial communications
are unavailable, inefficient or too expensive. Our telecommunications
transmission segment also operates our high-volume technology manufacturing
center that is utilized, in part, by our mobile data communications and RF
microwave amplifiers segments and to a much lesser extent by third-party
commercial customers who outsource a portion of their manufacturing to us.
Accordingly, our telecommunications transmission segment’s operating results are
impacted positively or negatively by the level of utilization of our high-volume
manufacturing center. Our mobile data communications segment provides customers
with an integrated solution, including mobile satellite transceivers and
satellite network support, to enable global satellite-based communications when
mobile, real-time, secure transmission is required for applications including
logistics, support and battlefield command and control. Our mobile data
communications segment also designs and manufactures microsatellites and related
components. Our RF microwave amplifiers segment designs, manufactures and
markets satellite earth station traveling wave tube amplifiers and solid-state
amplifiers, including high-power, broadband RF microwave amplifier
products.
A
substantial portion of our sales may be derived from a limited number of
relatively large customer contracts, such as our Movement Tracking System
(“MTS”) and our Blue Force Tracking (“BFT”) IDIQ contracts with the U.S. Army.
Timing of future orders and revenues associated with IDIQ and other large
contracts are difficult to accurately predict.
Quarterly
and period-to-period sales and operating results may be significantly affected
by our MTS or BFT contracts. In addition, our gross profit is affected by a
variety of factors, including the mix of products, systems and services sold,
production efficiencies, estimates of warranty expense, price competition and
general economic conditions. Our gross profit may also be affected by the impact
of any cumulative adjustments to contracts that are accounted for under the
percentage-of-completion method.
Our
contracts with the U.S. government can be terminated at any time and orders are
subject to unpredictable funding, deployment and technology decisions by the
U.S. government. Some of these contracts, such as the MTS and BFT contracts, are
indefinite delivery/indefinite quantity (“IDIQ”) contracts, and as such, the
U.S. government is not obligated to purchase any equipment or services under
these contracts. We have in the past experienced and we continue to expect
future significant fluctuations in sales and operating results from
quarter-to-quarter and period-to-period. As such, comparisons between periods
and our current results may not be indicative of a trend or future
performance.
Revenue
from the sale of our products is generally recognized when the earnings process
is complete, upon shipment or customer acceptance. Revenue from contracts
relating to the design, development or manufacture of complex electronic
equipment to a buyer’s specification or to provide services relating to the
performance of such contracts is generally recognized in accordance with
American Institute of Certified Public Accountants (“AICPA”) Statement of
Position 81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts” (“SOP 81-1”). Revenue from contracts that contain
multiple elements that are not accounted for under SOP 81-1 is generally
accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No.
00-21, “Revenue Arrangements with Multiple Deliverables.” Revenue from these
contracts is allocated to each respective element based on each element’s
relative fair value and is recognized when the respective revenue recognition
criteria for each element is met.
1
Recent
Acquisitions
The
Radyne Acquisition
On August
1, 2008 (the beginning of our fiscal 2009), we acquired Radyne, the largest
acquisition in our history. We believe that the acquisition of Radyne resulted
in the following strategic benefits:
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Strengthened
our leadership position in our satellite earth station product lines in
our telecommunications transmission
segment;
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More
than doubled the size of our RF microwave amplifiers segment by expanding
our amplifier product portfolio which immediately made us a leader, not
only in the solid-state amplifier market, but also in the satellite earth
station traveling wave tube amplifier
market;
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Broadened
the number of products and services that our mobile data communications
segment offered and allowed us to market additional mobile tracking
products as well as the design and manufacture of microsatellites and
related components; and
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Further
diversified our overall global customer base and expanded our addressable
markets.
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We
believe that, over time, our combined engineering and sales team will drive
further innovation in the marketplace and deliver new and advanced products to
our customers in all three of our operating segments. Our combined satellite
earth station sales and marketing team now offers current and prospective
customers an expanded one-stop shopping approach by providing them the
opportunity to buy Comtech and/or Radyne branded products. In addition, we are
continuing to integrate and share technology across our product lines. These
strategies have resulted in individual brands becoming less distinguishable and
historical sales patterns and mix less relevant. As a result, we believe that
period-to-period comparisons of individual brands as indicators of our
performance are not meaningful.
We have
achieved operating efficiencies by eliminating redundant functions and related
expenses. On August 1, 2008 (the date we acquired Radyne), we immediately
adopted and implemented a restructuring plan which included the vacating of
Radyne’s Phoenix, Arizona manufacturing facility. Radyne’s satellite earth
station product line’s manufacturing and engineering operations have been fully
integrated into our high-volume technology manufacturing center located in
Tempe, Arizona. In addition, Radyne’s corporate functions, which were co-located
in Radyne’s Phoenix, Arizona manufacturing facility, were moved to our
Melville, New York corporate headquarters. Our Radyne acquisition-related
restructuring was completed in less than one year.
From an
operational and financial reporting perspective, as of August 1, 2008, Radyne’s
satellite earth station product lines became part of our telecommunications
transmission segment; Radyne’s traveling wave tube amplifier (“TWTA”) product
portfolio became part of our RF microwave amplifiers segment; and Radyne’s
microsatellites and Sensor Enabled Notification (“SENS”) technology products
became part of our mobile data communications segment.
Because
our historical results prior to August 1, 2008 do not include Radyne, you should
not rely on period-to-period comparisons as an indicator of our future
performance as these comparisons may not be meaningful.
Other
Tactical and Product Line Acquisitions
In July
2008, we acquired the network backhaul assets and the NetPerformer and
AccessGate™ product lines of Verso Technologies (“Verso”) for approximately $3.9
million. This operation was combined with our existing business and is part of
our telecommunications transmission segment.
In
February 2007, we acquired certain assets and assumed certain liabilities of
Digicast Networks, Inc. (“Digicast”), a manufacturer of digital video
broadcasting equipment, for $1.0 million. This operation was combined with our
existing business and is part of the telecommunications transmission
segment.
In August
2006, we acquired certain assets and assumed certain liabilities of Insite
Consulting, Inc. (“Insite”), a logistics application software company, for
approximately $3.2 million, including transaction costs of approximately $0.2
million. Insite has developed the geoOps™ Enterprise Location Monitoring System,
a software-based solution that allows customers to integrate legacy data systems
with near real-time logistics and operational data systems. This operation was
combined with our existing business and is part of our mobile data
communications segment.
None of
our tactical and product line acquisitions, individually, or in the aggregate,
are material to our results of operations or, when considering their effects, to
our historical consolidated financial statements.
2
Critical
Accounting Policies
We
consider certain accounting policies to be critical due to the estimation
process involved in each.
Revenue
Recognition on Long-Term Contracts. Revenues and related
costs from long-term contracts relating to the design, development or
manufacture of complex electronic equipment to a buyer’s specification or to
provide services relating to the performance of such contracts are recognized in
accordance with SOP 81-1. We primarily apply the percentage-of-completion method
and generally recognize revenue based on the relationship of total costs
incurred to total projected costs, or, alternatively, based on output measures,
such as units delivered or produced. Profits expected to be realized on such
contracts are based on total estimated sales for the contract compared to total
estimated costs, including warranty 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 evident. Long-term U.S.
government cost-reimbursable type contracts are also specifically covered by
Accounting Research Bulletin No. 43 “Government Contracts, Cost-Plus
Fixed-Fee Contracts” (“ARB 43”), in addition to SOP 81-1.
We have
been engaged in the production and delivery of goods and services on a continual
basis under contractual arrangements for many years. Historically, we have
demonstrated an ability to accurately estimate total revenues and total expenses
relating to our long-term contracts. However, there exist inherent risks and
uncertainties in estimating revenues, expenses and progress toward completion,
particularly on larger or longer-term contracts. If we do not accurately
estimate the total sales, related costs and progress towards completion on such
contracts, the estimated gross margins may be significantly impacted or losses
may need to be recognized in future periods. Any such resulting changes in
margins or contract losses could be material to our results of operations and
financial condition.
In
addition, most government contracts have termination for convenience clauses
that provide the customer with the right to terminate the contract at any time.
Such terminations could impact the assumptions regarding total contract revenues
and expenses utilized in recognizing profit under the percentage-of-completion
method of accounting. Changes to these assumptions could materially impact our
results of operations and financial condition. Historically, we have not
experienced material terminations of our long-term contracts. We also address
customer acceptance provisions in assessing our ability to perform our
contractual obligations under long-term contracts. Our inability to perform on
our long-term contracts could materially impact our results of operations and
financial condition. Historically, we have been able to perform on our long-term
contracts.
Accounting for
Stock-Based Compensation. As discussed further in
“Notes to Consolidated
Financial Statements – Note (1)(j) Accounting for Stock-Based
Compensation” included in “Part II — Item
8. — Financial Statements and Supplementary Data,” we
adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) on
August 1, 2005 using the modified prospective method.
We have
used and expect to continue to use the Black-Scholes option pricing model to
compute the estimated fair value of stock-based awards. The Black-Scholes option
pricing model includes assumptions regarding dividend yields, expected
volatility, expected option term and risk-free interest rates. The assumptions
used in computing the fair value of stock-based awards reflect our best
estimates, but involve uncertainties relating to market and other conditions,
many of which are outside of our control. We estimate expected volatility by
considering the historical volatility of our stock, the implied volatility of
publicly traded stock options in our stock and our expectations of volatility
for the expected life of stock-based compensation awards. The expected option
term is the number of years that we estimate that share-based awards will be
outstanding prior to exercise. The risk-free interest rate is based on the U.S.
treasury yield curve in effect at the time of grant. As a result, if other
assumptions or estimates had been used for options granted, stock-based
compensation expense that was recorded could have been materially different.
Furthermore, if different assumptions are used in future periods, stock-based
compensation expense could be materially impacted in the future.
3
Impairment of
Goodwill and Other Intangible Assets. As of July 31,
2009, our goodwill and other intangible assets aggregated $204.5 million. For
purposes of reviewing impairment and the recoverability of goodwill, each of our
three operating segments constitutes a reporting unit and we must make various
assumptions regarding estimated future cash flows and other factors in
determining the fair values of the reporting unit. If these estimates or their
related assumptions change in the future, or if we change our reporting
structure, we may be required to record impairment charges in future periods. If
global economic conditions deteriorate from current levels, or if the market
value of our equity or assets significantly declines, or if we are not
successful in achieving our expected sales levels (including sales associated
with our Radyne acquisition and our MTS and BFT contracts), our goodwill may
become impaired in future periods. We perform an annual impairment review in the
first quarter of each fiscal year. Based on the impairment review performed at
the start of our first quarter of fiscal 2010, there was no impairment of
goodwill. In the future, unless there are indicators of impairment, such as a
significant adverse change in our future financial performance, our next
impairment review for goodwill will be performed and completed in the first
quarter of fiscal 2011. Any impairment charges that we may take in the future,
could be material to our results of operations and financial
condition.
Provision for
Warranty Obligations. We provide warranty coverage for most of our
products, including products under long-term contracts, for a period of at least
one year from the date of shipment. We record a liability for estimated warranty
expense based on historical claims, product failure rates and other factors.
Costs associated with some of our warranties that are provided under long-term
contracts are incorporated into our estimates of total contract costs. There
exist inherent risks and uncertainties in estimating warranty expenses,
particularly on larger or longer-term contracts. As such, if we do not
accurately estimate our warranty costs, any changes to our original estimates
could be material to our results of operations and financial
condition.
Accounting for
Income Taxes. Our deferred tax assets and liabilities are determined
based on temporary differences between financial reporting and tax bases of
assets and liabilities, and applying enacted tax rates expected to be in effect
for the year in which the differences are expected to reverse. The provision for
income taxes is based on domestic (including federal and state) and
international statutory income tax rates in the tax jurisdictions where we
operate, permanent differences between financial reporting and tax reporting and
available credits and incentives. We recognize interest and penalties related to
uncertain tax positions in income tax expense. The U.S. federal government is
our most significant income tax jurisdiction.
Significant
judgment is required in determining income tax provisions and tax positions. We
may be challenged upon review by the applicable taxing authority and positions
taken by us may not be sustained. We recognize all or a portion of the benefit
of income tax positions only when we have made a determination that it is
more-likely-than-not that the tax position will be sustained upon examination,
based upon the technical merits and other factors of the position. For tax
positions that are determined as more-likely-than-not to be sustained upon
examination, the tax benefit recognized is the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate settlement. The
development of reserves for income tax positions requires consideration of
timing and judgments about tax issues and potential outcomes, and is a
subjective critical estimate. In certain circumstances, the ultimate outcome of
exposures and risks involves significant uncertainties. If actual outcomes
differ materially from these estimates, they could have a material impact on our
results of operations and financial condition.
Provisions for
Excess and Obsolete Inventory. We record a provision for
excess and obsolete inventory based on historical and future usage trends. Other
factors may also influence our provision, including 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 our financial
statements at the time of such determination. Any such charges could be material
to our results of operations and financial condition.
4
Included
in inventories as of July 31, 2009, is approximately $16.8 million of inventory
related to our MTS and BFT contracts, including $5.1 million of ruggedized
computers (and related accessories) that are included in MTS systems that we
sell to the U.S. Army. In fiscal 2009, the U.S. Army informed us that it intends
to upgrade previously deployed MTS systems and purchase new MTS systems with a
different ruggedized computer model. Although we have sold the older version MTS
computer model to the U.S. Army since their selection of a new ruggedized MTS
computer, we expect demand for the older ruggedized computers and related
components which we currently have on hand to decline. We continue to actively
market these ruggedized computers and related components and we expect that we
will ultimately sell these computers for amounts in excess of their current net
book value based on a variety of factors, including our belief that there may be
additional deployments of MTS systems using these computers and that we intend
to continue to actively market them to potential customers including the Army
National Guard and NATO. In the future, if we determine that this inventory will
not be utilized or cannot be sold in excess of its current net book value, we
would be required to record a write-down of the value of such inventory in our
consolidated financial statements at the time of such determination. In
addition, if our MTS and BFT contracts are not renewed or extended, the level of
our MTS and BFT inventories could be excessive and we may be left with large
inventories of unusable parts that we would have to write-off. Any such charges
could be material to our consolidated results of operations in the period that
we make such determination.
Allowance for
Doubtful Accounts. We perform 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 seek to obtain insurance for certain domestic and international customers. We
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, especially in light of the current global
economic conditions and much tighter credit environment. 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 the financial health of specific customers. Changes to the
estimated allowance for doubtful accounts could be material to our results of
operations and financial condition.
Results
of Operations
The
following table sets forth, for the periods indicated, certain income and
expense items expressed as a percentage of our consolidated net
sales:
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Fiscal
Years Ended July 31,
(As
adjusted for the retroactive application of FSP APB 14-1)
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2009
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2008
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2007
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Net
sales
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100.0% | 100.0% | 100.0% | |||||||||
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Gross
margin
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41.1 | 44.2 | 43.4 | |||||||||
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Selling,
general and administrative expenses
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17.1 | 16.2 | 16.4 | |||||||||
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Research
and development expenses
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8.5 | 7.6 | 7.3 | |||||||||
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Amortization
of acquired in-process research and development
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1.1 | - | - | |||||||||
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Amortization
of intangibles
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1.3 | 0.3 | 0.6 | |||||||||
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Operating
income
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13.1 | 20.1 | 19.1 | |||||||||
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Interest
expense (income), net
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0.6 | (1.3) | (1.7) | |||||||||
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Income
before provision for income taxes
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12.5 | 21.4 | 20.7 | |||||||||
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Net
income
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8.1 | 13.9 | 14.1 | |||||||||
5
Business
Outlook for Fiscal 2010
Despite
signs that the worst of the challenging global economic environment may be over,
it remains difficult to accurately forecast our business outlook for fiscal
2010. We believe that we are well positioned to continue to weather the
difficult economic climate and despite our assumptions that challenging business
conditions will persist throughout most of fiscal 2010, we believe that fiscal
2010 will be another record year of sales and that our operating income will
significantly increase as compared to the levels we achieved in fiscal
2009.
We have
approximately $549.8 million in backlog as of July 31, 2009, of which a
substantial portion is expected to ship in fiscal 2010. In addition, as of July
31, 2009, we had $485.5 million of cash and cash equivalents and we intend to
supplement our organic growth and diversify our business by making one or more
acquisitions.
Our
revenue outlook by business segment for fiscal 2010 is as follows:
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Telecommunications
transmission segment – We currently expect annual sales in our
telecommunications transmission segment in fiscal 2010 to be slightly
lower or comparable with the sales level we achieved in fiscal 2009. Sales
of our satellite earth station products are expected to be suppressed in
fiscal 2010 by the same difficult economic and business conditions that
significantly impacted us in the second half of fiscal 2009. We expect
such conditions to continue through at least the first half of fiscal
2010. If economic conditions significantly improve, it is possible that
sales in our telecommunications transmission segment could increase as
compared to the levels we achieved in fiscal 2009. In addition, in order
to better focus our sales efforts in fiscal 2010, as discussed further in
the caption below entitled “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Comparison of Fiscal 2009 and 2008,” we are no longer offering
video encoder and decoder products and are no longer marketing fiberglass
antennas to commercial broadcast customers. We continue to be involved in
negotiations and discussions relating to large international
over-the-horizon microwave system opportunities, and we believe that at
least one of these contract opportunities will generate revenues by the
second half of fiscal 2010. These contracts have had and continue to
experience lengthy sales cycles and although we expect to ultimately
receive and generate revenue from one or more of these contract awards
during the second half of fiscal 2010, it remains difficult to predict the
timing of any potential contract award or related revenue. Bookings, sales
and profitability in our telecommunications transmission segment can
fluctuate dramatically from period-to-period due to many factors,
including the strength of our satellite earth station product line
bookings and the timing and related receipt of, and performance on, large
contracts from the U.S. government and international customers for our
over-the-horizon microwave systems.
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Mobile
data communications segment – Although our ability to forecast specific
customer fielding schedules, amounts and timing of future orders and
product mix requirements remains almost unpredictable, we expect that our
mobile data communications segment will report record sales in fiscal
2010. We currently have approximately $438.2 million of backlog in this
segment, of which a substantial portion is for the shipment or the
inclusion of new MTS ruggedized computers and related accessories. These
MTS ruggedized computers are manufactured and are currently expected to be
delivered timely - directly by a third-party supplier. A nominal amount of
MTS computer shipments were made in fiscal 2009 and we expect our
third-party supplier to reach full-scale production during the first half
of fiscal 2010. However, if these computers are not delivered timely by
the third-party supplier or if actual field deployment schedules are
delayed, our business outlook could be impacted. Bookings, sales and
profitability in our mobile data communications segment can fluctuate
dramatically from period-to-period due to many factors, including
unpredictable funding, deployment and technology decisions by the U.S.
government as well as risks associated with the uncertainty of the
prevailing political and economic
environments.
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RF
microwave amplifiers segment – We currently expect annual sales in our RF
microwave amplifiers segment to be significantly lower in fiscal 2010 as
compared to the record sales we achieved in fiscal 2009. In addition to
the incremental sales we generated as a result of the Radyne acquisition,
sales in fiscal 2009 significantly benefited from our participation in the
CREW 2.1 defense program which uses our broadband, solid-state high-power
radio signal jamming amplifiers and switches in systems to help protect
U.S. troops from the ever-evolving threat of radio-controlled roadside
bombs. Although we continue to see strong long-term demand from the U.S.
government for our RF microwave amplifiers, we are currently anticipating
lower CREW 2.1 related sales in fiscal 2010. Sales and orders of our RF
microwave amplifier products in fiscal 2010 are also expected to be
suppressed by the same difficult economic and business conditions that we
experienced in the second half of fiscal 2009. Bookings, sales and
profitability in our RF microwave amplifiers segment can fluctuate
dramatically from period-to-period due to many factors, including the
receipt of and performance on large contracts from the U.S. government and
international customers.
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6
Below is
a summary of our aggregated 2010 business outlook on certain income statement
line items:
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Our
gross profit, as a percentage of our expected fiscal 2010 net sales, is
expected to significantly decline from the percentage we achieved in
fiscal 2009. This decrease is primarily attributable to changes in product
mix. In fiscal 2010, a significant portion of our sales are expected to be
for new MTS ruggedized computers and MTS systems that include new MTS
ruggedized computers. These new MTS computers are manufactured by a
third-party supplier and have significantly lower gross margins than prior
MTS computers. As a result, gross margins in fiscal 2010 are expected to
significantly decline as compared to prior periods and gross margins in
any particular future period will be highly influenced by the ultimate
quantity of MTS ruggedized computers shipped in those periods. In
addition, our telecommunications transmission segment, which operates our
high-volume technology manufacturing center located in Tempe, Arizona, is
expected to experience lower gross margins due to anticipated overall
lower overhead absorption.
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Our
selling, general and administrative expenses, as a percentage of fiscal
2010 net sales, are expected to be significantly lower than fiscal 2009.
This decrease is primarily attributable to the increase in consolidated
net sales that we expect to achieve in fiscal 2010. In addition, our
selling, general and administrative expenses are expected to benefit from
lower expenses associated with the fact that we are no longer offering
video encoder and decoder products and we are no longer marketing
fiberglass antennas to commercial broadcast customers. We expect to
continue to incur selling, general and administrative expenses associated
with our selling and marketing efforts to the U.S. Army. We believe that
these efforts are necessary to help us secure follow-on contracts to our
current MTS and BFT contracts which expire in July 2010 and December 2011,
respectively.
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Research
and development expenses, as a percentage of fiscal 2010 net sales, are
expected to be lower than fiscal 2009. This decrease is primarily
attributable to the increase in consolidated net sales that we expect to
achieve in fiscal 2010. During fiscal 2010, we expect to continue to make
investments in our backward compatible next-generation MTS and BFT
products, as well as other research and development
efforts.
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Total
amortization of stock-based compensation (which is allocated to cost of
sales, selling, general and administrative and research and development
expense line items in our consolidated statement of operations), for
fiscal 2010, is expected to be lower than in fiscal
2009.
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Amortization
of intangibles for fiscal 2010 is currently expected to be slightly lower
than fiscal 2009 and, excluding the impact of any possible future
acquisitions, is anticipated to approximate $7.0
million.
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Interest
income is expected to be lower in fiscal 2010 as compared to fiscal 2009
primarily due to the expectation of a continued low-interest rate
environment. All of our available cash and cash equivalents are currently
invested in commercial and government money market mutual funds,
short-term U.S. Treasury obligations and bank deposits, and currently
yield a blended annual interest rate below
0.3%.
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Interest
expense is expected to increase in fiscal 2010 as compared to fiscal 2009
primarily due to incremental interest expense associated with the issuance
of $200.0 million of our 3.0% convertible senior notes. Although our 2.0%
convertible senior notes are no longer outstanding, as discussed further
in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Accounting Pronouncements,” we were required to
retroactively adjust and present interest expense for fiscal 2009 and
earlier periods.
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Our
fiscal 2010 estimated effective income tax rate is expected to
approximate 36.0% as compared to 35.1% in fiscal 2009. This increase is
primarily related to our expected increase in pre-tax income as well as
the expiration of the federal research and experimentation credit on
December 31, 2009. Our ultimate effective income tax rate in fiscal 2010
depends on various factors including, but not limited to, future tax
legislation enacted, the actual geographic composition of our revenue and
pre-tax income, the finalization of our IRS audits, future acquisitions,
and any future non-deductible
expenses.
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As
discussed above, we continue to operate our business in difficult market
conditions. Although we remain confident in the long-term demand drivers for our
businesses, it remains difficult for us to forecast when business conditions
will meaningfully improve. In addition, if our current or prospective customers
materially postpone, reduce or even forgo purchases of our products and services
to a greater extent than we currently anticipate, our business outlook will be
adversely affected.
7
Comparison
of Fiscal 2009 and 2008
Net Sales.
Consolidated net sales were $586.4 million and $531.6 million for fiscal
2009 and fiscal 2008, respectively, representing an increase of $54.8 million,
or 10.3%. The year-over-year increase in net sales is primarily attributable to
our acquisition of Radyne which significantly benefited both our
telecommunications transmission and RF microwave amplifiers segments. As further
discussed below, these increases were partially offset by a significant decline
in shipments by our mobile data communications segment to the U.S. Army,
pursuant to their request.
Telecommunications
transmission
Net sales
in our telecommunications transmission segment were $254.3 million and $208.9
million for fiscal 2009 and fiscal 2008, respectively, an increase of $45.4
million, or 21.7%. Net sales in this segment reflect increased sales of our
satellite earth station products, which were partially offset by lower sales of
our over-the-horizon microwave systems. Sales of our over-the-horizon microwave
systems were lower due to significantly lower direct sales to the U.S.
Department of Defense (“DoD”) and lower indirect sales to Algeria, our North
African end-customer.
Sales of
our satellite earth station products increased primarily due to incremental
sales attributable to the Radyne acquisition and incremental sales of our legacy
branded satellite earth station modems which incorporate DoubleTalk®
Carrier-in-Carrier®
technology. Throughout fiscal 2009, we were able to provide our customers and
prospective customers the opportunity to purchase both Comtech and/or Radyne
branded products. We believe that our strategy was well received by our
customers. Because we have and continue to integrate and share technology
including our DoubleTalk®
Carrier-in-Carrier®
technology across our product lines, we do not believe that sales performance
comparisons between our individual brands are meaningful indicators of current
or future performance.
We
believe that difficult economic conditions, particularly in the second half of
our fiscal 2009, suppressed the overall reported net sales in our
telecommunications transmission segment. Although historically nominal in the
aggregate, sales of our smaller legacy product offerings embedded within our
satellite earth station product line (e.g., voice gateways and data compression
chips) and our over-the-horizon microwave system product lines (e.g., fiberglass
antennas) declined as compared to fiscal 2008. Sales of our video encoder and
decoder products were significantly lower than expected as our commercial
broadcasting customers experienced very difficult business conditions in their
end-markets. In order to better focus our sales efforts in fiscal 2010, in
August 2009, we announced that we sold our video encoder and decoder product
line and ceased the marketing of fiberglass antennas to commercial broadcast
customers. Aggregate sales of these products were approximately $10.0 million in
fiscal 2009.
Our
telecommunications transmission segment represented 43.4% of consolidated net
sales for fiscal 2009 as compared to 39.3% for fiscal 2008.
Bookings,
sales and profitability in our telecommunications transmission segment can
fluctuate from period-to-period due to many factors including the book-and-ship
nature associated with our satellite earth station products, the current adverse
conditions in the global economy and credit markets, and the timing of, and our
related performance on, contracts from the U.S. government and international
customers for our over-the-horizon microwave systems.
Mobile data
communications
Net sales
in our mobile data communications segment were $177.0 million for fiscal 2009
and $261.1 million for fiscal 2008, a decrease of $84.1 million, or 32.2%. Sales
for fiscal 2009 include incremental sales relating to the design and manufacture
of microsatellites and from mobile tracking products that incorporate SENS
technology which we acquired as part of our acquisition of Radyne. The
year-over-year decline in mobile data communications segment sales is primarily
attributable to lower sales of mobile satellite transceivers and related systems
to the U.S. Army (pursuant to both our MTS and BFT contracts), which, as further
discussed below, is primarily attributable to timing imposed by the
customer.
In
January 2009, we received a $281.5 million purchase order from the U.S. Army for
new MTS third-party produced ruggedized computers and related accessories. This
order is the single largest order received in our history. In addition, in April
2009, we received an order for $97.2 million for the supply of MTS systems which
include both mobile satellite transceivers and MTS third-party ruggedized
computers. Except for some nominal deliveries we made late in fiscal 2009, the
U.S. Army has requested these orders be delivered during fiscal 2010. Sales to
the MTS program in fiscal 2009 were also impacted by the absence of MTS sales
for the Army National Guard that were specifically funded, in our fiscal 2008,
by a supplemental defense appropriations bill commonly referred to as the
Leahy-Bond Amendment.
8
We have
experienced and we expect to continue to experience future significant
fluctuations in sales and orders related to the MTS and BFT programs. As such,
period-to-period comparisons of our results may not be indicative of a trend or
future performance. Through July 31, 2009, we received $546.3 million in total
orders under our $605.1 million MTS contract, which expires in July 2010, and
$211.3 million in total orders under our $216.0 million BFT contract, which
expires in December 2011. Given the current contract ceiling levels related to
both our MTS and BFT contracts, we cannot obtain large future MTS or BFT orders
unless the respective programs obtain contract ceiling increases or issue us new
contract awards.
Our
mobile data communications segment represented 30.2% of consolidated net sales
for fiscal 2009 as compared to 49.1% for fiscal 2008.
Bookings,
sales and profitability in our mobile data communications segment can fluctuate
dramatically from period-to-period due to many factors, including unpredictable
funding, deployment and technology decisions by the U.S. government. Our MTS and
BFT contracts are both IDIQ contracts and, as such, the U.S. Army is not
obligated to purchase any equipment or services under these contracts. We are
aware that on occasion, the U.S. government has experienced delays in the
receipt of certain components that are eventually provided to us for
incorporation into our mobile satellite transceivers or mobile data
communications systems. In addition, a substantial portion of our mobile data
communications backlog as of July 31, 2009 includes orders relating to MTS
ruggedized computers which are manufactured by a third-party supplier. If we do
not receive these U.S. government furnished components or MTS ruggedized
computers in a timely manner, we could experience delays in fulfilling funded
and anticipated orders from our customers.
RF microwave
amplifiers
Net sales
in our RF microwave amplifiers segment were $155.1 million for fiscal 2009, as
compared to $61.6 million for fiscal 2008, an increase of $93.5 million, or
151.8%.
As a
result of the Radyne acquisition, we more than doubled our sales for fiscal
2009. In addition, net sales were higher due to increased sales of our legacy
solid-state, high-power broadband amplifiers and high-power switches that are
incorporated into defense-related systems, primarily sales associated with our
participation in the Counter Remote-Control Improvised Explosive Device
Electronic Warfare 2.1 (“CREW 2.1”) program.
Our RF
microwave amplifiers segment represented 26.4% of consolidated net sales for
fiscal 2009 as compared to 11.6% for fiscal 2008.
Bookings,
sales and profitability in our RF microwave amplifiers segment can fluctuate
from period-to-period due to many factors including the current adverse
conditions in the global economy and credit markets, and the timing of, and our
related performance on, contracts from the U.S. government and international
customers.
Geography and Customer
Type
Sales to
the U.S. government (including sales to prime contractors of the U.S.
government) represented 56.4% and 66.4% of consolidated net sales for fiscal
2009 and 2008, respectively. International sales (which include sales to U.S.
companies for inclusion in products that are sold to international customers)
represented 32.1% and 26.7% of consolidated net sales for fiscal 2009 and 2008,
respectively. Domestic commercial sales represented 11.5% and 6.9% of
consolidated net sales for fiscal 2009 and 2008, respectively.
Gross Profit.
Gross profit was $240.9 million and $234.9 million for fiscal 2009 and
2008, respectively, representing an increase of $6.0 million. The increase in
gross profit was primarily attributable to the increase in consolidated net
sales, discussed above, at significantly lower gross margins. Gross profit as a
percentage of net sales decreased to 41.1% for fiscal 2009 as compared to 44.2%
for fiscal 2008.
The
decrease in gross profit percentage in fiscal 2009 is primarily attributable to
lower sales and lower production of mobile satellite transceivers which resulted
in declines in gross profit percentages in both our telecommunications
transmission and mobile data communications segments. As discussed further
below, this was partially offset by an increase in gross profit percentage in
our RF microwave amplifiers segment.
9
Our
telecommunications transmission segment experienced a significant decline in
gross profit percentage during fiscal 2009 as compared to fiscal 2008. This
decline is primarily attributable to a less favorable product mix including an
overall decline in production of mobile satellite transceivers at our
high-volume technology manufacturing center located in Tempe, Arizona. The
impact of the lower production of mobile satellite transceivers, for our mobile
data communications segment, resulted in lower net operating efficiencies
(primarily due to lower overhead absorption) which more than offset the
efficiencies we achieved as a result of our successful execution of our
Radyne-related restructuring plan.
Our
mobile data communications segment experienced a significant decline in gross
profit percentage during fiscal 2009 as compared to fiscal 2008 primarily as a
result of lower sales of mobile satellite transceivers. Significant
period-to-period fluctuations in our gross margins can occur in our mobile data
communications segment as a result of the nature, timing and mix of actual
deliveries which are driven by the U.S. Army’s requirements.
Our RF
microwave amplifiers segment experienced a higher gross profit percentage during
fiscal 2009 as compared to fiscal 2008 primarily due to a more favorable product
mix as a result of the Radyne acquisition. Our RF microwave amplifier product
line now includes satellite earth station traveling wave tube amplifiers, which
were sold at higher gross margins than those of our legacy product lines. Gross
margins for our solid-state, high-power broadband amplifiers and switches, in
fiscal 2008, were negatively impacted by long production times relating of
certain complex solid-state, high power amplifiers and high-power switches that
employed newer technology. These amplifiers were shipped in full during fiscal
2009.
Included
in cost of sales for fiscal 2009 and 2008 are provisions for excess and obsolete
inventory of $5.7 million and $2.4 million, respectively. As discussed in our
“Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies – Provisions for Excess and Obsolete Inventory,”
we regularly review our inventory and record a provision for excess and
obsolete inventory based on historical and projected usage assumptions. Included
in the provision for fiscal 2009 is a $1.2 million write-down of inventory to
net realizable value associated with our decision, in July 2009, to no longer
offer video encoder and decoder products or market fiberglass antennas to
commercial broadcast customers. In addition, included in cost of sales for
fiscal 2009 is amortization of $1.5 million related to the estimated fair value
step-up of Radyne inventory acquired.
Selling, General
and Administrative Expenses. Selling, general
and administrative expenses were $100.2 million and $86.0 million for fiscal
2009 and 2008, respectively, representing an increase of $14.2 million, or
16.5%. Selling, general and administrative expenses for fiscal 2009 include
incremental spending associated with sales of Radyne’s products and services, an
increase in professional fees (primarily incurred in connection with legal and
other matters that are disclosed in the caption set forth under “Notes to Consolidated Financial
Statements – Note (15)(c) Legal Proceedings and Other Matters” included
in “Part II — Item
8. — Financial Statements and Supplementary Data”) and ongoing expenses
associated with promoting our next-generation MTS-HC and BFT-HC products and
services to the U.S. Army. This increase was partially offset by lower
cash-based incentive compensation primarily due to lower consolidated operating
income and to a lesser extent, the collection of certain previously written-off
accounts receivable. Amortization of stock-based compensation expense recorded
as selling, general and administrative expenses decreased to $7.1 million in
fiscal 2009 from $8.1 million in fiscal 2008.
Selling,
general and administrative expenses, as a percentage of consolidated net sales,
were 17.1% and 16.2% for fiscal 2009 and 2008. This increase is primarily
associated with timing of sales. Although we received record orders from the
U.S. Army in fiscal 2009, the U.S. Army requested that the significant portion
of these orders not be delivered until our fiscal 2010. Despite this delay, we
continued our sales and marketing efforts to the U.S. Army relating to our
next-generation MTS and BFT solutions.
Research and
Development Expenses. Research and development expenses were
$50.0 million and $40.5 million for fiscal 2009 and 2008, respectively,
representing an increase of $9.5 million, or 23.5%. The increase in expenses
primarily reflects our continued investment in research and development efforts
to develop new products within our legacy product lines as well as incremental
investments associated with the expanded product lines that we now offer as a
result of the Radyne acquisition. Research and development expenses also include
efforts associated with the development of next-generation MTS and BFT
solutions.
For
fiscal 2009 and 2008, research and development expenses of $30.1 million and
$24.1 million, respectively, related to our telecommunications transmission
segment, $8.9 million and $10.8 million, respectively, related to our mobile
data communications segment, $9.3 million and $3.9 million, respectively,
related to our RF microwave amplifiers segment, with the remaining expenses
related to the amortization of stock-based compensation expense which is not
allocated to our three operating segments. Amortization of stock-based
compensation expense recorded as research and development expenses was $1.7
million for both fiscal 2009 and 2008.
10
As a
percentage of consolidated net sales, research and development expenses were
8.5% and 7.6% for fiscal 2009 and 2008, respectively. This increase is primarily
associated with timing of sales. Although we received record orders from the
U.S. Army in fiscal 2009, the U.S. Army requested that the significant portion
of these orders not be delivered until our fiscal 2010.
As an investment for the future, we are continually enhancing our 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 fiscal 2009 and 2008, customers
reimbursed us $14.9 million and $7.8 million, respectively, which is not
reflected in the reported research and development expenses, but is included in
net sales with the related costs included in cost of sales. Included in the
$14.9 million of research and development funded by our customers are efforts
associated with our $8.0 million order we received to build, test and deliver
our next-generation BFT-HC transceiver to the U.S. Army.
Amortization of
Acquired In-Process Research and Development. During fiscal 2009, in
connection with the August 1, 2008 acquisition of Radyne, we immediately
amortized $6.2 million for the estimated fair value of acquired in-process
research and development projects. The acquired in-process research and
development projects were expensed upon acquisition because technological
feasibility had not been established and no future alternative use
existed.
Of this
amount, $3.3 million related to our RF microwave amplifiers segment and $2.9
million related to our telecommunications transmission segment. Such amounts are
included in each respective segment’s operating income results. There was no
amortization of acquired in-process research and development projects for fiscal
2008.
Amortization of
Intangibles. Amortization relating to intangible assets with finite lives
was $7.6 million and $1.7 million for fiscal 2009 and 2008, respectively. The
significant increase for fiscal 2009 as compared to fiscal 2008 is primarily
attributable to the amortization of intangible assets with finite lives acquired
in connection with the August 1, 2008 acquisition of Radyne.
Included
in amortization of intangibles in fiscal 2009 is the acceleration of
amortization of $0.4 million associated with our decision in July 2009 to no
longer offer video encoder and decoder products.
Operating Income.
Operating income for fiscal 2009 and 2008 was $76.9 million and $106.8
million, respectively. As further discussed below, the significant decrease is
primarily attributable to operating income declines in both our
telecommunications transmission and mobile data communications segments that was
partially offset by an increase in operating income in our RF microwave
amplifiers segment as well as lower unallocated operating expenses. Operating
income during fiscal 2009 was negatively impacted by a $6.2 million charge for
acquired in-process research and development projects.
Operating
income in our telecommunications transmission segment was $55.4 million for
fiscal 2009 as compared to $56.7 million for fiscal 2008. Excluding the impact
of $2.9 million of acquired-in-process research and development expenses,
operating income reflects a slight increase that is primarily attributable to
increased net sales at lower gross margins. In addition, operating income in our
telecommunications transmission segment was reduced by approximately $2.0
million (including a charge to cost of sales of approximately $1.2 million and
the acceleration of amortization of intangibles of approximately $0.4 million)
in connection with our decision in July 2009 to no longer offer video encoder
and decoder products or market fiberglass antennas to commercial broadcast
customers. Our telecommunications transmission segment benefited significantly
from operating synergies achieved as a result of our Radyne
acquisition.
Our
mobile data communications segment generated operating income of $31.4 million
for fiscal 2009 as compared to $72.8 million for fiscal 2008. The decrease in
operating income was primarily due to the significant decline in net sales and
gross margins, as discussed further above. Operating income in our mobile data
communications segment was also impacted by (i) incremental investments in our
selling and marketing activities primarily associated with promoting our
next-generation MTS and BFT products and services, (ii) incremental investments
associated with further developing our microsatellite applications to support
anticipated future revenue growth, and (iii) a slight increase in amortization
of intangible assets associated with the Radyne acquisition.
11
Our RF
microwave amplifiers segment generated operating income of $14.4 million for
fiscal 2009 as compared to $4.4 million for fiscal 2008. Operating income
increased significantly due to a higher level of net sales and gross margins
achieved, as discussed further above. Operating income in fiscal 2009 includes
the impact of $3.3 million of acquired in-process research and development
expenses. Operating income in our RF microwave amplifiers segment was also
impacted by incremental investments in research and development as well as a
significant increase in amortization of intangible assets associated with the
Radyne acquisition.
Unallocated
operating expenses decreased to $24.3 million for fiscal 2009 as compared to
$27.1 million for fiscal 2008 primarily due to lower payroll-related expenses,
including cash-based incentive compensation and amortization of stock-based
compensation. Amortization of stock-based compensation expense, which is
included in unallocated operating expenses, amounted to $9.6 million in fiscal
2009 as compared to $10.6 million in fiscal 2008.
Interest
Expense. Interest expense was $6.4 million and $7.1 million
for fiscal 2009 and 2008, respectively. This decrease is primarily attributed to
the conversion of our 2.0% convertible senior notes into shares of our common
stock as of February 12, 2009, partially offset by interest expense associated
with our May 8, 2009 issuance of our 3.0% convertible senior notes.
Interest Income
and Other. Interest income and other for fiscal 2009 was $2.7
million, as compared to $14.1 million for fiscal 2008. The decrease of $11.4
million is primarily attributable to the use of a portion of our cash and cash
equivalents to purchase Radyne and a significant decline in year-over-year
interest rates.
In
addition, during fiscal 2009, we changed our investment strategy relating to the
substantial increase in principal risks associated with maintaining cash and
cash equivalents primarily in commercial-based money market accounts. Our
investment strategy now includes investing in both commercial and government
money market funds, short-term U.S. Treasury obligations and bank deposits,
which currently yield a blended annual interest rate below 0.3%.
Provision for
Income Taxes. The provision for income taxes was $25.7 million
and $40.1 million for fiscal 2009 and 2008, respectively. Our effective tax rate
was 35.1% in fiscal 2009 compared to 35.3% in fiscal 2008.
Although
our effective tax rates for fiscal 2009 and 2008 were similar, our fiscal 2009
effective tax rate was significantly impacted by the fact that we recorded an
amortization charge of $6.2 million for acquired in-process research and
development, which is non-deductible for income tax purposes and which was
partially offset by discrete tax benefits of $1.2 million. The discrete tax
benefits for fiscal 2009 primarily relate to the passage of legislation that
included the retroactive extension of the expiration of the federal research and
experimentation credit from December 31, 2007 to December 31, 2009. Our
effective tax rate for fiscal 2008 reflected a net discrete tax cost of $0.1
million primarily related to our agreement with the Internal Revenue Service
(“IRS”) following their completion of the audit of our federal income tax
returns for fiscal 2004 and fiscal 2005 and our estimate of anticipated future
disallowable federal research and experimentation credits and interest expense
related to our 2.0% convertible senior notes.
Excluding
the aforementioned non-deductible acquired in-process research and development
and discrete tax items in both periods, our effective tax rate for fiscal
2009 was 33.9% as compared to 35.2% for fiscal 2008. The decrease in our
effective tax rate is primarily attributable to the fact that we were not able
to claim federal research and experimentation credits during the full 12 months
of fiscal 2008 (because the related legislation had lapsed on December 31,
2007).
During
fiscal 2009, the IRS continued to audit our federal income tax returns for the
fiscal years ended July 31, 2006 and July 31, 2007. In fiscal 2008, we reached
an agreement with the IRS relating to the allowable amount of federal research
and experimentation credits utilized and interest expense relating to our 2.0%
convertible senior notes for our federal income tax returns for the fiscal years
ended July 31, 2004 and 2005 and adjusted our estimate of anticipated future
disallowable federal research and experimentation credits and interest expense
based on the results of the audit. Although adjustments relating to the audits
and related settlements of our fiscal 2004 and fiscal 2005 tax returns were
immaterial, a resulting tax assessment or settlement for fiscal 2006 and fiscal
2007 or future periods could have a material adverse impact on our results of
consolidated operations and financial condition.
12
Comparison
of Fiscal 2008 and 2007
Net Sales.
Consolidated net sales were $531.6 million and $445.7 million for fiscal
2008 and 2007, respectively, representing an increase of $85.9 million, or
19.3%. The increase in net sales reflects significant growth in both our mobile
data communications and RF microwave amplifiers segments, partially offset by
lower net sales, as anticipated, in our telecommunications transmission
segment.
Net sales
in our telecommunications transmission segment were $208.9 million and $219.9
million for fiscal 2008 and 2007, respectively, a decrease of $11.0 million, or
5.0%. Net sales in this segment reflect increased sales of our satellite earth
station products which were more than offset by lower sales of our
over-the-horizon microwave systems. Sales of our satellite earth station
products for fiscal 2008 were higher than fiscal 2007 as we benefited from
strong demand for our bandwidth efficient satellite earth station modems,
including those used to support cellular backhaul applications. Net sales of our
over-the-horizon microwave systems for fiscal 2008 were significantly lower than
fiscal 2007 primarily due to lower sales of our 16 Mbps troposcatter modem
upgrade kits for use on the U.S. Department of Defense’s (“DoD”) AN/TRC-170
digital troposcatter terminals and lower indirect sales to Algeria, our North
African country end-customer. Net sales in fiscal 2007 include sales of $1.2
million relating to a gross profit adjustment, as discussed below, on a large
over-the-horizon microwave system contract. Our telecommunications transmission
segment represented 39.3% of consolidated net sales for fiscal 2008 as compared
to 49.3% for fiscal 2007.
Net sales
in our mobile data communications segment were a record $261.1 million for
fiscal 2008 and $189.6 million for fiscal 2007, an increase of $71.5 million, or
37.7%. This increase in net sales was due to the significant increase in
deliveries to the U.S. Army for orders placed under our current MTS and BFT
contracts. Deliveries to the Army National Guard, for orders placed under the
MTS contract, were significantly lower during fiscal 2008. Net sales for fiscal
2007 included sales of $1.1 million relating to a favorable gross profit
adjustment on our original MTS contract. Our mobile data communications segment
represented 49.1% of consolidated net sales for fiscal 2008 as compared to 42.6%
for fiscal 2007.
Net sales
in our RF microwave amplifiers segment were a record $61.6 million for fiscal
2008, compared to $36.2 million for fiscal 2007, an increase of $25.4 million,
or 70.2%. The significant increase in net sales was due to higher sales of our
amplifiers and high-power switches that are incorporated into defense-related
systems, primarily sales associated with our participation in the CREW 2.1
program. Our RF microwave amplifiers segment represented 11.6% of consolidated
net sales for fiscal 2008 as compared to 8.1% for fiscal 2007.
International
sales (which include sales to U.S. companies for inclusion in products that are
sold to international customers) represented 26.7% and 26.2% of consolidated net
sales for fiscal 2008 and 2007, respectively. Domestic commercial sales
represented 6.9% and 12.5% of consolidated net sales for fiscal 2008 and 2007,
respectively. Sales to the U.S. government (including sales to prime contractors
of the U.S. government) represented 66.4% and 61.3% of consolidated net sales
for fiscal 2008 and 2007, respectively.
Gross
Profit. Gross
profit was $234.9 million and $193.3 million for fiscal 2008 and 2007,
respectively, representing an increase of $41.6 million, or 21.5%. The increase
in gross profit was attributable to the increase in net sales discussed above
and related increased operating efficiencies. Gross profit as a percentage of
net sales increased to 44.2% for fiscal 2008 from 43.4% for fiscal
2007.
Excluding
the impact of adjustments discussed below, our gross profit as a percentage of
net sales for fiscal 2007 would have been 41.0%. The increase in the gross
profit percentage from 41.0% to 44.2% was driven by an increase in the gross
profit percentage in both our mobile data communications and telecommunications
transmission segments. These increases were partially offset by the impact of a
higher percentage of consolidated net sales occurring within the mobile data
communications segment, which typically has a lower gross profit percentage than
our telecommunications transmission segment. In addition, in fiscal 2008, we
experienced a lower gross profit percentage in our RF microwave amplifiers
segment.
13
Our
mobile data communications segment experienced a higher gross profit percentage
due to increased operating efficiencies associated with increased sales related
to our current MTS and BFT contracts and a more favorable product mix during
fiscal 2008 as compared to fiscal 2007. Our telecommunications transmission
segment experienced a higher gross profit percentage as it benefited from
increased usage of our high-volume technology manufacturing center (including
both incremental satellite earth station product sales and use by our two other
operating segments) that was partially offset by lower sales of our
16 Mbps troposcatter modem upgrade kits. In addition, in fiscal 2008 our
telecommunications transmission segment’s gross profit percentage was favorably
impacted by a $0.7 million reduction in our estimated reserve for warranty
obligations due to lower than anticipated claims received on contracts whose
warranty periods have expired. Our RF microwave amplifiers segment experienced a
lower gross profit percentage due to long production times associated with
contracts for certain complex amplifiers and high-power switches that employ
newer technology.
During
fiscal 2007 we recorded favorable cumulative gross profit adjustments of $11.8
million (of which $10.7 million related to the mobile data communications
segment and $1.1 million related to the telecommunications transmission
segment), resulting from our ongoing review of total estimated contract revenues
and costs, and the related gross margin at completion, on long-term contracts.
These adjustments were partially offset by a $0.1 million firmware-related
warranty provision in our mobile data communications segment.
Included
in cost of sales for fiscal 2008 and 2007 are provisions for excess and obsolete
inventory of $2.4 million and $4.5 million, respectively. As discussed in our
“Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Policies – Provisions for Excess and Obsolete
Inventory,” we regularly review our inventory and record a provision for
excess and obsolete inventory based on historical and projected usage
assumptions.
Selling, General
and Administrative Expenses. Selling, general
and administrative expenses were $86.0 million and $73.3 million for fiscal 2008
and 2007, respectively, representing an increase of $12.7 million, or 17.3%. The
increase in expenses was primarily attributable to higher payroll-related
expenses (including amortization of stock-based compensation and cash-based
incentive compensation) associated with the overall increase in our net sales
and profits and, to a lesser extent, legal and other professional fees. As a
percentage of consolidated net sales, selling, general and administrative
expenses were 16.2% and 16.4% for fiscal 2008 and 2007,
respectively.
Amortization
of stock-based compensation expense recorded as selling, general and
administrative expenses increased to $8.1 million in fiscal 2008 from $5.8
million in fiscal 2007.
Research and
Development Expenses. Research and development expenses were
$40.5 million and $32.5 million for fiscal 2008 and 2007, respectively,
representing an increase of $8.0 million, or 24.6%. The increase in expenses
primarily reflects our continued investment in research and development efforts
across all of our business segments. As a percentage of consolidated net sales,
research and development expenses were 7.6% and 7.3% for fiscal 2008 and 2007,
respectively.
For
fiscal 2008 and 2007, research and development expenses of $24.1 million and
$21.0 million, respectively, related to our telecommunications transmission
segment, $10.8 million and $7.9 million, respectively, related to our mobile
data communications segment, $3.9 million and $2.5 million, respectively,
related to our RF microwave amplifiers segment, with the remaining expenses
related to the amortization of stock-based compensation expense which is not
allocated to our three operating segments. Amortization of stock-based
compensation expense recorded as research and development expenses increased to
$1.7 million in fiscal 2008 from $1.1 million in fiscal 2007.
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 fiscal 2008 and 2007, customers
reimbursed us $7.8 million and $4.2 million, respectively, which is not
reflected in the reported research and development expenses, but is included in
net sales with the related costs included in cost of sales.
Amortization of
Intangibles. Amortization of intangibles was $1.7 million and $2.6
million for fiscal 2008 and 2007, respectively. The amortization primarily
relates to intangibles with finite lives that we acquired in connection with
various acquisitions. The decrease in amortization of intangibles for fiscal
2008 is related to certain intangibles that have been fully
amortized.
14
Operating
Income. Operating income for fiscal 2008 and 2007 was $106.8
million and $84.9 million, respectively. The $21.9 million, or 25.8%, increase
was primarily the result of the higher consolidated net sales and gross margin
percentage during fiscal 2008, partially offset by increased operating expenses
(including research and development expenses) as discussed above.
Operating
income in our telecommunications transmission segment decreased to $56.7 million
for fiscal 2008 from $59.2 million for fiscal 2007, primarily driven by lower
net sales (at a higher gross margin percentage) and increased operating
expenses. In addition, as discussed above under “Gross Profit,” included in
operating income for fiscal 2007 is a cumulative adjustment related to a large
over-the-horizon microwave systems contract which favorably impacted operating
income by $0.9 million.
Our
mobile data communications segment generated operating income of $72.8 million
for fiscal 2008 as compared to $45.4 million for fiscal 2007. The increase in
operating income was primarily due to the increase in net sales and gross
margins achieved during fiscal 2008, partially offset by increased operating
expenses. As discussed above under “Gross Profit,” included in
operating income in fiscal 2007 is the positive impact from cumulative
adjustments, net of the firmware-related warranty provision, of $9.1
million.
Operating
income in our RF microwave amplifiers segment increased to $4.4 million for
fiscal 2008 from $3.7 million for fiscal 2007 due primarily to the increase in
net sales (at a lower gross profit percentage) partially offset by increased
spending on research and development activities.
Unallocated
operating expenses increased to $27.1 million for fiscal 2008 from $23.3 million
for fiscal 2007 due to higher payroll-related expenses (including amortization
of stock-based compensation and cash-based incentive compensation) as well as
increased other costs associated with growing our business. Amortization of
stock-based compensation expense increased to $10.6 million in fiscal 2008 from
$7.4 million in fiscal 2007. This increase is primarily attributable to an
increase in both the number and related fair value of stock-based awards that
are being amortized over their respective service periods for fiscal 2008 as
compared to fiscal 2007.
Interest
Expense. Interest expense was $7.1 million and $6.8 million
for fiscal 2008 and 2007, respectively. Interest expense primarily represents
interest associated with our 2.0% convertible senior notes.
Interest Income
and Other. Interest income and other for fiscal 2008 was $14.1
million, as compared to $14.2 million for fiscal 2007. The decrease of $0.1
million was primarily due to a decline in interest rates partially offset by an
increase in investable cash since July 31, 2007.
Provision for
Income Taxes. The provision for income taxes was $40.1 million
and $29.7 million for fiscal 2008 and 2007, respectively. Our effective tax rate
was 35.3% and 32.1% for fiscal 2008 and 2007, respectively.
Our
effective tax rate for fiscal 2007 of 32.1% included discrete tax benefits of
approximately $2.6 million (including a $1.0 million tax benefit due to the
expiration of applicable statutes of limitations and a $0.6 million tax benefit
relating to the retroactive extension of the federal research and
experimentation credit in December 2006). Excluding these discrete tax benefits,
our effective tax rate for fiscal 2007 was approximately 34.9%. The increase
from 34.9% to 35.3% in fiscal 2008 was primarily driven by the expiration of the
federal research and experimentation credit as of December 31,
2007.
Our tax
rate for fiscal 2008 reflects an agreement we reached with the IRS relating to
its completion of the audit of our federal income tax returns for fiscal 2004
and fiscal 2005. The agreement primarily relates to the allowable amount of
federal research and experimentation credits utilized and interest expense
relating to our 2.0% convertible senior notes.
Our
provision for income tax in fiscal 2008 reflects a net discrete tax cost of
approximately $0.1 million, primarily related to the agreement with the IRS and
our estimate of anticipated future disallowable federal research and
experimentation credits and interest expense related to our 2.0% convertible
senior notes.
15
Liquidity
and Capital Resources
Our
unrestricted cash and cash equivalents increased to $485.5 million at July 31,
2009 from $410.1 million at July 31, 2008, representing an increase of $75.4
million. The increase in cash and cash equivalents during fiscal 2009 was
primarily driven by:
|
·
|
Net
cash provided by operating activities of $88.5 million for fiscal 2009 as
compared to $77.8 million for fiscal 2008. The net increase in cash
provided by operating activities was primarily driven by a significant
decrease in net working capital requirements during fiscal 2009 as
compared to fiscal 2008;
|
|
·
|
Net
cash used in investing activities for fiscal 2009 of $218.9 million as
compared to $20.5 million for fiscal 2008. On August 1, 2008 (the first
day of our fiscal 2009), we redeployed $205.3 million of our cash and cash
equivalents (net of cash acquired) to purchase Radyne. In addition, during
fiscal 2009, we spent $13.5 million to purchase property, plant and
equipment, including expenditures relating to ongoing equipment upgrades,
primarily enhancements to our high-volume technology manufacturing center
in Tempe, Arizona; and
|
|
·
|
Net
cash provided by financing activities of $205.8 million for fiscal 2009 as
compared to $9.8 million for fiscal 2008. During fiscal 2009, we increased
our cash position by approximately $194.7 million from the issuance of
$200.0 million of our 3.0% convertible senior notes. In addition, during
fiscal 2009, we generated $9.6 million of cash as a result of proceeds
from stock option exercises and employee stock purchase plan
shares.
|
During
fiscal 2009, we adopted a new investment policy relating to our unrestricted
cash and cash equivalents that is intended to minimize principal loss while at
the same time maximizing the income we receive without significantly increasing
risk. To minimize this risk, we generally invest our cash and cash equivalents
in money market mutual funds (both government and commercial), bank deposits,
and U.S. Treasury securities. Many of our money market mutual funds invest in
direct obligations of the U.S. government, bank securities guaranteed by the
Federal Deposit Insurance Corporation, certificates of deposits and commercial
paper and other securities issued by other companies. Historically, money market
funds have not been subject to principal risk. However, in fiscal 2009, due to
the global credit crisis, the money market fund industry experienced increased
volatility and some funds experienced a drop in net asset value. In addition,
certain U.S. Treasury securities traded beneath their maturity value. None of
our funds experienced a decline in net asset value in fiscal 2009 nor did we
experience any investment losses. While we cannot predict future market
conditions or market liquidity, we believe our investment policies to be
appropriate. Ultimately, the availability of our cash and cash equivalents is
dependent on a well-functioning liquid market.
As of
July 31, 2009, our material short-term cash requirements primarily consist of
working capital needs. Our material long-term cash requirements primarily
consist of the possible use of cash to repay our 3.0% convertible senior notes
and operating leases, including the present value of the net contractual
non-cancellable lease obligations and related costs (through October 31, 2018)
of $2.4 million related to Radyne’s former Phoenix, Arizona manufacturing and
engineering facility, which we have subleased to a third party through October
31, 2015.
We
currently expect capital expenditures for fiscal 2010 to be approximately $15.0
million to $17.0 million.
We have
historically met both our short-term and long-term cash requirements with funds
provided by a combination of cash and cash equivalent balances, cash generated
from operating activities and financing transactions. Based on our anticipated
level of future sales and operating income, we believe that our existing cash
and cash equivalent balances and our cash generated from operating activities
will be sufficient to meet both our currently anticipated short-term and
long-term operating cash requirements. As of July 31, 2009, we have
approximately $485.5 million of cash and cash equivalents. In fiscal 2010, we
may redeploy a significant portion of our existing cash and cash equivalents to
acquire one or more businesses or technologies.
Although
it is difficult in the current economic and financial environment to predict the
terms and conditions of financing that may be available in the future, should
our short-term or long-term cash requirements increase beyond our current
expectations, we believe that we would have sufficient access to credit from
financial institutions and/or financing from public and private debt and equity
markets.
As
discussed in “Notes to
Consolidated Financial Statements – Note (15)(c) Legal Proceedings and Other
Matters” we are incurring expenses associated with certain
legal proceedings. The outcome of legal proceedings is inherently difficult to
predict and an adverse outcome in one or more matters could have a material
adverse effect on our consolidated financial condition and in our statement of
operations in the period of such determination.
16
Financing
Arrangements
On May 8,
2009, we issued $200.0 million of our 3.0% convertible senior notes in a private
offering pursuant to Rule 144A under the Securities Act of 1933, as amended.
Through July 31, 2009, the net proceeds from this transaction were approximately
$194.7 million after deducting the initial purchasers’ discount and transaction
costs paid. For further information, see “Notes to Consolidated Financial
Statements – Note (10) Convertible Senior Notes” included in “Part II — Item
8. — Financial Statements and Supplementary Data.”
Because
of the disruption in the overall credit markets that occurred in fiscal 2009,
and the resulting inability of many companies to access credit, in June 2009, we
entered into a committed $100.0 million three-year, unsecured revolving credit
facility (“Credit Facility”) with a syndicate of bank lenders (see “Notes to Consolidated Financial
Statements – Note (9) Credit Facility” included in “Part II — Item
8. — Financial Statements and Supplementary Data”). This Credit
Facility replaces a prior $15.0 million uncommitted line of credit with a single
financial institution. At July 31, 2009, we have approximately $1.7 million of
standby letters of credit agreements outstanding under this Credit Facility
related to the guarantee of future performance on certain contracts and less
than $0.1 million of commercial letters of credit agreements outstanding for the
payment of goods and supplies.
Commitments
Except as
disclosed in the below table, in the normal course of business, we routinely
enter into binding and non-binding purchase obligations primarily covering
anticipated purchases of inventory and equipment. We do not expect that these
commitments, as of July 31, 2009, will materially adversely affect our
liquidity.
At July
31, 2009, we had contractual cash obligations relating to: (i) our $281.5
million MTS order, (ii) our operating lease commitments (including satellite
lease expenditures relating to our mobile data communications segment MTS and
BFT contracts) and (iii) the potential cash repayment of our 3.0% convertible
senior notes. Payments due under these long-term obligations, excluding interest
on the 3.0% convertible senior notes, are as follows:
|
Obligations Due by Fiscal
Years (in thousands)
|
||||||||||||||||||||
|
Total
|
2010
|
2011
and
2012
|
2013
and
2014
|
After
2015
|
||||||||||||||||
|
MTS
purchase orders
|
$ | 216,626 | 216,626 | - | - | - | ||||||||||||||
|
Operating
lease commitments
|
51,064 | 26,151 | 10,844 | 4,439 | 9,630 | |||||||||||||||
|
3.0%
convertible senior notes
|
200,000 | - | - | - | 200,000 | |||||||||||||||
|
Total
contractual cash obligations
|
467,690 | 242,777 | 10,844 | 4,439 | 209,630 | |||||||||||||||
|
Less
contractual sublease payments
|
(7,712 | ) | (1,193 | ) | (2,416 | ) | (2,488 | ) | (1,615 | ) | ||||||||||
|
Net
contractual cash obligations
|
$ | 459,978 | 241,584 | 8,428 | 1,951 | 208,015 | ||||||||||||||
In
connection with our $281.5 million order from the U.S. Army to upgrade 20,000
deployed MTS systems, we were required to place two purchase orders for
ruggedized computers and related accessories with a third party. As is typical
with U.S. government contract awards, we believe that if the U.S. Army were to
terminate its contract with us for convenience, we might be able to cancel our
purchase orders with our vendor and/or recover any unreimbursed costs from the
U.S. Army.
In the
ordinary course of business and as discussed further in “Notes to Consolidated Financial
Statements – Note (15)(c) Legal Proceedings and Other Matters” included
in “Part II — Item
8. — Financial Statements and Supplementary Data,” we
include indemnification provisions in certain of our customer contracts.
Pursuant to these agreements, we have agreed to indemnify, hold harmless and
reimburse the indemnified party for losses suffered or incurred by the
indemnified party, including but not limited to losses related to third-party
intellectual property claims. To date, there have not been any material costs or
expenses incurred in connection with such indemnification clauses. Our insurance
policies may not cover the cost of defending indemnification claims or providing
indemnification. As a result if a claim were asserted against us by any party
that we have agreed to indemnify, we could incur future legal costs and
damages.
17
As
discussed further in “Notes to
Consolidated Financial Statements – Note (10) Convertible Senior Notes”
included in
“Part II — Item 8. — Financial Statements and Supplementary
Data,” on May 8, 2009, we issued $200.0 million of our 3.0%
convertible senior notes. Holders of the notes will have the right to require us
to repurchase some or all of the outstanding notes, solely for cash, on May 1,
2014, May 1, 2019 and May 1, 2024 and upon certain events, including a change in
control. If not redeemed by us or repaid pursuant to the holders’ right to
require repurchase, the notes mature on May 1, 2029.
We have
approximately $1.7 million of standby letters of credit agreements outstanding
under our Credit Facility related to the guarantee of future performance on
certain contracts and less than $0.1 million of commercial letters of credit
outstanding under our Credit Facility for the payment of goods and
supplies.
We have
change of control agreements and indemnification agreements with certain of our
executive officers and certain key employees. All of these agreements may
require payments, in certain circumstances, including, but not limited to, an
event of a change in control of our Company. Such amounts are not included in
the above table.
Recent
Accounting Pronouncements
Adoption of FSP APB 14-1 on
August 1, 2009
In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May
Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP
APB 14-1”), which clarifies the accounting for certain convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement). Under FSP APB 14-1, the liability and equity components of
convertible debt instruments that may be settled entirely or partially in cash
upon conversion must be accounted for separately in a manner reflective of their
issuer’s nonconvertible debt borrowing rate. Previous guidance
provided for this type of convertible debt instrument to be accounted for
entirely as debt. Because early adoption was prohibited, we adopted FSP APB 14-1
on August 1, 2009.
Because
we were required to retroactively adjust and present the historical accounting
and reporting of our 2.0% convertible senior notes, the business information,
consolidated financial data, management’s discussion and analysis of financial
condition and results of operations, and consolidated financial statements and
supplementary data presented herein reflect our adoption of FSP APB 14-1.
Because holders of our 3.0% convertible senior notes can only receive stock upon
conversion, FSP APB 14-1 has no impact on our 3.0% convertible senior notes.
Beginning with the first quarter of fiscal 2010, our future SEC filings will
present the retroactive application of FSP APB 14-1 on prior period
information.
Other
Accounting Pronouncements
In
August 2009, the FASB issued Accounting Standards Update No. 2009-05,
“Measuring Liabilities at Fair Value” (“ASU 2009-05”). This update provides
amendments to Accounting Standards Codification (“ASC”) Topic 820, “Fair Value
Measurements and Disclosure” for the fair value measurement of liabilities when
a quoted price in an active market is not available. ASU 2009-05 is effective
for reporting periods beginning after August 28, 2009. This ASU will be
effective for our second quarter of our fiscal 2010. We are in the process of
evaluating this update and have not yet determined the impact that the adoption
of ASU 2009-05 will have on our consolidated financial statements.
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 168, “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles – A Replacement of FASB Statement
No. 162.” SFAS No. 168 establishes the FASB Accounting Standards
Codification as the single source of authoritative U.S. GAAP, in addition to SEC
rules and interpretive releases. We are required to adopt SFAS No. 168 during
the first quarter of fiscal 2010 and we expect its adoption to only impact the
references in our financial statements to technical accounting
literature.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events,”
which establishes accounting standards and disclosure for subsequent events. We
adopted SFAS 165 during the fourth quarter of fiscal 2009. The
adoption of FASB 165 required us to disclose our evaluation of subsequent events
through the date our financial statements are issued and did not impact our
consolidated financial statements.
18
In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies,” to
require that assets acquired and liabilities assumed in a business combination
that arise from contingencies be recognized at fair value if fair value can be
reasonably determined. If the fair value of such assets or liabilities cannot be
reasonably determined, then they would generally be recognized in accordance
with SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14,
“Reasonable Estimation of the Amount of a Loss – an interpretation of FASB
Statement No. 5.” This FSP also amends the subsequent accounting for
assets and liabilities arising from contingencies in a business combination and
certain other disclosure requirements. This FSP is effective for us for business
combinations that are consummated on or after August 1, 2009.
In
November 2008, the FASB ratified EITF Issue No. 08-6, “Equity Method
Investment Accounting Considerations” (“EITF 08-6”). EITF 08-6 clarifies
the accounting for certain transactions and impairment considerations involving
equity method investments. EITF 08-6 was effective on August 1, 2009 and
because we did not have any investments accounted for under the equity method,
its adoption did not have any impact on our consolidated financial
statements.
In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”).
This EITF provides guidance on whether or not a freestanding financial
instrument or embedded contract feature must be accounted for as a derivative
instrument. We adopted this policy on August 1, 2009 and its adoption did not
have any impact on our consolidated financial statements.
In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP 142-3 applies prospectively to intangible assets that are acquired,
individually or with a group of other assets, after the effective date in either
a business combination or asset acquisition. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. We
adopted FSP 142-3 on August 1, 2009 and our adoption did not have a material
effect on our consolidated financial statements.
In
February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No.
157,” which delays the effective date of FASB Statement No. 157, “Fair Value
Measurements,” for
non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The delay is intended to allow the FASB and
constituents additional time to consider the effect of various implementation
issues that have arisen, or that may arise, from the application of SFAS No.
157. For items within the scope of FSP 157-2, the FSP defers the effective date
of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. We adopted FSP 157-2 on August 1, 2009
and it had no material effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”). The purpose of issuing the statement is to
replace current guidance in SFAS 141 to better represent the economic value of a
business combination transaction. The changes to be effected with SFAS 141R from
the current guidance include, but are not limited to: (1) acquisition costs
will be recognized as expenses separately from the acquisition; (2) known
contractual contingencies at the time of the acquisition will be considered part
of the liabilities acquired that are measured at their fair value; all other
contingencies will be part of the liabilities acquired that are measured at
their fair value only if it is more likely than not that they meet the
definition of a liability; (3) contingent consideration based on the
outcome of future events will be recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as
well as non-controlling interests, in the acquiree, at the full amounts of their
fair values; and (5) a bargain purchase (defined as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
non-controlling interest in the acquiree) will require that excess to be
recognized as a gain attributable to the acquirer. The standard applies
prospectively to business combinations for which the acquisition date is on or
after August 1, 2009, except that resolution of certain tax contingencies and
adjustments to valuation allowances related to business combinations, which
previously were adjusted to goodwill, will be adjusted to income tax expense for
all such adjustments after August 1, 2009, regardless of the date of the
original business combination. We adopted SFAS No. 141R on August 1,
2009.
19
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
No. 160”), to change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity. This new consolidation method significantly changes the
accounting for transactions involving minority interest holders. SFAS
No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2008. Early adoption is
prohibited. We adopted SFAS No. 160 on August 1, 2009; and, since we did
not have any noncontrolling interests recorded in our financial statements our
adoption did not have any effect on our consolidated financial
statements.
In
December 2007, the FASB ratified the consensus in EITF Issue No. 07-1,
“Accounting for Collaborative Arrangements” (“EITF 07-1”), which defines
collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. We adopted EITF 07-1 on August 1,
2009. As we had no collaborative arrangements as defined by EITF 07-1, our
adoption did not have any effect on our consolidated financial
statements.
20