FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 34-26589, eff. 4/12/89) 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 April 30, 2001 ------------------------------------------------------ |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________________to___________________ Commission File Number: 0-7928 --------------------------------------------------- COMTECH TELECOMMUNICATIONS CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2139466 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation /organization) 105 Baylis Road, Melville, New York 11747 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (631) 777-8900 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. |_| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Par Value $.10 Per Share - 7,416,573 shares outstanding as of June 8, 2001.
COMTECH TELECOMMUNICATIONS CORP. INDEX Page No. --- PART I FINANCIAL INFORMATION Consolidated Balance Sheets - 2 April 30, 2001 (unaudited) and July 31, 2000 Consolidated Statements of Operations - 3 Three Months and Nine Months Ended April 30, 2001 and 2000 (unaudited) Consolidated Statements of Cash Flows - 4 Nine Months Ended April 30, 2001 and 2000 (unaudited) Notes to Consolidated Financial Statements 5 - 10 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 Quantitative and Qualitative Disclosures about Market Risk 16 PART II OTHER INFORMATION 16 Signature Page 17 1
FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> April 30, 2001 July 31, 2000 -------------- ------------- Assets (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 36,644,000 12,587,000 Marketable investment securities -- 18,634,000 Accounts receivable, less allowance for doubtful accounts of $687,000 at April 30, 2001 and $806,000 at July 31, 2000 29,018,000 24,204,000 Other receivables -- 9,038,000 Inventories, net 33,578,000 26,170,000 Prepaid expenses and other current assets 1,280,000 583,000 Deferred tax asset - current 3,058,000 3,125,000 ------------- ------------- Total current assets 103,578,000 94,341,000 Property, plant and equipment, net 12,824,000 10,738,000 Intangible assets, net of accumulated amortization of $2,067,000 at April 30, 2001 and $308,000 at July 31, 2000 26,321,000 17,669,000 Other assets 568,000 468,000 Deferred tax asset - non current 2,815,000 2,815,000 ------------- ------------- Total assets $ 146,106,000 126,031,000 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 4,200,000 2,100,000 Current installments of capital lease obligations (including payable to related party of $244,000 at April 30, 2001 and $347,000 at July 31, 2000) 585,000 608,000 Accounts payable 9,987,000 11,260,000 Accrued expenses and other current liabilities 16,027,000 13,657,000 Income tax payable 4,249,000 1,449,000 ------------- ------------- Total current liabilities 35,048,000 29,074,000 Long-term debt, less current installments 45,800,000 37,900,000 Capital lease obligations, less current installments (including payable to related party of $154,000 at July 31, 2000) 963,000 908,000 Other long-term liabilities 286,000 367,000 ------------- ------------- Total liabilities 82,097,000 68,249,000 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 7,491,123 shares at April 30, 2001 and 7,349,176 shares at July 31, 2000 749,000 735,000 Additional paid-in capital 67,383,000 66,740,000 Accumulated other comprehensive loss -- (113,000) Accumulated deficit (3,282,000) (8,687,000) ------------- ------------- 64,850,000 58,675,000 Less: Treasury stock (82,500 shares at April 30, 2001 and July 31, 2000) (184,000) (184,000) Deferred compensation (657,000) (709,000) ------------- ------------- Total stockholders' equity 64,009,000 57,782,000 ------------- ------------- Total liabilities and stockholders' equity $ 146,106,000 126,031,000 Commitments and contingencies ============= ============= </TABLE> See accompanying notes to consolidated financial statements 2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three months ended Nine months ended April 30, April 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 32,322,000 15,485,000 105,279,000 40,950,000 Cost of sales 19,979,000 11,098,000 67,172,000 29,080,000 ------------ ------------ ------------ ------------ Gross profit 12,343,000 4,387,000 38,107,000 11,870,000 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 5,646,000 2,919,000 18,030,000 7,381,000 Research and development 2,236,000 500,000 7,651,000 1,611,000 Amortization of intangibles 586,000 -- 1,759,000 -- ------------ ------------ ------------ ------------ Total operating expenses 8,468,000 3,419,000 27,440,000 8,992,000 ------------ ------------ ------------ ------------ Operating income 3,875,000 968,000 10,667,000 2,878,000 Other expense (income): Interest expense 957,000 28,000 2,836,000 99,000 Interest income (562,000) (583,000) (1,968,000) (635,000) Other 956,000 -- 864,000 -- ------------ ------------ ------------ ------------ Income before provision for income taxes 2,524,000 1,523,000 8,935,000 3,414,000 Provision for income taxes 997,000 552,000 3,529,000 1,246,000 ------------ ------------ ------------ ------------ Net income $ 1,527,000 971,000 5,406,000 2,168,000 ============ ============ ============ ============ Net income per share Basic $ 0.21 0.15 0.74 0.42 ============ ============ ============ ============ Diluted $ 0.19 0.13 0.69 0.38 ============ ============ ============ ============ Weighted average number of common shares outstanding - basic 7,396,000 6,513,000 7,324,000 5,120,000 Potential dilutive common shares 553,000 689,000 561,000 652,000 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted 7,949,000 7,202,000 7,885,000 5,772,000 ============ ============ ============ ============ </TABLE> See accompanying notes to consolidated financial statements 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine Months Ended April 30, --------- 2001 2000 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 5,406,000 $ 2,168,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,909,000 1,231,000 Deferred income taxes (67,000) 1,060,000 Provision for (reduction of) bad debt (119,000) 4,000 Provision for (reduction of) inventory reserve (620,000) 104,000 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (4,695,000) (2,394,000) Other receivables 9,038,000 -- Inventories (5,044,000) (3,438,000) Prepaid expenses and other current assets (697,000) (504,000) Other assets (47,000) (8,000) Accounts payable (1,273,000) 1,325,000 Accrued expenses and other current liabilities 1,403,000 (100,000) Income tax payable 2,800,000 -- Other liabilities (81,000) 394,000 ------------ ------------ Net cash provided by (used in) continuing operations 10,913,000 (158,000) Net cash used in discontinued operations -- (329,000) ------------ ------------ Net cash provided by (used in) operating activities 10,913,000 (487,000) ------------ ------------ Cash flows from investing activities: Investment in marketable securities (1,330,000) (36,221,000) Sale of marketable securities 20,211,000 -- Purchases of property, plant and equipment (2,113,000) (935,000) Purchase of intangible asset (2,063,000) -- Payment for business acquisitions (11,923,000) (11,000) ------------ ------------ Net cash used in investing activities 2,782,000 (37,167,000 ------------ ------------ Cash flows from financing activities: Borrowings under line of credit facility -- 1,000,000 Repayment of borrowings under line of credit facility -- (1,000,000) Borrowings under loan agreement 10,000,000 -- Principal payments on long-term debt (294,000) (618,000) Proceeds from exercise of stock options and warrants 656,000 409,000 Proceeds from common stock offering, net -- 42,450,000 ------------ ------------ Net cash provided by financing activities 10,362,000 42,241,000 ------------ ------------ Net increase in cash and cash equivalents 24,057,000 4,587,000 Cash and cash equivalents at beginning of period 12,587,000 5,896,000 ------------ ------------ Cash and cash equivalents at end of period $ 36,644,000 10,483,000 ============ ============ Supplemental cash flow disclosure: Cash paid during the period for: Interest $ 1,849,000 99,000 Income taxes $ 729,000 299,000 Non cash investing and financing activities: Fair value adjustment to securities available-for-sale $ -- (231,000) Acquisition of property and equipment through capital leases $ 326,000 281,000 Capital stock issued in connection with business acquisition $ -- 371,000 </TABLE> See accompanying notes to consolidated financial statements. 4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) General The accompanying consolidated financial statements at and for the three months and nine months ended April 30, 2001 and 2000 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, 2000 and the notes thereto contained in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on October 30, 2000. (2) Reclassification Certain reclassifications have been made to previously reported statements to conform to the Company's current financial statement format. (3) Acquisitions Hill In January 2000, we acquired certain assets and assumed certain liabilities of Hill Engineering, Inc. ("Hill") in exchange for 50,000 shares of the Company's common stock. The acquisition was accounted for under the "purchase method" of accounting. The purchase price amounted to approximately $371,000 which principally represents the fair value of the initial 30,000 shares of common stock issued to Hill. The remaining 20,000 shares were placed in escrow and will only be released to the sellers if certain profit goals, as defined in the agreement, are met and will be recorded at fair value on the date when the profit goals are met. The excess of the purchase price over the net assets acquired of approximately $606,000 is included in intangible assets in the accompanying consolidated balance sheet and is being amortized over a 15-year period. EF Data On July 10, 2000, the Company acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation, at an estimated adjusted cost of $54.4 million. The preliminary cash purchase price of $61.5 million was partially financed with $40 million supplied through institutional secured borrowings. Direct acquisition costs amounted to approximately $1.6 million. Based upon the acquisition agreement, an adjustment to the purchase price in the amount of $9.0 million was due to the Company which was included in the consolidated balance sheet in other receivables at July 31, 2000. This amount was received by the Company in September 2000. The acquisition was accounted for under the "purchase method" of accounting. The cost of the acquisition was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of the acquisition. The excess of the cost over the fair value of the net assets acquired amounted to approximately $26.2 million, of which $10.2 million was allocated to in-process research and development and was expensed as of the acquisition date, $7.5 million was recorded as purchased technology which is being amortized over seven years, $3.6 million was recorded as other purchased intangibles which are being amortized over five to seven years and $4.9 million has been recorded as goodwill, which is being amortized over ten years. MPD On April 30, 2001 we acquired certain assets and product lines of MPD Technologies, Inc. The acquisition is being accounted for under the "purchase method" of accounting. Accordingly, we have 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 of approximately $8.3 million has been preliminarily recorded as goodwill, subject to evaluation. The preliminary purchase price of $11.0 million, which is subject to adjustment, was financed through $10 million of institutional secured borrowings and the balance from internal company funds. We combined this operation with our Comtech PST Corp. subsidiary in the RF microwave amplifiers segment. 5
The following unaudited pro forma financial information presents the combined results of operations of the Company and MPD as if the acquisition had occurred as of the beginning of fiscal 2001 and 2000, respectively after giving effect to certain adjustments, including amortization of goodwill, additional depreciation expense, increased interest expense on debt related to the acquisition, and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and MPD actually combined as of the beginning of such periods. Nine Months Ended April 30, --------------------------- 2001 2000 ---- ---- Net sales $ 122,833,000 55,047,000 Net income $ 5,832,000 79,000 Net income per share: Basic $ 0.80 0.02 Diluted $ 0.74 0.01 (4) Marketable Investment Securities Marketable investment securities at April 30, 2000 consists of a mutual fund investment classified as available-for-sale and is recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on these available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. (5) Common Stock Offering In February and March 2000, the Company sold an aggregate of 2,645,000 shares of its common stock in a public offering resulting in net proceeds to the Company of approximately $42.4 million. (6) Comprehensive Income The Company's total comprehensive income for the three and nine month periods ended April 30, 2001 and 2000 was as follows: <TABLE> <CAPTION> Three months ended April 30, Nine months ended April 30, ----------------------------- ---------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 1,527,000 971,000 5,406,000 2,168,000 Other comprehensive loss, net of tax: Unrealized loss on available for sale securities -- (231,000) -- (231,000) ----------- -------- --------- --------- 1,527,000 740,000 5,406,000 1,937,000 =========== ======== ========= ========= </TABLE> At July 31, 2000, the accumulated other comprehensive loss consisted of a cumulative unrealized loss of available-for-sale marketable securities, net of a $67,000 deferred tax benefit. (7) Accounts Receivable Accounts receivable consist of the following: <TABLE> <CAPTION> April 30, 2001 July 31, 2000 -------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $ 21,200,000 19,841,000 Unbilled receivables (including retainages) on contracts-in-progress 4,577,000 2,602,000 Amounts receivable from the United States government and its agencies 3,928,000 2,567,000 ------------- ---------- 29,705,000 25,010,000 Less allowance for doubtful accounts 687,000 806,000 ------------- ---------- Accounts receivable, net $ 29,018,000 24,204,000 ============= =========== </TABLE> 6
(8) Inventories Inventories consist of the following: April 30, 2001 July 31, 2000 -------------- ------------- Raw materials and components $ 17,992,000 14,814,000 Work-in-process 17,495,000 14,265,000 ------------- ----------- 35,487,000 29,079,000 Less: Progress payments -- 380,000 Reserve for anticipated losses on contracts & inventory reserves 1,909,000 2,529,000 ------------- ----------- Inventories, net $ 33,578,000 26,170,000 ============= =========== (9) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: April 30, 2001 July 31, 2000 -------------- ------------- Customer advances and deposits $ 2,699,000 1,346,000 Accrued wages and benefits 3,976,000 3,970,000 Accrued commissions 1,259,000 3,992,000 Accrued warranty 3,351,000 2,314,000 Accrued interest on long-term debt 1,233,000 247,000 Deferred service revenue 999,000 -- Accrued contract costs 707,000 -- Other 1,803,000 1,788,000 ------------ ---------- $ 16,027,000 13,657,000 ============ ========== (10) Capital Lease Obligations Capital lease obligations consist of the following: April 30, 2001 July 31, 2000 -------------- ------------- Obligations under capital leases $1,548,000 1,516,000 Less current installments 585,000 608,000 ---------- ---------- $ 963,000 908,000 ========== ========== (11) Long-Term Debt Long-term debt consists of the following: April 30, 2001 July 31, 2000 -------------- ------------- Long term debt $ 50,000,000 40,000,000 Less current installments 4,200,000 2,100,000 ------------ ---------- $ 45,800,000 37,900,000 ============ ========== (12) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 7
(13) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with 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. (14) Segment and Principal Customer Information The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Reportable operating segments are determined based on the Company's management approach. The management approach, as defined by SFAS No. 131, 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 satellite ground station 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 location tracking and two-way messaging between mobile platforms or remote sites and user headquarters using satellite, terrestrial or Internet transmission. Unallocated assets consist principally of cash, deferred tax assets and intercompany receivables. Unallocated losses result from such corporate expenses as legal, accounting and executive. Sales between segments were negligible. Eliminations consist of intercompany balances. Three months ended April 30, 2001 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 25,297 3,766 3,259 -- -- 32,322 Operating income (loss) 4,583 (56) 74 (726) -- 3,875 Interest income 44 2 3 513 -- 562 Interest expense 940 17 -- -- -- 957 Depreciation and amortization 1,258 220 53 24 -- 1,555 Expenditures for long-lived assets 2,796 11,212 21 118 -- 14,147 Total assets $ 68,416 24,251 12,092 111,786 (70,439) 146,106 </TABLE> Three months ended April 30, 2000 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 12,043 2,995 447 -- -- 15,485 Operating income (loss) 1,943 55 (438) (592) -- 968 Interest income -- -- -- 583 -- 583 Interest expense 8 22 (2) -- -- 28 Depreciation and amortization 153 190 41 30 -- 414 Expenditures for long-lived assets 229 256 57 -- -- 542 Total assets $ 12,119 9,649 4,888 54,636 (4,144) 77,148 </TABLE> 8
Nine months ended April 30, 2001 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $ 85,592 10,981 8,706 -- -- 105,279 Operating income (loss) 13,814 (128) (401) (2,618) -- 10,667 Interest income 175 6 3 1,784 -- 1,968 Interest expense 2,777 59 -- -- -- 2,836 Depreciation and amortization 4,028 665 160 56 -- 4,909 Expenditures for long-lived assets 3,635 11,629 101 122 -- 15,487 Total assets $ 68,416 24,251 12,092 111,786 (70,439) 146,106 </TABLE> Nine months ended April 30, 2000 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Eliminations Total ------------ ---------- -------- ----------- ------------ ----- <S> <C> <C> <C> <C> <C> <C> Net sales $31,937 7,779 1,234 -- -- 40,950 Operating income (loss) 5,331 (126) (656) (1,671) -- 2,878 Interest income -- -- -- 635 -- 635 Interest expense 24 75 -- -- -- 99 Depreciation and amortization 442 560 110 119 -- 1,231 Expenditures for long-lived assets 672 350 189 5 -- 1,216 Total assets $12,119 9,649 4,888 54,636 (4,144) 77,148 </TABLE> (15) Accounting for Derivatives and Hedging Activities Effective August 1, 2000, the Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. Management believes it is prudent to minimize the risk caused by foreign currency fluctuation. Management minimizes the risk by hedging foreign currency receivables through the purchase of forward foreign currency contracts ("forward contracts") from financial institutions. Forward contracts represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price. Since forward contracts are purchased for the exact amount of foreign currency needed, the Company feels that it eliminates all risks relating to foreign currency fluctuation. Senior management continually monitors foreign currency risks and the use of this derivative instrument. Changes in the fair value of forward contracts designated and qualifying as cash flow hedges of forecasted transactions are reported in accumulated other comprehensive income (loss). The gains and losses are reclassified into earnings, as a component of cost of sales, in the same period as the asset acquired affects earnings. At April 30, 2001, the Company did not have any forward contracts. (16) 2001 Employee Stock Purchase Plan At the Annual Stockholders' Meeting, held on December 12, 2000, the stockholders approved the Company's 2001 Employee Stock Purchase Plan ("the Plan"). This plan provides for the purchase by eligible employees of up to 300,000 shares of the Company's common stock subject to certain limitations as defined in the Plan. 9
(17) Recent Accounting Pronouncements The SEC has issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which provides the SEC Staff's interpretations of the applications of generally accepted revenue recognition accounting principles. The Company must adopt SAB No. 101, as amended, by May 1, 2001. Management does not expect the adoption to have a material effect on the Company's consolidated financial statements. Effective May 1, 2001, the Company is also required to adopt the provisions of EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs". Management does not expect the adoption to have a material effect on the Company's consolidated financial statements. COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We design, develop, produce and market sophisticated wireless telecommunications transmission components 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-multi-point telecommunications and reception applications such as satellite communications, over-the-horizon microwave systems, cellular telephone systems and cable and broadcast television. Our broadband amplifier products are also used in cellular and PCS instrumentation testing and certain defense systems. Our business consists of three segments: mobile data communications services, telecommunications transmission, and RF microwave amplifiers. We began reporting financial results on a segment basis in fiscal 1999. Our sales are made to domestic and international customers, both commercial and governmental. International sales (including sales to prime contractors' international customers) are expected to increase in the foreseeable future due to the growing worldwide demand for wireless and satellite telecommunications and our expanded line of product offerings to meet these demands. Our sales of mobile data communications services are expected to increase substantially if, when and as orders are received under our contract with the U.S. Army and we penetrate other government and commercial markets for these services. At times, a substantial portion of our sales is 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. For the quarter ended April 30, 2001, there were no customers for which sales accounted for 10% or more of our consolidated sales. For the quarter ended April 30, 2000, sales to one customer accounted for 52.3% of consolidated sales. Accordingly, we can experience significant fluctuations in sales and operating results from quarter to quarter and, we expect such fluctuations to occur in the future. Sales consist of stand-alone products and systems. For the past five years we have endeavored to achieve greater product sales as a percentage of total sales, because product sales generally have higher gross profit margins than systems sales. In the future, as our installed base of mobile data communications terminals is established, we expect an increasing amount of our sales will be attributable to the recurring revenue component of our mobile data communications services segment. We generally recognize income from 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 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 contract-in-progress are recorded in the period in which such losses become known. Our gross profit is affected by a variety of factors, including the mix of products, systems and equipment sold, production efficiency and price competition. 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. Deferred compensation consists of restricted stock awards granted to certain operating management personnel. Under these grants, the employees purchased shares of our common stock at prices representing a discount to the then market value. 10
The shares vest ten years after issuance, subject to earlier vesting upon achievement of certain operating unit performance goals. 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. In June 1999, the U.S. Army awarded Comtech Mobile Datacom Corp. a contract which, subject to, among other things, government funding and deployment decisions and additional field testing, provides for the purchase of up to $418.2 million in mobile terminal units and global data communications services over an eight-year period. Sales will be dependent upon annual government funding and deployment decisions. In January 2000, we acquired certain assets and assumed certain liabilities of Hill Engineering, Inc. ("Hill") in exchange for 50,000 shares of the Company's common stock. The acquisition was accounted for under the "purchase method" of accounting. The purchase price amounted to approximately $371,000 which principally represents the fair value of the initial 30,000 shares of common stock issued to Hill. The remaining 20,000 shares were placed in escrow and will only be released to the sellers if certain profit goals, as defined in the agreement are met and will be recorded at fair value on the date when the profit goals are met. This business operates in the RF Microwave Amplifiers segment. The excess of the purchase price over the net assets acquired of approximately $606,000 is included in intangible assets in the accompanying consolidated balance sheet and is being amortized over a 15-year period. In July 2000, we acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation for cash. 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 the acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $26.2 million, of which $10.2 million was allocated to in-process research and development and was expensed as of the acquisition date, $7.5 million was recorded as purchased technology, $3.6 million was recorded as other purchased intangibles which are being amortized over 5-7 years and $4.9 million has been recorded as goodwill, which is being amortized over ten years. $40 million of the purchase price was supplied through institutional secured borrowings bearing an interest rate of 9.25% due in semiannual installments through 2005, and the balance from internal company funds. We combined this operation with our existing satellite communications operations included in our telecommunications transmission segment. On April 30, 2001, we acquired certain assets and product lines of MPD Technologies, Inc. The acquisition was accounted for under the "purchase method" of accounting. Accordingly, we have 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 of approximately $8.3 million has been preliminarily recorded as goodwill subject to evaluation. The preliminary purchase price of $11 million, which is subject to adjustment, was financed through $10 million of institutional secured borrowings and the balance from internal company funds. The secured borrowing bears an interest rate of 8.5% and requires interest only payments through June 2005 at which time the entire principal is due. We combined this operation with our Comtech PST Corp. operation in our RF microwave amplifiers segment. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2001 AND APRIL 30, 2000 Net Sales Consolidated net sales were $32.3 million and $15.5 million for the three months ended April 30, 2001 and 2000, respectively, representing an increase of $16.8 million or 108.7%. This increase was primarily due to increased sales by our telecommunications transmission segment of satellite earth station products. The increase in this business segment, which was due primarily to the increase generated by the acquisition we completed in July 2000 of EF Data, a division of Adaptive Broadband Corp., was $13.3 million. To a lesser extent we also had higher sales in our other two segments. The increase in our RF microwave amplifiers segment was $771,000 and the increase in our mobile data communications services segment was $2.8 million. International sales increased by $1.7 million representing 42.6% and 78.0% of total net sales for the three months ended April 30, 2001 and 2000, respectively. Domestic sales increased by $7.2 million representing 27.7% and 11.2% of total net sales for the three months ended April 30, 2001 and 2000, respectively. U.S. government sales increased by $7.9 million representing 29.7% and 10.8% of total net sales for the three months ended April 30, 2001 and 2000, respectively. Gross Profit Gross profit was $12.3 million and $4.4 million for the three months ended April 30, 2001 and 2000, respectively, representing an increase of approximately $7.9 million or 181.4%. This increase was due primarily to the increase in sales volume. Gross margin, as a percentage of net sales, was 38.2% and 28.3% in the three months ended April 30, 2001 and 2000, respectively. The higher gross profit margin in the 2001 period was due primarily to the increase in the sale of satellite earth station equipment products by our telecommunications transmission segment, which generally have a lower per unit cost and 11
yield a higher gross profit margin than most other equipment and systems we sell. Also in the 2001 period, there was a cumulative adjustment to reflect a higher gross profit margin percentage on a contract for which sales were previously recognized using a lower gross margin. Profits expected to be realized on contracts are based on total 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. Selling, General and Administrative Selling, general and administrative expenses were $5.6 million and $2.9 million for the three months ended April 30, 2001 and 2000, respectively, representing an increase of $2.7 million or 93.4%. This increase was due primarily to the additional expenses including additional personnel, sales and marketing expenses and other administrative expenses required to support the higher sales volume. As a percentage of sales, these expenses were 17.5% and 18.9% in the 2001 and 2000 quarters, respectively. Research & Development Research and development expenses were $2.2 million and $500,000 for the three-month periods of 2001 and 2000, respectively, representing an increase of $1.7 million or approximately 347.2%. As an investment for the future we are continually enhancing and developing new products and technologies. In the three-month period of 2001, the increase is due primarily to expenses at our EF Data business, (which was acquired in July 2000) for the continuation of research and development for the projects that were underway at the time of the acquisition as well as new projects. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2001 and 2000, customers reimbursed us $277,000 and $760,000, respectively, which amounts are not reflected in the reported research and development expenses. Internally funded and customer funded research and development expenses combined, as a percentage of net sales, represented approximately 7.8% and 8.1% in the three-month periods of 2001 and 2000, respectively. Operating Income As a result of the foregoing factors, we had operating income $3.9 million in the three months ended April 30, 2001 as compared to $968,000 in the prior year period, representing an increase of approximately $2.9 million or 300.3%. Interest Expense Interest expense was $957,000 and $28,000 for the three months ended April 30, 2001 and 2000, respectively, representing an increase of $929,000. The increase was due primarily to the interest on the $40.0 million of long-term debt that we incurred in connection with the acquisition of EF Data. The balance of interest expense was interest expense associated with our capital lease obligations. Interest Income Interest income was $562,000 and $583,000 for the three months ended April 30, 2001 and 2000, respectively, representing a decrease of $21,000. This decrease was due to the decrease in the interest rate received on our short-term investments. Other Expense Other expense was $956,000 and $0 for the three months ended April 30, 2001 and 2000, respectively. The amount in the 2001 period was due primarily to the loss realized upon the sale on March 31, 2001 of a short-term investment classified as available-for-sale. Provision for Income Taxes The provision for income taxes was $997,000 and $552,000 for the three months ended April 30, 2001 and 2000, respectively. The income tax provision for the three-month period of 2001 reflects an approximate 39.5% tax rate while the provision for the three-month period of 2000 reflects an effective tax rate of approximately 36%. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2001 AND APRIL 30, 2000 Net Sales Consolidated net sales were $105.3 million and $41.0 million for the nine months ended April 30, 2001 and 2000, respectively, representing an increase of $64.3 million or 157.1%. This increase was primarily due to increased sales by our telecommunications transmission segment of satellite earth station products. The increase in this business segment, which was due primarily to the increase generated by the acquisition we completed in July 2000 of EF Data, a division of Adaptive Broadband Corp., was $53.7 million or approximately 168.0%. To a lesser extent we also had higher sales in our other two segments. The increase in our RF microwave amplifier segment was $3.2 million and the increase in our mobile data communications services segment was $7.5 million. International sales increased by $18.5 million representing 47.4% and 76.7% of total net sales for the nine months ended April 30, 2001 and 2000, respectively. Domestic sales increased by $25.6 million representing 30.5% and 15.9% of total net sales for the nine months ended April 30, 2001 and 2000, respectively. U.S. government sales increased by $20.2 million representing 22.1% and 7.4% of total net sales for the nine months ended April 30, 2001 and 2000, respectively. 12
Gross Profit Gross profit was $38.1 million and $11.9 million for the nine months ended April 30, 2001 and 2000, respectively, representing an increase of approximately $26.2 million or 221.0%. This increase was due primarily to the increase in sales volume. Gross margin, as a percentage of net sales, was 36.2% and 29.0% in the nine months ended April 30, 2001 and 2000, respectively. The higher gross profit margin in the 2001 period was due primarily to the increase in the sale of satellite earth station equipment products by our telecommunications transmission segment, which generally have a lower per unit cost and yield a higher gross profit margin than most other equipment and systems we sell. Also in the 2001 period, there was a cumulative adjustment to reflect a higher gross profit margin percentage on a contract for which sales were previously recognized using a lower gross margin. Profits expected to be realized on contracts are based on total 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. Selling, General and Administrative Selling, general and administrative expenses were $18.0 million and $7.4 million for the nine months ended April 30, 2001 and 2000, respectively, representing an increase of $10.6 million or 144.3%. This increase was due primarily to the additional expenses including additional personnel, sales and marketing expenses and other administrative expenses required to support the higher sales volume. As a percentage of sales, these expenses were 17.1% and 18.0% in the 2001 and 2000 periods, respectively. Research & Development Research and development expenses were $7.7 million and $1.6 million for the nine-month periods of 2001 and 2000, respectively, representing an increase of $6.0 million or approximately 374.9%. As an investment for the future we are continually enhancing and developing new products and technologies. In the nine-month period of 2001, the increase is due primarily to expenses at our EF Data business, (which was acquired in July 2000) for the continuation of research and development for the projects that were underway at the time of the acquisition as well as new projects. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2001 and 2000, customers reimbursed us $637,000 and $1.2 million, respectively, which amounts are not reflected in the reported research and development expenses. Internally funded and customer funded research and development expenses combined, as a percentage of net sales, represented approximately 7.9% and 6.9% in the nine-month periods of 2001 and 2000, respectively. Operating Income As a result of the foregoing factors, we had operating income of $10.7 million in the nine months ended April 30, 2001 as compared to $2.9 million in the prior year period, representing an increase of approximately $7.8 million or 270.6%. Interest Expense Interest expense was $2.8 million and $99,000 for the nine months ended April 30, 2001 and 2000, respectively, representing an increase of $2.7 million. The increase was due primarily to the interest on the $40.0 million of long-term debt that we incurred in connection with the acquisition of EF Data. The balance of interest expense was associated with our capital lease obligations. Interest Income Interest income was $2.0 million and $635,000 for the nine months ended April 30, 2001 and 2000, respectively, representing an increase of $1.3 million. This increase was due primarily to the increase in the amount of cash available to invest during this period in fiscal 2001 principally as a result of the proceeds received from a follow-on stock offering completed in the third quarter of fiscal 2000. Interest income was primarily derived from the short-term investments of the cash on hand in excess of working capital requirements. Other Expense Other expense was $864,000 and $0 in the nine months ended April 30, 2001 and 2000, respectively. The amount in the 2001 period was due primarily to the loss realized upon the sale on March 31, 2001 of a short-term investment classified as available-for-sale partially offset by royalty income of approximately $120,000. Provision for Income Taxes The provision for income taxes was $3.5 million and $1.2 million for the nine months ended April 30, 2001 and 2000, respectively. The income tax provision for the nine-month period of 2001 reflects an approximate 39.5% tax rate while the provision for the nine-month period of 2000 reflects an effective tax rate of approximately 36.5%. 13
LIQUIDITY AND CAPITAL RESOURCES For the nine months ended April 30, 2001, our cash and cash equivalent position increased by $24.1 million, from $12.6 million at July 31, 2000 to $36.6 million at April 30, 2001. Operating activities provided $10.9 million, investing activities provided $2.8 million and financing activities provided $10.4 million. The following changes are reflected in the financial statements: Accounts receivable increased by $4.7 million from July 31, 2000, due primarily to the higher sales volume, the timing of shipments and the subsequent collection of the related receivables. The allowance for doubtful accounts decreased by $119,000 The Company reviews its allowance for doubtful accounts periodically and believes it is sufficient based on past experience and the Company's credit standards. We also have a credit insurance policy in the amount of $10.0 million for certain foreign receivables. Other receivables decreased by $9.0 million as a result of the receipt of this amount from Adaptive Broadband Corp. as a purchase price adjustment under the asset purchase agreement relating to the acquisition of EF Data. Net inventories increased by $5.7 million (which excludes approximately $1.7 million acquired from MPD Technologies) due primarily to the higher levels of inventory required by our mobile data communications segment for its U.S. Army contract. A significant portion of the Company's product lines require a competitive delivery response to customers' requirements and require the Company to provide for a level of "off-the-shelf" equipment. Thus, inventory levels will vary as a function of backlog and new orders. The only other general inventory that the Company maintains is for basic components, which are common for most of its products. Inventory reserves are reviewed on an ongoing basis and adjustments are made as needed. Accounts payable decreased by $1.3 million due primarily to the timing of inventory purchases. Accrued expenses and other current liabilities increased by $1.4 million (net of $1.0 million incurred as a result of the MPD Technologies acquisition). The increase was due primarily to increases in customer advances and deposits, accrued interest on long-term debt, deferred service revenue and accrued contract costs, partially offset by a decrease in accrued commissions. Taxes payable increased by $2.8 million due primarily to the additional income taxes associated with the increase in taxable income for the period and also to higher effective income tax rates. We entered into new capital leases during the period in the amount of $326,000 for the purchase of capital equipment. At April 30, 2001, our capital lease obligation, including the current portion, was $1.5 million. Our long-term debt, including the current portion, is $50.0 million. In July 2000 we partially financed the acquisition of EF Data with $40.0 million of secured long-term debt. It bears an interest rate of 9.25% and is payable semi-annually over a five-year period with the first principal payment due on June 30, 2001. In April 2001, we secured an additional $10 million from the same institutional lender to partially finance the product line acquisition from MPD Technologies. The additional $10 million bears an interest rate of 8.5% and requires interest only payments until June 2005 at which time the entire principal is due. We believe that our cash and cash equivalents and short-term investment will be sufficient to meet our operating cash requirements for at least the next year. 14
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 a developmental 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 the mobile data communications industry; 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. 15
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. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. When applicable, the Company may enter into foreign currency contracts solely to hedge foreign currency receivables. It has established policies, procedures and internal processes governing the management of this hedging to reduce market risks inherent in foreign exchange. Any change in these markets would not materially affect the consolidated financial position, results of operations or cash flows of the Company. PART II OTHER INFORMATION Item 1. Legal Proceedings Two former employees (the "Plaintiffs") of the Company's discontinued Comtech Wireless subsidiary, commenced an action in the United States District Court, District of New Jersey, against the Company and others (Verma, et al. V. Comtech Telecommunications Corp., et al.) asserting, among other things, breach of certain restricted stock agreements and seeking unspecified monetary damages, specific performance of the restricted stock agreements, including the issuance of an aggregate 225,000 shares of the Company's Common Stock for a purchase price of $.10 per share, and other relief. The Company believes it has meritorious defenses to all the claims asserted and intends to vigorously defend the action. It has filed an answer and has asserted certain counterclaims against the Plaintiffs. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Asset Purchase Agreement between MPD Technologies, Inc. and Comtech Telecommunications Corp. dated as of March 2, 2001. Incorporated by reference to Exhibit No. 2.1 to the Registrant's Form 8-K dated April 30, 2001 filed May 14, 2001. (b) Reports on Form 8-K None 16
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. -------------------------------- (Registrant) Date: June 14, 2001 By: /s/ Fred Kornberg ---------------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: June 14, 2001 By: /s/ J. Preston Windus, Jr. ----------------------------------- J. Preston Windus, Jr. Senior Vice President Chief Financial Officer 17