10-Q 1 d54317_10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 Form 10-Q (Mark One) |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended January 31, 2003 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------------- ----------------- Commission File Number: 0-7928 COMTECH TELECOMMUNICATIONS CORP. (Exact name of registrant as specified in its charter) Delaware 11-2139466 (State or other jurisdiction (I.R.S. Employer of incorporation /organization) Identification Number) 105 Baylis Road, Melville, New York 11747 (Address of principal executive offices) (Zip Code) (631) 777-8900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS: As of March 6, 2003, the number of outstanding shares of Common Stock, par value $.10 per share, of the Registrant was 7,562,637. COMTECH TELECOMMUNICATIONS CORP. INDEX
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - January 31, 2003 (Unaudited) and July 31, 2002 2 Consolidated Statements of Operations - Three Months and Six Months Ended January 31, 2003 and 2002 (Unaudited) 3 Consolidated Statements of Cash Flows - Six Months Ended January 31, 2003 and 2002 (Unaudited) 4 Notes to Consolidated Financial Statements 5 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 Item 4. Controls and Procedures 15 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 Signature Page 16 Certifications 17-18
1 PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
January 31, July 31, Item 1. 2003 2002 ------------- ------------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 27,301,000 15,510,000 Accounts receivable, less allowance for doubtful accounts of $852,000 at January 31, 2003 and $795,000 at July 31, 2002 33,833,000 27,435,000 Inventories, net 28,153,000 33,996,000 Prepaid expenses and other current assets 1,405,000 1,407,000 Deferred tax asset - current 2,492,000 2,492,000 ------------- ------------- Total current assets 93,184,000 80,840,000 Property, plant and equipment, net 11,882,000 11,889,000 Goodwill and other intangibles with indefinite lives 17,726,000 17,726,000 Other intangibles with definite lives, net 11,925,000 12,902,000 Other assets, net 497,000 661,000 Deferred tax asset - non-current 2,568,000 2,568,000 ------------- ------------- Total assets $ 137,782,000 126,586,000 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 1,983,000 -- Current installments of capital lease obligations 1,043,000 1,062,000 Accounts payable 9,895,000 9,529,000 Accrued expenses and other current liabilities 9,776,000 9,686,000 Customer advances and deposits 8,373,000 2,173,000 Deferred service revenue 5,048,000 4,343,000 Income taxes payable 3,798,000 2,470,000 ------------- ------------- Total current liabilities 39,916,000 29,263,000 Long-term debt, less current installments 26,700,000 28,683,000 Capital lease obligations, less current installments 779,000 1,294,000 Other long-term liabilities 4,000 58,000 ------------- ------------- Total liabilities 67,399,000 59,298,000 Stockholders' equity: Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 -- -- Common stock, par value $.10 per share; authorized 30,000,000 shares; issued 7,656,387 shares at January 31, 2003 and 7,602,921 shares at July 31, 2002 766,000 760,000 Additional paid-in capital 68,182,000 67,883,000 Retained earnings (accumulated deficit) 1,827,000 (825,000) ------------- ------------- 70,775,000 67,818,000 Less: Treasury stock (93,750 shares) (185,000) (185,000) Deferred compensation (207,000) (345,000) ------------- ------------- Total stockholders' equity 70,383,000 67,288,000 ------------- ------------- Total liabilities and stockholders' equity $ 137,782,000 126,586,000 ============= ============= Commitments and contingencies
See accompanying notes to consolidated financial statements. 2 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended Six months ended January 31, January 31, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net sales $ 42,326,000 30,525,000 73,599,000 61,570,000 Cost of sales 28,783,000 21,406,000 48,379,000 41,646,000 ------------ ------------ ------------ ------------ Gross profit 13,543,000 9,119,000 25,220,000 19,924,000 ------------ ------------ ------------ ------------ Expenses: Selling, general and administrative 6,372,000 5,304,000 12,700,000 10,877,000 Research and development 3,296,000 2,712,000 6,312,000 5,360,000 Amortization of intangibles 526,000 370,000 1,052,000 731,000 ------------ ------------ ------------ ------------ 10,194,000 8,386,000 20,064,000 16,968,000 ------------ ------------ ------------ ------------ Operating income 3,349,000 733,000 5,156,000 2,956,000 Other expense (income): Interest expense 686,000 683,000 1,377,000 1,656,000 Interest income (62,000) (98,000) (121,000) (280,000) ------------ ------------ ------------ ------------ Income before provision for income taxes 2,725,000 148,000 3,900,000 1,580,000 Provision for income taxes 872,000 -- 1,248,000 530,000 ------------ ------------ ------------ ------------ Net income $ 1,853,000 148,000 2,652,000 1,050,000 ============ ============ ============ ============ Net income per share: Basic $ 0.25 0.02 0.35 0.14 ============ ============ ============ ============ Diluted $ 0.23 0.02 0.34 0.13 ============ ============ ============ ============ Weighted average number of common shares outstanding-basic 7,536,000 7,440,000 7,523,000 7,439,000 Potential dilutive common shares 389,000 453,000 326,000 499,000 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted 7,925,000 7,893,000 7,849,000 7,938,000 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 3 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended January 31 ----------------------------- 2003 2002 ------------ ------------ Cash flows from operating activities: Net income $ 2,652,000 1,050,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,108,000 2,646,000 Provision for (reduction of) bad debt allowance 142,000 (165,000) Provision for inventory reserves 823,000 323,000 Changes in operating assets and liabilities, net of effect of acquisition: Accounts receivable (6,540,000) 797,000 Inventories 4,790,000 4,383,000 Prepaid expenses and other current assets (163,000) 478,000 Other assets (9,000) 140,000 Accounts payable 366,000 (3,050,000) Accrued expenses and other current liabilities 49,000 (2,591,000) Customer advances and deposits 6,200,000 1,130,000 Deferred service revenue 705,000 1,019,000 Income taxes payable 1,328,000 292,000 Other liabilities (54,000) (54,000) ------------ ------------ Net cash provided by operating activities 13,397,000 6,398,000 ------------ ------------ Cash flows from investing activities: Purchases of property, plant and equipment (1,853,000) (1,557,000) Purchase of technology license (75,000) (91,000) Cash received (payments made) in connection with business acquisitions 551,000 (14,000) ------------ ------------ Net cash used in investing activities (1,377,000) (1,662,000) ------------ ------------ Cash flows from financing activities: Prepayment of principal under loan agreement -- (19,217,000) Principal payments on capital lease obligations (534,000) (612,000) Proceeds from issuance of stock 305,000 242,000 ------------ ------------ Net cash used in financing activities (229,000) (19,587,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents 11,791,000 (14,851,000) Cash and cash equivalents at beginning of period 15,510,000 36,205,000 ------------ ------------ Cash and cash equivalents at end of period $ 27,301,000 21,354,000 ============ ============
See accompanying notes to consolidated financial statements. 4 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) General The accompanying consolidated financial statements for the three months and six months ended January 31, 2003 and 2002 are unaudited. In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2002 and the notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission, and the Company's other filings with the Securities and Exchange Commission. (2) Reclassifications Certain reclassifications have been made to previously reported statements to conform to the Company's current financial statement format. (3) Acquisition On July 31, 2002, the Company acquired certain assets and assumed certain liabilities of Advanced Hardware Architectures, Inc. ("AHA") for $6,985,000, including transaction costs of $185,000. The purchase price was subject to adjustment based on AHA's net tangible assets as of July 31, 2002. During the three months ended January 31, 2003, the purchase price adjustment was finalized and the Company received $551,000, net of related costs. The acquisition was accounted for under the purchase method of accounting. Accordingly, the Company has recorded the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $6,312,000 of which $2,192,000 was allocated to in-process research and development and was expensed as of the acquisition date, $4,032,000 was allocated to existing and core technology and trade name and is being amortized over nine years and $88,000 was allocated to order backlog and amortized over six months. The Company's operating results for the three and six months ended January 31, 2003 include AHA. (4) Accounts Receivable Accounts receivable consist of the following:
January 31, July 31, 2003 2002 ----------- ----------- Accounts receivable from commercial customers $14,679,000 15,424,000 Unbilled receivables (including retainages) on contracts-in-progress 16,065,000 9,304,000 Amounts receivable from the United States government and its agencies 3,941,000 3,502,000 ----------- ----------- 34,685,000 28,230,000 Less allowance for doubtful accounts 852,000 795,000 ----------- ----------- Accounts receivable, net $33,833,000 27,435,000 =========== ===========
The amount of retainages included in unbilled receivables was $64,000 and $778,000 at January 31, 2003 and July 31, 2002, respectively. In the opinion of management, substantially all of the unbilled balances will be billed and collected within one year. 5 (5) Inventories Inventories consist of the following:
January 31, July 31, 2003 2002 ----------- ----------- Raw materials and components $15,693,000 15,920,000 Work-in-process and finished goods 16,562,000 21,365,000 ----------- ----------- 32,255,000 37,285,000 Less: Reserve for anticipated losses on contracts and inventory reserves 4,102,000 3,289,000 ----------- ----------- Inventories, net $28,153,000 33,996,000 =========== ===========
Inventories directly related to long-term contracts were $4,704,000 and $8,461,000 at January 31, 2003 and July 31, 2002, respectively. (6) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following:
January 31, July 31, 2003 2002 ----------- ----------- Accrued wages and benefits $ 3,051,000 2,918,000 Accrued commissions 1,336,000 1,125,000 Accrued warranty 2,775,000 2,975,000 Other 2,614,000 2,668,000 ----------- ----------- $ 9,776,000 9,686,000 =========== ===========
Changes in the Company's product warranty liability during the six months ended January 31, 2003 and 2002 were as follows:
Six months ended January 31, ---------------------------- 2003 2002 ----------- ----------- Balance at beginning of period $ 2,975,000 4,336,000 Provision for warranty obligations 375,000 485,000 Charges incurred (575,000) (847,000) ----------- ----------- Balance at end of period $ 2,775,000 3,974,000 =========== ===========
(7) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". Basic EPS is computed based on the weighted average number of shares outstanding. Diluted EPS reflects the maximum dilution from potential common stock issuable pursuant to the exercise of stock options and warrants, if dilutive, outstanding during each period. (8) Segment and Principal Customer Information Reportable operating segments are determined based on the Company's management approach. The management approach is based on the way that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While the Company's results of operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in three segments: (i) Telecommunications Transmission, (ii) RF Microwave Amplifiers and (iii) Mobile Data Communications Services. Telecommunications Transmission products include modems, frequency converters, satellite VSAT transceivers and antenna and over-the-horizon microwave communications products and systems. RF Microwave Amplifiers products include high-power amplifier products that use the microwave and radio frequency spectrums. Mobile Data Communications Services include two-way messaging links between mobile platforms or remote sites and user headquarters using satellite, terrestrial microwave or Internet links. 6 Unallocated assets consist principally of cash, deferred tax assets and intercompany receivables. Unallocated losses result from such corporate expenses as legal, accounting and executive. Corporate management defines and reviews segment profitability based on the same allocation methodology as presented in the segment data tables. Inter-segment sales for the three and six months ended January 31, 2003, by the telecommunications transmission segment to the RF microwave amplifiers segment were $1.1 million and $1.9 million, respectively. Inter-segment sales for the three and six months ended January 31, 2003 by the telecommunications transmission segment to the mobile data communications services segment were $0.9 million in both periods. Inter-segment sales for the three and six months ended January 31, 2002, by the telecommunications transmission segment to the RF microwave amplifiers segment were $0.6 million and $1.4 million, respectively. Inter-segment sales are excluded from the sales amounts in the tables below. Sales to one customer in the three and six months ended January 31, 2003 represented $6.9 million or 16.3% of total net sales and $8.2 million or 11.1% of total net sales, respectively. These sales were from our telecommunications transmission and mobile data communications services segments. All of the Company's long-lived assets are located in the United States. Three months ended January 31, 2003 (in thousands)
Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- Net sales $22,283 6,306 13,737 -- 42,326 Operating income (loss) 2,463 569 1,305 (988) 3,349 Interest income 2 1 -- 59 62 Interest expense 464 222 -- -- 686 Depreciation and amortization 1,133 270 81 85 1,569 Expenditures for long-lived assets, including intangibles 657 22 319 7 1,005 Total assets 58,406 21,270 24,870 33,236 137,782
Three months ended January 31, 2002 (in thousands)
Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- Net sales $19,903 5,542 5,080 -- 30,525 Operating income (loss) 1,045 427 66 (805) 733 Interest income 31 1 2 64 98 Interest expense 456 227 -- -- 683 Depreciation and amortization 933 302 50 19 1,304 Expenditures for long-lived assets, including intangibles 381 21 59 1 462 Total assets 58,891 25,151 15,347 26,039 125,428
7 Six months ended January 31, 2003 (in thousands)
Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- Net sales $44,101 12,831 16,667 -- 73,599 Operating income (loss) 4,561 1,292 1,199 (1,896) 5,156 Interest income 7 1 -- 113 121 Interest expense 932 445 -- -- 1,377 Depreciation and amortization 2,265 540 159 144 3,108 Expenditures for long-lived assets, including intangibles 1,314 223 398 15 1,950 Total assets 58,406 21,270 24,870 33,236 137,782
Six months ended January 31, 2002 (in thousands)
Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- Net sales $40,154 12,142 9,274 -- 61,570 Operating income (loss) 3,785 737 114 (1,680) 2,956 Interest income 68 2 2 208 280 Interest expense 1,201 455 -- -- 1,656 Depreciation and amortization 1,850 661 99 36 2,646 Expenditures for long-lived assets, including intangibles 1,059 422 374 6 1,861 Total assets 58,891 25,151 15,347 26,039 125,428
(9) Accounting for Business Combinations, Goodwill and Other Intangible Assets Intangibles with definite lives as of January 31, 2003 are as follows:
Gross Carrying Accumulated Net Amount Amortization Book Value ----------- ------------ ----------- Existing technologies $11,850,000 3,409,000 8,441,000 Core technologies 1,315,000 73,000 1,242,000 Technology licenses 2,229,000 152,000 2,077,000 Trade name 175,000 10,000 165,000 Order backlog 88,000 88,000 -- ----------- ----------- ----------- Total $15,657,000 3,732,000 11,925,000 =========== =========== ===========
The aggregate amortization expense for the six months ended January 31, 2003 and 2002 was $1,052,000 and $731,000, respectively. The estimated amortization expense for the twelve months ending January 31, 2004, 2005, 2006, 2007 and 2008 is $1,943,000, $1,943,000, $1,943,000, $1,943,000 and $1,120,000, respectively. Intangibles with indefinite lives by reporting unit as of January 31, 2003 are as follows: Telecommunications transmission $ 7,870,000 RF microwave amplifiers 8,422,000 Mobile data communications services 1,434,000 ----------- $17,726,000 =========== 8 The Company performed its annual required impairment test for goodwill and other intangibles with indefinite lives as of August 1, 2002. Based on this evaluation, the Company determined that no impairment existed as of August 1, 2002. (10) Recent Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 on August 1, 2002. The adoption did not have a material impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Company adopted SFAS No. 145 on August 1, 2002. The adoption did not have a material impact on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption did not have a material impact on the Company's consolidated financial statements. In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain guarantees to be recorded at fair value regardless of the probability of the loss. The adoption did not have a material impact on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. The disclosure requirements shall be effective for financial reports for interim periods beginning after December 15, 2002. We will adopt the disclosure portion of this statement for the fiscal quarter ending April 30, 2003. The adoption will not have any impact on the Company's consolidated financial position or results of operations. COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We design, develop, produce and market sophisticated wireless telecommunications transmission products and systems and solid state high-power broadband amplifiers for commercial and government purposes. Our products are used in point-to-point and point-to-multipoint telecommunication applications such as satellite communications, over-the-horizon microwave systems, telephone systems and cable and broadcast television. Our broadband amplifier products are also used in cellular and PCS instrumentation testing, medical instrumentation and certain defense systems. Our business consists of three segments: telecommunications transmission, RF microwave amplifiers and mobile data communications services. Our sales are made to domestic and international customers, both commercial and governmental. International sales (including sales to prime contractors for end use by international customers) are expected to remain a substantial portion of our total sales for the foreseeable future due to the worldwide demand for wireless and satellite telecommunication products and services. At times, a substantial portion of our sales may be derived from a limited number of relatively large customer contracts, the timing of which cannot be predicted. Quarterly sales and operating results may be significantly affected by one or more of such contracts. Accordingly, we can experience significant fluctuations in sales and operating results from quarter to quarter. Sales consist of stand-alone products and systems. For the past several years, we have endeavored to achieve greater product sales as a percentage of total sales, because product sales generally have higher gross profit margins than systems 9 sales. In the future, as our installed base of mobile data communications terminals is established, an increasing amount of our sales may be attributable to the recurring service revenue component of our mobile data communications services segment. We generally recognize income on contracts only when the products are shipped. However, when the performance of a contract will extend beyond a 12-month period, income is recognized on the percentage-of-completion method. Profits expected to be realized on contracts are based on total estimated sales value as related to estimated costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts-in-progress are recorded in the period in which such losses become known. Since our contract with the U.S. Army for the Movement Tracking System is for an eight-year period, revenue recognition is based on the percentage-of-completion method. The gross margin is based on the estimated sales and expenses for the entire eight-year contract. The amount of revenue recognized has been limited to the amount of funded orders received from the U.S. Army. The portion of such orders representing service time revenue is being deferred until the service time is used by the customer. Significant changes in the estimates used to derive the gross profit margin can materially impact our operating results and financial condition in future periods (see Critical Accounting Policies below for more information). Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiency, price competition and general economic conditions. Selling, general and administrative expenses consist primarily of salaries and benefits for marketing, sales and administrative employees, advertising and trade show costs, professional fees and amortization of deferred compensation. Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development efforts is related to specific contracts and is recoverable under those contracts because they are funded by the customers. Such customer-funded expenditures are not included in research and development expenses for financial reporting purposes, but are reflected in cost of sales. On July 31, 2002, we acquired certain assets for cash and assumed certain liabilities of Advanced Hardware Architectures, Inc. ("AHA"). The acquisition was accounted for under the purchase method of accounting. Accordingly, we allocated the purchase price to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $6.3 million, of which $2.2 million was allocated to in-process research and development and expensed as of the acquisition date. The results of operations in our telecommunications transmission segment include the AHA related business commencing on August 1, 2002. CRITICAL ACCOUNTING POLICIES The Company considers certain accounting policies to be critical due to the estimation process involved in each. Revenue Recognition on Long-Term Contracts As discussed above, when the performance of a contract will extend beyond a 12-month period, revenue and related costs are recognized on the percentage-of-completion method of accounting. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become known. Some of the Company's largest contracts, including its contract with the U.S. Army for the Movement Tracking System, are accounted for using the percentage-of-completion method. The Company has engaged on a continuing basis in the production and delivery of goods and services under contractual arrangements for many years. Historically, the Company has demonstrated an ability to accurately estimate revenues and expenses relating to its long-term contracts. However, there exist inherent risks and uncertainties in estimating revenues and expenses, particularly on larger or longer-term contracts. If the Company does not accurately estimate the total sales and related costs on such contracts, the estimated gross margins may be significantly impacted or losses may need to be recognized in future periods. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations and financial position. 10 The cumulative orders to-date under the Movement Tracking System contract have been far below the Army's initial requirements. The Company is currently in active discussions with the Army to address the funding shortfalls experienced to date on this program. The ultimate resolution of these discussions could result in, among other things, material changes to the estimates used in applying the percentage-of-completion method of accounting. Impairment of Intangible Assets As of January 31, 2003, the Company's intangible assets, including goodwill, aggregated $29.7 million. In assessing the recoverability of the Company's goodwill and other intangibles, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company's results of operations. Provisions for Excess and Obsolete Inventory We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical and future usage trends. Several factors may influence the sale and use of our inventories, including our decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in the Company's financial statements at the time of such determination. Any such charges could be material to the Company's results of operations and financial position. Allowance for Doubtful Accounts We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers' current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we have obtained credit insurance for certain international customers that we have determined could be a credit risk. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to the Company's results of operations and financial position. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND JANUARY 31, 2002 Net Sales. Consolidated net sales were $42.3 million and $30.5 million for the three months ended January 31, 2003 and 2002, respectively, representing an increase of $11.8 million or 38.7%. Sales increased in all of our segments with the most significant increase from our mobile data communications services segment. Sales in this segment were $13.7 million for the three months ended January 31, 2003 as compared to $5.1 million for the three months ended January 31, 2002, representing an increase of $8.6 million or 168.6%. The increase was due to higher sales of our Movement Tracking System to the U.S. Army and sales relating to an order we received during fiscal 2003 from a major U.S. prime contractor that is providing a battle command application to the U.S. Army. Sales from our telecommunications transmission segment were $22.3 million and $19.9 million for the three months ended January 31, 2003 and 2002, respectively, representing an increase of $2.4 million or 12.1%. The increase in this segment was primarily due to sales from AHA in the fiscal 2003 period. Sales from our RF microwave amplifier segment were $6.3 million and $5.5 million for the three months ended January 31, 2003 and 2002, respectively. For the three months ended January 31, 2003, and 2002, respectively, our mobile data communications services segment represented 32.4% and 16.8% of total net sales, our telecommunications transmission segment represented 52.7% and 65.2% of total net sales and our RF microwave amplifier segment represented 14.9% and 18.0% of total net sales. International sales represented 37.6% and 46.2%, domestic sales represented 13.4% and 29.6% and U.S. government sales represented 49.0% and 24.2% of total net sales for the three month periods in fiscal 2003 and 2002, respectively. 11 Gross Profit. Gross profit was $13.5 million and $9.1 million for the three months ended January 31, 2003 and 2002, respectively, representing an increase of $4.4 million. This increase was primarily due to the higher sales level in the fiscal 2003 period as compared to the fiscal 2002 period. Gross margin, as a percentage of net sales, was 32.0% and 29.9% for the three months ended January 31, 2003 and 2002, respectively. This increase in the gross margin was primarily the result of the different product mix in the comparative quarters, as well as greater overhead absorption. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $6.4 million and $5.3 million for the three months ended January 31, 2003 and 2002, respectively, representing an increase of $1.1 million. The increase was due to the addition of AHA, as well as higher selling expenses relating to the higher sales level in the fiscal 2003 period. As a percentage of sales, selling, general and administrative expenses were 15.1% and 17.4% for the three months ended January 31, 2003 and 2002, respectively. Research and Development Expenses. Research and development expenses were $3.3 million and $2.7 million, respectively, for the three months ended January 31, 2003 and 2002. As an investment for the future, we are continually enhancing our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended January 31, 2003 and 2002, customers reimbursed us $0.6 million and $0.4 million, respectively, which amounts are not reflected in the reported research and development expenses. Amortization of Intangibles. Amortization of intangibles was $0.5 million and $0.4 million for the three months ended January 31, 2003 and 2002, respectively. The increase was the result of the amortization related to the additional intangibles with definite lives we acquired in connection with the acquisition of AHA. Operating Income. Operating income for the three months ended January 31, 2003 and 2002 was $3.3 million and $0.7 million, respectively. The increase was the result of the higher sales and gross profit discussed above, partially offset by higher operating expenses. Interest Expense. Interest expense was $0.7 million for both of the three month periods ended January 31, 2003 and 2002. Our interest expense relates to our long-term debt and capital lease obligations, all of which are at fixed rates. Interest Income. Interest income was $62,000 and $98,000 for the three months ended January 31, 2003 and 2002, respectively. The decrease was primarily the result of lower interest rates during the three months ended January 31, 2003 as compared to the same period in fiscal 2002. Provision for Income Taxes. The provision for income taxes for the three months ended January 31, 2003 reflects an estimated effective tax rate of 32%. No provision for income taxes was required for the three months ended January 31, 2002. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2003 AND JANUARY 31, 2002 Net Sales. Consolidated net sales were $73.6 million and $61.6 million for the six months ended January 31, 2003 and 2002, respectively, representing an increase of $12.0 million or 19.5%. Sales increased in all of our segments with the most significant increase from our mobile data communications services segment. Sales in this segment were $16.7 million and $9.3 million for the six months ended January 31, 2003 and 2002, respectively, an increase of $7.4 million or 79.6%. The increase was due to higher sales of our Movement Tracking System to the U.S. Army and sales relating to an order we received during fiscal 2003 from a major U.S. prime contractor that is providing a battle command application to the U.S. Army. Sales from our telecommunications transmission segment were $44.1 million and $40.2 million for the six months ended January 31, 2003 and 2002, respectively, representing an increase of $3.9 million or 9.7%. The increase from this segment was primarily due to sales from AHA. Sales from our RF microwave amplifier segment were $12.8 million and $12.1 million for the six months ended January 31, 2003 and 2002, respectively. For the six months ended January 31, 2003 and 2002, respectively, our mobile data communications services segment represented 22.7% and 15.1% of total net sales, our telecommunications transmission segment represented 59.9% and 65.3% of total net sales and our RF microwave amplifier segment represented 17.4% and 19.6% of total net sales. International sales represented 41.0% and 45.0%, domestic sales represented 17.6% and 28.3% and U.S. government sales represented 41.4% and 26.7% of total net sales for the six month periods in fiscal 2003 and 2002, respectively. Gross Profit. Gross profit was $25.2 million and $19.9 million for the six months ended January 31, 2003 and 2002, respectively, representing an increase of $5.3 million. The increase was primarily due to the higher sales level in the fiscal 2003 period as compared to the fiscal 2002 period. Gross margin, as a percentage of net sales, was 34.3% and 32.4% for the six 12 months ended January 31, 2003 and 2002, respectively. This increase in the gross margin was primarily the result of the different product mix in the comparative periods, as well as greater overhead absorption. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $12.7 million and $10.9 million for the six months ended January 31, 2003 and 2002, respectively, representing an increase of $1.8 million. This increase was due to the addition of AHA as well as higher selling expenses relating to the higher sales level in the fiscal 2003 period. As a percentage of sales, selling, general and administrative expenses were 17.3% and 17.7% for the six months ended January 31, 2003 and 2002, respectively. Research and Development Expenses. Research and development expenses were $6.3 million and $5.4 million, respectively for the six months ended January 31, 2003 and 2002. As an investment for the future, we are continually enhancing our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the six months ended January 31, 2003 and 2002, customers reimbursed us $1.2 million and $0.9 million, respectively, which amounts are not reflected in the reported research and development expenses. Amortization of Intangibles. Amortization of intangibles was $1.1 million and $0.7 million for the six months ended January 31, 2003 and 2002, respectively. The increase was primarily due to the amortization related to the additional intangibles with definite lives we acquired in connection with the acquisition of AHA. Operating Income. Operating income for the six months ended January 31, 2003 and 2002 was $5.2 million and $3.0 million, respectively. The increase was the result of the higher sales and gross profit discussed above, partially offset by higher operating expenses. Interest Expense. Interest expense was $1.4 million and $1.7 million for the six months ended January 31, 2003 and 2002, respectively. The decrease is the result of a partial debt prepayment during the first quarter of fiscal 2002. Our interest expense relates to our long-term debt and capital lease obligations, all of which are at fixed rates. Interest Income. Interest income was $121,000 and $280,000 for the six months ended January 31, 2003 and 2002, respectively. The decrease was primarily the result of lower interest rates during the six months ended January 31, 2003 as compared to the same period in fiscal 2002. Provision for Income Taxes. The provision for income taxes for the six months ended January 31, 2003 reflects an estimated effective tax rate of 32%. The estimated effective tax rate used for the six months ended January 31, 2002 was approximately 33.5%. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents increased to $27.3 million at January 31, 2003 from $15.5 million at July 31, 2002. Net cash provided by operating activities was $13.4 million for the six months ended January 31, 2003. Such amount reflects (i) net income of $2.7 million plus the impact of depreciation and amortization aggregating $3.1 million; and (ii) changes in working capital balances, which include an increase of $6.2 million in customer advances primarily relating to a new $42.3 million contract received during the six months ended January 31, 2003. Net cash used in investing activities for the six months ended January 31, 2003 was $1.4 million. Cash of $1.9 million was used for capital expenditures and $75,000 was used for the purchase of a technology license. These uses of cash were partly offset by cash of $0.6 million we received in connection with final adjustments to the purchase price of AHA. Net cash used in financing activities was $229,000. Principal payments on capital lease obligations amounted to $534,000. This use of cash was offset by proceeds from the sale of stock and exercise of stock options aggregating $305,000. In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment, and from time to time, technology licenses. We do not expect that these commitments as of January 31, 2003 will materially adversely affect our liquidity. At January 31, 2003 we had contractual cash obligations to repay debt (including capital lease obligations) and to make payments under operating leases. Payments due under these long-term obligations are as follows: 13
Obligations due by fiscal year (in thousands) Remainder 2004 2006 of and and After Total 2003 2005 2007 2007 ------- ------- ------- ------- ------- Long-term debt $28,683 -- 28,683 -- -- Capital lease obligations 1,822 528 1,114 180 -- Operating lease commitments 12,396 1,711 5,837 2,439 2,409 ------- ------- ------- ------- ------- Total contractual cash obligations $42,901 2,239 35,634 2,619 2,409 ======= ======= ======= ======= =======
We have entered into standby letter of credit agreements with financial institutions relating to the guarantee of future performance on certain contracts. At January 31, 2003, the balance of these agreements was $293,000. We believe that our cash and cash equivalents will be sufficient to meet our operating cash requirements for at least the next year. In the event that we identify a significant acquisition that requires additional cash, we would seek to borrow additional funds or raise additional equity capital. FORWARD-LOOKING STATEMENTS Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements, including but not limited to, information relating to the future performance and financial condition of the Company, the plans and objectives of the Company's management and the Company's assumptions regarding such performance and plans that are forward-looking in nature and involve certain significant risks and uncertainties. Actual results could differ materially from such forward-looking information. The Company's Form 10-K filed with the Securities and Exchange Commission identifies many of such risks and uncertainties, which include the following: o the impact of a continued domestic and foreign economic slow-down on the demand for our products and services, particularly in the telecommunications industry; o risks associated with our mobile data communications business being in an early stage; o our potential inability to keep pace with rapid technological changes; o our backlog being subject to customer cancellation or modification; o our sales to the U.S. government being subject to funding, deployment and other risks; o our fixed price contracts being subject to risks; o our dependence on component availability, subcontractor availability and performance by key suppliers; o the highly competitive nature of our markets; o our dependence on international sales; o the adverse effect on demand for our products and services that would be caused by a decrease in the value of foreign currencies relative to the U.S. dollar; o the potential entry of new competitors in all of our segments; o uncertainty whether the satellite communications industry or infrastructure will continue to develop and the market will grow; o uncertainty whether the Internet will continue to grow in international markets; o the potential impact of increased competition on prices, profit margins and market share for the Company's products and services; o the availability of satellite capacity on a leased basis needed to provide the necessary global coverage for our mobile data communications services; o whether we can successfully implement our satellite mobile data communications services and achieve recurring revenues for such services; and o whether we can successfully combine and assimilate the operations of acquired businesses and product lines. 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds and short-term U.S. treasury securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. Item 4. Controls and Procedures Our principal executive and financial officers have concluded, based on their evaluation as of a date within 90 days before the filing of this Form 10-Q, that our disclosure controls and procedures (as defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The evaluation included controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect these internal controls. PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Stockholders' Meeting, held on December 10, 2002, Mr. Gerard R. Nocita and Mr. Ira Kaplan were elected as Directors for a three-year term. The votes were as follows: Mr. Gerard R. Nocita - votes for 5,960,083; votes withheld 880,203. Mr. Ira Kaplan - votes for 5,966,846; votes withheld 873,440. Mr. Sol S. Weiner, Mr. Edwin Kantor and Mr. Fred Kornberg continued on as Directors for terms expiring in two years and Mr. Richard L. Goldberg and Dr. George Bugliarello for a term expiring in one year. The stockholders ratified the selection of KPMG LLP as the Company's auditors for its 2003 fiscal year by a vote of 6,204,356 shares for and 566,152 shares against, with 69,779 share abstaining. The stockholders approved the adoption of the amendment to the Company's 2000 Stock Incentive Plan by a vote of 4,608,005 shares for and 1,500,524 shares against, with 731,757 shares abstaining. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. (Registrant) Date: March 12, 2003 By: /s/ Fred Kornberg --------------------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President (Principal Executive Officer) Date: March 12, 2003 By: /s/ Robert G. Rouse --------------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 16 CERTIFICATION I, Fred Kornberg, Chief Executive Officer of Comtech Telecommunications Corp. (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comtech Telecommunications Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 12, 2003 By: /s/ Fred Kornberg ------------------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President (Principal Executive Officer) 17 CERTIFICATION I, Robert G. Rouse, Chief Financial Officer of Comtech Telecommunications Corp. (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comtech Telecommunications Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in SEC Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 12, 2003 By: /s/ Robert G. Rouse --------------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 18