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, 2002 ----------------------------------------------------- |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to -------------------- ---------------------- Commission File Number: 0-7928 --------------------------------------------------- COMTECH TELECOMMUNICATIONS CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2139466 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation /organization) Identification Number) 105 Baylis Road, Melville, New York 11747 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (631) 777-8900 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS: As of March 11, 2002, the number of outstanding shares of Common Stock, par value $.10 per share, of the Registrant was 7,471,976.
COMTECH TELECOMMUNICATIONS CORP. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - January 31, 2002 (Unaudited) and July 31, 2001 2 Consolidated Statements of Operations - Three Months and Six Months Ended January 31, 2002 and 2001 (Unaudited) 3 Consolidated Statements of Cash Flows - Six Months Ended January 31, 2002 and 2001 (Unaudited) 4 Notes to Consolidated Financial Statements 5 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 Signature Page 15 1
PART I FINANCIAL INFORMATION COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Item 1. <TABLE> <CAPTION> January 31, July 31, 2002 2001 ------------- ------------- Assets (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 21,354,000 36,205,000 Accounts receivable, less allowance for doubtful accounts of $680,000 at January 31, 2002 and $845,000 at July 31, 2001 26,742,000 27,374,000 Inventories, net 32,026,000 36,732,000 Prepaid expenses and other current assets 673,000 1,151,000 Deferred tax asset - current 2,634,000 2,634,000 ------------- ------------- Total current assets 83,429,000 104,096,000 Property, plant and equipment, net 11,715,000 11,778,000 Goodwill and other intangibles with indefinite lives, net of accumulated amortization of $1,648,000 at January 31, 2002 and at July 31, 2001 17,671,000 17,657,000 Other intangibles with definite lives, net of accumulated amortization of $1,940,000 at January 31, 2002 and $1,209,000 at July 31, 2001 9,522,000 10,162,000 Other assets, net 365,000 569,000 Deferred tax asset - non current 2,726,000 2,726,000 ------------- ------------- Total assets $ 125,428,000 146,988,000 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ -- 5,900,000 Current installments of capital lease obligations (including payable to related party of $155,000 at July 31, 2001) 1,021,000 1,097,000 Accounts payable 7,964,000 11,014,000 Accrued expenses and other current liabilities 12,154,000 13,615,000 Deferred service revenue 3,092,000 2,073,000 Income taxes payable 3,600,000 3,308,000 ------------- ------------- Total current liabilities 27,831,000 37,007,000 Long-term debt, less current installments 28,683,000 42,000,000 Capital lease obligations, less current installments 1,820,000 2,157,000 Other long-term liabilities 205,000 259,000 ------------- ------------- Total liabilities 58,539,000 81,423,000 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 7,551,538 shares at January 31, 2002 and 7,511,105 shares at July 31, 2001 755,000 751,000 Additional paid-in capital 67,729,000 67,490,000 Accumulated deficit (923,000) (1,973,000) ------------- ------------- 67,561,000 66,268,000 Less: Treasury stock (93,750 shares at January 31, 2002 and 82,500 shares at July 31, 2001) (237,000) (184,000) Deferred compensation (435,000) (519,000) ------------- ------------- Total stockholders' equity 66,889,000 65,565,000 ------------- ------------- Total liabilities and stockholders' equity $ 125,428,000 146,988,000 ============= ============= 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 Six months ended January 31, January 31, ---------------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 30,525,000 33,111,000 61,570,000 72,957,000 Cost of sales 21,406,000 20,455,000 41,646,000 47,193,000 ------------ ---------- ---------- ---------- Gross profit 9,119,000 12,656,000 19,924,000 25,764,000 ------------ ---------- ---------- ---------- Operating expenses: Selling, general and administrative 5,304,000 6,217,000 10,877,000 12,384,000 Research and development 2,712,000 2,618,000 5,360,000 5,416,000 Amortization of intangibles 370,000 579,000 731,000 1,172,000 ------------ ---------- ---------- ---------- Total operating expenses 8,386,000 9,414,000 16,968,000 18,972,000 ------------ ---------- ---------- ---------- Operating income 733,000 3,242,000 2,956,000 6,792,000 Other expense (income): Interest expense 690,000 920,000 1,663,000 1,878,000 Interest income (98,000) (812,000) (280,000) (1,406,000) Other, net (7,000) (92,000) (7,000) (92,000) ------------ ---------- ---------- ---------- Income before provision for income taxes 148,000 3,226,000 1,580,000 6,412,000 Provision for income taxes -- 1,354,000 530,000 2,533,000 ------------ ---------- ---------- ---------- Net income 148,000 1,872,000 1,050,000 3,879,000 ============ ========== ========== ========== Net income per share: Basic $ 0.02 0.26 0.14 0.53 ============ ========== ========== ========== Diluted $ 0.02 0.24 0.13 0.49 ============ ========== ========== ========== Weighted average number of common shares outstanding-basic 7,440,000 7,309,000 7,439,000 7,289,000 Potential dilutive common shares 453,000 546,000 499,000 572,000 ------------ ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding assuming dilution - diluted 7,893,000 7,855,000 7,938,000 7,861,000 ============ ========== ========== ========== </TABLE> See accompanying notes to consolidated financial statements 3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Six months ended January 31 ---------- (Unaudited) 2002 2001 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 1,050,000 3,879,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,646,000 3,354,000 Increase (decrease) in bad debt allowance (165,000) 101,000 Provision for (reduction of) inventory reserves 323,000 (234,000) Changes in operating assets and liabilities: Accounts receivable 797,000 (8,312,000) Inventories 4,383,000 (2,963,000) Prepaid expenses and other current assets 478,000 (786,000) Other assets 140,000 (41,000) Accounts payable (3,050,000) (1,024,000) Accrued expenses and other current liabilities (1,461,000) (196,000) Deferred service revenue 1,019,000 -- Income taxes payable 292,000 1,916,000 Other long-term liabilities (54,000) (54,000) ------------ ------------ Net cash provided by (used in) operating activities 6,398,000 (4,360,000) ------------ ------------ Cash flows from investing activities: Purchases of property, plant and equipment (1,557,000) (952,000) Purchase of technology license (91,000) -- Payment for business acquisition, net of cash received (14,000) 8,976,000 Purchase of marketable investment securities -- (1,096,000) ------------ ------------ Net cash (used in) provided by investing activities (1,662,000) 6,928,000 ------------ ------------ Cash flows from financing activities: Prepayment of principal under loan agreement (19,217,000) -- Principal payments on capital lease obligations (612,000) (296,000) Proceeds from exercise of stock options and warrants 242,000 542,000 ------------ ------------ Net cash (used in) provided by financing activities (19,587,000) 246,000 ------------ ------------ Net (decrease) increase in cash and cash equivalents (14,851,000) 2,814,000 Cash and cash equivalents at beginning of period 36,205,000 12,587,000 ------------ ------------ Cash and cash equivalents at end of period $ 21,354,000 15,401,000 ============ ============ Supplemental cash flow disclosure: Cash paid during the period for: Interest $ 1,700,000 1,816,000 Income taxes $ 238,000 617,000 Non cash investing activities: Acquisition of equipment through capital leases $ 199,000 326,000 </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 for the three months and six months ended January 31, 2002 and 2001 are unaudited. In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. The results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended July 31, 2001 and the notes thereto contained in the Company's Annual Report on Form 10-K, filed 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 In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. ("MPD") for $12.7 million, including transaction costs of $.8 million. 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 purchase price of $12.7 million was financed through $10.0 million of institutional secured borrowings and the balance from internal company funds. The Company's operating results for the six months ended January 31, 2002 include MPD. (4) Comprehensive Income The Company's total comprehensive income for the three-month and six-month periods ended January 31, 2002 and 2001 was as follows: <TABLE> <CAPTION> For the Three Months Ended For the Six Months Ended January 31, January 31, ---------------------------- ---------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net income $ 148,000 1,872,000 1,050,000 3,879,000 Other comprehensive income (loss), net of tax: Unrealized loss on available-for-sale securities -- (256,000) -- (291,000) Unrealized loss on forward foreign currency contracts -- (50,000) -- -- ---------- ---------- ---------- ---------- Comprehensive income $ 148,000 1,566,000 1,050,000 3,588,000 ========== ========== ========== ========== </TABLE> (5) Accounts Receivable Accounts receivable consist of the following: <TABLE> <CAPTION> January 31, 2002 July 31, 2001 ---------------- ------------- <S> <C> <C> Accounts receivable from commercial customers $17,121,000 18,336,000 Unbilled receivables (including retainages) on contracts-in-progress 6,655,000 5,939,000 Amounts receivable from the United States government and its agencies 3,646,000 3,944,000 ----------- ----------- 27,422,000 28,219,000 Less allowance for doubtful accounts 680,000 845,000 ----------- ----------- Accounts receivable, net $26,742,000 27,374,000 =========== =========== </TABLE> 5
(6) Inventories Inventories consist of the following: <TABLE> <CAPTION> January 31, 2002 July 31, 2001 ---------------- ------------- <S> <C> <C> Raw materials and components $17,203,000 18,718,000 Work-in-process 17,426,000 20,294,000 ----------- ----------- 34,629,000 39,012,000 Less: Reserve for anticipated losses on contracts and inventory reserves 2,603,000 2,280,000 ----------- ----------- Inventories, net $32,026,000 36,732,000 =========== =========== </TABLE> (7) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: <TABLE> <CAPTION> January 31, 2002 July 31, 2001 ---------------- ------------- <S> <C> <C> Customer advances and deposits $ 3,219,000 2,089,000 Accrued wages and benefits 2,286,000 3,663,000 Accrued commissions 1,251,000 1,021,000 Accrued warranty 3,974,000 4,336,000 Other 1,424,000 2,506,000 ----------- ---------- $12,154,000 13,615,000 =========== ========== </TABLE> (8) Long-Term Debt In August 2001, the Company prepaid $19.2 million of principal on the $40.0 million of debt incurred in connection with the EF Data acquisition. After the prepayment, the aggregate remaining amount of principal outstanding relating to the $50 million of borrowings associated with the EF Data and MPD Technologies acquisitions was $28.7 million. There was no prepayment penalty as a result of the pay down, which was funded by available cash balances. As a result of the prepayment, the next principal payment on such borrowings is not due until December 2003. (9) 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. (10) 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 modems, frequency converters, satellite VSAT transceivers and antennas 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 between mobile platforms or remote sites and user headquarters using satellite, terrestrial microwave or Internet links. Unallocated assets consist principally of cash, deferred tax assets and intercompany receivables. Unallocated losses result from such corporate expenses as legal, accounting and executive. Segment sales below for the three and six month periods ended January 31, 2002 exclude inter-segment sales between the Telecommunications Transmission and RF Microwave Amplifiers segments aggregating $635,000 and $1,376,000, respectively, which were at approximately breakeven. 6
Three months ended January 31, 2002 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- <S> <C> <C> <C> <C> <C> 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 463 227 -- -- 690 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 </TABLE> Three months ended January 31, 2001 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- <S> <C> <C> <C> <C> <C> Net sales $ 27,861 3,306 1,944 -- 33,111 Operating income (loss) 4,590 75 (297) (1,126) 3,242 Interest income 118 4 -- 690 812 Interest expense 897 23 -- -- 920 Depreciation and amortization 1,300 220 55 21 1,596 Expenditures for long-lived assets, including intangibles 368 232 21 4 625 Total assets 69,372 11,079 11,465 38,920 130,836 </TABLE> Six months ended January 31, 2002 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- <S> <C> <C> <C> <C> <C> 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 1,208 455 -- -- 1,663 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 </TABLE> 7
Six months ended January 31, 2001 (in thousands) <TABLE> <CAPTION> Mobile Data Telecommunications RF Microwave Communications Transmission Amplifiers Services Unallocated Total ------------ ---------- -------- ----------- ----- <S> <C> <C> <C> <C> <C> Net sales $ 60,295 7,215 5,447 -- 72,957 Operating income (loss) 9,232 (73) (475) (1,892) 6,792 Interest income 131 4 -- 1,271 1,406 Interest expense 1,836 42 -- -- 1,878 Depreciation and amortization 2,770 445 107 32 3,354 Expenditures for long-lived assets, including intangibles 839 417 80 4 1,340 Total assets 69,372 11,079 11,465 38,920 130,836 </TABLE> (11) Accounting for Business Combinations, Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and SFAS No. 142 effective August 1, 2001. As of July 31, 2001, $4.6 million of intangibles, net of accumulated amortization of $.8 million, were reclassified as intangibles with indefinite lives. For the three and six month periods ended January 31, 2001, the amount of amortization, net of income taxes, associated with goodwill and other intangibles with indefinite lives included in net income was $.2 million and $.4 million, respectively. If SFAS No. 142 had been adopted effective August 1, 2000, net income for the three and six month periods ended January 31, 2001 would have been $2.1 million, and $4.3 million, respectively. Basic earnings per share for the three and six month periods ended January 31, 2001 would have been $0.28 and $0.58 and diluted earnings per share would have been $0.26 and $0.54. Intangibles with indefinite lives by reporting unit as of January 31, 2002 are as follows: Telecommunications transmission $ 7,870,000 RF microwave amplifiers 8,367,000 Mobile data communications services 1,434,000 ----------- $17,671,000 =========== (12) 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 is required to adopt SFAS No. 144 no later than August 1, 2002. The Company does not expect SFAS No. 144 will have a material impact on the Company's consolidated financial statements. 8
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 and certain defense systems. Our business consists of three segments: mobile data communications services, telecommunications transmission, and RF microwave amplifiers. Our sales of mobile data communications services may 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. 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 growing worldwide demand for wireless and satellite telecommunication products and services and our expanded line of RF microwave amplifier product offerings to meet these demands. 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 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 service revenue component of our mobile data communications services segment. We generally recognize income under 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 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 revenues 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. 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 customer. Such customer-funded expenditures are not included in research and development expenses for financial reporting purposes but are reflected in cost of sales. 9
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 $26.8 million, of which $10.2 million was allocated to in-process research and development and was expensed as of the acquisition date. Forty million dollars of the purchase price was supplied through institutional secured borrowings bearing interest at 9.25% due in installments through 2005, and the balance from internal company funds. In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. for cash. 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 purchase price was financed through $10.0 million of institutional secured borrowings and the balance from internal company funds. The secured borrowing bears interest at a 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. CRITICAL ACCOUNTING POLICIES The Company considers certain accounting policies relating to revenue recognition on long-term contracts and impairment of intangible assets to be critical policies due to the estimation process involved in each. Revenue Recognition on Long-Term Contracts As discussed above, when the performance of a contract will extend beyond a 12-month period, revenue and related costs are recognized on the percentage-of-completion method of accounting. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become known. Some of the Company's largest contracts, including its contract with the U.S. Army for the Movement Tracking System, are accounted for using the percentage-of-completion method. If the Company does not accurately estimate the total sales and related costs on such contracts, the estimated gross margins may be significantly impacted or losses may need to be recognized in future periods. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations and financial position. Impairment of Intangible Assets As of January 31, 2002, the Company's intangible assets, including goodwill, aggregated $27.2 million. In assessing the recoverability of the Company's goodwill and other intangibles, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company's results of operations. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND JANUARY 31, 2001 Net Sales. Consolidated net sales were $30.5 million and $33.1 million for the three months ended January 31, 2002 and 2001, respectively, representing a decrease of $2.6 million or 7.9%. Sales during the three months ended January 31, 2002 continued to be adversely impacted by the weak economic environment. Particular softness was experienced in our telecommunications transmission segment as a result of the significant downturn in the telecommunications market. We believe sales in this segment will continue to be adversely impacted until economic conditions improve. Sales from our telecommunications transmission segment were $19.9 million, or 65.2% of our total net sales, during the three months ended January 31, 2002 as compared to $27.9 million, or 84.3% of our total net sales, during the three months ended January 31, 2001. Sales from our RF microwave amplifier segment were $5.5 million and $3.3 million for the three months ended January 31, 2002 and 2001, respectively, or 18.0% and 10.0% of our total net sales. The increase of approximately $2.2 million was principally the result of the acquisition of certain assets and product lines of MPD Technologies, Inc. in April 2001. Sales from our mobile data communications services segment were $5.1 million, or 16.8% of our total net sales for the three months ended January 31, 2002, versus $1.9 million, or 5.7% of our total net sales for the three months ended January 31, 2001. The increase of approximately $3.2 million was due to increased sales of our Movement Tracking System, primarily to the U.S. Army. International sales represented 46.2% and 50.0% of total net sales for the three months ended January 31, 2002 and 2001, respectively. Domestic sales represented 29.6% and 32.2% of total net sales for the three months ended January 31, 2002 and 2001, respectively. U.S. government sales represented 24.2% and 17.8% of total net sales for the three months ended January 31, 2002 and 2001, respectively. Gross Profit. Gross profit was $9.1 million and $12.7 million for the three months ended January 31, 2002 and 2001, respectively. The decrease was partially due to the reduced total level of sales discussed above. In addition, gross margin, as a percentage of sales, decreased from 38.2% to 29.9%. The decrease in the gross margin percentage was driven by the significant decrease in telecommunications transmission segment sales which generally carry higher margins than sales from the other two segments. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.3 million and $6.2 million for the three months ended January 31, 2002 and 2001, respectively. The decrease is related to the reduction in sales during the three months ended January 31, 2002. Research and Development Expenses. Research and development expenses were $2.7 million and $2.6 million, respectively, during the three months ended January 31, 2002 and 2001. Despite the softness in sales discussed above, we are continuing to invest in the future by 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, 2002 and 2001, customers reimbursed us $0.4 million and $0.2 million, respectively, which amounts are not reflected in the reported research and development expenses. Amortization of Intangibles. Amortization of intangibles decreased from $0.6 million to $0.4 million during the three months ended January 31, 2002 compared to the three months ended January 31, 2001 as incremental amortization expense relating to the acquisition of certain assets and product lines of MPD Technologies, Inc. was more than offset by the cessation of goodwill amortization in accordance with newly adopted accounting pronouncements (see note 11 to the consolidated financial statements). 10
Operating Income. Operating income for the three months ended January 31, 2002 and 2001 was $0.7 million and $3.2 million, respectively. The decrease was the result of the decrease in gross profit, discussed above, partially offset by reduced selling, general and administrative expenses. Interest Expense. Interest expense was $0.7 million and $0.9 million for the three months ended January 31, 2002 and 2001, respectively. Additional interest on borrowings in connection with the acquisition of certain assets and product lines of MPD Technologies, Inc. in April 2001 were more than offset by interest savings from the prepayment of $19.2 million of debt in August 2001. Interest Income. Interest income was $0.1 million and $0.8 million for the three months ended January 31, 2002 and 2001, respectively. The decrease was the result of a lower level of investable funds during the three months ended January 31, 2002, as well as lower interest rates. Provision for Income Taxes. The provision for income taxes for the three months ended January 31, 2002 was zero since the estimated effective tax rate for the full fiscal year is expected to be approximately 33% compared to the 37% used in the first quarter of fiscal 2002. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2002 AND JANUARY 31, 2001 Net Sales. Consolidated net sales were $61.6 million and $73.0 million for the six months ended January 31, 2002 and 2001, respectively, representing a decrease of $11.4 million or 15.6%. Sales during the six months ended January 31, 2002 continued to be adversely impacted by the weak economic environment. Particular softness was experienced in our telecommunications transmission segment as a result of the significant downturn in the telecommunications market. We believe sales in this segment will continue to be adversely impacted until economic conditions improve. Sales from our telecommunications transmission segment were $40.2 million, or 65.3% of our total net sales, during the six months ended January 31, 2002 as compared to $60.3 million, or 82.6% of our total net sales, during the six months ended January 31, 2001. Sales from our RF microwave amplifier segment were $12.1 million and $7.2 million for the six months ended January 31, 2002 and 2001, respectively, or 19.6% and 9.9% of our total net sales. The increase of approximately $4.9 million was principally the result of the acquisition of certain assets and product lines of MPD Technologies, Inc. in April 2001. Sales from our mobile data communications services segment were $9.3 million, or 15.1% of our total net sales for the six months ended January 31, 2002, versus $5.5 million, or 7.5% of our total net sales for the three months ended January 31, 2001. The increase of approximately $3.8 million was due to increased sales of our Movement Tracking System, primarily to the U.S. Army. International sales represented 45.0% and 49.6% of total net sales for the six months ended January 31, 2002 and 2001, respectively. Domestic sales represented 28.3% and 31.7% of total net sales for the six months ended January 31, 2002 and 2001, respectively. U.S. government sales represented 26.7% and 18.7% of total net sales for the six months ended January 31, 2002 and 2001, respectively. Gross Profit. Gross profit was $19.9 million and $25.8 million for the six months ended January 31, 2002 and 2001, respectively. The decrease was partially due to the reduced total level of sales discussed above. In addition, gross margin, as a percentage of sales, decreased from 35.3% to 32.4%. The decrease in the gross margin percentage was driven by the significant decrease in telecommunications transmission segment sales which generally carry higher margins than sales from the other two segments. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $10.9 million and $12.4 million for the six months ended January 31, 2002 and 2001, respectively. The decrease is related to the reduction in sales during the six months ended January 31, 2002. Research and Development Expenses. Research and development expenses were approximately $5.4 million during the six-month periods of 2002 and 2001. Despite the softness in sales discussed above, we are continuing to invest in the future by 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, 2002 and 2001, customers reimbursed us $0.9 million and $0.4 million, respectively, which amounts are not reflected in the reported research and development expenses. 11
Amortization of Intangibles. Amortization of intangibles decreased from $1.2 million to $0.7 million during the six months ended January 31, 2002 compared to the six months ended January 31, 2001 as incremental amortization expense relating to the acquisition of certain assets and product lines of MPD Technologies, Inc. was more than offset by the cessation of goodwill amortization in accordance with newly adopted accounting pronouncements (see note 11 to the consolidated financial statements). Operating Income. Operating income for the six months ended January 31, 2002 and 2001 was $3.0 million and $6.8 million, respectively. The decrease was the result of the decrease in gross profit, discussed above, partially offset by reduced selling, general and administrative expenses. Interest Expense. Interest expense was $1.7 million and $1.9 million for the six months ended January 31, 2002 and 2001, respectively. Additional interest on borrowings in connection with the acquisition of certain assets and product lines of MPD Technologies, Inc. in April 2001 were more than offset by interest savings from the prepayment of $19.2 million of debt in August 2001. Interest Income. Interest income was $0.3 million and $1.4 million for the six months ended January 31, 2002 and 2001, respectively. The decrease was the result of a lower level of investable funds during the six months ended January 31, 2002 as well as lower interest rates. Provision for Income Taxes. The effective tax rate for the six months ended January 31, 2002 was approximately 33% compared to the 37% used in the first quarter of fiscal 2002. The lower effective rate is the result of the impact of permanent differences on a lower level of pre-tax income than was originally anticipated for the year. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents decreased to $21.4 million at January 31, 2002 from $36.2 million at July 31, 2001. The decrease of $14.8 million was primarily the result of the prepayment in August 2001 of $19.2 million in borrowings related to the acquisition of EF Data. As a result of the prepayment, our next principal payment on long-term debt is not due until December 2003. Net cash provided by operating activities was $6.4 million for the six months ended January 31, 2002. Such amount reflects (i) net income for the period plus the impact of non-cash items such as depreciation and amortization and (ii) the changes in working capital balances. Net cash used by investing activities was $1.7 million for the six months ended January 31, 2002. Substantially all of the cash used related to capital expenditures aggregating $1.6 million. Net cash used by financing activities was $19.6 million for the six months ended January 31, 2002. We prepaid $19.2 million of borrowings in August 2001. In addition, principal payments on capital lease obligations amounted to $0.6 million during the six months ended January 31, 2002. These uses of cash were offset by proceeds from the sale of stock and exercise of stock options aggregating $0.2 million. 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: 12
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. 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. Therefore, 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 have commenced an action in the United States District Court, District of New Jersey, against the Company and others 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. There is a pending motion of the plaintiffs to dismiss the counterclaims and to strike certain of the affirmative defenses. The Company has opposed the motion and cross-moved to dismiss the claims of one plaintiff. 13
We are subject to certain legal actions, which arise, in the normal course of business. Although we believe that the outcome of these actions, including the matter described above, will not have a material adverse effect on our consolidated financial position, legal costs incurred in connection with these matters could materially impact our results of operations, particularly within a quarterly period. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Stockholders' Meeting, held on December 11, 2001, Mr. Sol S. Weiner, Mr. Edwin Kantor and Mr. Fred Kornberg were elected as Directors for a three-year term. The votes were as follows: Mr. Sol S. Weiner - votes for 6,282,821; votes withheld 379,207. Mr. Edwin Kantor - votes for 6,294,526; votes withheld 367,502 and Mr. Fred Kornberg - votes for 6,287,832; votes withheld 374,196. Mr. Richard L. Goldberg and Dr. George Bugliarello continued on as Directors for terms expiring in two years and Mr. Gerard R. Nocita for a term expiring in one year. The stockholders ratified the selection of KPMG LLP as the Company's auditors for its 2002 fiscal year by a vote of 6,632,235 shares for and 20,143 shares against with 9,650 share abstaining. The stockholders approved the adoption of the amendment to the Company's 2000 Stock Incentive Plan by a vote of 5,427,361 shares for and 695,665 shares against with 539,001 shares abstaining. Item 6. Exhibits and Reports on Form 8-K (b) Exhibits None (c) Reports on Form 8-K None 14
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: March 13, 2002 By: /s/ Fred Kornberg ----------------------------- Fred Kornberg Chairman of the Board Chief Executive Officer and President Date: March 13, 2002 By: /s/ Robert G. Rouse ----------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer 15