UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-K
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(Mark
One)
T Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the fiscal year ended July 31, 2008
o Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Commission
File Number: 0-7928
(Exact
name of registrant as specified in its charter)
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Delaware
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11-2139466
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(State
or other jurisdiction of incorporation /organization)
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(I.R.S.
Employer Identification Number)
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68
South Service Road, Suite 230,
Melville,
NY
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11747
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(Address
of principal executive offices)
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(Zip
Code)
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(631)
962-7000
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $.10 per share
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NASDAQ
Stock Market LLC
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Series
A Junior Participating Cumulative
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Preferred
Stock par value $.10 per share
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NASDAQ
Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
T
Yes o No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of Section 15(d) of the Act.
o
Yes T
No
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.
T
Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer T Accelerated
filer o
Non-accelerated filer o
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes T
No
The
aggregate market value of the registrant’s voting stock held by non-affiliates
of the registrant, computed by reference to the closing sales price as quoted on
the NASDAQ National Market
on January 31, 2008 was approximately $1,078,824,000.
The
number of shares of the registrant’s common stock outstanding on September 12,
2008 was 24,509,227.
DOCUMENTS
INCORPORATED BY REFERENCE.
Certain
portions of the document listed below have been incorporated by reference into
the indicated Part of this Annual Report on Form 10-K:
Proxy
Statement for Annual Meeting of Stockholders to be held December 5, 2008 - Part
III
INDEX
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| PART II | ||
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ii
Note: As used in
this Annual Report on Form 10-K, the terms “Comtech,” “we,” “us,” “our” and “our
Company” mean Comtech Telecommunications Corp. and Comtech’s
subsidiaries.
We
design, develop, produce and market innovative products, systems and services
for advanced communications solutions. We believe many of our solutions play a
vital role in providing or enhancing communication capabilities when terrestrial
communications infrastructure is unavailable, inefficient or too expensive. We
conduct our business through three complementary segments: telecommunications
transmission, mobile data communications and RF microwave amplifiers. We sell
our products to a diverse customer base in the global commercial and government
communications markets. We believe we are a leader in the market segments that
we serve.
Over the
past several years, we have expanded our product lines through increased
research and development and completed a number of small tactical product line
acquisitions. We have increased our marketing efforts and have broadened our
customer base. These actions and the increased reliance on our products and
services by the U.S. military have resulted in significant growth over the past
six years. Our fiscal 2008 sales of $531.6 million and net income of $76.4
million are the highest in the history of our company.
At July
31, 2008, we had $410.1 million of unrestricted cash and cash equivalents on
hand. On August 1, 2008 (the beginning of our fiscal year 2009), and as more
fully described throughout this Form 10-K, we purchased Radyne Corporation
(“Radyne”) using a portion of our existing cash and cash equivalents for a
preliminary aggregate purchase price of approximately $231.7 million (including
estimated transaction costs and payments made for outstanding share-based stock
awards). We believe that the acquisition of Radyne resulted in the following
strategic benefits:
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-
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Strengthened
our leadership position in our satellite earth station product line in our
telecommunications transmission
segment;
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-
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More
than doubled the size of our RF microwave amplifiers segment by expanding
our amplifier product portfolio and immediately positioning us as a
leader, not only in the solid-state amplifier market but also in the
satellite earth station traveling wave tube amplifier
market;
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-
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Broadened
the number of products and services that our mobile data communications
segment can offer by allowing us to market additional mobile tracking
products as well as design and manufacture of microsatellites and related
components; and
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-
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Further
diversified our overall global customer base and expanded our addressable
markets.
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We
believe that, over time, we will be able to take advantage of our combined
engineering and sales talents to drive further innovation in the marketplace and
deliver new and advanced products to our customers in all three of our business
segments. We also believe that we will be able to achieve operating efficiencies
by eliminating redundant functions and related expenses by closing Radyne’s
Phoenix, Arizona manufacturing facility and integrating that operation into our
high-volume technology manufacturing center located in Tempe,
Arizona.
As more
fully described throughout this Form 10-K, we believe that we are positioned for
another year of record revenues and net income in fiscal
2009.
Our
historical financial information and other information (including quantified
information) presented in this Form 10-K, given as of a date prior to
August 1, 2008, reflects our business prior to the acquisition of Radyne, unless
the context specifically states otherwise.
Our
Internet website is www.comtechtel.com and we make available free of charge, on
our website, our annual reports, quarterly reports, current reports and any
related amendments. Unless specifically noted, the reference to our
website address does not constitute incorporation by reference of the
information contained therein into this Annual Report on Form 10-K. In addition, any materials filed with
the SEC may be read and copied by the public at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. We are incorporated in the state of Delaware and were
founded in 1967.
1
The
global commercial and government communications markets have experienced rapid
technological advances and changes during the past decade. We believe the
markets that we directly operate in are expected to grow due to many
factors, including the following:
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·
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The Global Development of
Information-Intensive Economies. Businesses, governments and
consumers have become increasingly reliant upon the Internet and
multimedia applications to communicate voice, video and data to their
customers, suppliers, and employees around the world. We expect demand for
these high-bandwidth applications to continue to
grow.
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·
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Demand for Increased
Communications Cost Efficiencies. Due to the significant
increase in global voice, video (including high definition television
("HDTV")) and data communications traffic, communications service
providers have been forced to increase their investments in transmission
infrastructure in order to maintain the quality and availability of their
services. As a result, communications service providers are continually
seeking technology solutions that increase the efficiency of their
networks in order to reduce overall network operating costs. In light of
the relatively high cost of satellite transmission versus other
transmission channels, we believe that communications service providers
will make their satellite equipment vendor selections based upon the
operating efficiency and quality of the products and
solutions.
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·
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The Emergence of
Information-Based, Network-Centric Warfare. Militaries around the
world, including the United States (“U.S.”) military, have become
increasingly reliant on information and communications technology to
provide critical advantages in battlefield, support and logistics
operations. Situational awareness, defined by knowledge of the location
and strength of friendly and unfriendly forces during battle, can increase
the likelihood of success during a conflict. As evidenced by the recent
Iraq and Afghanistan conflicts, stretched battle and supply lines
have used satellite-based or over-the-horizon microwave communications
solutions to span distances that normal radio communications, such as
terrestrial-based systems, are unable to cover. We expect the need for
these technologies to remain high due to the lack of terrestrial-based
communications infrastructure in many parts of the world where the U.S.
and other militaries operate.
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·
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The Need for Developing
Countries to Upgrade Their Commercial and Defense Communication
Systems. We believe many developing countries are
committing greater resources and are now placing a higher priority on
developing and upgrading their communications systems than in the past.
Many of these countries lack the financial resources to install extensive
land-based networks, particularly where they have large geographic areas
or unfriendly terrain that make the installation of telecommunications
infrastructure more costly. We believe that satellite and over-the-horizon
microwave technologies often provide the most affordable and effective
solutions to meet the requirements for communications services in these
countries.
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We
continue to respond to the aforementioned trends across our three business
segments by focusing internal and customer funded research and development
resources to produce secure, scalable and reliable technologies to meet these
evolving market needs.
We manage
our business with the following principal corporate business
strategies:
· Seek
leadership positions in markets where we can provide specialized products and
services;
· Identify
and participate in emerging technologies that enhance or expand our product
portfolio;
· Operate
business segments flexibly to maximize responsiveness to our
customers;
· Strengthen
our diversified and balanced customer base; and
· Pursue
acquisitions of businesses and technologies.
We
believe that, as a result of these business strategies, we are well positioned
to continue to capitalize on growth opportunities in the global commercial and
government communications markets.
2
The
successful execution of our principal corporate strategies is based on our
competitive strengths, which are described below:
Leadership
Positions in All Three Business Segments – In our telecommunications
transmission segment, we believe we are the leading provider of satellite earth
station modems, over-the-horizon microwave systems, and integrated circuits
incorporating Turbo Product Code (“TPC”) forward error correction technology and
DoubleTalk® Carrier-in-Carrier® bandwidth compression. In our
mobile data communications segment, we are the sole supplier of the U.S. Army
logistics community’s Movement Tracking System (“MTS”) and continue to integrate
our technologies and products with other U.S. military battlefield command and
control applications and systems. In our RF microwave amplifiers
segment, we believe we are one of the largest independent suppliers of
broadband, high-power, high-performance RF microwave amplifiers and, as a result
of the Radyne acquisition, we believe we have positioned ourselves as a leader
in the satellite earth station traveling wave tube amplifier
market.
Innovative Leader
with Emphasis on Research and Development – We have established a leading
technology position in our fields through internal and customer funded research
and development activities. We believe we were the first company to
begin full-scale deployment of TPC and DoubleTalk® Carrier-in-Carrier® bandwidth compression in digital
satellite earth station modems, which can significantly reduce satellite
transponder lease costs or increase satellite earth station modem data
throughput. Our field-proven over-the-horizon microwave systems
utilize a proprietary 16 megabits per second (“Mbps”) adaptive digital
modem. Our mobile data communications system is the leading L-band
satellite-based mobile data communications system used by the U.S. Army
logistics community for near real-time messaging and location tracking of mobile
assets. In our RF microwave amplifiers segment we are incorporating Gallium
Nitride technology into our products which allows us to offer customers more
powerful and higher efficiency RF microwave amplifiers. In addition, as a result
of the Radyne acquisition, we can now offer traveling wave tube amplifiers that
have built-in block up-converters thereby significantly reducing operating costs
for domestic and international broadcasters.
Diverse Customer
Base with Long-Standing Relationships – We have established long-standing
relationships with leading domestic and international system and network
suppliers in the satellite, defense, broadcast and aerospace industries, as well
as the U.S. government and foreign governments. Our products are in service
around the globe and we continue to expand our geographic distribution. We
believe that our customers recognize our ability to develop new technologies and
to meet stringent program requirements. The Radyne acquisition further
diversified our overall global customer base.
Core
Manufacturing Expertise That Supports All Three Business Segments – Our
high-volume technology manufacturing center located in Tempe, Arizona utilizes
state-of-the-art design and production techniques, including analog, digital and
RF microwave production, hardware assembly and full-service
engineering. All three of our business segments utilize this
manufacturing center for certain high-volume production which allows us to
secure volume discounts on key components, control the quality of our
manufacturing process and maximize the utilization of our manufacturing
capacity.
Successful
Acquisition Track Record – We have demonstrated that we can successfully
integrate acquired businesses, achieve increased efficiencies and capitalize on
market and technological synergies. We believe that our disciplined
approach in identifying, integrating and capitalizing on acquisitions provides
us with a proven platform for additional growth. The Radyne acquisition was the
largest acquisition in our history and, although we have not yet completed our
integration and restructuring plans, we believe we are on track to achieve all
of the strategic goals and operating efficiency targets that we originally
established.
Our
Three Business Segments
We
conduct our business through three complementary business segments:
telecommunications transmission, mobile data communications and RF microwave
amplifiers. By operating independently with their own management
teams, our business segments are able to maintain a high level of focus on their
respective businesses and customers. Our corporate senior management team
supports the business segments by, among other things, actively seeking to
exploit synergies that exist between the segments, including in areas such as
manufacturing, technology, sales, marketing and customer
support. Financial information about our business segments is
provided in “Notes to
Consolidated Financial Statements – Note (12) Segment
Information.”
3
Overview
Our
telecommunications transmission segment provides equipment and systems that are
used to enhance satellite transmission efficiency and that enable wireless
communications in environments where terrestrial communications are unavailable,
inefficient, or too expensive. These products and systems are used in
a wide variety of commercial and government applications including the
transmission of voice, video and data over the Internet (such as Voice over
Internet Protocol (“VoIP”) and broadband video), long distance telephony, the
backhaul of cellular traffic using satellites, broadcast, cable and highly
secure defense applications.
The
following are the key products and systems, along with related markets and
applications, for our telecommunications transmission segment:
Satellite Earth Station Equipment
and Systems – We provide customers a one-stop shopping approach by
offering a broad range of satellite earth station equipment. Our products
include modems, frequency converters, power amplifiers, transceivers, access
devices, voice gateways, IP encapsulators and media routers. The acquisition of
Radyne, on August 1, 2008, further strengthened our leadership position and
broadened our product offerings to include HDTV video encoders and decoders.
Many of our modems incorporate TPC, an advanced form of forward error correction
which can significantly reduce satellite transponder lease costs or increase
satellite earth station modem data throughput. During the past
several years, we have introduced a new line of satellite modems that allow for
greater data transmission than ever before. For example, some of our modems now
include technology such as low density parity check (“LDPC”), a next-generation
form of forward error correction, as well as DoubleTalk® Carrier-in-Carrier®
bandwidth compression, a technique in our modems that allows satellite earth
stations to transmit and receive at the same frequency, effectively reducing
transponder bandwidth requirements by 50%. Our time division multiple access
(“TDMA”) and single channel per carrier (“SCPC”) based communication products
and software enable our customers to utilize satellite network bandwidth
management techniques to more cost-effectively enable, among others,
applications such as video teleconferencing, distance learning, telemedicine and
Internet content delivery.
Over-the-Horizon Microwave Equipment
and Systems – We design, develop, produce and market over-the-horizon
microwave communications equipment and systems that can transmit signals over
unfriendly or inaccessible terrain from 20 to 600 miles by reflecting the
transmitted signals off of the troposphere, an atmospheric layer located
approximately seven miles above the earth’s surface. Over-the-horizon
microwave communications is a cost-effective, secure alternative to satellite
communications as it does not require the leasing of satellite transponder
space. Traditional end-users of our equipment have included foreign
governments who have used our over-the-horizon microwave systems to, among other
things, transport radar tracking information from remote border locations, and
oil and gas companies, who use our systems to enable communication links for
offshore oilrigs and other remote exploration activities. Our continued
advancements in over-the-horizon microwave technology are enabling new
applications for these systems, such as the transmission of video. Over the past
two years, we have sold our 16 Mbps adaptive digital troposcatter modem upgrade
kit to the U.S. military which resulted in enhanced capability of their
AN/TRC-170 digital troposcatter terminal. As a result of working
closely with the U.S. military, we are focusing product development and
marketing efforts to upgrade other AN/TRC-170 key components. We also recently
began marketing our newly developed 20 Mbps troposcatter modem for use on a
floating oil drilling platform. We expect demand for this product to be strong
as oil companies seek new oil deposits further offshore.
Forward Error Correction
Technology – We design, develop and market forward error correction
integrated circuit solutions which allow for more efficient transmission of
voice, video and data in wireless communication channels. We have been issued
several U.S. patents relating to our forward error correction technology. We
incorporate this technology into our satellite earth station modems, which we
believe increases the efficiency of our modems for the transmission of satellite
traffic. We have also integrated TPC technology into our over-the-horizon
microwave systems. We believe that the cost efficiency to our customers of this
technology provides us with a competitive advantage in the markets we serve. In
addition, we market data compression integrated circuits which are used by
leading manufactures of copiers and data storage products.
In
addition to the above key products and systems, our telecommunications
transmission segment operates and benefits from our high-volume technology
manufacturing center located in Tempe, Arizona. All three of our business
segments, as well as third-party commercial customers who outsource a portion of
their manufacturing to us, utilize this manufacturing center for certain
high-volume production which allows us to secure volume discounts on key
components, control the quality of our manufacturing process and maximize the
utilization of our manufacturing capacity.
4
Business
Strategies
Our
telecommunications transmission segment business strategies are as
follows:
Expand Leadership
Position in Satellite Earth Station Market – Our satellite earth station modems,
which incorporate leading technologies and standards such as TPC, LDPC, Digital
Video Broadcasting Standard 2 (DVB-S2) and DoubleTalk® Carrier-in-Carrier® bandwidth compression have established us as a leading
provider to domestic and international commercial satellite systems and network
customers, as well as U.S. and foreign governments. We intend to continue
introducing and developing new products to create high return on investments for
our customers which we believe will result in continued demand for our products.
For example, in the second half of fiscal 2008, we announced our CDM-625
advanced satellite modem which is our first modem to combine LDPC forward error
correction technology with DoubleTalk® Carrier-in-Carrier® bandwidth compression. We believe
that the CDM-625 modem is an ideal platform for both commercial and government
customers who require two-way connectivity at data rates ranging from 18 Kbps to
25 Mbps. We also, in order to better serve the U.S government market, are
focusing sales efforts on the SLM-5650A, a high speed, compact, rugged modem
that is ideally suited for many government and military applications such as
fixed, at-the-halt and on-the-move communications. The SLM-5650A is fully
compatible with Federal Information Processing Standard (“FIPS”) 140-2 (a
government security standard). The SLM-5650A has an advanced network processor
able to handle 150 Mbps of TCP/IP traffic and can be integrated with our
Vipersat Management System to provide fully automated network and capacity
management. We are continuing to market product offerings that include access
devices and voice gateways which allow our customers to consolidate
multi-service network traffic such as voice, video and data. When combined with
our satellite earth station modems, the solution is ideal for backhauling
cellular traffic using satellites, which can significantly reduce
their bandwidth requirements. The acquisition of Radyne, on August 1, 2008,
further strengthened our leadership position and broadened our product
offerings. For example, we can now offer Skywire™, a shared-bandwidth
modem designed specifically for small to mid-sized enterprise networks.
Under certain application environments we believe Skywire™ is one of the most
bandwidth efficient TDMA solutions available. We expect to continue expanding
our leadership position by offering new products and solutions to meet the
expected increased demand from commercial, government and defense
customers.
Capitalize on Increased Demand for
Over-the-Horizon Microwave Systems and Upgrades – As the leading supplier
in this specialized product line, we expect to continue to capitalize on
increased demand for new systems, as well as demand for upgrades to a large
global installed base of older systems. These systems are sometimes referred to
as troposcatter systems and are extremely reliable and secure when compared to
satellite-based systems. Our systems, which include our patented TPC
forward error correction technology, are able to transmit video and other
broadband applications at throughput speeds in excess of 16 Mbps. To date, the
largest single end-customer for our over-the-horizon microwave systems has been
a North African country which we believe is between major phases of a multi-year
roll-out of a large project. In fiscal 2007 and fiscal 2008, the U.S. Department
of Defense (“DoD”) purchased our 16 Mbps adaptive digital modem upgrade kits to
be used on a portion of the DoD’s inventory of AN/TRC-170 digital troposcatter
terminals. We are in continuing discussions with the DoD to upgrade other key
components on the AN/TRC-170. The increased capability of the upgraded
AN/TRC-170 terminals could reduce the DoD’s dependence on satellite
communications in areas of conflict. As a result of our success with
our North African end-customer and the DoD, other foreign countries and
militaries have shown interest in our over-the-horizon microwave systems
technology and we believe the overall market for our products and systems is
expanding.
Continue to Develop Technology for
Efficient Bandwidth Utilization – As demand for satellite bandwidth
continues to increase, technological advances will be needed to provide
affordable bandwidth solutions for our customers. We intend to
continue to develop next generation advances of our forward error correction
technology and believe this will have important utility in responding to the
increasing demand for satellite bandwidth utilization, particularly by U.S.
military, security and intelligence agencies. We intend to continue
to enhance our Internet, TDMA and SCPC-based software and products which enable
customers to utilize bandwidth management techniques to enable, among others,
applications such as video teleconferencing, distance learning, telemedicine and
Internet content delivery. We intend, over time, to incorporate the
above-mentioned DoubleTalk® Carrier-in-Carrier®
technology into additional satellite modems (including modems that we now sell
as a result of the Radyne acquisition). In recent years, we have expanded our
satellite earth station product offerings and began selling IP encapsulators and
media routers, that, when combined with our bandwidth efficient satellite earth
station modems, can reduce operating expenses for service providers delivering
IP-based broadcast connectivity. In July 2008, we completed a small product line
acquisition and began offering NetPerformer products which combine the
functionality of voice gateway and data routers and provide data compression
over a single wide area network which enables our customers to potentially
bypass toll costs on public networks. We expect to continue to develop new
NetPerformer products as well as our Skywire™ products (which were introduced to
the marketplace by Radyne in December 2007).
5
Overview
Our
mobile data communications segment provides customers with integrated solutions
to enable global satellite-based communications when mobile, real-time, secure
transmission is required. On August 1, 2008, as a result of the Radyne
acquisition, we also began offering our customers the design and production of
microsatellite systems and related components. We provide our
products and services to both government and commercial customers.
A
substantial portion of sales in our mobile data communications segment have
historically come from, and are expected to be derived in the future from sales
of our integrated mobile data communications solutions to the U.S. military.
These solutions include mobile satellite transceivers, the supply and operation
of satellite packet data networks (including arranging for and providing
satellite capacity), ruggedized computers and satellite earth station network
gateways, and associated installation, training and maintenance. Our mobile data
communications solutions have been integrated into several U.S. military
logistics and battlefield command and control applications and have been
installed on a variety of vehicles including Abrams tanks, Bradley Fighting
Vehicles, helicopters such as the Apache, Black Hawk and Chinook and High
Mobility Multipurpose Wheeled Vehicles (“HMMWV”). When equipped with this
technology, soldiers operating these vehicles are able to be continually tracked
and maintain communications with a command center and fellow soldiers in the
field. Our extremely reliable proprietary network service employs full
end-to-end path redundancy as well as back-up capability in the event of a major
catastrophe, and we maintain a 24 x 7 network operations and customer care
center that provides customers with ongoing support any time, day and
night.
Our
government and commercial customers can choose from a number of products and
related technology for mobile tracking and communications including the
following:
MT-2011 – A single sealed
mobile satellite transceiver with no moving parts, the MT-2011 is used by
customers to transmit and receive near real-time packet data and is proven to
operate under rugged environmental and operating conditions on land, in the air,
and on the water. It has a single interface port for connecting the terminal to
power and to devices such as mobile and handheld computers. The MT-2011 can
operate anywhere in the world over any available L-band satellite
system.
MT-2012 – Incorporating all
of the features of our field-proven MT-2011 mobile satellite transceiver, this
enhanced transceiver features embedded radio frequency identification devices
(“RFID”) and selected availability anti-spoofing modules (“SAASM”). The built-in
RFID interrogator provides total asset visibility by communicating with RFID
tags attached to inventory, such as cargo containers, and transmits data back to
the requesting user. The transceiver also contains an expanded memory buffer
which allows the MT-2012 to accept larger data files for transmission over
satellite.
MTM-203 – This miniaturized
L-band transceiver incorporates the key features of our MT-2011. It also
incorporates state-of-the-art technology created for users where both
restrictions in size and weight are critical. In fiscal 2008, we received a FIPS
140-2 validation certification from the National Institute for Standards and
Technology for the MTM-203 Miniature Satellite Transceiver Module. We believe
this certification will allow for increased sales of the MTM-203 to users who
must operate on certain secure military networks.
geoOpsTM Enterprise Location Management
System – This
web-based software provides an integrated capability to command, control and
manage mobile ground vehicles. The software integrates the functions of route
planning, transportation control, dispatching, travel and road condition
monitoring and is updated via an easy to use electronic map.
Sensor Enabled Notification (“SENS”)
Technology – As a result of the Radyne acquisition, we now offer both
government and commercial customers a low-cost, spread-spectrum technology-based
system which can remotely track a large number of simultaneous transmissions via
low earth-orbit satellites and miniaturized satellite transmitters. The
information received is processed and distributed to users through an Internet
Portal at www.sensservice.com.
Messages can be retrieved via several methods including the Internet, email,
voice or fax and can be forwarded to a user-designated site. Our SENS technology
is integrated with a variety of mapping solutions and can provide our customers
with features such as GeoFencing which allows customers to track whether or not
their vehicles stay within pre-defined boundaries.
6
The
following are the key applications for our mobile data communications segment’s
products and services:
The U.S. Army’s Movement Tracking
System (“MTS”) – We have continuously provided a turnkey solution to the
U.S. Army’s logistics community since 1999 under a competitively awarded
contract. We believe the MTS system, which is currently being used by U.S.
forces in Iraq and in certain other areas of the world, is the leading L-band
satellite-based mobile data communication system for near real-time messaging
and location tracking of logistics-oriented mobile assets. Since 1999, we have
provided these systems under indefinite delivery/indefinite quantity
(“IDIQ”) contracts. Our first MTS contract, which was awarded to us in
1999, was for $463.2 million (including a ceiling increase awarded in July
2007). Total orders received under our first MTS contract were $460.2 million.
In August 2007, we were awarded a
new MTS contract, with a ceiling value of $605.1 million, to continue to provide
and support products and services through July 12, 2010. Through July 31, 2008,
we have received total orders under our new MTS contract of $133.6 million and since 1999, we have
supplied over 20,000 terminals to the MTS program. Although we anticipate the
roll-out and ongoing maintenance of the MTS system to continue, the contract can
be terminated at any time, is not subject to automatic renewal or extension, and
orders are subject to unpredictable funding, deployment and technology decisions
by the U.S. government.
Battlefield Command and Control
Applications – Pursuant to various contracts with the U.S. Army
Communications Electronics Command (“CECOM”), our technology has been integrated
into the U.S. Army’s Force XXI Battle Command, Brigade and Below ("FBCB2")
command and control systems, also known as Blue Force Tracking (“BFT”). Our
efforts include the supply of mobile satellite transceivers, the lease of
satellite capacity, the supply and operation of the satellite packet data
network and network gateways, and associated systems support and maintenance. In
August 2007, we were awarded an IDIQ contract to continue to provide products
and services in support of the BFT program through December 31, 2011. The BFT
contract has a ceiling value of $216.0 million. Through July 31, 2008, we have received
total orders under our BFT contract of $134.8 million and since 2003, we have
supplied over 60,000 terminals to the BFT program and similar to our MTS
contract, it can be terminated at any time, is not subject to automatic renewal
or extension, and orders are subject to unpredictable funding, deployment and
technology decisions.
Homeland Security and Multi-National
Applications – Our products and services can also be used to facilitate
communications in the event that natural disasters or other situations, such as
a terrorist attack, disable or limit existing terrestrial
communications. For example, the Army National Guard has purchased
(through the MTS contract) our mobile data communication products to better
prepare for and react to disaster recovery operations at the local, state and
national levels. In order to support its troops located in the Middle East, the
Republic of Georgia Army has deployed our Quick Deploy Satellite System, a
portable briefcase communications platform utilizing components similar to those
used in the MTS system. In addition, the North Atlantic Treaty Organization
(“NATO”) has incorporated our geoOps™ Enterprise Location Management System into
a multi-national satellite-based friendly force tracking system. The geoOps™
software can be used to share near real-time operational data allowing the same
view of unfolding operations or emergency scenarios amongst friendly
forces.
Commercial Satellite-Based Mobile
Data Applications – We believe that there may be opportunities to
leverage our core strengths and expertise in satellite-based mobile tracking and
messaging services into commercial market applications. These include vehicle
tracking and communication for domestic and international transportation
companies, private fleets and heavy equipment fleets. We continue to carefully
explore this market opportunity and seek to identify markets that have a
particular requirement for our high quality, real-time and secure
satellite-based communications network. Such markets could include fleet
operators whose vehicles transport dangerous or hazardous materials, such as
armaments, explosives, or flammable materials (e.g., oil or industrial
chemicals). We will continue to market our solutions in a methodical way and
target them to those customers whose needs best fit our technology offerings. We
do not expect a significant amount of commercial sales in this area in fiscal
2009.
Microsatellite Space Applications
– As a result of our Radyne acquisition, we now can offer both government
and commercial customers the design and production of microsatellites that
provide a portion of the functionality of expensive large satellites but at a
fraction of the cost. In recent years, the market for faster, smaller and more
inexpensive microsatellites (which we define as less than 400 kilograms) has
been emerging as end-users seek to enhance the ability to launch mission
specific inexpensive systems for imaging, communications, replenishment, repair
and enhancement of existing space assets as well as provide low cost platforms
for space technology development and experiments. Our microsatellites and
related components are used on space missions primarily sponsored by the U.S.
Department of Defense and National Aeronautics and Space Administration
("NASA"). We believe the market for microsatellite space application is growing
and we expect to invest in marketing, sales and internal research and
development efforts so that we can solidify a leadership position in this
marketplace.
7
Business
Strategies
Our
mobile data communications segment business strategies are as
follows:
Continue to Capitalize on
Opportunities with the U.S. Army – We believe that the reliable and
effective performance of our system has demonstrated to the U.S. Army the value
of a mobile, global satellite-based communications network when real-time,
secure transmission is required. We are currently working closely with the
U.S. Army to provide additional enhancements to both our network capabilities
and communications performance and are developing new transceiver products that
we believe provide compelling technological advancement to our existing products
and that are, importantly, backwards compatible with the large number of
existing BFT and MTS systems in active deployment today. We also continue to
develop new products that feature enhancements, including miniaturization and
updated software that can provide increased speed, functionality and a more
intuitive and easier to use graphical user interface for end-users. Ultimately,
we believe that by seeking to work collaboratively with the U.S. Army to ensure
that its short-term and long-term needs are addressed, we will enhance our
competitive positioning for a potential future recompete, renewal or extension
of the MTS and BFT contracts.
Leverage our Current Installed Base
into other Military Commands – In light of the integration of our mobile
satellite transceivers into the U.S. Army’s BFT and MTS command and control
systems used in Iraq, Afghanistan and elsewhere around the world, we believe and
have demonstrated that there are a number of opportunities for us to market our
products and solutions to other military commands, both in the U.S. and
internationally. The Army National Guard and the First Marine
Expeditionary Forces have received funding in the past to purchase our products
and services. Both the Republic of Georgia and the Australian Defense Force have
recently deployed our products. Also, our geoOps™ Enterprise Location Management
System software platform has been incorporated into NATO’s International
Security Assistance Force Tracking System, a satellite-based mobile
communication system. We continue to work with a number of other international
military commands to increase brand and product awareness. Although the sales
cycle relating to these other military commands is long and difficult to
predict, we believe that our products and technologies can meet other potential
customer country requirements.
Market and Develop New Commercial
Satellite-Based Mobile Data Applications – Although the market for
commercial satellite-based mobile data applications is extremely competitive, we
believe the performance of our system in the military setting may establish our
system as an attractive choice for users in certain commercial markets. We
recently received certification from the Department of the Army, Military
Surface Deployment and Distribution Command, Defense Transportation Tracking
System Program Office (“DTTS”), to track and monitor hazardous cargo shipments,
including arms, ammunition and explosives and other sensitive items, being
transported by commercial carriers. We believe we are only the second
company since the start of the DTTS program to receive this certification. We
also intend to continue to enhance and market our SENS technology (that we
acquired through the Radyne acquisition) to expand its market potential. We will
continue to market our solutions in a methodical way and target them to those
customers whose needs best fit our technology offerings. We do not expect a
significant amount of commercial sales in this area in fiscal 2009.
Overview
We
believe we are one of the largest independent companies designing, developing,
manufacturing and marketing solid-state, high-power, broadband amplifiers in the
microwave and RF spectrums. As a result of our acquisition of Radyne, we more
than doubled the size of our RF microwave amplifiers segment and immediately
positioned ourselves as a leader in the satellite earth station traveling wave
tube amplifier (“TWTA”) market and expanded our RF microwave amplifier segment’s
product portfolio to include klystron tube power amplifiers
(“KPA”). TWTA and KPA amplifiers can boost the strength of a signal
prior to transmission to satellites, which are often more than 21,000 miles from
the surface of the earth.
All of
our amplifiers reproduce signals with great power, current or voltage amplitude,
and are extremely complex and critical to the performance of the systems into
which they are incorporated. We sell our amplifiers to domestic and foreign
commercial and government users.
8
The
following are the principal markets and applications for our
amplifiers:
Broadcast and Broadband Satellite
Communication Applications – As a result of our acquisition of Radyne, we
now offer our customers TWTA and KPA amplifiers used to amplify signals from
satellite earth stations throughout the world. Our amplifiers can provide power
levels that are vital to satellite communication applications including
traditional broadcast, direct-to-home broadcast, satellite newsgathering and the
emerging broadband communications markets, specifically IP-based satellite
communications. Our amplifiers are used on several high capacity U.S.
military satellite programs including the Family of Advanced Beyond-Line-of-Site
Terminal and the Wideband Global Satellite Constellation programs.
Defense Applications – U.S.
and foreign military customers use our amplifiers in a variety of
telecommunications systems (such as transmitting and boosting signals) and
electronic warfare systems (such as simulation, communications, radar, jamming
and in identification friend or foe (“IFF”) systems). The U.S. military also
uses our amplifiers in systems designed to help protect U.S. troops from
radio-controlled roadside bombs. Our integrated radio frequency assemblies,
which consist of one of our high-power RF amplifiers and an Ultra High Frequency
(“UHF”) radio frequency assembly integrated into a single module, are used in
the Enhanced Position Location Reporting System (“EPLRS”). The EPLRS radio
network is a highly reliable communication system used by the DoD that
automatically reconfigures itself to overcome the line-of-sight limitations of
UHF communications, as well as jamming threats. Our TWTA and KPA amplifiers are
used by military customers throughout the world for mobile applications
including those on helicopters and ships. We believe that ongoing
military activities and heightened homeland security concerns are resulting in
increased interest in our amplifier products.
Sophisticated Commercial
Applications – Our amplifiers are key components in sophisticated
commercial applications. For example, our amplifiers are used in oncology
treatment systems that allow doctors to give patients who are suffering from
cancer higher doses of radiation while focusing closer on the tumors, thereby
avoiding damage to healthy tissue. In addition, our amplifiers are used to
amplify signals carrying voice, video or data for air-to-satellite-to-ground
communications. For example, our amplifiers, when incorporated as
part of an aircraft satellite communication system, can provide passengers with
email, Internet access and video conferencing.
Business
Strategies
We manage
our RF microwave amplifiers segment with the following principal
strategies:
Develop a one-stop shopping approach
for RF Microwave Amplifiers – As a result of the Radyne acquisition, we
have significantly expanded our amplifier product portfolio to include TWTAs and
KPAs. Although we intend to maintain separate product specific sales forces, we
believe that we can offer customers a one-stop shopping approach by offering a
broad range of RF microwave amplifier equipment for use in commercial and
government applications. We will continue to internally fund research and
development activities and pursue customer funded research and development to
fuel new product development. We expect this emphasis on research and
development to enhance our existing product lines, develop new capabilities and
solidify and strengthen our position in our principal markets.
Continue to Penetrate the Market for
Outsourced Amplifier Production – Because solid-state, high-power,
broadband amplifiers are important to the performance of the larger systems into
which they are incorporated, many large systems companies often prefer to
manufacture these amplifiers in-house. We believe that our focus on
and expertise in designing and manufacturing solid-state, high-power, broadband
amplifiers, as well as our high-volume manufacturing capability, often make us a
cost-effective and technologically superior alternative to such in-house
manufacturing. Some of the companies who have outsourced amplifier
production to us include Rockwell Collins, Inc., Thales Group, European
Aeronautic Defense and Space Company, Telephonics Corporation, Northrop Grumman
Corporation, BAE Systems PLC, ITT Corporation and Raytheon.
Expand Marketing and Sales Efforts
in the Defense Market – We believe there are a number of long-term
opportunities in the defense and military markets, particularly for our
amplifiers used in electronic warfare applications, and that we can increase our
share of this market by pursuing partnering arrangements with existing and new
prime contractors. For example, we were selected by one of our customers to
participate in the Counter Remote Controlled Improvised Explosive Device
Electronic Warfare 2.1 program (“CREW 2.1”) and are supplying broadband,
solid-state high-power radio signal jamming amplifiers and switches to be used
to help protect U.S. troops from the ever-evolving threat of radio controlled
roadside bombs. The participation in this program allows us to demonstrate our
latest developments in the next generation of amplifier technology and our
high-volume production capabilities.
9
|
Business
Segment
|
Products/Systems
and Services
|
Representative
Customers
|
End-User
Applications
|
|
Telecommunications
transmission
|
Satellite
earth station equipment and systems including: modems, frequency
converters, power amplifiers, transceivers, access devices, voice
gateways, network management systems and video encoding
products
|
Satellite
systems integrators, wireless and other communication service providers,
broadcasters and defense contractors such as Intelsat and Globecom, as
well as
U.S.
and foreign governments
|
Commercial
and defense applications including the transmission of voice, video and
data over the Internet, broadband, long distance telephone, broadcast
(including high-definition television) and cable, distance learning and
telemedicine
|
|
Over-the-horizon
microwave systems and adaptive modems
|
Military
government customers and related prime manufacturers, as well as oil
companies such as BP Amoco
|
Secure
defense applications, such as transmission of U.S. military and government
data, and commercial applications such as the transmission of voice and
data to and from oil platforms
|
|
|
Forward
error correction technology such as TPC, LDPC and data compression
technology
|
Satellite
and wireless equipment providers and leading manufacturers of copier and
data storage products, such as Sony
|
Enables
more efficient transmission of voice, video and data in wireless
communication channels
|
|
|
Mobile
data communications
|
Mobile
satellite transceivers, network services, installation, training and
maintenance and SENS technology based products
|
U.S.
Army logistics community, CECOM, foreign governments, and prime
contractors to the U.S. Armed Forces, NATO and commercial
customers
|
Two-way
satellite-based mobile tracking, messaging services (U.S. Army’s MTS),
battlefield command and control applications (BFT), RFID applications and
commercial applications such as fleet tracking
|
|
Microsatellites
and related components
|
U.S.
government including military agencies, NASA and foreign
customers (both government and scientific)
|
Mission
specific, lower cost satellite applications (both military and
scientific)
|
|
|
RF
microwave amplifiers
|
Amplifiers
including solid-state, high-power, broadband RF microwave
amplifiers
|
Domestic
and international defense customers, prime contractors and system
suppliers such as Raytheon, ITT and Thales, medical equipment companies
such as Varian and aviation industry system integrators such as Rockwell
Collins
|
Defense
applications including communications, radar, jamming and IFF and
commercial applications such as medical applications (oncology treatment
systems) and satellite communications (including
air-to-satellite-to-ground communications)
|
|
Traveling
wave tube amplifiers and klystron amplifiers
|
Domestic
and international defense customers, prime contractors and system
suppliers such as L-3 and satellite broadcasters such as DirecTV and
EchoStar
|
Satellite
broadcast and broadband satellite communications and defense
applications
|
10
We have
made acquisitions of businesses and enabling technologies during the past three
years and have followed a disciplined approach in identifying, executing and
capitalizing on these acquisitions.
The
Radyne Acquisition
In August
2008, and as more fully described throughout this Form 10-K, we acquired Radyne
for a preliminary aggregate purchase price of approximately $231.7 million
(including estimated transaction costs and payments made for outstanding
share-based stock awards). We believe that the acquisition of Radyne resulted in
the following strategic benefits:
|
-
|
Strengthened
our leadership position in our satellite earth station product lines in
our telecommunications transmission
segment;
|
|
-
|
More
than doubled the size of our RF microwave amplifiers segment by expanding
our amplifier product portfolio and immediately positioning us as a
leader, not only in the solid-state amplifier market, but in the satellite
earth station traveling wave tube amplifier
market;
|
|
-
|
Broadened
the number of products and services that our mobile data communications
segment can offer by allowing us to market additional mobile tracking
products as well as the design and manufacture of microsatellites and
related components; and
|
|
-
|
Further
diversified our overall global customer base and expanded our addressable
markets.
|
We
believe that, over time, we will be able to take advantage of our combined
engineering and sales talents to drive further innovation in the marketplace and
deliver new and advanced products to our customers in all three of our business
segments. In connection with the Radyne acquisition, we also expect that we will
be able to achieve operating efficiencies by eliminating redundant functions and
related expenses. In order to achieve these efficiencies, on August 1, 2008, we
immediately adopted a restructuring plan and are currently in the process of
closing Radyne’s Phoenix, Arizona manufacturing facility and integrating that
operation into our high-volume technology manufacturing center located in Tempe,
Arizona. In addition, Radyne’s corporate functions, which were co-located in
Radyne’s Phoenix, Arizona manufacturing facility, are currently being moved to
our Melville, New York corporate office. The closing of Radyne’s facility and
related integration is expected to be completed in the second half of fiscal
2009.
In connection with the realization of
operating synergies, we have preliminarily estimated that we may incur up to
$9.6 million of
restructuring costs, of which, approximately $8.7 million
relates to possible exit costs relating to the shut-down of Radyne’s Phoenix
Arizona manufacturing facility. We have already incurred approximately $0.8 million of
severance costs for Radyne employees who were notified that they were being
terminated on August 1, 2008. We are currently in preliminary negotiations with
a tenant who subleases, from us, a portion of the manufacturing facility and is
interested in subleasing the remaining portion of this facility from us. If the
negotiations with this tenant are successful, our actual net cost related to the
shut-down of the manufacturing facility will be significantly lower. We
anticipate that we will be able to capitalize all of the aforementioned costs as
part of purchase accounting in accordance with Emerging Issues Task Force 95-3,
“Recognition of Liabilities in Connection with a Purchase Business Combination”
(“EITF 95-3”). In addition, in connection with the acquisition, in August 2008
(the start of our fiscal 2009) and in accordance with SFAS No. 141, “Business
Combinations,” we expect, based on a preliminary analysis, to record a one-time
charge of $6.2 million
reflecting the fair-market value of in-process research and development
acquired.
From an
operational and financial reporting perspective, as of August 1, 2008, Radyne’s
satellite electronics and video encoders and decoder product lines are now part
of our telecommunications transmission segment, Radyne’s TWTA and KPA amplifier
product portfolios are now part of our RF microwave amplifiers segment and
Radyne’s microsatellites and SENS products are now part of our mobile data
communications segment.
11
Other
Tactical and Product Line Acquisitions
In August
2006, we acquired certain assets and assumed certain liabilities of Insite
Consulting, Inc. (“Insite”), a logistics application software company, for $3.2
million, including transaction costs of $0.2 million. In addition to the
guaranteed purchase price, we may be required to make certain earn-out payments
based on the achievement of future sales targets. The first part of the earn-out
cannot exceed $1.4 million and is limited to a five-year period ending August
2011. The second part of the earn-out, which is for a ten-year period ending
August 2016, is unlimited and based on a per unit future sales target primarily
relating to new commercial satellite-based mobile data communications markets.
Insite has developed the geoOps™ Enterprise Location Monitoring System, a
software-based solution that allows customers to integrate legacy data systems
with near-real time logistics and operational data systems. Through July 31,
2008, no earn-out payments have been made. This operation was combined with our
existing business and is part of our mobile data communications
segment.
In
February 2007, we acquired certain assets and assumed certain liabilities of
Digicast Networks, Inc. (“Digicast”), a manufacturer of digital video
broadcasting equipment, for $1.0 million. This operation was combined with our
existing business and is part of our telecommunications transmission
segment.
In July
2008, we acquired the network backhaul assets and the NetPerformer and
AccessGate product lines of Verso Technologies ("Verso") for approximately
$3.9 million. This operation was combined with our existing business and is part
of our telecommunications transmission segment.
Sales and
marketing strategies vary with particular markets served and include direct
sales through sales, marketing and engineering personnel, sales through
independent representatives, value-added resellers or a combination of the
foregoing. We devote time to evaluating and responding to requests for proposals
by governmental agencies around the world, and as needed, we employ the use of
specialized consultants to develop our proposals and bids.
We intend
to continue to expand international marketing efforts by engaging additional
independent sales representatives, distributors and value-added resellers and by
establishing additional foreign sales offices. As appropriate and as guided by
corporate senior management, our three business segments capitalize on
manufacturing, technology, sales, marketing and customer support synergies
between them.
Our
management, technical and marketing personnel establish and maintain
relationships with customers. Our strategy includes a commitment to provide
ongoing customer support for our systems and equipment. This support
involves providing direct access to engineering staff or trained technical
representatives to resolve technical or operational issues.
Our
over-the-horizon microwave systems, mobile data communications products and
services, amplifier product lines and satellite earth station products (such as
Skywire™) that use relatively new technology have long sales
cycles. Once a product is designed into a system, customers may be
reluctant to change the incumbent supplier due to the extensive qualification
process and potential redesign required in using alternative sources.
Accordingly, management is actively involved in key aspects of relations with
our major customers.
Sales by
geography and customer type, as a percentage of consolidated net sales, are as
follows:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
United
States
|
||||||||||||
|
U.S.
government
|
66.4 | % | 61.3 | % | 47.3 | % | ||||||
|
Commercial
customers
|
6.9 | % | 12.5 | % | 17.1 | % | ||||||
|
Total
United States
|
73.3 | % | 73.8 | % | 64.4 | % | ||||||
|
International
|
26.7 | % | 26.2 | % | 35.6 | % | ||||||
International
sales include sales to U.S. domestic companies for inclusion in products that
will be sold to international customers. One customer, a prime contractor,
represented 3.1% of consolidated net sales in fiscal 2008, 5.4% in fiscal 2007
and 10.2% of consolidated net sales in fiscal 2006. On August 1, 2008, as a
result of our acquisition of Radyne, we further diversified our overall global
customer base.
12
Our
backlog as of July 31, 2008 and 2007 was $201.1 million and $129.0 million,
respectively. We expect that a majority of the backlog as of July 31,
2008 will be recognized as sales during fiscal 2009.
At July
31, 2008, 71.5% of the backlog consisted of U.S. government contracts,
subcontracts and government funded programs, 21.4% consisted of orders for use
by international customers (including sales to U.S. domestic companies for
inclusion in products that will be sold to international customers) and 7.1%
consisted of orders for use by U.S. commercial customers.
On August
1, 2008, as a result of our acquisition of Radyne, our backlog increased from
$201.1 million to $252.5 million.
Almost
all of the contracts in our backlog are subject to cancellation at the
convenience of the customer or for default in the event that we are unable to
perform under the contract. Backlog for our U.S. government customers includes
amounts appropriated by Congress and allotted to the contract by the procuring
government agency. Our backlog does not include the value of options that may be
exercised in the future on multi-year contracts, nor does it include the value
of additional purchase orders that we may receive under IDIQ contracts or basic
ordering agreements. Almost all of our U.S. government revenues in fiscal 2008,
2007 and 2006 were derived from firm fixed-price contracts. Under these types of
contracts, we perform for an agreed-upon price and we can derive benefits from
cost savings, but bear the risk of cost overruns. Our cost-plus-fixed-fee
contracts, which to date have been insignificant, typically provide for
reimbursement of allowable costs incurred plus a negotiated fee.
Variations
in backlog from time to time are attributable, in part, to the timing of
contract proposals, the timing of contract awards and the delivery schedules on
specific contracts. Our satellite earth station equipment product
line operates under short lead times and usually generates sales out of
inventory. As a result, we believe our backlog at any point in the fiscal year
is not necessarily indicative of the total sales anticipated for any particular
future period.
Our
manufacturing operations consist principally of the assembly and testing of
electronic products that we design and build from purchased fabricated parts,
printed circuits and electronic components.
We
operate a high-volume technology manufacturing center located in Tempe, Arizona
which is utilized by all three of our business segments for certain high-volume
production which allows us to secure volume discounts on key components, control
the quality of our manufacturing process and maximize the utilization of our
manufacturing capacity. During fiscal 2009, we expect to close a redundant
facility located in Phoenix, Arizona (that we acquired from Radyne) and
integrate those operations into our Tempe, Arizona facility.
We
consider our facilities to be well maintained and adequate for current and
planned production requirements. All of our manufacturing facilities,
including those that serve the military market, must comply with stringent
customer specifications. We employ formal quality management programs and other
training programs, including the International Standard Organization’s (“ISO’s”)
quality procedure registration programs.
Our
ability to deliver products to customers on a timely basis is dependent, in
part, upon the availability and timely delivery by subcontractors and suppliers
(including the U.S. government) of the components and subsystems that we use in
manufacturing our products. Electronic components and raw materials used in our
products are generally obtained from independent suppliers. Some
components are standard items and are available from a number of
suppliers. Others are manufactured to our specifications by
subcontractors. Although we obtain certain components and subsystems
from a single source or a limited number of sources, we believe that most
components and equipment are available from multiple sources. Certain U.S.
government contracts require us to incorporate government furnished parts into
our products. Delays in receipt of such parts can adversely impact the timing of
our performance on the related contracts.
We
reported research and development expenses for financial reporting purposes of
$40.5 million, $32.5 million and $25.8 million in fiscal 2008, 2007 and 2006,
respectively, representing 7.6%, 7.3% and 6.6% of total net sales, respectively,
for these periods.
13
A portion
of our research and development efforts relates to the adaptation of our basic
technology to specialized customer requirements and is recoverable under
contracts, and such expenditures are not reflected in our research and
development expenses for financial reporting purposes, but are included in net
sales with the related costs included in cost of sales. During fiscal 2008, 2007
and 2006, we were reimbursed by customers for such activities in the amounts of
$7.8 million, $4.2 million and $4.4 million, respectively. Our
aggregate research and development expenditures (internal and customer funded)
were $48.3 million, $36.6 million and $30.2 million or 9.1%, 8.2% and 7.7% of
total net sales in fiscal 2008, 2007 and 2006, respectively.
As a
result of the Raydne acquisition, we believe that, over time, we will be able to
take advantage of our combined engineering talents to drive further innovation
in the marketplace and deliver new and advanced products to our customers in all
three of our business segments. In connection with the acquisition, in fiscal
2009, and in accordance with SFAS No. 141, “Business Combinations,” we expect,
based on a preliminary analysis, to record a one-time charge of $6.2 million
reflecting the fair-market value of in-process research and development
acquired.
We rely
upon trade secrets, technical know-how and continuing technological innovation
to develop and maintain our competitive position. The products we
sell require significant engineering design and manufacturing
expertise. The majority of these technological capabilities, however,
are not protected by patents and licenses. We rely on the expertise of our
employees and our learned experiences in both the design and manufacture of our
products and the delivery of our services. Our DoubleTalk® Carrier-in-Carrier® bandwidth compression technology is
licensed by us from a third-party.
Some of
our key telecommunications transmission technology is protected by patents,
which are significant to protecting our proprietary technology. We have been
issued several U.S. patents relating to forward error correction technology that
is utilized in our TPC-enabled satellite modems. The earliest of
these patents expires in 2012.
Our
businesses are highly competitive and are characterized by rapid technological
change. A significant technological breakthrough by others, including new
companies or our customers, could have a material adverse effect on our
business. Our growth and financial condition depend on, among other
things, our ability to keep pace with such changes and developments and to
respond to the sophisticated requirements of an increasing variety of electronic
equipment users and transmission technologies.
Certain
of our competitors are substantially larger, have significantly greater
financial, marketing, research and development, technological and operating
resources and broader product lines than we do. The competitors in
our telecommunications transmission segment include ViaSat, Inc., Miteq Inc.,
iDirect, Inc., Paradise Datacom LLC, Harmonic, Inc. and Telefonaktiebolaget
LM Ericsson. The competitors in our mobile data communications segment include
Qualcomm, Inc. and EMS Technologies, Inc. The competitors in our RF microwave
amplifiers segment include Communications and Power Industries, Inc., E2V
Technologies Ltd., Miteq, Inc., Herley Industries, Inc., Aethercomm and Empower
RF Systems, Inc. Some large companies such as Raytheon Company, General Dynamics
Corporation and Northrop Grumman Corporation have subsidiaries or divisions that
compete against us in one or more business segments. In addition, new and
potential competitors are always emerging.
Certain
of our customers, such as prime contractors who currently outsource their
engineering and manufacturing requirements to us, have technological
capabilities in our product areas and could choose to replace our products with
their own. In some cases, we partner or team with companies (both large and
mid-tier) to compete against other teams for large defense programs. In some
cases, these same companies may be competitors as it relates to certain aspects
of our business.
We
believe that competition in all of our markets is based primarily on technology
innovation, product performance, reputation, delivery times, customer support
and price. Due to our flexible organizational structure and
proprietary know-how, we believe we have the ability to develop, produce and
deliver products on a cost-effective basis faster than many of our
competitors.
14
At July
31, 2008, we had 1,350 employees (including temporary employees and
contractors), 793 of whom were engaged in production and production support, 311
in research and development and other engineering support and 246 in marketing
and administrative functions. On August 1, 2008, as a result of the Radyne
acquisition, our employee base increased by approximately 400 employees. None of
our employees are represented by a labor union. We believe that our employee
relations are good.
We are
subject to a variety of local, state and federal governmental
regulations. Our products that are incorporated into wireless
communications systems must comply with various governmental regulations,
including those of the Federal Communications Commission (“FCC”). Our
manufacturing facilities, which may store, handle, emit, generate and dispose of
hazardous substances that are used in the manufacture of our products, are
subject to a variety of local, state and federal regulations, including those
issued by the Environmental Protection Agency. Our international
sales are subject to U.S. and foreign regulations such as the International
Traffic in Arms Regulations (“ITAR”) and Export Administration Regulations and
may require licenses (including export licenses) from U.S. government agencies
or require the payment of certain tariffs. In addition, we are
subject to European Union (“EU”) directives related to the recycling of
electrical and electronic equipment. Our financial reporting, corporate
governance, public disclosure and compliance practices are governed by laws such
as the Sarbanes-Oxley Act of 2002 and rules and regulations issued by the
Securities and Exchange Commission (“SEC”). As a U.S. government
contractor and subcontractor, we are subject to a variety of rules and
regulations, such as the Federal Acquisition Regulations.
During
fiscal 2008 and as more fully described in “Item 1A. Risk Factors” and “Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” we have incurred incremental costs associated with export
compliance matters. To date, we have incurred costs in connection with
compliance with other regulations in the normal course of business.
Forward-Looking
Statements
This Form
10-K contains “forward-looking statements” including statements concerning the
future of our industry, product development, business strategy, continued
acceptance of our products, market growth, and dependence on significant
customers. These statements can be identified by the use of
forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate,”
“continue,” or other similar words. When considering forward-looking statements,
you should keep in mind the risk factors and other cautionary statements in this
Form 10-K. However, the risks described in this Form 10-K are not the
only risks that we face. Additional risks and uncertainties, not currently known
to us or that do not currently appear to be material, may also materially
adversely affect our business, financial condition and/or operating results in
the future. The risk factors noted below and other factors noted throughout this
Form 10-K could cause our actual financial condition or results to differ
significantly from those contained in any forward-looking
statement.
Our
recent acquisition of Radyne Corporation (“Radyne”) may not be successful and we
may not realize anticipated benefits from this acquisition. The Radyne
acquisition may divert our resources and management attention and our operating
results may fall short of expectations.
On August
1, 2008 (the beginning of our fiscal year 2009), we purchased Radyne using a
portion of our existing cash and cash equivalents for a preliminary aggregate
purchase price of approximately $231.7 million. Although we expect to realize
strategic, operational and financial benefits as a result of the Radyne
acquisition, we cannot assure whether and to what extent such benefits will be
achieved. In particular, the success of the Radyne acquisition will depend, in
part, on our ability to realize anticipated efficiencies and cost savings,
primarily through the elimination of redundant functions and the integration of
certain operations. No assurances can be given that we will be able to achieve
these efficiencies and cost savings.
15
Radyne
has a history of inconsistent operating results and missing expectations and we
will face operational and administrative challenges as we work to integrate
Radyne’s operations into our business. In particular, the Radyne acquisition has
significantly expanded the types of products that we sell, expanded the
businesses with which we are engaged in, as well as increased the number of our
employees and the number of facilities we operate, thereby presenting us with
significant challenges as we will need to manage the substantial increase in
scale resulting from the acquisition. We must integrate a large number of
systems, both operational and administrative. Delays in the process could have a
material adverse impact on our business, results of operations and financial
condition. Ultimately, we may not be successful.
The
diversion of our management’s attention to these matters and away from other
business concerns could have an adverse effect on our business and operating
results may fall short of expectations.
Future
acquisitions and strategic investments may divert our resources and management
attention, results may fall short of expectations and, as a result, our
operating results may be difficult to forecast and may be volatile.
We intend
to continue pursuing acquisitions of investments in businesses, technologies and
product lines as a key component of our growth strategy. Any future acquisitions
or investments may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt and amortization
expenses or in-process research and development charges related to intangibles
assets. Acquisitions involve numerous risks, including:
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difficulties
in the integration of the operations, technologies, products and personnel
of an acquired business;
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diversion
of management’s attention from other business
concerns;
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increased
expenses associated with the acquisition;
and
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loss
of key employees or customers of any acquired
business.
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We cannot
assure you that our future acquisitions will be successful and will not
adversely affect our business, results of operations or financial
condition.
Due
to many factors, including the Radyne acquisition and the amount of business
represented by large contracts, our operating results are difficult to forecast
and may be volatile.
We have
experienced, and will experience in the future, significant fluctuations in new
orders, net sales and operating results, including our net income and earnings
per share, from quarter-to-quarter. One reason for this is that a significant
portion of our business — primarily the over-the-horizon microwave systems of
our telecommunications transmission segment, our RF microwave amplifiers segment
and our mobile data communications segment — is derived from a limited number of
relatively large customer contracts, the timing of which cannot be
predicted.
Our new
orders, net sales and operating results, including our net income and earnings
per share, also may vary significantly from period-to-period because of the
following factors: the financial performance of acquisitions; product mix sold;
fluctuating market demand; price competition; new product introductions by our
competitors; fluctuations in foreign currency exchange rates; unexpected changes
in delivery of components or subsystems; political instability; regulatory
developments; changes in income tax rates or tax credits; the price and expected
volatility of our stock (which will impact, among other items, the amount of
stock-based compensation expense we may record); and general economic
conditions.
In
addition, on August 1, 2008, as a result of our acquisition of Radyne there will
be a significant change to our future financial performance. Accordingly, you
should not rely on period-to-period comparisons as indications of our future
performance because these comparisons may not be meaningful.
16
Our
business, results of operations, liquidity and financial condition depend on our
ability to maintain our level of U.S. government business.
In recent
years, we have increased our dependence on U.S. government business. Our sales
to the U.S. government (including sales to prime contractors to the U.S.
government) accounted for approximately 66.4%, 61.3% and 47.3% of our
consolidated net sales for the fiscal years ended July 31, 2008, 2007 and 2006,
respectively. Approximately 71.5% of our backlog at July 31, 2008 consisted of
orders from the U.S. government. Radyne’s business and net sales were also
significantly dependent on the business it received from the U.S.
government.
We expect
such business to represent a significant portion of our consolidated net sales
for the foreseeable future. U.S. government business exposes us to various
risks, including:
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unexpected
contract or project terminations or
suspensions;
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unpredictable
order placements, reductions or
cancellations;
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reductions
in government funds available for our projects due to government policy
changes, budget cuts and other spending
priorities;
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penalties
arising from post-award contract
audits;
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cost
audits in which the value of our contracts may be
reduced;
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higher-than-expected
final costs, particularly relating to software and hardware development,
for work performed under contracts where we commit to specified deliveries
for a fixed price; and
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unpredictable
cash collections of unbilled receivables that may be subject to acceptance
of contract deliverables by the customer and contract close out
procedures, including government approval of final indirect
rates.
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All of
our U.S. government contracts can be terminated by the U.S. government for its
convenience. Termination for convenience provisions provide only for our
recovery of costs incurred or committed, settlement expenses and profit on work
completed prior to termination. In addition to the right of the U.S. government
to terminate, U.S. government contracts are conditioned upon the continuing
approval by Congress of the necessary spending. Congress usually appropriates
funds for a given program on a fiscal year basis even though contract
performance may take more than one year. Consequently, at the beginning of a
major program, the contract may not be fully funded, and additional monies are
normally committed to the contract only if, and when, appropriations are made by
Congress for future fiscal years.
We obtain
U.S. government contracts through a competitive bidding process. We cannot
assure you that we will continue to win competitively awarded contracts or that
awarded contracts will generate sufficient net sales to result in
profitability.
If
we are unable to comply with complex U.S. government regulations governing
security and contracting practices, we could be disqualified as a supplier to
the U.S government.
As a
supplier to the U.S. government, we must comply with numerous regulations,
including those governing security and contracting practices. Failure to comply
with these procurement regulations and practices could result in fines being
imposed against us or our suspension for a period of time from eligibility for
bidding on, or for award of, new government contracts. If we are disqualified as
a supplier to government agencies, we would lose most, if not all, of our U.S.
government customers and revenues from sales of our products would decline
significantly. Among the potential causes for disqualification are violations of
various statutes, including those related to procurement integrity, export
control, U.S. government security regulations, employment practices, protection
of the environment, accuracy of records in the recording of costs, and foreign
corruption. The government could investigate and make inquiries of our business
practices and conduct audits of contract performance and cost accounting. Based
on the results of such audits, the U.S. government could adjust our
contract-related costs and fees. Depending on the results of these audits and
investigations, the government could make claims against us, and if it were to
prevail, certain incurred costs would not be recoverable by us.
17
We could be adversely affected by the
results of ongoing investigations into our compliance with export
regulations.
In
October 2007, our Florida-based subsidiary, Comtech Systems, Inc. (“CSI”),
received a customs export enforcement subpoena from the U.S. Immigration and
Customs Enforcement (“ICE”) branch of the Department of Homeland Security. The
subpoena relates to CSI’s $2.0 million contract with the Brazilian Naval
Commission (the Brazil contract) and it required the production of all books,
records and documents, including copies of contracts, invoices and payments
related to agreements between CSI, its agent, its subcontractor and the
Brazilian government. We believe that the ICE investigation is focused primarily
on whether or not CSI was in compliance with export-related laws and
regulations, including the International Traffic in Arms Regulations (“ITAR”)
and the Export Administration Regulations. CSI produced documents in response to
the subpoena request. Customs
officials have detained certain inventory related to the Brazil contract pending
resolution of this matter.
We engaged outside counsel to assist CSI
in its response to the subpoena and related matters and to conduct our own
investigation. Based on our ongoing investigation into this matter, we
believe that the detained inventory, which consists of commercial satellite
equipment, was not modified or adapted in any way to meet Brazilian military
requirements and was only subject to the jurisdiction of the Department of
Commerce and not the jurisdiction of the U.S. Department of State. In addition,
in order to provide certain defense services, including conducting factory
acceptance testing at CSI’s Florida facility, we obtained a license (referred to
as a Technical Assistance Agreement (“TAA”)) from the U.S. Department of State.
We believe that the TAA authorized all activities under the Brazil contract that
were subject to the jurisdiction of the U.S. Department of State.
We
believe that CSI made a good faith effort to comply with applicable regulations;
however, we believe that CSI made inadvertent administrative errors resulting in
a TAA that did not become effective on a timely basis. The administrative errors
relate primarily to the execution of non-disclosure agreements (“NDA”) with
certain third country national employees of CSI’s agent. These individuals have
now signed appropriate NDAs, and, in December 2007, CSI filed an amended TAA
with the U.S. Department of State. CSI has requested that the U.S. Department of
State confirm CSI’s and our view that the Brazil contract does not require any
other State Department license.
In March
2008, the Enforcement Division of the U.S. Department of State informed us that
they were reviewing our amended TAA. In May 2008, the U.S.
Attorney’s Office in the Middle District of
Florida informed us that, based on its conversations with the ICE agent who
initiated the subpoena, it was closing its investigation into the Brazil matter.
In June 2008, the ICE agent informed us that he would recommend that the
detained inventory be released back to us upon the U.S. Department of State
confirming our position that a State Department license for the hardware shipped
was not required. In August
2008, the ICE agent informed us that the U.S. Department of State wanted
to clarify certain technical matters and, on its behalf, the ICE agent was going
to interview one of our engineers.
This interview
occurred in September of 2008. We continue to remain cautiously
optimistic that we will be able to shortly reship the Brazil inventory to our
customer.
In
addition to their review of the Brazil contract, in March 2008, the Enforcement
Division of the U.S. Department of State informed us that they sought to confirm
our company-wide ITAR compliance for the five-year period ended March 2008. In
response, we expanded the scope of our own investigation. In June 2008, we
provided detailed information and a summary of our findings to the U.S.
Department of State. In July 2008, the U.S. Department of State requested
supplemental information and we responded to their request. Our findings to date
indicate that there were certain instances of exports and defense services
during the five-year period for which we did not have the appropriate
authorization from the U.S. Department of State; however, none of those
instances involved Proscribed Countries as defined by ITAR. We are awaiting
additional feedback from the U.S. Department of State as it
relates to all of the aforementioned matters.
Since the
receipt of the original Brazil subpoena in October 2007, we have engaged outside
counsel and export consultants to help us assess and improve, as appropriate,
our internal controls with respect to U.S. export controls laws and regulations
and laws governing record keeping
and dealings with foreign representatives. In addition, in connection with our August 1, 2008 acquisition of
Radyne, we are expanding our export internal control assessment to include our
newly acquired subsidiaries. To date, we have noted opportunities for improving
our procedures to comply with such laws and regulations, including at our newly
acquired Radyne subsidiaries and are in the process of making
improvements.
18
During fiscal 2008, we have taken
numerous steps to significantly improve our export control processes, including
the hiring of additional employees who are knowledgeable and experienced with
ITAR and the engagement of an outside export consultant to conduct additional
training. We are also in the process of implementing enhanced formal
company-wide ITAR control procedures, including at our newly acquired Radyne
subsidiaries. Because our assessments are continuing, we expect to remediate,
improve and enhance our internal controls relating to exports throughout fiscal
2009.
Because the above matters are ongoing,
we cannot determine the ultimate outcome of these matters. Violations of U.S.
export control-related laws and regulations could result in civil or criminal
fines and/or penalties and/or result in an injunction against us, all of which
could, in the aggregate, materially impact our business, results of operations
and cash flows. Should we identify a material weakness relating to our
compliance, the ongoing costs of remediation could be material. In addition,
inventory related to the Brazil contract (including the inventory that has been
detained) had a net book value of $1.1 million as of July 31, 2008. If this
inventory is permanently seized or not returned to us timely, or we can not
resell the inventory to other customers, we would be required to write-off the
value of this inventory in a future accounting period.
Our
dependence on international sales and international sales agents may adversely
affect us. U.S. export laws may also restrict our ability to sell our products
abroad which reduces our ability to obtain sales from foreign
customers.
Sales for
use by international customers (including sales to U.S. domestic companies for
inclusion in products that will be sold to international customers) represented
approximately 26.7%, 26.2% and 35.6% of our consolidated net sales for the
fiscal years ended July 31, 2008, 2007 and 2006, respectively. Approximately
21.4% of our backlog at July 31, 2008 consisted of orders for use by foreign
customers. We expect that international sales (including sales from Radyne) will
continue to be a substantial portion of our consolidated net sales.
These
sales expose us to certain risks, including barriers to trade, fluctuations in
foreign currency exchange rates (which may make our products less
price-competitive), political and economic instability, exposure to public
health epidemics, availability of suitable export financing, tariff regulations,
and other U.S. and foreign regulations that may apply to the export of our
products and the generally greater difficulties of doing business
abroad.
We
attempt to reduce the risk of doing business in foreign countries by seeking
subcontracts with large systems suppliers, contracts denominated in U.S.
dollars, advance or milestone payments and irrevocable letters of credit in our
favor. However, we may not be able to reduce the economic risk of doing business
in foreign countries, in all instances. In such cases, billed and unbilled
receivables relating to international sales are subject to increased
collectibility risk and may result in significant write-offs, which could have a
material adverse impact on our business, results of operations and financial
condition. In addition, foreign defense contracts generally contain provisions
relating to termination at the convenience of the government.
In some
countries, we may rely upon one international sales agent. We attempt to reduce
our reliance on sales agents by establishing additional foreign sales offices
and by engaging, where practicable, more than one independent sales
representative in a territory.
Certain
of our products and systems may require licenses from U.S. government agencies
for export from the U.S., and some of our products are not permitted to be
exported. In addition, in certain cases, U.S. export controls also severely
limit unlicensed technical discussions such as with any persons who are not U.S.
citizens or permanent residents. As a result, in cases where we may need a
license, it may reduce our ability to compete against a non-U.S. domiciled
foreign company who may not be subject to the same U.S. laws. We cannot be sure
of our ability to gain any licenses that may be required to export our products,
and failure to receive required licenses could materially reduce our ability to
sell our products outside the U.S.
19
We
have significant operations in Florida and California, and other locations,
which could be materially and adversely impacted, in the event of a natural
disaster or other significant disruption.
Our telecommunications transmission
segment designs and manufactures our over-the-horizon microwave equipment and
systems out of two facilities located in Florida, where major hurricanes have
occurred in the past. As of August 1, 2008, our RF microwave amplifiers segment
manufactures and designs traveling wave tube amplifier and klystron
amplifiers in Santa Clara,
California, close to major earthquake fault lines.
Our operations in these and other
locations (such as in our high-volume technology manufacturing center
located in Tempe, Arizona and our mobile data communication segment’s network
operations center located in Germantown, Maryland), could be subject to natural
disasters or other significant disruptions, including hurricanes, typhoons,
tsunamis, floods, earthquakes, fires, water shortages, other extreme weather
conditions, medical epidemics, acts of terrorism, power shortages and blackouts,
telecommunications failures, and other natural and manmade disasters or
disruptions.
In the event of such a natural disaster
or other disruption, we could experience disruptions or interruptions to our
operations or the operations of our suppliers, distributors, resellers or
customers; destruction of facilities; and/or loss of life, all of which could
materially increase our costs and expenses and materially adversely affect our
business, revenue and financial condition.
All
of our businesses are subject to rapid technological change; we rely upon
licensed technology for some of our products and we must keep pace with changes
to compete successfully.
We are
engaged in businesses characterized by rapid technological change, evolving
industry standards, frequent new product announcements and enhancements, and
changing customer demands. The introduction of products and services embodying
new technologies and the emergence of new industry standards could render any of
our products and services obsolete or non-competitive. The technology used in
our products and services evolves rapidly, and our business position depends, in
large part, on the continuous refinement of our scientific and engineering
expertise and the development, either through internal research and development
or acquisitions, of new or enhanced products and technologies. We may not have
the economic or technological resources to be successful in such efforts and we
may not be able to identify and respond to technological improvements made by
our competitors in a timely or cost-effective fashion. Our DoubleTalk® Carrier-in-Carrier® bandwidth compression technology is
licensed by us from a third-party. A significant technological
breakthrough by others, including smaller competitors or new firms, could have a
material adverse impact on our business, results of operations and financial
condition.
Reductions
in telecommunications equipment and systems spending may negatively affect our
revenues, profitability and the recoverability of our assets, including
intangible assets.
For the
last several years, the U.S. and global economies have been growing and our
revenues and profits have increased as our customers have increased their
spending on telecommunications equipment and systems. However, during fiscal
2008, adverse conditions in the U.S. consumer mortgage market have negatively
impacted the global economy and nearly all businesses, including ours, are
facing uncertain economic environments. Some economists are now predicting a
recession. Our businesses have been negatively affected in the past by uncertain
economic environments both in the overall market, and more specifically in the
telecommunications sector. As a result of the current global economic
conditions, our customers may reduce their budgets for spending on
telecommunications equipment and systems. As a consequence, our current
customers and other prospective customers may postpone, reduce or even forego
the purchase of our products and systems, which could adversely affect our
revenues, profitability and the recoverability of our assets, including
intangible assets. Although we remain confident that the long-term demand
drivers for our businesses, including our satellite earth station products,
remain strong, it is currently difficult to assess whether or not future
bookings will meet or exceed the levels experienced in fiscal
2008.
20
Our
mobile data communications business is subject to unique risks.
Our
mobile data communications business segment is reliant upon just a few
contracts. In addition to the other risk factors described in this section, the
risk factors applicable to our mobile data communications business include the
following:
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Our
mobile data communications segment’s revenues and profits are primarily
derived from the Movement Tracking Systems (“MTS”) contract and the U.S.
Army’s Force XXI Battle Command, Brigade and Below command and control
systems (also known as Blue Force Tracking (“BFT”)) contract. Both of
these contracts can be terminated at any time and orders are subject to
unpredictable funding, deployment and technology decisions by the U.S.
government. Because both of these contracts are indefinite
delivery/indefinite quantity (“IDIQ”) contracts, the U.S. Army is not
obligated to purchase any equipment or services under the
contracts.
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Our
MTS and BFT contracts are not subject to automatic renewal or extension
upon their scheduled expiration on July 12, 2010 and December 31, 2011,
respectively. In addition, the U.S. Army may decide to award
future orders, at any time, to other parties. If another party is awarded
future orders or if one or both of our contracts are not renewed, extended
or if we fail to succeed in a recompete process, it would have a material
adverse impact on our business and results of
operations.
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In
fiscal 2007, the BFT program’s prime contractor, Northrop Grumman
Corporation, awarded a contract to a competitor to develop a new prototype
network and related equipment to increase network capacity for the U.S.
Army’s BFT tracking system. Although we are currently working closely with
the U.S. Army to provide additional enhancements to our network
capabilities and communications performance and believe that we have and
are developing new products that provide compelling technological
advancement to our existing products and that are, importantly, backwards
compatible with the large number of existing BFT and MTS systems in active
deployment today, it is possible that the U.S. Army (including our MTS
customers) will ultimately cease or reduce its ordering levels of our
products and services. If this occurs, it would have a material
adverse impact on our business and results of
operations.
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We
currently anticipate that we will continue to maintain a substantial
inventory in order to provide products to our customers on a timely basis.
Certain components required in our production process have purchasing
lead-times of four months or longer, and the delivery timetables on our
contracts require us to provide products in shorter timeframes after we
receive an order. If forecasted orders are not received, we may be left
with large inventories of slow moving or unusable parts or terminals that
would result in an adverse impact on our business, results of operations
and financial condition.
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We
lease the satellite capacity necessary to operate our system from a
limited number of third party satellite networks. Our ability to grow and
remain profitable depends on the ability of our satellite network
providers to provide sufficient network capacity, reliability and security
to our customers. If our satellite network providers were to increase the
prices of their services, or to suffer operational or technical failures,
our business, results of operation and financial condition could be
adversely affected.
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Our
systems occasionally experience downtime. All satellite communications are
subject to the risk that a satellite or ground station failure or a
natural disaster may interrupt service. Interruptions in service could
have a material adverse impact on our business, results of operations and
financial condition. Should we be required to restore service on another
system in the event of a satellite failure, our costs could increase which
would have a material adverse effect on our business, results of
operations and financial condition.
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To
date, commercial satellite-based mobile data applications have not been a
material part of our business. In addition, we do not have extensive
experience designing, manufacturing or selling microsatellites and related
components. Our future success in developing these markets will depend on,
among other things, our ability to access the best distribution channels,
the development or licensing of applications which create value for the
customer and our ability to attract and retain qualified personnel. We may
have to increase our operating expenses to be successful in these
markets.
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There
are several existing and potential commercial and defense-related
competitors, such as Qualcomm, Inc. and Northrop Grumman Corporation, that
participate in the mobile data communications market and who have much
greater financial resources than us. Existing competitors, including
terrestrial-based service providers, are also aggressively pricing their
products and services and may continue to do so in the future. Competitors
such as ViaSat, Inc. and Harris Corporation continue to offer new
value-added products and services, which we may be unable to match on a
timely or cost effective basis. Companies, such as Surrey Satellite
Technology, Ltd. and MicroSat Systems, Inc., compete against us in the
microsatellite and related components markets. Increased
competition may adversely impact margins throughout the industry. We
anticipate that new competitors will also enter the mobile data
communications market in the future. This could adversely impact our
existing business, results of operations and financial condition and could
also impair our ability to penetrate the commercial market in a
significant way.
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Our
backlog is subject to customer cancellation or modification and such
cancellation could result in decreased sales and increased provisions for excess
and obsolete inventory.
We
currently have a backlog of orders, mostly under contracts that the customer may
modify or terminate. Almost all of the contracts in our backlog are subject to
cancellation at the convenience of the customer or for default in the event that
we are unable to perform under the contract. We cannot assure you
that our backlog will result in net sales.
We record
a provision for excess and obsolete inventory based on historical and future
usage trends and other factors including the consideration of the amount of
backlog we have on hand at any particular point in time. If our backlog is
canceled or modified, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated the provision required for
excess and obsolete inventory. In the future, if we determine that
our inventory is overvalued, we will be required to recognize such costs in our
financial statements at the time of such determination. Any such
charges could be material to our results of operations and financial
condition.
Our
dependence on component availability, government furnished equipment,
subcontractor availability and performance and key suppliers, including the core
manufacturing expertise of our high-volume technology manufacturing center
located in Tempe, Arizona, may adversely affect us.
Although
we obtain certain components and subsystems from a single source or a limited
number of sources, we believe that most components and subsystems are available
from alternative suppliers and subcontractors. A significant interruption in the
delivery of such items, however, could have a material adverse impact on our
business, results of operations and financial condition.
In recent
years, we have increased the company-wide dependency on our high-volume
technology manufacturing center located in Tempe, Arizona, which is part of our
telecommunications transmission segment. In fiscal 2008, 2007 and 2006,
intersegment sales by the telecommunications transmission segment to the mobile
data communications segment were $123.8 million, $78.3 million and $55.7
million, respectively. Intersegment sales in fiscal 2008, 2007 and 2006 by the
telecommunications transmission segment to the RF microwave amplifiers segment
were $16.0 million, $6.5 million and $7.5 million, respectively. If a natural
disaster or other business interruption occurred, we do not have immediate
access to other manufacturing facilities, and as a result, our business would
suffer. In addition, if our high-volume technology manufacturing center is
unable to produce sufficient product or maintain quality, it could have a
material adverse impact on all three of our business segments, our results of
operations and our financial condition.
We intend
to continue to increase our company-wide dependency on our high-volume
technology manufacturing center. For example, the success of the Radyne
acquisition will depend, in part, on our ability to realize anticipated
efficiencies and cost savings, primarily through the result of closing Radyne’s
Phoenix, Arizona, manufacturing facility and integrating that operation into our
Tempe, Arizona facility. We also intend to continue to seek contracts with third
parties to outsource a portion of their manufacturing to us. No assurances can
be given that we will be able to achieve these efficiencies and cost
savings.
In the
past, the U.S. government experienced delays in the receipt of certain
components that are ultimately provided to us for incorporation into our
satellite transceivers that we ship to the U.S. government. If we do not receive
these government furnished components in a timely manner, we could experience
delays in fulfilling orders from our customers.
22
Contract
cost growth on our fixed price contracts and other contracts that cannot be
justified as an increase in contract value due from customers exposes us to
reduced profitability and the potential loss of future business and other
risks.
A
substantial portion of our products and services are sold under fixed price
contracts. This means that we bear the risk of unanticipated technological,
manufacturing, supply or other problems, price increases or other increases in
the cost of performance. Operating margin is adversely affected when contract
costs that cannot be billed to the customer are incurred. This cost growth can
occur if initial estimates used for calculating the contract price were
incorrect, or if estimates to complete increase. The cost estimation process
requires significant judgment and expertise. Reasons for cost growth may include
unavailability and productivity of labor, the nature and complexity of the work
to be performed, the effect of change orders, the availability of materials, the
effect of any delays in performance, availability and timing of funding from the
customer, natural disasters, and the inability to recover any claims included in
the estimates to complete. A significant change in an estimate on one or more
programs could have a material impact on our business, results of operations and
financial condition.
Adverse
regulatory changes could impair our ability to sell products.
Our
products are incorporated into wireless communications systems that must comply
with various U.S. government regulations, including those of the FCC, as well as
international laws and regulations. Regulatory changes, including changes in the
allocation and availability of frequency spectrum, and in the military standards
and specifications that define the current satellite networking environment,
could materially harm our business by (i) restricting development efforts by us
and our customers, (ii) making our current products less attractive or obsolete,
or (iii) increasing the opportunity for additional competition. Changes in, or
our failure to comply with, applicable laws and regulations could materially
harm our business. In addition, the increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt new
standards and reassign bandwidth for these products and services. The reduced
number of available frequencies for other products and services and the time
delays inherent in the government approval process of new products and services
have caused and may continue to cause our customers to cancel, postpone or
reschedule their installation of communications systems including their
satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave
communication systems. This, in turn, could have a material adverse effect on
our sales of products to our customers.
The EU
has adopted two directives to facilitate the recycling of electrical and
electronic equipment sold in the EU. The first of these is the Waste from
Electrical and Electronic Equipment directive, which directs EU member states to
enact laws, regulations, and administrative provisions to ensure that producers
of electrical and electronic equipment are financially responsible for the
collection, recycling, treatment, and environmentally sound disposal of certain
products placed on the market after August 13, 2005, and from products in
use prior to that date that are being replaced. The EU has also adopted the
Restriction on the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment (“RoHS”) directive. The RoHS directive restricts the use of
lead, mercury, and certain other substances in electrical and electronic
products placed on the market in the EU after July 1, 2006.
Similar
laws and regulations have been or may be enacted in other regions, including in
the U.S., China and Japan. Other environmental regulations may require us to
reengineer our products to utilize components that are more environmentally
compatible, and such reengineering and component substitution may result in
additional costs to us. There can be no assurance that such existing or future
laws will not have a material adverse effect on our business.
Our
investments in recorded goodwill and other intangible assets as a result of
prior acquisitions, including goodwill and other intangible assets resulting
from our Radyne acquisition could be impaired as a result of future business
conditions, requiring us to record substantial write-downs that would reduce our
operating income.
We have
goodwill and intangible assets of $31.9 million recorded on our balance sheet as
of July 31, 2008. This amount will materially increase as a result of the Radyne
acquisition. We evaluate the recoverability of recorded goodwill amounts and
intangible assets annually, or when evidence of potential impairment exists. The
annual impairment test is based on several factors requiring judgment. Changes
in our operating performance or business conditions, in general, could result in
an impairment of goodwill which could be material to our results of operations.
In addition, if we are not successful in achieving anticipated operating
efficiencies associated with the Radyne acquisition, our goodwill and intangible
assets may become impaired.
23
The
loss of key technical or management personnel could adversely affect our
business.
Our
success depends on the continued contributions of key technical management
personnel, including the key corporate and operating unit management at each of
our subsidiaries. Many of our key personnel, particularly the key engineers of
our subsidiaries, would be difficult to replace, and are not subject to
employment or noncompetition agreements. Our growth and future success will
depend in large part upon our ability to attract and retain highly qualified
engineering, sales and marketing personnel. Competition for such personnel from
other companies, academic institutions, government entities and other
organizations is intense. Although we believe that we have been successful to
date in recruiting and keeping key personnel, we may not be successful in
attracting and retaining the personnel we will need to continue to grow and
operate profitably. Also, the management skills that have been appropriate for
us in the past may not continue to be appropriate if we continue to grow and
diversify.
Our
business and operating results may be negatively impacted if we are unable to
continue to manage growth of our businesses.
Certain
of our businesses have experienced periods of rapid growth that have placed, and
may continue to place, significant demands on our managerial, operational and
financial resources. In addition to anticipated organic growth, our revenues are
expected to significantly increase in fiscal 2009 as a result of the Radyne
acquisition. In order to manage this growth, we must continue to improve and
expand our management, operational and financial systems and controls. We also
need to continue to recruit and retain personnel and train and manage our
employee base. We must carefully manage research and development capabilities
and production and inventory levels to meet product demand, new product
introductions and product and technology transitions. If we are not able to
timely and effectively manage our growth and maintain the quality standards
required by our existing and potential customers, we could experience a material
adverse impact on our business, results of operations and financial
condition.
Our
markets are highly competitive.
The
markets for our products are highly competitive. We cannot assure you that we
will be able to successfully compete or that our competitors will not develop
new technologies and products that are more effective than our own. We expect
the DoD’s increased use of commercial off-the-shelf products and components in
military equipment will encourage new competitors to enter the market. Also,
although the implementation of advanced telecommunications services is in its
early stages in many developing countries, we believe competition may intensify
as businesses and foreign governments realize the market potential of
telecommunications services. Many of our competitors have financial, technical,
marketing, sales and distribution resources greater than ours.
Protection
of our intellectual property is limited; we are subject to the risk of third
party claims of infringement.
Our DoubleTalk® Carrier-in-Carrier® bandwidth compression technology is
licensed by us from a third-party. Our businesses rely in large part upon
our proprietary scientific and engineering know-how and production techniques.
Historically, patents have not been an important part of our protection of our
intellectual property rights. We rely upon the laws of unfair competition,
restrictions in licensing agreements and confidentiality agreements to protect
our intellectual property. We limit access to and distribution of our
proprietary information. These efforts allow us to rely upon the knowledge and
experience of our management and technical personnel to market our existing
products and to develop new products. The departure of any of our key management
and technical personnel, the breach of their confidentiality and non-disclosure
obligations to us or the failure to achieve our intellectual property objectives
may have a material adverse impact on our business, results of operations and
financial condition. Our ability to compete successfully and achieve future
revenue growth will depend, in part, on our ability to protect our proprietary
technology and operate without infringing upon the rights of others. We may fail
to do so. In addition, the laws of certain countries in which our products are
or may be sold may not protect our products and intellectual property rights to
the same extent as the laws of the U.S.
We
believe that we own or have licensed all intellectual property rights necessary
for the operation of our businesses as currently contemplated. If the technology
we use is found to infringe on protected technology, we could be required to
change our business practices, license the protected technology, and/or pay
damages or other compensation to the infringed party. If we are unable to
license protected technology that we use in our business or if we are required
to change our business practices, we could be prohibited from making and selling
our products or providing certain telecommunications services.
24
Our
operations are subject to environmental laws and regulations and we may be
subject to environmental liabilities.
We engage
in manufacturing and are subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture our products, such as the fabrication of fiberglass antennas by
our Comtech Antenna Systems, Inc. subsidiary. We are also subject to the RoHS
directive which restricts the use of lead, mercury and other substances in
electrical and electronic products. The failure to comply with current or future
environmental requirements could result in the imposition of substantial fines,
suspension of production, alteration of our manufacturing processes or cessation
of operations that could have a material adverse impact on our business, results
of operations and financial condition.
In
addition, the handling, treatment or disposal of hazardous substances by us or
our predecessors may have resulted, or could in the future result, in
contamination requiring investigation or remediation, or leading to other
liabilities, any of which could have a material adverse impact on our business,
results of operations and financial condition.
Our
fiscal 2004 and fiscal 2005 Federal income tax returns were recently audited by
the Internal Revenue Service and our fiscal 2006 tax return has been selected
for audit. Other returns may be selected for audit in the future. Although
adjustments relating to our fiscal 2004 and fiscal 2005 tax return were
immaterial, a resulting tax assessment or settlement for fiscal 2006 and other
periods that may be selected for future audit could have a material adverse
impact on our results of operations and financial position.
We are
subject to income taxes in both the U.S. and certain foreign jurisdictions,
including Canada. Significant judgment is required in determining the provision
for income taxes. Although we believe our tax estimates are reasonable, the
final determination of tax examinations and any related litigation could be
materially different than what is reflected in historical income tax provisions
and accruals.
Recently
enacted securities laws and regulations are increasing our costs and possible
future changes to financial reporting standards may result in incremental
costs.
The
Sarbanes-Oxley Act of 2002 required changes in some of our corporate governance,
public disclosure and compliance practices. These changes resulted in increased
costs and as we grow, we expect to see our costs increase. The SEC has
promulgated and proposed new rules on a variety of subjects including the
possibility that we would be required to adopt International Financial Reporting
Standards (“IFRS”). If we are required to change our financial reporting
standards and policies to comply with IFRS, our costs could significantly
increase. In addition, the NASDAQ Stock Market LLC (“NASDAQ”) has revised its
requirements for companies, such as us, that are listed on the NASDAQ. These
changes are increasing our legal and financial compliance costs including making
it more difficult and more expensive for us to obtain director and officer
liability insurance or maintain our current liability coverage. We believe that
these new and proposed laws and regulations could make it more difficult for us
to attract and retain qualified members of our Board of Directors, particularly
to serve on our audit committee, and qualified executive officers.
We
are subject to the ongoing internal control provisions of Section 404 of the
Sarbanes-Oxley Act of 2002. Identification of material weaknesses in internal
controls (including those at our newly acquired subsidiaries at Radyne), if
identified, could indicate a lack of proper controls to generate accurate
financial statements.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are
required to furnish a report of management’s assessment of the effectiveness of
our internal controls as part of our Annual Report on Form 10-K. Our independent
registered accountants are required to attest to and report on management’s
assessment, as well as provide a separate opinion. To issue our report, we
document our internal control design and the testing processes that support our
evaluation and conclusion, and then we test and evaluate the results. There can
be no assurance, however, that we will be able to remediate material weaknesses,
if any, that may be identified in future periods, or maintain all of the
controls necessary for continued compliance. There likewise can be no assurance
that we will be able to retain sufficient skilled finance and accounting
personnel, especially in light of the increased demand for such personnel among
publicly traded companies.
25
Changes
in financial accounting standards related to stock-based awards are expected to
continue to have a significant effect on our reported results.
In fiscal
2006, we adopted Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment,” a revised standard that requires that we record
compensation expense in the statement of operations for employee and director
stock-based awards using a fair value
method. The adoption of the new standard had a significant effect on our
reported earnings, and could adversely impact our ability to provide accurate
guidance on our future reported financial results due to the variability of the
factors used to estimate the value of stock-based awards. As a result, the
ongoing application of this standard could impact the future value of our common
stock and may result in greater stock price volatility.
In
addition, since our inception, we have used stock-based awards as a fundamental
component of our employee compensation packages. We believe that stock-based
awards directly
motivate our employees to maximize long-term stockholder value and, through the
use of long-term vesting, encourage employees to remain with us. To the extent
that this accounting standard makes it less attractive to grant stock-based
awards to employees, we may incur increased compensation costs, change our
equity compensation strategy or find it difficult to attract, retain and
motivate employees, each of which could have a material adverse impact on our
business, results of operations and financial condition.
We
face risks from the uncertainty of prevailing political conditions.
Current
global political conditions are uncertain. For example, the winner of the
November 2008 U.S. presidential election could significantly change policies or
priorities which could have a negative impact on our business. Because the
accuracy of our budgeting and forecasting process relies on stable political
conditions, the prevailing political environment renders estimates of future
income and expenses even more difficult than usual to formulate. The future
direction of the political environment could have a material adverse impact on
our business, results of operations and financial condition.
Terrorist
attacks and threats, and government responses thereto, and threats of war
elsewhere may negatively impact all aspects of our operations, revenues, costs
and stock price.
Terrorist
attacks, the U.S. government’s and other governments’ responses thereto, and
threats of war could adversely impact our business, results of operations and
financial condition. Any escalation in these events or similar or future events
may disrupt our operations or those of our customers and may affect the
availability of materials needed to manufacture our products or the means to
transport those materials to manufacturing facilities and finished products to
customers. In addition, these could have an adverse impact on the U.S. and world
economy in general.
Provisions
in our corporate documents, stockholder rights plan, and Delaware law could
delay or prevent a change in control of Comtech.
We have
taken a number of actions that could have the effect of discouraging, delaying
or preventing a merger or acquisition involving Comtech that our stockholders
may consider favorable. For example, we have a classified board and the
employment contract with our chief executive officer and contracts with other of
our executive officers provide for substantial payments in certain circumstances
or in the event of a change of control of Comtech. We also adopted a stockholder
rights plan that could cause substantial dilution to a stockholder, and
substantially increase the cost paid by a stockholder, who attempts to acquire
us on terms not approved by our Board of Directors. These provisions could
prevent us from being acquired. In addition, our certificate of incorporation
grants our Board of Directors the authority to fix the rights, preferences and
privileges of and issue up to 2,000,000 shares of preferred stock without
stockholder action. Although we have no present intention to issue shares of
preferred stock, such an issuance of any class or series of our preferred stock
could have rights which would adversely affect the voting power of the common
stock or which could delay, defer, or prevent a change in control of Comtech. In
addition, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, this statute provides
that except in certain limited circumstances a corporation shall not engage in
any “business combination” with an “interested stockholder” for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A “business combination” includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, for purposes of Section 203 of the
Delaware General Corporation Law, an “interested stockholder” is a person who,
together with affiliates, owns, or within three years did own, 15% or more of
the corporation’s voting stock. This provision could have the effect of delaying
or preventing a change in control of Comtech.
26
Our
debt service obligations may adversely affect our cash flow.
The
higher level of indebtedness resulting from the issuance of our 2.0% convertible
senior notes increases the risk that we may default on our debt obligations. Our
2.0% convertible senior notes, may, at our option, be redeemable for cash on or
after February 4, 2009. Holders of our 2.0% convertible senior notes have the
right to require us to repurchase some or all of the outstanding 2.0%
convertible senior notes on February 1, 2011, February 1, 2014 and February 1,
2019, and upon certain events, including a change in control.
Should we
decide to redeem some or all of the outstanding 2.0% convertible senior notes,
or if the holders of our 2.0% convertible senior notes require us to repurchase
some or all of the outstanding 2.0% convertible senior notes, we cannot assure
you that we will be able to generate sufficient cash flow to pay the interest on
our debt or that future working capital, borrowings or equity financing will be
available to pay or refinance such debt. The level of our indebtedness, among
other things, could: make it difficult for us to make payments on our debt; make
it difficult for us to obtain any necessary financing in the future for working
capital, acquisitions, capital expenditures, debt service requirements or other
purposes; limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and make us more vulnerable in
the event of a downturn in our business.
Our
stock price is volatile.
The stock
market in general, and the stock prices of technology-based companies in
particular, have experienced extreme volatility that often has been unrelated to
the operating performance of any specific public company. The market
price of our common stock has fluctuated significantly in the past and is likely
to fluctuate significantly in the future as well.
Factors
that could have a significant impact on the market price of our stock are
described throughout the Risk Factors section and include:
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strategic
transactions, such as acquisitions and
divestures;
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| · | issuance of potentially dilutive equity-type securities |
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future
announcements concerning us or our
competitors;
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receipt
or non-receipt of substantial orders for products and
services;
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quality
deficiencies in services or
products;
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·
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results
of technological innovations;
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new
commercial products;
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·
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changes
in recommendations of securities
analysts;
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·
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government
regulations;
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·
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proprietary
rights or product or patent
litigation;
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·
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changes
in economic conditions generally, particularly in the telecommunications
sector;
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·
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changes
in securities market conditions,
generally;
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energy
blackouts;
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·
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acts
of terrorism or war;
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·
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inflation
or deflation; and
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rumors
or allegations regarding our financial disclosures or
practices.
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Shortfalls
in our sales or earnings in any given period relative to the levels expected by
securities analysts could immediately, significantly and adversely affect the
trading price of our common stock.
None.
27
Historically,
we have not owned any material properties and facilities and have relied upon a
strategy of leasing. Our properties and facilities (including Radyne facilities)
are noted below:
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·
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Our
corporate headquarters are located in an office building complex in
Melville, New York. The lease, which is for 9,600 square feet, provides
for our use of the premises for seven years through July
2013.
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·
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Our
RF microwave amplifiers segment manufactures our solid-state, high-power,
broadband amplifiers, in a 46,000 square foot engineering and
manufacturing facility on more than two acres of land in Melville, New
York and a 6,000 square foot facility in Topsfield, Massachusetts. We
lease the New York facility from a partnership controlled by our Chairman,
Chief Executive Officer and President. The lease, as amended, provides for
our use of the premises as they now exist for a term of ten years through
December 2011. We have a right of first refusal in the event of a sale of
the facility. The base annual rent under the lease is subject
to customary adjustments. Our RF microwave amplifiers segment manufactures
our satellite earth station traveling wave tubes amplifiers, certain solid
state amplifiers, and klystron tube amplifiers in two leased manufacturing
facilities located in Santa Clara, California. These two facilities
comprise approximately 71,000 square feet and are subject to lease
agreements that expire in 2012. Our RF microwave amplifiers segment also
operates a small office in the United
Kingdom.
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|
·
|
Although
primarily used for our satellite earth station product lines which are
part of the telecommunications transmission segment, all three of our
business segments utilize our high-volume technology manufacturing
facilities located in Tempe, Arizona. These manufacturing facilities,
comprising 176,000 square feet, utilize state-of-the-art design and
production techniques, including analog, digital and RF microwave
production, hardware assembly and full service engineering. The leases for
these facilities expire through fiscal 2011 and in each lease we have the
option to extend the term of the lease for up to an additional five-year
period. As a result of the Radyne acquisition, we also currently occupy
approximately 75,000 square feet of building space in Phoenix, Arizona.
The lease for this building currently expires in October 2018. On August
1, 2008, we adopted and initiated a restructuring plan to achieve
operating efficiencies and are currently in the process of consolidating
Radyne’s Phoenix, Arizona-based operations into our Tempe, Arizona
facility. We are currently in preliminary negotiations with a
tenant who subleases, from us, a portion of Radyne’s Phoenix, Arizona
facility. This tenant is interested in subleasing the remaining portion of
this facility from us. If these negotiations are not successful, we intend
to perform an assessment of whether or not we will be able to sublease the
Phoenix, Arizona facility for the remaining duration of the lease, and at
what rent, if any, we might be able to receive, given the poor real estate
market conditions in the Phoenix, Arizona areas as well the uncertainties
relating to the local economic
environment.
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|
·
|
Our
telecommunications transmission segment leases an additional fourteen
facilities, six of which are located in the U.S. The U.S. facilities
(excluding our Arizona-based facilities) aggregate 159,000 square feet and
are primarily utilized for manufacturing, engineering, and general office
use. Our telecommunications transmission segment also operates five small
offices in China, India, North Africa, Singapore, the United Kingdom and
Canada, all of which aggregate 25,000 square feet and are primarily
utilized for customer support, engineering and
sales.
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|
·
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Our
mobile data communications segment operates two main facilities
aggregating 57,000 square feet. We maintain a 32,000 square foot facility
located in Germantown, Maryland which contains our main network operations
center. This lease expires in March 2018. Our mobile data communications
segment also maintains a 25,000 square foot facility in Ashburn, Virginia,
which is used to support the design, sales and manufacture of our
microsatellite and SENS products. This lease expires in 2012. We also have
two small offices located in Colorado that are primarily used for
engineering capabilities.
|
The terms
for all of our leased facilities are generally for multi-year periods and we
believe that we will be able to renew these leases or find comparable facilities
elsewhere.
28
In
October 2007, our Florida-based subsidiary, Comtech Systems, Inc. (“CSI”),
received a customs export enforcement subpoena from the U.S. Immigration and
Customs Enforcement (“ICE”) branch of the Department of Homeland Security. The
subpoena relates to CSI’s $2.0 million contract with the Brazilian Naval
Commission (the Brazil contract) and it required the production of all books,
records and documents, including copies of contracts, invoices and payments
related to agreements between CSI, its agent, its subcontractor and the
Brazilian government. We believe that the ICE investigation is focused primarily
on whether or not CSI was in compliance with export-related laws and
regulations, including the International Traffic in Arms Regulations (“ITAR”)
and the Export Administration Regulations. CSI produced documents in response to
the subpoena request. Customs
officials have detained certain inventory related to the Brazil contract pending
resolution of this matter.
We engaged outside counsel to assist CSI
in its response to the subpoena and related matters and to conduct our own
investigation. Based on our ongoing investigation into this matter, we
believe that the detained inventory, which consists of commercial satellite
equipment, was not modified or adapted in any way to meet Brazilian military
requirements and was only subject to the jurisdiction of the Department of
Commerce and not the jurisdiction of the U.S. Department of State. In addition,
in order to provide certain defense services, including conducting factory
acceptance testing at CSI’s Florida facility, we obtained a license (referred to
as a Technical Assistance Agreement (“TAA”)) from the U.S. Department of State.
We believe that the TAA authorized all activities under the Brazil contract that
were subject to the jurisdiction of the U.S. Department of State.
We
believe that CSI made a good faith effort to comply with applicable regulations;
however, we believe that CSI made inadvertent administrative errors resulting in
a TAA that did not become effective on a timely basis. The administrative errors
relate primarily to the execution of non-disclosure agreements (“NDA”) with
certain third country national employees of CSI’s agent. These individuals have
now signed appropriate NDAs, and, in December 2007, CSI filed an amended TAA
with the U.S. Department of State. CSI has requested that the U.S. Department of
State confirm CSI’s and our view that the Brazil contract does not require any
other State Department license.
In March
2008, the Enforcement Division of the U.S. Department of State informed us that
they were reviewing our amended TAA. In May 2008, the U.S.
Attorney’s Office in the Middle District of
Florida informed us that, based on its conversations with the ICE agent who
initiated the subpoena, it was closing its investigation into the Brazil matter.
In June 2008, the ICE agent informed us that he would recommend that the
detained inventory be released back to us upon the U.S. Department of State
confirming our position that a State Department license for the hardware shipped was not required.
In August
2008, the ICE agent informed us that the U.S. Department of State wanted
to clarify certain technical matters and, on its behalf, the ICE agent was going
to interview one of our engineers. This interview occurred
in September of 2008. We continue to remain cautiously optimistic
that we will be able to shortly reship the Brazil inventory to our
customer.
In
addition to their review of the Brazil contract, in March 2008, the Enforcement
Division of the U.S. Department of State informed us that they sought to confirm
our company-wide ITAR compliance for the five-year period ended March 2008. In
response, we expanded the scope of our own ongoing investigation. In June 2008,
we provided detailed information and a summary of our findings to the U.S.
Department of State. In July 2008, the U.S. Department of State requested
supplemental information and we responded to their request. Our findings to date
indicate that there were certain instances of exports and defense services
during the five-year period for which we did not have the appropriate
authorization from the U.S. Department of State; however, none of those
instances involved Proscribed Countries as defined by ITAR. We are awaiting
additional feedback from the U.S. Department of State as it relates to all of
the aforementioned matters.
Since the
receipt of the original Brazil subpoena in October 2007, we have engaged outside
counsel and export consultants to help us assess and improve, as appropriate,
our internal controls with respect to U.S. export controls laws and regulations
and laws governing record keeping
and dealings with foreign representatives. In addition, in connection with our August 1, 2008 acquisition of
Radyne, we are expanding our export internal control assessment to include our
newly acquired subsidiaries. To date, we have noted opportunities for improving
our procedures to comply with such laws and regulations, including at our newly
acquired Radyne subsidiaries and are in the process of making
improvements.
29
During fiscal 2008, we have taken
numerous steps to significantly improve our export control processes, including
the hiring of additional employees who are knowledgeable and experienced with
ITAR and the engagement of an outside export consultant to conduct additional
training. We are also in the process of implementing enhanced formal
company-wide ITAR control procedures, including at our newly acquired Radyne
subsidiaries. Because our assessments are continuing, we expect to remediate,
improve and enhance our internal controls relating to exports throughout fiscal
2009.
Because the above matters are ongoing,
we cannot determine the ultimate outcome of these matters. Violations of U.S.
export control-related laws and regulations could result in civil or criminal
fines and/or penalties and/or result in an injunction against us, all of which
could, in the aggregate, materially impact our business, results of operations
and cash flows. Should we identify a material weakness relating to our
compliance, the ongoing costs of remediation could be material. In addition,
inventory related to the Brazil contract (including the inventory that has been
detained) had a net book value of $1.1 million as of July 31, 2008. If this
inventory is permanently seized or not returned to us timely, or we can not
resell the inventory to other customers, we would be required to write-off the
value of this inventory in a future accounting period.
No
matters were submitted to our stockholders during the fourth quarter of the
fiscal year ended July 31, 2008.
30
The graph
below compares the cumulative total stockholder return on our common stock with
the cumulative total return on the S&P’s 500 Index and the NASDAQ
Telecommunications Index for each of the last five fiscal years ended July 31,
assuming an investment of $100 at the beginning of such period and the
reinvestment of any dividends. The comparisons in the graphs below are based
upon historical data and are not indicative of, nor intended to forecast, future
performance of our common stock.
31
Our
common stock trades on the NASDAQ Stock Market LLC (“NASDAQ”) under the symbol
“CMTL.” The following table shows the quarterly range of the high and
low sale prices for our common stock as reported by the NASDAQ. Such
prices do not include retail markups, markdowns or commissions.
|
Common Stock
|
||||||||
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended July 31, 2007
|
||||||||
|
First
Quarter
|
$ | 36.96 | 26.88 | |||||
|
Second
Quarter
|
39.86 | 33.56 | ||||||
|
Third
Quarter
|
40.23 | 33.21 | ||||||
|
Fourth
Quarter
|
48.94 | 37.93 | ||||||
|
Fiscal
Year Ended July 31, 2008
|
||||||||
|
First
Quarter
|
58.00 | 35.45 | ||||||
|
Second
Quarter
|
56.07 | 43.01 | ||||||
|
Third
Quarter
|
48.41 | 37.59 | ||||||
|
Fourth
Quarter
|
51.21 | 38.63 | ||||||
We have
never paid cash dividends on our common stock. Although we currently expect to
use earnings and cash on hand to finance the development and expansion of our
businesses, our Board of Directors reviews our dividend policy periodically. The
payment of dividends in the future will depend upon our earnings, capital
requirements, financial condition and other factors considered relevant by our
Board of Directors.
None.
We did
not repurchase any of our equity securities during fiscal 2008.
As of
September 12, 2008, there were approximately 787 holders of
our common stock. Such number of record owners was determined from
our shareholder records and does not include beneficial owners of our common
stock held in the name of various security holders, dealers and clearing
agencies.
32
The
following table shows selected historical consolidated financial data for our
Company. During the fiscal quarter ended January 31, 2005, the
Company adopted Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The Effect
of Contingently Convertible Instruments on Diluted Earnings Per Share.” The
Company has restated, for comparative purposes, the historical share and per
share data, including earnings per share (“EPS”), to reflect the impact of the
assumed conversion of the Company’s 2.0% convertible senior notes in calculating
diluted EPS. Effective August 1, 2005, we adopted the provisions of SFAS
No. 123(R), “Share-Based Payment” using the modified prospective method and, as
a result, periods prior to August 1, 2005 do not reflect the recognition of
stock-based compensation expense.
All share
and per share amounts have also been adjusted to reflect the three-for-two stock
split of the Company’s common shares that occurred in April 2005. Detailed
historical financial information is included in the audited consolidated
financial statements for fiscal 2008, 2007 and 2006.
|
Fiscal
Years Ended July 31,
(In
thousands, except per share amounts)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Consolidated
Statement of
|
||||||||||||||||||||
|
Operations
Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 531,627 | 445,684 | 391,511 | 307,890 | 223,390 | ||||||||||||||
|
Cost
of sales
|
296,687 | 252,389 | 232,210 | 180,524 | 135,858 | |||||||||||||||
|
Gross
profit
|
234,940 | 193,295 | 159,301 | 127,366 | 87,532 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Selling,
general and administrative
|
85,967 | 73,312 | 67,071 | 51,819 | 36,016 | |||||||||||||||
|
Research
and development
|
40,472 | 32,469 | 25,834 | 21,155 | 15,907 | |||||||||||||||
|
In-process
research and development
|
- | - | - | - | 940 | |||||||||||||||
|
Amortization
of intangibles
|
1,710 | 2,592 | 2,465 | 2,328 | 2,067 | |||||||||||||||
| 128,149 | 108,373 | 95,370 | 75,302 | 54,930 | ||||||||||||||||
|
Operating
income
|
106,791 | 84,922 | 63,931 | 52,064 | 32,602 | |||||||||||||||
|
Other
expenses (income):
|
||||||||||||||||||||
|
Interest
expense
|
2,683 | 2,731 | 2,687 | 2,679 | 1,425 | |||||||||||||||
|
Interest
income and other
|
(14,065 | ) | (14,208 | ) | (9,243 | ) | (4,072 | ) | (921 | ) | ||||||||||
|
Income
before provision for income taxes
|
118,173 | 96,399 | 70,487 | 53,457 | 32,098 | |||||||||||||||
|
Provision
for income taxes
|
41,740 | 31,186 | 25,218 | 16,802 | 10,271 | |||||||||||||||
|
Net
income
|
$ | 76,433 | 65,213 | 45,269 | 36,655 | 21,827 | ||||||||||||||
|
Net
income per share:
|
||||||||||||||||||||
|
Basic
|
$ | 3.17 | 2.81 | 1.99 | 1.69 | 1.03 | ||||||||||||||
|
Diluted
|
$ | 2.76 | 2.42 | 1.72 | 1.42 | 0.92 | ||||||||||||||
|
Weighted
average number of common shares outstanding -
basic
|
24,138 | 23,178 | 22,753 | 21,673 | 21,178 | |||||||||||||||
|
Weighted
average number of common and common equivalent shares outstanding assuming
dilution – diluted
|
28,278 | 27,603 | 27,324 | 27,064 | 24,781 | |||||||||||||||
(continued)
33
|
Fiscal
Years Ended July 31,
(In
thousands)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Other
Consolidated Operating Data:
|
||||||||||||||||||||
|
Backlog
at period-end
|
$ | 201,122 | 129,044 | 186,007 | 153,314 | 83,549 | ||||||||||||||
|
New
orders
|
603,705 | 388,721 | 424,204 | 377,655 | 206,797 | |||||||||||||||
|
Research
and development expenditures - internal and customer
funded
|
48,224 | 36,639 | 30,243 | 24,156 | 21,656 | |||||||||||||||
|
As
of July 31,
(In
thousands)
|
|||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
|||||||||||||||||||||
|
Total
assets
|
$ | 653,120 | 556,342 | 455,266 | 382,403 | 306,390 | |||||||||||||||
|
Working
capital
|
484,451 | 397,083 | 308,986 | 254,690 | 201,218 | ||||||||||||||||
|
Convertible
senior notes
|
105,000 | 105,000 | 105,000 | 105,000 | 105,000 | ||||||||||||||||
|
Other
long-term obligations
|
- | 108 | 243 | 396 | 158 | ||||||||||||||||
|
Stockholders’
equity
|
442,802 | 345,768 | 254,242 | 196,629 | 142,398 | ||||||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We
design, develop, produce and market innovative products, systems and services
for advanced communications solutions. We believe many of our solutions play a
vital role in providing or enhancing communication capabilities when terrestrial
communications infrastructure is unavailable or ineffective. We
conduct our business through three complementary segments: telecommunications
transmission, mobile data communications and RF microwave amplifiers. We sell
our products to a diverse customer base in the global commercial and government
communications markets. We believe we are a leader in the market segments that
we serve.
Our
telecommunications transmission segment provides equipment and systems that are
used to enhance satellite transmission efficiency and that enable wireless
communications in environments where terrestrial communications are unavailable,
inefficient or too expensive. Our telecommunications transmission segment also
operates our high-volume technology manufacturing center that is utilized, in
part, by our mobile data communications and RF microwave amplifiers segments as
well as third party commercial customers who outsource a portion of their
manufacturing to us. Accordingly, our telecommunications transmission segment
benefits from the related increased operating efficiencies. Our mobile data
communications segment provides customers with an integrated solution, including
mobile satellite transceivers and satellite network support, to enable global
satellite-based communications when mobile, real-time, secure transmission is
required. Our mobile data communications segment also designs and
manufactures microsatellites and related components. Our RF microwave amplifiers
segment designs, manufactures and markets satellite earth station traveling wave
tube amplifiers, klystron amplifiers and solid-state amplifiers, including
high-power, broadband RF microwave amplifier products.
A
substantial portion of our sales may be derived from a limited number of
relatively large customer contracts, such as our Movement Tracking System
(“MTS”) contract with the U.S. Army and our U.S. Army’s Force XXI Battle
Command, Brigade and Below command and control systems (also known as Blue Force
Tracking (“BFT”)) contract, for which the timing of revenues cannot be
predicted. Quarterly and period-to-period sales and operating results
may be dramatically affected by one or more of such contracts. In addition, our
gross profit is affected by a variety of factors, including the mix of products,
systems and services sold, production efficiencies, estimates of warranty
expense, price competition and general economic conditions. Our gross profit may
also be affected by the impact of any cumulative adjustments to contracts that
are accounted for under the percentage-of-completion method. Our contracts with
the U.S. government can be terminated at any time and orders are subject to
unpredictable funding, deployment and technology decisions by the U.S.
government. Some of these contracts, such as the MTS and BFT contracts, are
indefinite delivery/indefinite quantity (“IDIQ”) contracts, and as such, the
U.S. government is not obligated to purchase any equipment or services under
these contracts. Accordingly, we can experience significant fluctuations in
sales and operating results from quarter-to-quarter and period-to-period
comparisons may not be indicative of a trend or future performance.
34
Revenue
from the sale of our products is generally recognized when the earnings process
is complete, upon shipment or customer acceptance. Revenue from
contracts relating to the design, development or manufacture of complex
electronic equipment to a buyer’s specification or to provide services relating
to the performance of such contracts is generally recognized in accordance with
American Institute of Certified Public Accountants (“AICPA”) Statement of
Position 81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts” (“SOP 81-1”). Revenue from contracts that contain
multiple elements that are not accounted for under SOP 81-1 are generally
accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No.
00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables.” Revenue from these contracts is allocated to each
respective element based on each element’s relative fair value and is recognized
when the respective revenue recognition criteria for each element are
met.
The
Radyne Acquisition
In August
2008, and as more fully described throughout this Form 10-K, we acquired Radyne
for a preliminary aggregate purchase price of approximately $231.7 million
(including estimated transaction costs and payments made for outstanding
share-based stock awards). We believe that the acquisition of Radyne resulted in
the following strategic benefits:
|
-
|
Strengthened
our leadership position in our satellite earth station product lines in
our telecommunications transmission
segment;
|
|
-
|
More
than doubled the size of our RF microwave amplifiers segment by expanding
our amplifier product portfolio and immediately positioning us as a
leader, not only in the solid-state amplifier market, but in the satellite
earth station traveling wave tube amplifier
market;
|
|
-
|
Broadened
the number of products and services that our mobile data communications
segment can offer by allowing us to market additional mobile tracking
products as well as the design and manufacture of microsatellites and
related components; and
|
|
-
|
Further
diversified our overall global customer base and expanded our addressable
markets.
|
We
believe that, over time, we will be able to take advantage of our combined
engineering and sales talents to drive further innovation in the marketplace and
deliver new and advanced products to our customers in all three of our business
segments. In connection with the Radyne acquisition, we also expect that we will
be able to achieve operating efficiencies by eliminating redundant functions and
related expenses. In order to achieve these efficiencies, on August 1, 2008, we
immediately adopted a restructuring plan and are currently in the process of
closing Radyne’s Phoenix, Arizona manufacturing facility and integrating that
operation into our high-volume technology manufacturing center located in Tempe,
Arizona. In addition, Radyne’s corporate functions, which were co-located in Radyne’s Phoenix,
Arizona manufacturing facility, are currently being moved to our
Melville, New York corporate office. The closing of Radyne’s facility and
related integration is expected to be completed in the second half of fiscal
2009.
In
connection with the realization of operating synergies, we have preliminarily
estimated that we may incur up to $9.6 million of
restructuring costs, of which, approximately $8.7 million
relates to possible exit costs relating to the shut-down of Radyne’s Phoenix
Arizona manufacturing facility. We have already incurred approximately $0.8 million of
severance costs for Radyne employees who were notified that they were being
terminated on August 1, 2008. We are currently in preliminary negotiations with
a tenant who subleases, from us, a portion of the manufacturing facility,
and is interested in subleasing the remaining portion of this facility from
us. If the negotiations with this tenant are successful, our actual net cost
related to the shut-down of the manufacturing facility will be significantly
lower. We anticipate that we will be able to capitalize all of the
aforementioned costs as part of purchase accounting in accordance with Emerging
Issues Task Force 95-3, “Recognition of Liabilities in Connection with a
Purchase Business Combination (“EITF 95-3”).
In
addition, in connection with the acquisition, during the three months ended
October 31, 2008 (our first quarter of fiscal 2009), and in accordance with SFAS
No. 141, “Business Combinations,” we expect, based on a preliminary analysis, to
record a one-time charge of $6.2 million
reflecting the fair-market value of in-process research and development
acquired.
35
From
an operational and financial reporting perspective, as of August 1, 2008,
Radyne’s satellite electronics and video encoders and decoder product lines are
now part of our telecommunications transmission segment, Radyne’s TWTA and KPA
amplifier product portfolios are now part of our RF microwave amplifiers segment
and Radyne’s microsatellites and SENS products are now part of our mobile data
communications segment.
Other Tactical and Product Line Acquisitions
In August
2006, we acquired certain assets and assumed certain liabilities of Insite
Consulting, Inc. (“Insite”), a logistics application software company, for $3.2
million, including transaction costs of $0.2 million. Insite has developed the
geoOps™ Enterprise Location Monitoring System, a software-based solution that
allows customers to integrate legacy data systems with near-real time logistics
and operational data systems. This operation was combined with our existing
business and is part of our mobile data communications segment.
In
February 2007, we acquired certain assets and assumed certain liabilities of
Digicast Networks, Inc. (“Digicast”), a manufacturer of digital video
broadcasting equipment, for $1.0 million. This operation was combined with our
existing business and is part of the telecommunications transmission
segment.
In July
2008, we acquired the network backhaul assets and the NetPerformer and
AccessGate product lines of Verso Technologies ("Verso") for approximately $3.9
million. This operation was combined with our existing business and is part of
our telecommunications transmission segment.
We
consider certain accounting policies to be critical due to the estimation
process involved in each.
Revenue
Recognition on Long-Term Contracts. Revenues and related
costs from long-term contracts relating to the design, development or
manufacture of complex electronic equipment to a buyer’s specification or to
provide services relating to the performance of such contracts are recognized in
accordance with SOP 81-1. We primarily apply the percentage-of-completion method
and generally recognize revenue based on the relationship of total costs
incurred to total projected costs, or, alternatively, based on output measures,
such as units delivered or produced. Profits expected to be realized on such
contracts are based on total estimated sales for the contract compared to total
estimated costs, including warranty costs, at completion of the
contract. These estimates are reviewed and revised periodically
throughout the lives of the contracts, and adjustments to profits resulting from
such revisions are made cumulative to the date of the
change. Estimated losses on long-term contracts are recorded in the
period in which the losses become evident. Long-term U.S. government
cost-reimbursable type contracts are also specifically covered by Accounting
Research Bulletin No. 43 “Government Contracts, Cost-Plus Fixed-Fee
Contracts” (“ARB 43”), in addition to SOP 81-1.
We have
been engaged in the production and delivery of goods and services on a continual
basis under contractual arrangements for many years. Historically, we
have demonstrated an ability to accurately estimate revenues and expenses
relating to our long-term contracts. However, there exist inherent
risks and uncertainties in estimating revenues, expenses and progress toward
completion, particularly on larger or longer-term contracts. If we do
not accurately estimate the total sales, related costs and progress towards
completion on such contracts, the estimated gross margins may be significantly
impacted or losses may need to be recognized in future periods. Any
such resulting changes in margins or contract losses could be material to our
results of operations and financial position.
In
addition, most government contracts have termination for convenience clauses
that provide the customer with the right to terminate the contract at any time.
Such terminations could impact the assumptions regarding total contract revenues
and expenses utilized in recognizing profit under the percentage-of-completion
method of accounting. Changes to these assumptions could materially impact our
results of operations and financial position. Historically, we have
not experienced material terminations of our long-term contracts.
We also
address customer acceptance provisions in assessing our ability to perform our
contractual obligations under long-term contracts. Our inability to perform on
our long-term contracts could materially impact our results of operations and
financial condition. Historically, we have been able to perform on
our long-term contracts.
Accounting for
Stock-Based Compensation. As discussed further in
“Notes to Consolidated
Financial Statements – Note 1(j) Accounting for Stock-Based
Compensation,” we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123(R) on August 1, 2005 using the modified prospective
method.
36
We have
used and expect to continue to use the Black-Scholes option pricing model to
compute the estimated fair value of stock-based awards. The Black-Scholes option
pricing model includes assumptions regarding dividend yields, expected
volatility, expected option term and risk-free interest rates. The assumptions
used in computing the fair value of stock-based awards reflect our best
estimates, but involve uncertainties relating to market and other conditions,
many of which are outside of our control. We estimate expected volatility by
considering the historical volatility of our stock, the implied volatility of
publicly traded stock options in our stock and our expectations of volatility
for the expected term of stock-based compensation awards. As a result, if other
assumptions or estimates had been used for options granted, stock-based
compensation expense that was recorded could have been materially different.
Furthermore, if different assumptions are used in future periods, stock-based
compensation expense could be materially impacted in the future.
Impairment of
Goodwill and Other Intangible Assets. As of July 31,
2008, our goodwill and other intangible assets aggregated $31.9 million. This
amount will materially increase as a result of the Radyne acquisition. In
assessing the recoverability of goodwill and other intangibles, we 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, we may be required
to record impairment charges for these assets in future periods. Any
such resulting impairment charges could be material to our results of
operations.
Provision for
Warranty Obligations. We provide warranty coverage for most of
our products, including products under long-term contracts, for a period of at
least one year from the date of shipment. We record a liability for estimated
warranty expense based on historical claims, product failure rates and other
factors. Costs associated with some of our warranties that are provided under
long-term contracts are incorporated into our estimates of total contract costs.
There exist inherent risks and uncertainties in estimating warranty expenses,
particularly on larger or longer-term contracts. As such, if we do not
accurately estimate our warranty costs, any changes to our original estimates
could be material to our results of operations and financial
condition.
Accounting for
Income Taxes. Our deferred tax assets and liabilities are determined
based on temporary differences between financial reporting and tax bases of
assets and liabilities, applying enacted tax rates expected to be in effect for
the year in which the differences are expected to reverse. The provision for
income taxes is based on domestic and international statutory income tax rates
in the tax jurisdictions where we operate, permanent differences between
financial reporting and tax reporting and available credits and incentives. We
recognize interest and penalties related to certain uncertain tax positions in
income tax expense. The U.S. Federal government is our most significant income
tax jurisdiction.
Significant
judgment is required in determining income tax provisions and tax positions. We
may be challenged upon review by the applicable taxing authority and positions
taken by us may not be sustained. We recognize all or a portion of the benefit
of income tax positions only when we have made a determination that it is
more-likely-than-not that the tax position will be sustained upon examination,
based upon the technical merits of the position. For tax positions that are
determined as more-likely-than-not to be sustained upon examination, the tax
benefit recognized is the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement. The development of reserves
for income tax positions requires consideration of timing and judgments about
tax issues and potential outcomes, and is a subjective critical estimate. In
certain circumstances, the ultimate outcome of exposures and risks involves
significant uncertainties. If actual outcomes differ materially from these
estimates, they could have a material impact on our results of operations and
financial condition. As discussed in “Notes to Consolidated Financial
Statements – Note 1(h) Income Taxes and Note 9 Income Taxes,” on August
1, 2007 we adopted FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109” (“FIN 48”).
Provisions for
Excess and Obsolete Inventory. We record a provision for
excess and obsolete inventory based on historical and future usage
trends. Other factors may also influence our provision, including
decisions to exit a product line, technological change and new product
development. These factors could result in a change in the amount of
excess and obsolete inventory on hand. Additionally, our estimates of
future product demand may prove to be inaccurate, in which case we may have
understated or overstated the provision required for excess and obsolete
inventory. In the future, if we determine that our inventory was
overvalued, we would be required to recognize such costs in our financial
statements at the time of such determination. Any such charges could
be material to our results of operations and financial condition.
37
Allowance for
Doubtful Accounts. We perform credit evaluations of our
customers and adjust credit limits based upon customer payment history and
current creditworthiness, as determined by our review of our customers’ current
credit information. Generally, we will require cash in advance or
payment secured by irrevocable letters of credit before an order is accepted
from an international customer that we do not do business with
regularly. In addition, we seek to obtain insurance for certain
international customers. We monitor collections and payments from our
customers and maintain an allowance for doubtful accounts based upon our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within
our expectations and the allowances established, we cannot guarantee that we
will continue to experience the same credit loss rates that we have in the
past. Measurement of such losses requires consideration of historical
loss experience, including the need to adjust for current conditions, and
judgments about the probable effects of relevant observable data, including
present economic conditions such as delinquency rates and the financial health
of specific customers. Changes to the estimated allowance for
doubtful accounts could be material to our results of operations and financial
condition.
The
following table sets forth, for the periods indicated, certain income and
expense items expressed as a percentage of our consolidated net
sales:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Gross
margin
|
44.2 | 43.4 | 40.7 | |||||||||
|
Selling,
general and administrative expenses
|
16.2 | 16.4 | 17.1 | |||||||||
|
Research
and development expenses
|
7.6 | 7.3 | 6.6 | |||||||||
|
Amortization
of intangibles
|
0.3 | 0.6 | 0.6 | |||||||||
|
Operating
income
|
20.1 | 19.1 | 16.3 | |||||||||
|
Interest
expense (income), net
|
(2.1 | ) | (2.5 | ) | (1.7 | ) | ||||||
|
Income
before provision for income taxes
|
22.2 | 21.6 | 18.0 | |||||||||
|
Net
income
|
14.4 | 14.6 | 11.6 | |||||||||
We expect
that fiscal 2009 will be another record year of net sales and net income. We
believe we will continue to successfully execute our business strategies, that
we will continue to experience organic growth in our existing businesses and
that we will generate incremental net sales and net income as a result of the
Radyne acquisition.
Our
outlook by business segment is noted below:
|
·
|
Telecommunications
transmission segment - We expect that annual net sales in our
telecommunications transmission segment will increase in fiscal 2009. Our
acquisition of Radyne has further strengthened our leadership position in
our satellite earth station product line and we expect annual sales of our
satellite earth station products to increase as we believe we will benefit
from ongoing strong demand for our bandwidth efficient satellite earth
station modems, including those used to support cellular backhaul
applications. Annual sales of over-the-horizon microwave systems are also
expected to increase. We continue to be involved in lengthy negotiations
and discussions related to a number of large over-the-horizon microwave
system opportunities, and, although it is extremely difficult to predict
the timing of any potential contract award, we believe that we will be
awarded one or more contracts relating to these opportunities during
fiscal 2009. Sales in our telecommunications transmission segment can
fluctuate dramatically from period-to-period due to many factors including
the strength of our satellite earth station product line bookings and the
timing and related receipt of and performance on, large contracts from the
U.S. government and international customers for our over-the-horizon
microwave system contracts.
|
38
|
·
|
Mobile
data communications segment –We expect that annual net sales in our mobile
data communications segment will increase in fiscal 2009, primarily due to
increased demand for MTS product and services. Through
July 31, 2008, we have received $133.6
million in new orders under the MTS contract and have now supplied
over 20,000
transceivers to the MTS program. There
is approximately $184.0
million of potential
MTS
funding
available from
the Global
War on Terrorism
(“GWOT”)
funding supplement
and $9.0
million from the
government’s fiscal 2008 base
budget. In addition, there is $142.0
million of potential
MTS
funding
available for the government’s fiscal 2009 budget
(including GWOT).
Although we do not expect to receive the
full
amount of the
remaining potential
MTS
funding
available
in fiscal 2009, we expect orders and related revenue in fiscal 2009
to increase as compared to the amount we received in fiscal 2008. We
also believe that demand for our BFT products and services will remain
strong. Through July 31, 2008, we have received $134.8
million in new orders under the BFT contract and have now supplied
over 60,000
transceivers to the BFT program. We continue to be focused on maintaining
and expanding our role in both the MTS and BFT programs by upgrading and
enhancing the performance of our satellite network and transceivers. In
addition, as a result of the Radyne acquisition, we expect to generate
incremental revenue in fiscal 2009 from the design and manufacture of
microsatellites and from mobile tracking products that incorporate SENS
technology. Sales and profitability in our mobile data communications
segment can fluctuate dramatically from period-to-period due to many
factors including unpredictable funding, deployment and technology
decisions by the U.S. government as well as risks from the uncertainty of
prevailing political
conditions.
|
|
·
|
RF
microwave amplifiers segment - We believe that annual net sales in our RF
microwave amplifiers segment will increase. As a result of our acquisition
of Radyne, we more than doubled the size of our RF microwave amplifiers
segment and immediately positioned ourselves, not only as a leader in the
solid-state amplifier market, but as a leader in the satellite earth
station traveling wave tube amplifier market and expanded our RF microwave
amplifier segment’s product portfolio to include klystron tube power
amplifiers. These products are used on U.S. government satellite programs
including the Family of Advanced Beyond-Line-of-Sight Terminal and the
Wideband Global Satellite Communications programs. Sales of our
solid-state high-power broadband amplifiers are expected to be comparable
to the levels experienced in fiscal 2008. Although we currently expect
sales of amplifiers that are used on the Crew 2.1 program to decline from
the levels achieved in fiscal 2008, we believe we will experience
increased sales of solid-state, high-power, broadband amplifiers used for
other defense-related and satellite applications. Sales in our RF
microwave amplifiers segment can fluctuate dramatically from
period-to-period due to many factors including the receipt of and
performance on, large contracts from the U.S. government and international
customers. In addition, sales and profitability can fluctuate due to
longer than anticipated production times associated with contracts for
certain complex amplifiers and high-power switches that employ newer
technology.
|
Our gross
profit, as a percentage of fiscal 2009 net sales, is expected to decline from
the percentage achieved in fiscal 2008, primarily due to the inclusion of sales
of Radyne’s products which traditionally have been sold at gross margins below
those of our existing businesses. In connection with our acquisition
of Radyne, on August 1, 2008, we initiated a restructuring plan to achieve
operating efficiencies by eliminating redundant functions and related expenses
by closing Radyne’s Phoenix, Arizona manufacturing facility and integrating that
operation into our high-volume technology manufacturing center located in Tempe,
Arizona. We expect this integration to be completed during the second half of
fiscal 2009. Our gross margin in fiscal 2009 will also be negatively impacted by
amortization of $1.5 million related to the estimated fair value step-up of
inventory acquired.
Selling,
general and administrative expenses for fiscal 2009, as a percentage of net
sales, are expected to be slightly lower than our historical spending pattern
over the past three years, as we expect to benefit from synergies associated
with the acquisition of Radyne. We are currently in the process of integrating
Radyne’s corporate functions, into our Melville, New York corporate
headquarters. We expect this integration to be completed by the second half of
fiscal 2009.
Research
and development expenses for fiscal 2009, as a percentage of net sales, are
expected to be comparable to our historical spending pattern over the past three
years. During fiscal 2009, we believe that we will begin to take advantage of
our combined engineering and sales talents to drive further innovation in the
marketplace and deliver new and advanced products to our customers in all three
of our business segments. In addition, in connection with the acquisition,
during the three months ended October 31, 2008 (our first quarter of fiscal
2009), and in accordance with SFAS No. 141, “Business Combinations,” we expect,
based on a preliminary analysis, to record a one-time amortization charge of
$6.2 million reflecting the fair value of in-process research and development
acquired.
39
Total
amortization of stock-based compensation expense (which is allocated to the cost
of sales, selling, general and administrative and research and development
expense line items in our consolidated statement of operations) for fiscal 2009,
is expected to be similar to fiscal 2008.
Amortization
of intangibles is expected to substantially increase in fiscal 2009 due to the
Radyne and Verso acquisitions. We are accounting for both the acquisitions of
Radyne and Verso in accordance with SFAS No. 141. As of August 1, 2008, and
based on our preliminary estimates, we expect incremental amortization of
approximately $6.9 million, of
which $5.4 million (to be
recorded as operating expenses in our consolidated statements of operations) is
related to amortization of intangibles and $1.5 million (to be
recorded as cost of sales in our consolidated statements of operations) is
related to the estimated fair value step-up of Radyne's inventory
acquired.
Interest
income is expected to be significantly lower due to the decline in interest
rates as well as the use of cash for the Radyne acquisition. We expect to earn
approximately 2.00% to 2.30% on our cash and cash equivalents in fiscal 2009.
Interest expense is expected to primarily reflect interest associated with our
2.0% convertible notes.
Our estimated tax rate of
35.75% for fiscal 2009 reflects the fact, among others, that the
Federal research and experimentation ("R&E") credit has expired as of
December 31, 2007. Our tax rate for fiscal 2008 was 35.3%.
Based on
the aforementioned, we believe our net income will increase from the levels
achieved in fiscal 2008 and that fiscal 2009 will be another record
year.
Net Sales.
Consolidated net sales were $531.6 million and $445.7 million for fiscal
2008 and 2007, respectively, representing an increase of $85.9 million, or
19.3%. The increase in net sales reflects significant growth in both our mobile
data communications and RF microwave amplifiers segments, partially offset by
lower net sales, as anticipated, in our telecommunications transmission
segment.
Net sales
in our telecommunications transmission segment were $208.9 million and $219.9
million for fiscal 2008 and 2007, respectively, a decrease of $11.0 million, or
5.0%. Net sales in this segment reflect increased sales of our satellite earth
station products which were more than offset by lower sales, as anticipated, of
our over-the-horizon microwave systems. Sales of our satellite earth station
products for fiscal 2008 were higher than fiscal 2007 as we continue to benefit
from the ongoing strong demand for our bandwidth efficient satellite earth
station modems, including those used to support cellular backhaul applications.
Net sales of our over-the-horizon microwave systems for fiscal 2008 were
significantly lower than fiscal 2007 primarily due to lower sales of our 16 Mbps
troposcatter modem upgrade kits for use on the U.S. Department of Defense’s
(“DoD”) AN/TRC-170 digital troposcatter terminals and lower indirect sales to
our North African country end-customer. Net sales in fiscal 2007 include sales
of $1.2 million relating to a gross profit adjustment, as discussed below, on a
large over-the-horizon microwave system contract. Our telecommunications
transmission segment represented 39.3% of consolidated net sales for fiscal 2008
as compared to 49.3% for fiscal 2007.
Sales and
profitability in our telecommunications transmission segment can fluctuate from
period-to-period due to many factors including the book-and-ship nature
associated with our satellite earth station products and the timing of, and our
related performance on, contracts from the U.S. government and international
customers for our over-the-horizon microwave systems.
Net sales
in our mobile data communications segment were a record $261.1 million for
fiscal 2008 and $189.6 million for fiscal 2007, an increase of $71.5 million, or
37.7%. This increase in net sales was due to the significant increase in
deliveries to the U.S. Army for orders placed under our new MTS and BFT
contracts. Deliveries to the Army National Guard, for orders placed under the
MTS contract, were significantly lower during fiscal 2008. Net sales
for fiscal 2007 included sales of $1.1 million relating to a favorable gross
profit adjustment on our original MTS contract. Our mobile data communications
segment represented 49.1% of consolidated net sales for fiscal 2008 as compared
to 42.6% for fiscal 2007.
Sales and
profitability in our mobile data communications segment can fluctuate
dramatically from period-to-period due to many factors, including unpredictable
funding, deployment and technology decisions by the U.S. government. In
addition, both our new MTS and BFT contracts are IDIQ contracts, and as such,
the U.S. Army is generally not obligated to purchase any equipment or services
under these contracts. In addition, we are aware, that on occasion, the U.S.
government has experienced delays in the receipt of certain components that are
eventually provided to us for incorporation into our mobile satellite
transceivers. If we do not receive these U.S. government furnished components in
a timely manner, we could experience delays in fulfilling funded and anticipated
orders from our customers.
40
Net sales in our RF microwave amplifiers segment were a record $61.6 million for fiscal 2008, compared to $36.2 million for fiscal 2007, an increase of $25.4 million, or 70.2%. The significant increase in net sales was due to higher sales of our amplifiers and high-power switches that are incorporated into defense-related systems, primarily sales associated with our participation in the Counter Remote-Control Improvised Explosive Device Electronic Warfare 2.1 (“CREW 2.1”) program. Our RF microwave amplifiers segment represented 11.6% of consolidated net sales for fiscal 2008 as compared to 8.1% for fiscal 2007.
International
sales (which include sales to U.S. companies for inclusion in products that are
sold to international customers) represented 26.7% and 26.2% of consolidated net
sales for fiscal 2008 and 2007, respectively. Domestic commercial sales
represented 6.9% and 12.5% of consolidated net sales for fiscal 2008 and 2007,
respectively. Sales to the U.S. government (including sales to prime contractors
of the U.S. government) represented 66.4% and 61.3% of consolidated net sales
for fiscal 2008 and 2007, respectively.
Gross
Profit. Gross
profit was $234.9 million and $193.3 million for fiscal 2008 and 2007,
respectively, representing an increase of $41.6 million, or
21.5%. The increase in gross profit was attributable to the increase in net
sales discussed above and related increased operating efficiencies. Gross profit
as a percentage of net sales increased to 44.2% for fiscal 2008 from 43.4% for
fiscal 2007.
Excluding
the impact of adjustments discussed below, our gross profit as a percentage of
net sales for fiscal 2007 would have been 41.0%. The increase in the gross
profit percentage from 41.0% to 44.2% was driven by an increase in the gross
profit percentage in both our mobile data communications and telecommunications
transmission segments. These increases were partially offset by the impact of a
higher percentage of consolidated net sales occurring within the mobile data
communications segment, which typically has a lower gross profit percentage than
our telecommunications transmission segment. In addition, in fiscal 2008, we
experienced a lower gross profit percentage in our RF microwave amplifiers
segment.
Our
mobile data communications segment experienced a higher gross profit percentage
due to increased operating efficiencies associated with increased sales related
to our new MTS and BFT contracts and a more favorable product mix during fiscal
2008 as compared to fiscal 2007. Our telecommunications transmission segment
experienced a higher gross profit percentage as it benefited from increased
usage of our high-volume technology manufacturing center (including both
incremental satellite earth station product sales and use by our two other
operating segments) that was partially offset by lower sales of our
16 Mbps troposcatter modem upgrade kits. In addition, in fiscal 2008 our
telecommunications transmission segment’s gross profit percentage was favorably
impacted by a $0.7 million reduction in our estimated reserve for warranty
obligations due to lower than anticipated claims received on contracts whose
warranty periods have expired. Our RF microwave amplifiers segment experienced a
lower gross profit percentage due to long production times associated with
contracts for certain complex amplifiers and high-power switches that employ
newer technology.
During
fiscal 2007 we recorded favorable cumulative gross profit adjustments of $11.8
million (of which $10.7 million related to the mobile data communications
segment and $1.1 million related to the telecommunications transmission
segment), resulting from our ongoing review of total estimated contract revenues
and costs, and the related gross margin at completion, on long-term contracts.
These adjustments were partially offset by a $0.1 million firmware-related
warranty provision in our mobile data communications segment.
Included in cost of sales for
fiscal 2008 and 2007 are
provisions for excess and obsolete inventory of $2.4 million and $4.5
million, respectively. As discussed in our “Critical Accounting Policies –
Provisions for Excess and Obsolete Inventory,” we regularly review our inventory
and record a provision for excess and obsolete inventory based on historical and
projected usage assumptions.
Selling, General
and Administrative Expenses. Selling, general
and administrative expenses were $86.0 million and $73.3 million for fiscal 2008
and 2007, respectively, representing an increase of $12.7 million, or 17.3%. The
increase in expenses was primarily attributable to higher payroll-related
expenses (including amortization of stock-based compensation and cash-based
incentive compensation) associated with the overall increase in our net sales
and profits and, to a lesser extent, legal and other professional fees,
including costs associated with the Brazil Subpoena and Export Matters,
discussed in “Notes to
Consolidated Financial Statements – Note (13) Commitments and
Contingencies.” As a percentage of consolidated net sales,
selling, general and administrative expenses were 16.2% and 16.4% for fiscal
2008 and 2007, respectively.
Amortization
of stock-based compensation expense recorded as selling, general and
administrative expenses increased to $8.1 million in fiscal 2008 from $5.8
million in fiscal 2007.
41
Research and
Development Expenses. Research and development expenses were
$40.5 million and $32.5 million for fiscal 2008 and 2007, respectively,
representing an increase of $8.0 million, or 24.6%. The increase in expenses
primarily reflects our continued investment in research and development efforts
across all of our business segments. As a percentage of consolidated net sales,
research and development expenses were 7.6% and 7.3% for fiscal 2008 and 2007,
respectively.
For
fiscal 2008 and 2007, research and development expenses of $24.1 million and
$21.0 million, respectively, related to our telecommunications transmission
segment, $10.8 million and $7.9 million, respectively, related to our mobile
data communications segment, $3.9 million and $2.5 million, respectively,
related to our RF microwave amplifiers segment, with the remaining expenses
related to the amortization of stock-based compensation expense which is not
allocated to our three operating segments. Amortization of stock-based
compensation expense recorded as research and development expenses increased to
$1.7 million in fiscal 2008 from $1.1 million in fiscal 2007.
As an
investment for the future, we are continually enhancing our existing products
and developing new products and technologies. Whenever possible, we seek
customer funding for research and development to adapt our products to
specialized customer requirements. During fiscal 2008 and 2007, customers
reimbursed us $7.8 million and $4.2 million, respectively, which is not
reflected in the reported research and development expenses, but is included in
net sales with the related costs included in cost of sales.
Amortization of
Intangibles. Amortization of intangibles was $1.7 million and $2.6
million for fiscal 2008 and 2007, respectively. The amortization primarily
relates to intangibles with finite lives that we acquired in connection with
various acquisitions. The decrease in amortization of intangibles for fiscal
2008 is related to certain intangibles that have been fully
amortized.
Operating
Income. Operating income for fiscal 2008 and 2007 was $106.8
million and $84.9 million, respectively. The $21.9 million, or 25.8%, increase
was primarily the result of the higher consolidated net sales and gross margin
percentage during fiscal 2008, partially offset by increased operating expenses
(including research and development expenses) as discussed above.
Operating
income in our telecommunications transmission segment decreased to $56.7 million
for fiscal 2008 from $59.2 million for fiscal 2007, primarily driven by lower
net sales (at a higher gross margin percentage) and increased operating expenses
(including expenses associated with the Brazil Subpoena and Export Matters). In
addition, as discussed above under Gross Profit, included in
operating income for fiscal 2007 is a cumulative adjustment related to a large
over-the-horizon microwave systems contract which favorably impacted operating
income by $0.9 million.
Our
mobile data communications segment generated operating income of $72.8 million
for fiscal 2008 as compared to $45.4 million for fiscal 2007. The increase in
operating income was primarily due to the increase in net sales and gross
margins achieved during fiscal 2008, partially offset by increased operating
expenses. As discussed above under “Gross Profit,” included in
operating income in fiscal 2007 is the positive impact from cumulative
adjustments, net of the firmware-related warranty provision, of $9.1
million.
Operating
income in our RF microwave amplifiers segment increased to $4.4 million for
fiscal 2008 from $3.7 million for fiscal 2007 due primarily to the increase in
net sales (at a lower gross profit percentage) partially offset by increased
spending on research and development activities.
Unallocated
operating expenses increased to $27.1 million for fiscal 2008 from $23.3 million
for fiscal 2007 due to higher payroll-related expenses (including amortization
of stock-based compensation and cash-based incentive compensation) as well as
increased other costs associated with growing our business. Amortization of
stock-based compensation expense increased to $10.6 million in fiscal 2008 from
$7.4 million in fiscal 2007. This increase is primarily attributable to an
increase in both the number and related fair value of stock-based awards that
are being amortized over their respective service periods for fiscal 2008 as
compared to fiscal 2007.
Interest
Expense. Interest expense was $2.7 million for both fiscal
2008 and 2007. Interest expense primarily represents interest associated with
our 2.0% convertible senior notes.
Interest Income
and Other. Interest income and other for fiscal 2008 was $14.1
million, as compared to $14.2 million for fiscal 2007. The decrease of $0.1
million was primarily due to a decline in interest rates partially offset by an
increase in investable cash since July 31, 2007.
42
Provision for
Income Taxes. The provision for income taxes was $41.7 million and $31.2
million for fiscal 2008 and 2007, respectively. Our effective tax
rate was 35.3% and 32.4% for fiscal 2008 and 2007, respectively.
Our effective tax rate for fiscal 2007 of 32.4%
included discrete tax benefits of approximately $2.6 million (including a $1.0
million tax benefit due to the expiration of applicable statutes of limitations
and a $0.6 million tax benefit relating to the retroactive extension of Federal
R&E credits in December 2006). Excluding these discrete tax benefits, our
effective tax rate for fiscal 2007 was approximately 35.0%. The increase from
35.0% to 35.3% in fiscal 2008 was primarily driven by the expiration of the
R&E credit as of December 31, 2007.
Our tax
rate for fiscal 2008 reflects an agreement we reached with the Internal Revenue
Service (“IRS”) relating to its completion of the audit of our Federal income
tax returns for fiscal 2004 and fiscal 2005. The agreement primarily relates to
the allowable amount of R&E credits utilized and interest expense relating
to our 2% convertible senior notes. The IRS has also informed us that it intends
to audit our fiscal 2006 tax return with a focus on the same items it disallowed
in fiscal 2004 and fiscal 2005. Our provision for income tax in fiscal 2008,
reflects a net discrete tax cost of approximately $0.1 million, primarily
related to the agreement with the IRS and our estimate of anticipated future
disallowable R&E credits and interest expense.
Although
adjustments relating to our fiscal 2004 and fiscal 2005 tax return were
immaterial, a resulting tax assessment or settlement for fiscal 2006 and other
periods that may be selected for future audit could have a material adverse
impact on our results of operations and financial position.
Net
Sales. Consolidated net sales were $445.7 million and $391.5
million for fiscal 2007 and 2006, respectively, representing an increase of
$54.2 million, or 13.8%. The increase in net sales reflected growth in our
telecommunications transmission and mobile data communications segments,
partially offset by lower net sales in our RF microwave amplifiers
segment.
Net sales
in our telecommunications transmission segment were $219.9 million and $197.9
million for fiscal 2007 and 2006, respectively, an increase of $22.0 million, or
11.1%. The increase in net sales in this segment primarily reflected increased
sales of our over-the-horizon microwave systems and satellite earth station
products. Sales of our over-the-horizon microwave systems for fiscal 2007 were
higher than fiscal 2006 due to deliveries of our 16 Mbps troposcatter modem
upgrade kits for use on the U.S. Department of Defense’s (“DoD”) AN/TRC-170
digital troposcatter terminals. On the other hand, sales of our over-the-horizon
microwave systems, both direct and indirect, to our North African country
end-customer were lower during fiscal 2007 as we believe the end-customer is
between major phases of a multi-year roll-out of a large project. Net sales in
fiscal 2007 include sales of $1.2 million relating to a gross profit adjustment,
as discussed below, on a large over-the-horizon microwave system contract. Sales
of satellite earth station products in fiscal 2007 were higher than fiscal 2006
as we continued to benefit from demand for our bandwidth efficient satellite
earth station modems, including those used to support cellular backhaul
applications. Our telecommunications transmission segment represented 49.3% of
consolidated net sales for fiscal 2007 as compared to 50.5% for fiscal
2006.
Net sales
in our mobile data communications segment were $189.6 million and $149.5 million
for fiscal 2007 and 2006, respectively, an increase of $40.1 million, or 26.8%.
The increase in net sales was due to an increase in deliveries to the U.S. Army
and Army National Guard for ongoing support of MTS program activities and higher
sales of battlefield command and control applications to the U.S. military. This
increase was partially offset by a decline in net sales of $17.3 million related
to the impact of our decision, made in fiscal 2006, to significantly
de-emphasize stand-alone sales of low margin turnkey employee mobility
solutions. Net sales in fiscal 2007 and 2006 include sales of $1.1 million and
$9.5 million, respectively, relating to gross profit adjustments on our original
MTS contract, discussed below. Our mobile data communications segment
represented 42.6% of consolidated net sales for fiscal 2007 as compared to 38.2%
for fiscal 2006.
Net sales
in our RF microwave amplifiers segment were $36.2 million for fiscal 2007
compared to $44.1 million for fiscal 2006, a decrease of $7.9 million, or 17.9%.
The decrease in net sales was due to lower sales of our amplifiers that are
incorporated into improvised explosive device jamming systems, as well as
certain orders in the backlog that shipped in fiscal 2008. Our RF microwave
amplifiers segment represented 8.1% of consolidated net sales for fiscal 2007 as
compared to 11.3% for fiscal 2006.
43
International
sales (which include sales to U.S. companies for inclusion in products which are
sold to international customers) represented 26.2% and 35.6% of consolidated net
sales for fiscal 2007 and 2006, respectively. Domestic commercial
sales represented 12.5% and 17.1% of consolidated net sales for fiscal 2007 and
2006, respectively.
During
fiscal 2007 and 2006, one customer, a prime contractor, represented 5.4% and
10.2% of consolidated net sales, respectively.
Gross
Profit. Gross profit was $193.3 million and $159.3 million for
fiscal 2007 and 2006, respectively, representing an increase of $34.0 million,
or 21.3%. The increase in gross profit was primarily attributable to
the increase in net sales discussed above, as well as an increase in the gross
profit percentage to 43.4% for fiscal 2007 from 40.7% for 2006.
As
discussed further below, we recorded favorable cumulative adjustments relating
to certain long-term contracts, which were partially offset by a
firmware-related warranty provision in both periods. Excluding the impact of
these adjustments and the firmware-related warranty provision, to both net sales
and gross profit, our gross profit as a percentage of sales for fiscal 2007 and
2006 would have been 41.0% and 39.8%, respectively. The increase in the adjusted
gross profit percentage was primarily due to increased gross margins within our
telecommunications transmission segment, primarily due to the benefit of higher
sales of our new 16 Mbps troposcatter modem upgrade kits, and increased
operating efficiencies in our mobile data communications segment, including the
benefit of our decision to significantly de-emphasize stand-alone sales of low
margin turnkey employee mobility solutions. The increase in gross margins was
offset, in part, by lower gross margins in our RF microwave amplifiers segment
primarily due to lower sales and product mix.
During
fiscal 2007 and 2006, we recorded favorable cumulative gross profit adjustments
of $11.8 million (of which $10.7 million related to the mobile data
communications segment and $1.1 million related to the telecommunications
transmission segment) and $9.1 million (of which $8.5 million related to the mobile data
communications segment and $0.6 million related to the RF microwave
amplifiers segment), respectively, relating to our ongoing review of
total estimated contract revenues and costs, and the related gross margin at
completion, on long-term contracts. Offsetting these adjustments, in our mobile
data communications segment and included in cost of sales for fiscal 2007
and 2006, is a firmware-related warranty provision of $0.1 million and $1.7
million, respectively.
The
favorable cumulative gross profit adjustments recorded in both periods in our
mobile data communications segment resulted from the increase in the estimated
gross profit at completion on our original MTS contract. The adjustments are
primarily related to increased operating efficiencies and, as it relates to
fiscal 2007, the finalization of our total contract costs (including estimates
for warranty obligations) relating to the completion of the original MTS
contract. The favorable cumulative
gross profit adjustment recorded in our telecommunications transmission segment
during fiscal 2007 related to an increase in the estimated gross profit at
completion on a large over-the-horizon microwave system contract. The favorable
cumulative gross profit adjustment recorded in our RF microwave amplifiers
segment during fiscal 2006 related to a U.S. military contract that was
substantially completed in fiscal 2006.
Included in cost of sales for
fiscal 2007 and 2006 are
provisions for excess and obsolete inventory of $4.5 million and $2.0
million, respectively. As discussed in our “Critical Accounting Policies –
Provisions for Excess and Obsolete Inventory,” we regularly review our inventory
and record a provision for excess and obsolete inventory based on historical and
projected usage assumptions.
Selling, General
and Administrative Expenses. Selling, general and
administrative expenses were $73.3 million and $67.1 million for fiscal 2007 and
2006, respectively, representing an increase of $6.2 million, or 9.2%. The
increase in expenses was primarily attributable to higher payroll-related
expenses (including amortization of stock-based compensation) and increased
other costs associated with the growth of our business. This increase was
offset, in part, by lower expenses in our mobile data communications segment as
we continued to de-emphasize stand-alone sales of low margin turnkey employee
mobility solutions. As a percentage of consolidated net sales, selling, general
and administrative expenses were 16.4% and 17.1% for fiscal 2007 and 2006,
respectively.
Amortization
of stock-based compensation expense recorded as selling, general and
administrative expenses increased to $5.8 million in fiscal 2007 from $4.6
million in fiscal 2006.
44
Research and
Development Expenses. Research and development expenses were
$32.5 million and $25.8 million for fiscal 2007 and 2006, respectively,
representing an increase of $6.7 million, or 26.0%. Approximately $21.0 million
and $19.0 million of such amounts, respectively, related to our
telecommunications transmission segment, with the remaining expenses primarily
related to our mobile data communications segment and, to a lesser extent, our
RF microwave amplifiers segment. As a percentage of consolidated net sales,
research and development expenses were 7.3% and 6.6% for fiscal 2007 and 2006,
respectively.
As an
investment for the future, we are continually enhancing our existing products
and developing new products and technologies. Whenever possible, we
seek customer funding for research and development to adapt our products to
specialized customer requirements. During fiscal 2007 and 2006, customers
reimbursed us $4.2 million and $4.4 million, respectively, which is
not reflected in the reported research and development expenses, but is included
in net sales with the related costs included in cost of sales.
Amortization
of stock-based compensation expense recorded as research and development
expenses increased to $1.1 million in fiscal 2007 from $0.7 million in fiscal
2006.
Amortization of
Intangibles. Amortization of intangibles for fiscal 2007 and
2006 was $2.6 million and $2.5 million, respectively. The
amortization primarily relates to intangibles with finite lives that we acquired
in connection with various acquisitions (including the acquisitions of Insite
and Digicast that occurred in fiscal 2007).
Operating
Income. Operating income for fiscal 2007 and 2006 was $84.9
million and $63.9 million, respectively. The $21.0 million, or 32.9%
increase, was primarily the result of the higher sales and gross profit,
discussed above.
Operating
income in our telecommunications transmission segment increased to $59.2 million
for fiscal 2007 from $49.8 million for fiscal 2006, as a result of increased net
sales and gross profit, partially offset by increased operating expenses. In
addition, as discussed above under “Gross Profit,” included in
operating income for fiscal 2007 is a cumulative adjustment related to a large
over-the-horizon microwave systems contract which favorably impacted operating
income by $0.9 million.
Our
mobile data communications segment generated operating income of $45.4 million
for fiscal 2007 compared to $21.7 million for fiscal 2006. The increase in
operating income was primarily due to the increase in net sales and operating
efficiencies achieved, including the benefit of lower selling, general and
administrative expenses as we continued to de-emphasize stand-alone sales of low
margin turnkey employee mobility solutions. In addition, as discussed above
under “Gross Profit,”
included in operating income for fiscal 2007 and 2006, are positive impacts from
the cumulative adjustments, net of the respective firmware-related warranty
provisions, of $9.1 million and $5.8 million, respectively.
Operating
income in our RF microwave amplifiers segment decreased to $3.7 million for
fiscal 2007 from $8.3 million for fiscal 2006 due primarily to lower net sales
and lower gross margins. In addition, as discussed above under “Gross Profit,” included in
operating income for fiscal 2006 is a cumulative adjustment which favorably
impacted operating income by $0.5 million.
Unallocated
operating expenses increased to $23.3 million for fiscal 2007 from $15.9 million
for fiscal 2006 due primarily to higher payroll-related expenses (including
increased amortization of stock-based compensation), as well as increased other
costs associated with growing our business. Amortization of stock-based
compensation expense increased to $7.4 million in fiscal 2007 from $5.7 million
in fiscal 2006. This increase was primarily attributable to an increase in both
the number and related fair value of stock-based awards that are being amortized
over their respective service periods for fiscal 2007 as compared to fiscal
2006.
Interest
Expense. Interest expense was $2.7 million for both fiscal
2007 and 2006. Interest expense primarily relates to our 2.0%
convertible senior notes.
Interest Income
and Other. Interest income and other for fiscal 2007 was $14.2
million, as compared to $9.2 million for fiscal 2006. The $5.0
million increase was primarily due to an increase in interest rates and
additional investable cash since July 2006.
45
Provision for
Income Taxes. The provision for income taxes was $31.2 million and $25.2
million for fiscal 2007 and 2006, respectively. Our effective tax rate was 32.4%
and 35.8% for fiscal 2007 and 2006, respectively.
The
decrease in the effective tax rate was primarily attributable to the passage of
legislation, in fiscal 2007, extending the Federal research and experimentation
credit, including $0.6 million of tax benefits related to the retroactive
application of the credit to fiscal 2006, and the approval by our stockholders
of an amendment to the 2000 Stock Incentive Plan (the “Plan”) which will permit
us to claim tax deductions for cash incentive awards anticipated to be paid
under the Plan without limitation under §162(m) of the Internal Revenue Code. In
addition, we also recorded incremental tax benefits aggregating $2.0 million
during fiscal 2007 including a $1.0 million tax benefit due to the expiration of
applicable statutes of limitations. Our tax rate for fiscal 2006 was favorably
impacted by the recording of a net benefit of $0.6 million primarily relating to
the favorable settlement of a state tax matter. Excluding adjustments, our
effective tax rate for fiscal 2007 approximated 35.0%.
Our
unrestricted cash and cash equivalents increased to $410.1 million at July 31,
2008 from $342.9 million at July 31, 2007, representing an increase of $67.2
million. None of our cash equivalents include municipal auction-rate securities.
On August 1, 2008 (the beginning of our fiscal year 2009), and as more fully
described throughout this Form 10-K, we purchased Radyne using a portion of our
existing cash and cash equivalents for a preliminary aggregate purchase price of
approximately $231.7 million (including estimated transaction costs and payments
made for outstanding share-based stock awards).
Net cash
provided by operating activities was $77.8 million for fiscal 2008 compared to
$89.2 million for fiscal 2007. The decrease in cash provided by operating
activities, during fiscal 2008 as compared to fiscal 2007, was driven by an
increase in working capital requirements associated with the significant
increase in sales activity in our mobile data communications and RF microwave
amplifiers segments. The increase in working capital requirements (primarily for
inventory) was driven by the timing of shipments to our customers, as well as
the necessary investment in inventory in support of current
backlog.
Net cash
used in investing activities for fiscal 2008 was $20.5 million, of which $14.1
million was for purchases of property, plant and equipment including
expenditures relating to ongoing equipment upgrades as well as enhancements to
our high-volume technology manufacturing center in Tempe, Arizona. In fiscal
2008, we purchased the network backhaul assets and the NetPerformer and
AccessGate product lines of Verso Technologies for approximately $3.9 million.
Through July 31, 2008, we incurred approximately $3.2 million of acquisition
costs associated with the purchase of Radyne, of which approximately $2.1
million were paid.
We
currently expect capital expenditures for fiscal 2009 to be approximately $20.0
million to $22.0 million.
Net cash
provided by financing activities was $9.8 million for fiscal 2008, due primarily
to the proceeds from stock-option exercises and employee stock purchase plan
shares aggregating $7.6 million and a $2.4 million excess income tax benefit
from the exercise of stock awards.
We have
historically met both our short-term and long-term cash requirements with funds
provided by a combination of cash and cash equivalent balances, cash generated
from operating activities and financing transactions. Based on our anticipated
level of future sales and operating income, we believe that our existing cash
and cash equivalent balances and our cash generated from operating activities
will be sufficient to meet both our currently anticipated short-term and
long-term cash requirements. In addition, should our short-term or long-term
cash requirements increase beyond our current expectations, we believe that we
would have sufficient access to credit from financial institutions and/or
financing from public and private debt and equity markets.
As of
July 31, 2008, our material short-term cash requirements primarily consisted of
working capital needs and the $231.7 million of cash and cash equivalents
necessary to complete the acquisition of Radyne. In addition to the aggregate
purchase price, the acquisition of Radyne also triggered certain liabilities
associated with Radyne’s change-in-control and professional fee agreements,
which we assumed, aggregating $4.1 million.
46
Our
material long-term cash requirements primarily consists of the possible use of
cash to repay $105.0 million of our 2.0% convertible senior notes due 2024,
including any interest accreted into the principal amount of the notes after
February 1, 2011, and contractual non-cancellable lease obligations aggregating
$14.8 million. We are currently in preliminary negotiations with a tenant who
subleases, from us, a portion of Radyne’s Phoenix, Arizona facility. If
these negotiations are not successful, we intend to perform an assessment on
whether or not we will be able to sublease the Phoenix, Arizona facility for the
remaining duration of the lease, and at what rent, if any, we might be able to
receive, given the poor real estate market conditions in the Phoenix, Arizona
area as well as uncertainties relating to the local economic
environment.
As of
July 31, 2008, $105.0 million of our 2.0% convertible senior notes were
outstanding. As discussed further in “Notes to Consolidated Financial
Statements – Note (8) - 2.0% Convertible Senior Notes due 2024,” we could
be obligated to repurchase these notes in the short-term (i) if all or a portion
of the outstanding notes are converted during a conversion period and we elect
to deliver cash to the converting noteholders, (ii) if we elect to redeem some
or all of the outstanding notes on or after February 4, 2009 using
cash, or (iii) upon the occurrence of certain events, including a change in
control of our company.
Financing
Arrangement
On
January 27, 2004, we issued $105.0 million of our 2.0% convertible senior notes
in a private offering pursuant to Rule 144A under the Securities Act of 1933, as
amended. For further information concerning this financing, see “Notes to Consolidated Financial
Statements – Note (8) - 2.0% Convertible Senior Notes due
2024.”
Commitments
In the
normal course of business, we routinely enter into binding and non-binding
purchase obligations primarily covering anticipated purchases of inventory and
equipment. We do not expect that these commitments, as of July 31, 2008, will
materially adversely affect our liquidity.
At July
31, 2008, we had contractual cash obligations to repay our 2.0% convertible
senior notes, operating lease obligations (including satellite lease
expenditures relating to our mobile data communications segment contracts) and
the financing of a purchase of proprietary technology. Payments due under these
long-term obligations, excluding interest on the 2.0% convertible senior notes,
are as follows:
|
Obligations
Due by Fiscal Years (in thousands)
|
||||||||||||||||||||
|
Total
|
2009
|
2010
and
2011
|
2012
and
2013
|
After
2014
|
||||||||||||||||
|
2.0%
convertible senior notes
|
$ | 105,000,000 | - | - | - | 105,000,000 | ||||||||||||||
|
Operating
lease commitments
|
38,781,000 | 25,095,000 | 7,385,000 | 2,911,000 | 3,390,000 | |||||||||||||||
|
Other
obligations
|
113,000 | 113,000 | - | - | - | |||||||||||||||
|
Total
contractual cash obligations
|
$ | 143,894,000 | 25,208,000 | 7,385,000 | 2,911,000 | 108,390,000 | ||||||||||||||
On
August 1, 2008 (the beginning of our fiscal year 2009), and as more fully
described throughout this Form 10-K, we purchased Radyne using a portion of our
existing cash and cash equivalents for a preliminary aggregate purchase price of
approximately $231.7
million. The acquisition of Radyne also triggered certain liabilities associated
with Radyne’s change-in-control and professional fee agreements aggregating
$4.1
million. In addition, on August 1, 2008, we immediately adopted a restructuring
plan and are currently in the process of closing Radyne’s Phoenix, Arizona
manufacturing facility and integrating that operation into our high-volume
technology manufacturing center located in Tempe, Arizona. Radyne’s corporate
functions, which were co-located in Radyne’s Phoenix, Arizona manufacturing
facility, are currently being moved to our Melville, New York
corporate office. In connection with the realization of operating synergies, we
have preliminarily estimated that we might incur up to $9.6
million of restructuring costs. Such amounts are not included in the above
table.
47
As
further discussed in “Notes to
Consolidated Financial Statements – Note (8) - 2.0% Convertible Senior Notes due
2024,” we may, at our option, redeem some or all of the notes on or after
February 4, 2009. Holders of our 2.0% convertible senior notes will have the
right to require us to repurchase some or all of the outstanding notes on
February 1, 2011, February 1, 2014 and February 1, 2019 and upon certain events.
The notes can be converted, at the option of the noteholders, during the
conversion period of September 15, 2008 through December 15, 2008. Upon
receiving notification of a noteholder’s intent to convert, we, in accordance
with the provisions of the indenture, will inform the noteholder of our
intention to deliver shares of common stock or cash, or a combination
thereof.
We have
entered into standby letter of credit agreements with financial institutions
relating to the guarantee of future performance on certain contracts. At July
31, 2008, the balance of these agreements was $2.7 million.
Brazil Subpoena and Export
Matters
In
October 2007, our Florida-based subsidiary, Comtech Systems, Inc. (“CSI”),
received a customs export enforcement subpoena from the U.S. Immigration and
Customs Enforcement (“ICE”) branch of the Department of Homeland Security. The
subpoena relates to CSI’s $2.0 million contract with the Brazilian Naval
Commission (the Brazil contract) and it required the production of all books,
records and documents, including copies of contracts, invoices and payments
related to agreements between CSI, its agent, its subcontractor and the
Brazilian government. We believe that the ICE investigation is focused primarily
on whether or not CSI was in compliance with export-related laws and
regulations, including the International Traffic in Arms Regulations (“ITAR”)
and the Export Administration Regulations. CSI produced documents in response to
the subpoena request. Customs
officials have detained certain inventory related to the Brazil contract pending
resolution of this matter.
We engaged outside counsel to assist CSI
in its response to the subpoena and related matters and to conduct our own
investigation. Based on our ongoing investigation into this matter, we
believe that the detained inventory, which consists of commercial satellite
equipment, was not modified or adapted in any way to meet Brazilian military
requirements and was only subject to the jurisdiction of the Department of
Commerce and not the jurisdiction of the U.S. Department of State. In addition,
in order to provide certain defense services, including conducting factory
acceptance testing at CSI’s Florida facility, we obtained a license (referred to
as a Technical Assistance Agreement (“TAA”)) from the U.S. Department of State.
We believe that the TAA authorized all activities under the Brazil contract that
were subject to the jurisdiction of the U.S. Department of State.
We
believe that CSI made a good faith effort to comply with applicable regulations;
however, we believe that CSI made inadvertent administrative errors resulting in
a TAA that did not become effective on a timely basis. The administrative errors
relate primarily to the execution of non-disclosure agreements (“NDA”) with
certain third country national employees of CSI’s agent. These individuals have
now signed appropriate NDAs, and, in December 2007, CSI filed an amended TAA
with the U.S. Department of State. CSI has requested that the U.S. Department of
State confirm CSI’s and our view that the Brazil contract does not require any
other State Department license.
In March
2008, the Enforcement Division of the U.S. Department of State informed us that
they were reviewing our amended TAA. In May 2008, the U.S.
Attorney’s Office in the Middle District of
Florida informed us that, based on its conversations with the ICE agent who
initiated the subpoena, it was closing its investigation into the Brazil matter.
In June 2008, the ICE agent informed us that he would recommend that the
detained inventory be released back to us upon the U.S. Department of State
confirming our position that a State Department license for the hardware shipped
was not required. In August 2008, the ICE agent informed us that the U.S.
Department of State wanted to clarify certain technical matters and, on its
behalf, the ICE agent was going to interview one of our engineers. This
interview occurred in September of 2008. We continue to remain cautiously
optimistic that we will be able to shortly reship the Brazil inventory to our
customer.
In
addition to their review of the Brazil contract, in March 2008, the Enforcement
Division of the U.S. Department of State informed us that they sought to confirm
our company-wide ITAR compliance for the five-year period ended March 2008. In
response, we expanded the scope of our own ongoing investigation. In June 2008,
we provided detailed information and a summary of our findings to the U.S.
Department of State. In July 2008, the U.S. Department of State requested
supplemental information and we responded to their request. Our findings to date
indicate that there were certain instances of exports and defense services
during the five-year period for which we did not have the appropriate
authorization from the U.S. Department of State; however, none of those
instances involved Proscribed Countries as defined by ITAR. We are awaiting
additional feedback from the U.S. Department of State as it relates to all of
the aforementioned matters.
48
Since the
receipt of the original Brazil subpoena in October 2007, we have engaged outside
counsel and export consultants to help us assess and improve, as appropriate,
our internal controls with respect to U.S. export control laws and regulations
and laws governing record keeping
and dealings with foreign representatives. In addition, in connection with our August 1, 2008 acquisition of
Radyne, we are expanding our export internal control assessment to include our
newly acquired subsidiaries. To date, we have noted opportunities for improving
our procedures to comply with such laws and regulations, including at our newly
acquired Radyne subsidiaries.
During fiscal 2008, we have taken
numerous steps to significantly improve our export control processes, including
the hiring of additional employees who are knowledgeable and experienced with
ITAR and the engagement of an outside export consultant to conduct additional
training. We are also in the process of implementing enhanced formal
company-wide ITAR control procedures, including at our newly acquired Radyne
subsidiaries. Because our assessments are continuing, we expect to remediate,
improve and enhance our internal controls relating to exports throughout fiscal
2009.
Because the above matters are ongoing,
we cannot determine the ultimate outcome of these matters. Violations of U.S.
export control-related laws and regulations could result in civil or criminal
fines and/or penalties and/or result in an injunction against us, all of which
could, in the aggregate, materially impact our business, results of operations
and cash flows. Should we identify a material weakness relating to our
compliance, the ongoing costs of remediation could be material. In addition,
inventory related to the Brazil contract (including the inventory that has been
detained) had a net book value of $1.1 million as of July 31, 2008. If this
inventory is permanently seized or not returned to us timely, or we can not
resell the inventory to other customers, we would be required to write-off the
value of this inventory in a future accounting period.
Other
Legal Proceedings
The
Company is party to certain other legal actions, which arise in the normal
course of business. Although the ultimate outcome of litigation is difficult to
accurately predict, the Company believes that the outcome of these actions will
not have a material effect on its consolidated financial condition or results of
operations.
49
In June
2008, the Financial Accounting Standards Board (“FASB”) issued a Staff Position
(“FSP”) on Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities.” This FSP requires share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
prior to vesting be accounted for as participating securities for purposes of
calculating and presenting earnings per share. We are required to
adopt this FSP, retroactively, beginning in the first quarter of our fiscal 2010
year. Early adoption is prohibited. As we have not
historically issued share-based payment awards that contain such rights, the
adoption of this FSP will have no impact on our consolidated financial
statements.
In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”).
This EITF provides guidance on whether or not a freestanding financial
instrument or embedded contract feature must be accounted for as a derivative
instrument. We are required to adopt this EITF beginning in the first
quarter of our fiscal 2010 year. Early adoption is prohibited for
those entities that already elected an alternative accounting
policy. Since we only have freestanding financial instruments or
embedded features that are either indexed to our stock and that would be
classified as equity if they were a freestanding instrument, the adoption of
this EITF will have no impact on our consolidated financial
statements.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”), which clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants.” In addition, FSP APB 14-1 indicates that issuers of such
instruments generally should separately account for the liability and equity
components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. We must adopt FSP APB 14-1 beginning in the
first quarter of fiscal 2010 and will be required to retroactively present prior
period information. FSP APB 14-1 is applicable to our 2.0% $105.0 million
convertible senior notes. With respect to the impact of
adoption, the FSP will require us to retroactively separate the liability and
equity components of such debt in our consolidated balance sheets on a fair
value basis. The FSP will also result in lower reported net income
and basic earnings per share since our historical reported interest expense will
be retroactively recorded at our nonconvertible debt borrowing rate, which is
higher than the stated 2.0% convertible debt rate. Due to the fact that we have
historically included the common shares issuable upon conversion of the 2.0%
notes and adjusted our net income to reflect our nonconvertible debt borrowing
rate in diluted earnings per share, the adoption of FSP ABP 14-1 will not impact
our historically reported diluted earnings per share.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”) which defines the category and order of
authority of accounting principles that are generally accepted, including rules
and interpretations of the Securities and Exchange Commission (“SEC”).
SFAS No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” Adoption of SFAS No. 162 will not have a
material affect on our consolidated financial statements.
In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP 142-3 applies prospectively to intangible assets that are acquired,
individually or with a group of other assets, after the effective date in either
a business combination or asset acquisition. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is
prohibited. We must adopt FSP 142-3 beginning in the first quarter of fiscal
2010. Adoption of FSP 142-3 will not have a material affect on our consolidated
financial statements.
50
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures of how
and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under SFAS No. 133, and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with
early adoption permitted. We adopted the provisions of SFAS No. 161 effective
May 1, 2008. The adoption had no impact on our consolidated financial
statements and disclosures.
In
February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No.
157,” which delays the effective date of FASB Statement No. 157, “Fair Value
Measurements,” for
non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The delay is intended to allow the FASB and
constituents additional time to consider the effect of various implementation
issues that have arisen, or that may arise, from the application of SFAS No.
157. For items within the scope of FSP 157-2, the FSP defers the
effective date of SFAS No. 157 to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. We must adopt
FSP 157-2 beginning in the first quarter of fiscal 2010. Adoption of the SFAS
No. 157 will not have a material effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”). SFAS No. 141R requires the acquiring
entity in a business combination to recognize all the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose all of the information required
to evaluate and understand the nature and financial effect of the business
combination. This statement is effective for acquisition dates on or after the
beginning of the first annual reporting period beginning after December 15,
2008. Early adoption is prohibited. We must adopt SFAS No. 141R beginning in the
first quarter of fiscal 2010. Adoption of SFAS No. 141R will not have a material
affect on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
No. 160”) to change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity. This new consolidation method significantly changes the
accounting for transactions involving minority interest holders. SFAS
No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2008. Early adoption is
prohibited. We must adopt SFAS No. 160 beginning in the first quarter of
fiscal 2010. We currently do not have any noncontrolling interests recorded in
our financial statements; accordingly, we do not expect that the adoption of
SFAS No. 160 to have a material effect on our consolidated financial
statements.
In
December 2007, the FASB ratified the consensus in Emerging Issues Task Force
Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”), which
defines collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. We must adopt
EITF 07-1 beginning in the first quarter of fiscal 2010. EITF 07-1 is
generally to be applied retrospectively to all periods presented for all
collaborative arrangements existing as of the effective date. We currently do
not participate in collaborative arrangements as defined by EITF 07-1;
accordingly, we currently do not expect the adoption of EITF 07-1 to have a
material effect on our consolidated financial statements.
In
February 2007, the FASB released SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”) to provide
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS No. 159 is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. We adopted the provisions
of SFAS No. 159 effective August 1, 2008. The adoption had no impact
on our consolidated financial statements.
51
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) to clarify the definition of fair value, establish a framework for
measuring fair value and expand the disclosures on fair value measurements. SFAS
No. 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 also stipulates that, as a
market-based measurement, fair value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or
liability, and establishes a fair value hierarchy that distinguishes between (a)
market participant assumptions developed based on market data obtained from
sources independent of the reporting entity (observable inputs) and (b) the
reporting entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances
(unobservable inputs). Except for the deferral imposed by FSP 157-2 for
non-financial assets and non-financial liabilities discussed above, SFAS No. 157
is effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. We adopted the provisions of SFAS No. 157
applicable to financial assets and liabilities effective August 1,
2008. The adoption had no impact on our consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our
earnings and cash flows are subject to fluctuations due to changes in interest
rates primarily from our investment of available cash balances. Under our
current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. If the interest rate we receive on our
investment of available cash balances (excluding approximately $231.7 million
that was used in connection with our Radyne acquisition) were to change by 10%,
our annual interest income would be impacted by approximately $0.5
million.
Our 2.0%
convertible senior notes bear a fixed rate of interest. As such, our earnings
and cash flows are not sensitive to changes in interest rates on our long-term
debt. As of July 31, 2008, we estimate the fair market value of our 2.0%
convertible senior notes to be $164.8 million based on recent trading
activity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Reports
of Independent Registered Public Accounting Firm, Consolidated Financial
Statements, Notes to Consolidated Financial Statements and Related Financial
Schedule are listed in the Index to Consolidated Financial Statements and
Schedule annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
52
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Annual Report on Form 10-K, an evaluation of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures was carried out by the Company under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures have been designed and are being operated in
a manner that provides reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. A system of
controls, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the system of controls are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been
detected.
Management’s
Report on Internal Control Over Financial Reporting
Management
of Comtech is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accounted accounting principles.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of July 31, 2008. In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework. Based on our
assessment, we determined that, as of July 31, 2008, the Company’s internal
control over financial reporting was effective based on those
criteria.
KPMG LLP
(“KPMG”), our independent registered public accounting firm, has performed an
audit of the Company’s internal control over financial reporting as of July 31,
2008 based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). This audit is required to be performed in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Our
independent auditors were given unrestricted access to all financial records and
related data. KPMG’s audit reports appear on pages F-2 and F-3 of this annual
report.
Changes
In Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our
fiscal quarter ended July 31, 2008, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
Not
applicable.
53
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Certain
information concerning directors and officers is incorporated by reference to
our Proxy Statement for the Annual Meeting of Stockholders to be held December
5, 2008 (the “Proxy Statement”) which will be filed with the Securities and
Exchange Commission no more than 120 days after the close of our fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
Information
regarding executive compensation is incorporated by reference to the Proxy
Statement, which will be filed with the Securities and Exchange Commission no
more than 120 days after the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information
regarding securities authorized for issuance under equity compensation plans and
certain information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the Proxy Statement, which will
be filed with the Securities and Exchange Commission no more than 120 days after
the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS,
AND
DIRECTOR INDEPENDENCE
Information
regarding certain relationships and related transactions is incorporated by
reference to the Proxy Statement, which will be filed with the Securities and
Exchange Commission no more than 120 days after the close of our fiscal
year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
Information
regarding principal accountant fees and services is incorporated by reference to
the Proxy Statement, which will be filed with the Securities and Exchange
Commission no more than 120 days after the close of our fiscal
year.
54
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
| (a) | (1) The Registrant’s financial statements together with a separate index are annexed hereto. |
| (2) The Financial Statement Schedule listed in a separate index is annexed hereto. | |
| (3) Exhibits required by Item 601 of Regulation S-K are listed below. | |
|
|
|
|
Exhibit Number
|
Description of
Exhibit
|
Incorporated
By Reference to
Exhibit
|
|
|
3(a)(i)
|
Restated
Certificate of Incorporation of the Registrant
|
Exhibit
3(a)(i) to the Registrant’s 2006 Form 10-K
|
|
|
3(a)(ii)
|
Amended
and Restated By-Laws of the Registrant
|
Exhibit
3(ii) to the Registrant’s Form
8-K
dated December 6, 2007
|
|
|
4(a)
|
Rights
Agreement dated as of December 15, 1998 between the Registrant and
American Stock Transfer and Trust Company, as Rights Agent
|
Exhibit
4(1) to the Registrant’s Form 8-A/A dated December 23,
1998
|
|
|
4(b)
|
Indenture
by and between the Registrant and The Bank of New York, as trustee, dated
as of January 27, 2004, including form of Note
|
Exhibit
4.2 to the Registrant’s Form S-3 (File No. 333-114268)
|
|
|
4(c)
|
Registration
Rights Agreement dated as of January 27, 2004, between the Registrant and
Bear, Stearns & Co. Inc., as Initial Purchaser
|
Exhibit
4.4 to the Registrant’s Form S-3 (File No. 333-114268)
|
|
|
|
|||
|
|
|||
|
|
|
||
|
10(c)*
|
Amended
and Restated 1993 Incentive Stock Option Plan
|
Appendix
A to the Registrant’s Proxy Statement dated November 3, 1997
|
|
|
10(d)*
|
Amended
and restated 2000 Stock Incentive Plan
|
Exhibit
10 to Registrant’s Form 8-K filed December 6, 2007
|
|
|
10(e)*
|
Form of Stock Option Agreement
pursuant to the 2000 Stock Incentive Plan
|
Exhibit
10(f)(7) to the Registrant’s 2005 Form 10-K
|
|
|
10(f)*
|
Form of Stock Option Agreement for
Non-employee Directors pursuant to the 2000 Stock Incentive
Plan
|
Exhibit
10(f)(8) to the Registrant’s 2006 Form 10-K
|
|
|
10(g)*
|
2001
Employee Stock Purchase Plan
|
Appendix
B to the Registrant’s Proxy Statement dated November 6, 2000
|
|
|
10(h)*
|
Lease
and amendment thereto on the Melville, New York Facility
|
Exhibit
10(k) to the Registrant’s 1992 Form 10-K
|
55
|
Exhibit
Number
|
Description of Exhibit |
Incorporated
By Reference to
Exhibit
|
|
|
10(i)
|
Movement
Tracking System Contract between Comtech Mobile Datacom Corporation and
the U.S. Army’s Contract Agency dated August 31, 2007…
|
Exhibit
10(j) to the Registrant’s 2007 Form 10-K
|
|
|
10(j)
|
Blue
Force Tracking System Contract between Comtech Mobile Datacom Corporation
and the U.S. Army CECOM dated August 31, 2007…
|
Exhibit
10(k) to the Registrant’s 2007 Form 10-K
|
|
|
10(k)
|
Form
of Indemnification Agreement between the Registrant and Richard L. Burt,
Fred Kornberg, Robert L. McCollum, Michael D. Porcelain and certain
non-executive officers
|
Exhibit
10.1 to Registrant’s 8-K filed on March 8, 2007
|
|
|
10(l)
|
Agreement
and Plan of Merger, dated May 10, 2008, among the Company, Purchaser and
Radyne
|
Exhibit
2.1 to the Registrant’s Form 8-K
filed May 12, 2008
|
|
|
10(m)
|
Amendment
to Agreement and Plan of Merger, dated as of July 11, 2008, among the
Company, Purchaser and Radyne
|
Exhibit
2.1 to the Registrant’s Form 8-K
filed July 14, 2008
|
|
|
|
|||
|
|
|||
|
|
|||
|
|
|||
|
|
|||
|
|
*
Management contract or compensatory plan or arrangement.
…
Certain portions of this agreement have been omitted and filed separately with
the Securities and Exchange
Commission pursuant to a
request for confidential treatment.
Exhibits
to this Annual Report on Form 10-K are available from the Company upon request
and payment to the Company for the cost of reproduction. The information is also
available on our Internet website at www.comtechtel.com.
56
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities and 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.
|
|
|
September 17,
2008
|
By: /s/Fred
Kornberg
|
|
(Date)
|
Fred
Kornberg, Chairman of the Board
|
|
and
Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
| Signature |
|
Title
|
|
September 17,
2008
|
/s/Fred
Kornberg
|
Chairman
of the Board
|
|
(Date)
|
Fred
Kornberg
|
Chief
Executive Officer and President
(Principal
Executive Officer)
|
|
September 17,
2008
|
/s/Michael D.
Porcelain
|
Senior
Vice President and
|
|
(Date)
|
Michael
D. Porcelain
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
September 17,
2008
|
/s/Richard L.
Goldberg
|
Director
|
|
(Date)
|
Richard
L. Goldberg
|
|
|
September 17,
2008
|
/s/Edwin Kantor
|
Director
|
|
(Date)
|
Edwin
Kantor
|
|
|
September 17,
2008
|
/s/Ira Kaplan
|
Director
|
|
(Date)
|
Ira
Kaplan
|
|
|
September 17,
2008
|
/s/Gerard R.
Nocita
|
Director
|
|
(Date)
|
Gerard
R. Nocita
|
|
|
September 17,
2008
|
/s/Robert G. Paul
|
Director
|
|
(Date)
|
Robert
G. Paul
|
57
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to
Consolidated Financial Statements and Schedule
|
Page
|
||
|
|
F-2,
F-3
|
|
|
|
||
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7,
F-8
|
|
|
|
F-9
to F-38
|
|
|
Additional
Financial Information Pursuant to the Requirements of Form
10-K:
|
||
|
S-1
|
||
|
Schedules
not listed above have been omitted because they are either not applicable
or the required information has been provided elsewhere in the
consolidated financial statements or notes
thereto.
|
||
F-1
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of Comtech Telecommunications Corp.:
We have
audited the accompanying consolidated balance sheets of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended July 31, 2008. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Comtech Telecommunications
Corp. and subsidiaries as of July 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
discussed in Notes 1(j) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based
Payment,” effective August 1, 2005.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Comtech Telecommunications Corp.’s internal
control over financial reporting as of July 31, 2008, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
September 17, 2008 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Melville,
New York
September
17, 2008
F-2
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders of Comtech Telecommunications Corp.:
We have
audited Comtech Telecommunications Corp. and subsidiaries internal control over
financial reporting as of July 31, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Comtech Telecommunications
Corp. and subsidiaries' management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion of the Company’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Comtech Telecommunications Corp. and subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
July 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Comtech
Telecommunications Corp. and subsidiaries as of July 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended July 31, 2008, and our report dated September 17, 2008, expressed
an unqualified opinion on those consolidated financial statements.
Melville,
New York
September
17, 2008
F-3
COMTECH TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Consolidated
Balance Sheets
As of
July 31, 2008 and 2007
|
Assets
|
2008
|
2007
|
||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 410,067,000 | 342,903,000 | |||||
|
Accounts
receivable, net
|
70,040,000 | 73,585,000 | ||||||
|
Inventories,
net
|
85,966,000 | 61,987,000 | ||||||
|
Prepaid
expenses and other current assets
|
5,891,000 | 6,734,000 | ||||||
|
Deferred
tax asset – current
|
10,026,000 | 9,380,000 | ||||||
|
Total
current assets
|
581,990,000 | 494,589,000 | ||||||
|
Property,
plant and equipment, net
|
34,269,000 | 29,282,000 | ||||||
|
Goodwill
|
24,363,000 | 24,387,000 | ||||||
|
Intangibles
with finite lives, net
|
7,505,000 | 5,717,000 | ||||||
|
Deferred
financing costs, net
|
1,357,000 | 1,903,000 | ||||||
|
Other
assets, net
|
3,636,000 | 464,000 | ||||||
|
Total
assets
|
$ | 653,120,000 | 556,342,000 | |||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 31,423,000 | 26,137,000 | |||||
|
Accrued
expenses and other current liabilities
|
49,671,000 | 47,332,000 | ||||||
|
Customer
advances and deposits
|
15,287,000 | 20,056,000 | ||||||
|
Current
installments of other obligations
|
108,000 | 135,000 | ||||||
|
Interest
payable
|
1,050,000 | 1,050,000 | ||||||
|
Income
taxes payable
|
- | 2,796,000 | ||||||
|
Total
current liabilities
|
97,539,000 | 97,506,000 | ||||||
|
Convertible
senior notes
|
105,000,000 | 105,000,000 | ||||||
|
Other
obligations, less current installments
|
- | 108,000 | ||||||
|
Income
taxes payable – non-current
|
1,909,000 | - | ||||||
|
Deferred
tax liability – non-current
|
5,870,000 | 7,960,000 | ||||||
|
Total
liabilities
|
210,318,000 | 210,574,000 | ||||||
|
Commitments
and contingencies (See Note 13)
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, par value $.10 per share; shares authorized and unissued
2,000,000
|
- | - | ||||||
|
Common
stock, par value $.10 per share; authorized 100,000,000 shares; issued
24,600,166 shares and 24,016,329 shares at July 31, 2008 and 2007,
respectively
|
2,460,000 | 2,402,000 | ||||||
|
Additional
paid-in capital
|
186,246,000 | 165,703,000 | ||||||
|
Retained
earnings
|
254,281,000 | 177,848,000 | ||||||
| 442,987,000 | 345,953,000 | |||||||
|
Less:
|
||||||||
|
Treasury
stock (210,937 shares)
|
(185,000 | ) | (185,000 | ) | ||||
|
Total
stockholders’ equity
|
442,802,000 | 345,768,000 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 653,120,000 | 556,342,000 | |||||
See
accompanying notes to consolidated financial statements.
F-4
COMTECH TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Consolidated
Statements of Operations
Fiscal
Years Ended July 31, 2008, 2007 and 2006
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 531,627,000 | 445,684,000 | 391,511,000 | ||||||||
|
Cost
of sales
|
296,687,000 | 252,389,000 | 232,210,000 | |||||||||
|
Gross
profit
|
234,940,000 | 193,295,000 | 159,301,000 | |||||||||
|
Expenses:
|
||||||||||||
|
Selling,
general and administrative
|
85,967,000 | 73,312,000 | 67,071,000 | |||||||||
|
Research
and development
|
40,472,000 | 32,469,000 | 25,834,000 | |||||||||
|
Amortization
of intangibles
|
1,710,000 | 2,592,000 | 2,465,000 | |||||||||
| 128,149,000 | 108,373,000 | 95,370,000 | ||||||||||
|
Operating
income
|
106,791,000 | 84,922,000 | 63,931,000 | |||||||||
|
Other
expenses (income):
|
||||||||||||
|
Interest
expense
|
2,683,000 | 2,731,000 | 2,687,000 | |||||||||
|
Interest
income and other
|
(14,065,000 | ) | (14,208,000 | ) | (9,243,000 | ) | ||||||
|
Income
before provision for income taxes
|
118,173,000 | 96,399,000 | 70,487,000 | |||||||||
|
Provision
for income taxes
|
41,740,000 | 31,186,000 | 25,218,000 | |||||||||
|
Net
income
|
$ | 76,433,000 | 65,213,000 | 45,269,000 | ||||||||
|
Net
income per share (See Note 1(i)):
|
||||||||||||
|
Basic
|
$ | 3.17 | 2.81 | 1.99 | ||||||||
|
Diluted
|
$ | 2.76 | 2.42 | 1.72 | ||||||||
|
Weighted
average number of common shares outstanding – basic
|
24,138,000 | 23,178,000 | 22,753,000 | |||||||||
|
Weighted
average number of common and common equivalent shares
outstanding assuming dilution – diluted
|
28,278,000 | 27,603,000 | 27,324,000 | |||||||||
See
accompanying notes to consolidated financial statements.
F-5
COMTECH TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income
Fiscal
Years Ended July 31, 2008, 2007 and 2006
|
Common Stock
|
Additional
Paid-in
|
Retained
|
Treasury Stock
|
Stockholders’
|
Comprehensive
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Shares
|
Amount
|
Equity
|
Income
|
|||||||||||||||||||||||||
|
Balance
July 31, 2005
|
22,781,678 | $ | 2,278,000 | $ | 127,170,000 | $ | 67,366,000 | 210,937 | $ | (185,000 | ) | $ | 196,629,000 | |||||||||||||||||||
|
Equity-classified
stock award compensation
|
- | - | 5,742,000 | - | - | - | 5,742,000 | $ | - | |||||||||||||||||||||||
|
Proceeds
from exercise of options
|
244,737 | 24,000 | 1,839,000 | - | - | - | 1,863,000 | - | ||||||||||||||||||||||||
|
Proceeds
from issuance of employee stock purchase plan shares
|
26,178 | 3,000 | 671,000 | - | - | - | 674,000 | - | ||||||||||||||||||||||||
|
Excess
income tax benefit from stock award exercises
|
- | - | 4,065,000 | - | - | - | 4,065,000 | - | ||||||||||||||||||||||||
|
Net
income
|
- | - | - | 45,269,000 | - | - | 45,269,000 | 45,269,000 | ||||||||||||||||||||||||
|
Balance
July 31, 2006
|
23,052,593 | 2,305,000 | 139,487,000 | 112,635,000 | 210,937 | (185,000 | ) | 254,242,000 | 45,269,000 | |||||||||||||||||||||||
|
Equity-classified
stock award compensation
|
- | - | 7,408,000 | - | - | - | 7,408,000 | - | ||||||||||||||||||||||||
|
Proceeds
from exercise of options
|
938,000 | 94,000 | 9,441,000 | - | - | - | 9,535,000 | - | ||||||||||||||||||||||||
|
Proceeds
from issuance of employee stock purchase plan shares
|
25,736 | 3,000 | 755,000 | - | - | - | 758,000 | - | ||||||||||||||||||||||||
|
Excess
income tax benefit from stock award exercises
|
- | - | 8,612,000 | - | - | - | 8,612,000 | - | ||||||||||||||||||||||||
|
Net
income
|
- | - | - | 65,213,000 | - | - | 65,213,000 | 65,213,000 | ||||||||||||||||||||||||
|
Balance
July 31, 2007
|
24,016,329 | 2,402,000 | 165,703,000 | 177,848,000 | 210,937 | (185,000 | ) | 345,768,000 | 65,213,000 | |||||||||||||||||||||||
|
Equity-classified
stock award compensation
|
- | - | 10,595,000 | - | - | - | 10,595,000 | - | ||||||||||||||||||||||||
|
Proceeds
from exercise of options
|
559,681 | 56,000 | 6,640,000 | - | - | - | 6,696,000 | - | ||||||||||||||||||||||||
|
Proceeds
from issuance of employee stock purchase plan shares
|
24,156 | 2,000 | 902,000 | - | - | - | 904,000 | - | ||||||||||||||||||||||||
|
Excess
income tax benefit from stock award exercises
|
- | - | 2,406,000 | - | - | - | 2,406,000 | - | ||||||||||||||||||||||||
|
Net
income
|
- | - | - | 76,433,000 | - | - | 76,433,000 | 76,433,000 | ||||||||||||||||||||||||
|
Balance
July 31, 2008
|
24,600,166 | $ | 2,460,000 | $ | 186,246,000 | $ | 254,281,000 | 210,937 | $ | (185,000 | ) | $ | 442,802,000 | $ | 76,433,000 | |||||||||||||||||
See accompanying notes to
consolidated financial statements.
F-6
COMTECH TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Consolidated
Statements of Cash Flows
Fiscal
Years Ended July 31, 2008, 2007 and 2006
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 76,433,000 | 65,213,000 | 45,269,000 | ||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization of property, plant and equipment
|
9,196,000 | 7,536,000 | 6,242,000 | |||||||||
|
Amortization
of intangible assets with finite lives
|
1,710,000 | 2,592,000 | 2,465,000 | |||||||||
|
Amortization
of stock-based compensation
|
10,640,000 | 7,401,000 | 5,681,000 | |||||||||
|
Amortization
of deferred financing costs
|
546,000 | 546,000 | 546,000 | |||||||||
|
Loss
on disposal of property, plant and equipment
|
6,000 | 203,000 | 36,000 | |||||||||
|
Provision
for (benefit from) allowance for doubtful accounts
|
723,000 | (375,000 | ) | 748,000 | ||||||||
|
Provision
for excess and obsolete inventory
|
2,414,000 | 4,491,000 | 2,030,000 | |||||||||
|
Excess
income tax benefit from stock award exercises
|
(2,374,000 | ) | (7,990,000 | ) | (4,065,000 | ) | ||||||
|
Deferred
income tax (benefit) expense
|
(2,736,000 | ) | (147,000 | ) | 832,000 | |||||||
|
Changes
in assets and liabilities, net of effects of acquisitions:
|
||||||||||||
|
Restricted
cash securing letter of credit obligations
|
- | 1,003,000 | 31,000 | |||||||||
|
Accounts
receivable
|
2,822,000 | (3,163,000 | ) | (14,743,000 | ) | |||||||
|
Inventories
|
(25,038,000 | ) | (4,818,000 | ) | (17,909,000 | ) | ||||||
|
Prepaid
expenses and other current assets
|
49,000 | 492,000 | (2,791,000 | ) | ||||||||
|
Other
assets
|
39,000 | 73,000 | (260,000 | ) | ||||||||
|
Accounts
payable
|
5,361,000 | (2,200,000 | ) | 4,760,000 | ||||||||
|
Accrued
expenses and other current liabilities
|
1,235,000 | 5,608,000 | 7,733,000 | |||||||||
|
Customer
advances and deposits
|
(4,769,000 | ) | 16,512,000 | (1,738,000 | ) | |||||||
|
Deferred
service revenue
|
- | (9,896,000 | ) | 1,686,000 | ||||||||
|
Income
taxes payable
|
1,519,000 | 6,156,000 | 7,777,000 | |||||||||
|
Net
cash provided by operating activities
|
77,776,000 | 89,237,000 | 44,330,000 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of property, plant and equipment
|
(14,064,000 | ) | (12,075,000 | ) | (12,327,000 | ) | ||||||
|
Purchases
of other intangibles with finite lives
|
(193,000 | ) | (38,000 | ) | (197,000 | ) | ||||||
|
Payments
for business acquisitions
|
(6,194,000 | ) | (3,937,000 | ) | (1,000,000 | ) | ||||||
|
Net
cash used in investing activities
|
(20,451,000 | ) | (16,050,000 | ) | (13,524,000 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Principal
payments on other obligations
|
(135,000 | ) | (154,000 | ) | (234,000 | ) | ||||||
|
Excess
income tax benefit from stock award exercises
|
2,374,000 | 7,990,000 | 4,065,000 | |||||||||
|
Proceeds
from exercises of stock options
|
6,696,000 | 9,535,000 | 1,863,000 | |||||||||
|
Proceeds
from issuance of employee stock purchase plan shares
|
904,000 | 758,000 | 674,000 | |||||||||
|
Net
cash provided by financing activities
|
9,839,000 | 18,129,000 | 6,368,000 | |||||||||
(Continued)
F-7
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Consolidated
Statements of Cash Flows (continued)
Years
ended July 31, 2008, 2007 and 2006
|
2008
|
2007
|
2006
|
||||||||||
|
Net
increase in cash and cash equivalents
|
$ | 67,164,000 | 91,316,000 | 37,174,000 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
342,903,000 | 251,587,000 | 214,413,000 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 410,067,000 | 342,903,000 | 251,587,000 | ||||||||
|
Supplemental cash flow
disclosure
|
||||||||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Interest
|
$ | 2,120,000 | 2,150,000 | 2,142,000 | ||||||||
|
Income
taxes
|
$ | 43,843,000 | 24,778,000 | 16,573,000 | ||||||||
|
Non
cash investing activities:
|
||||||||||||
|
Accrued
business acquisition payments
|
$ | 1,169,000 | 290,000 | - | ||||||||
See
accompanying notes to consolidated financial statements.
(1) Summary of Significant
Accounting and Reporting Policies
|
(a)
|
Principles of
Consolidation
|
The
accompanying consolidated financial statements include the accounts of Comtech
Telecommunications Corp. and its subsidiaries (“the Company”), all of which are
wholly-owned. All significant intercompany balances and transactions
have been eliminated in consolidation.
|
(b)
|
Nature of
Business
|
|
|
The
Company designs, develops, produces and markets innovative products,
systems and services for advanced communications
solutions.
|
|
|
The
Company’s business is highly competitive and characterized by rapid
technological change. The Company’s growth and financial
position depends, among other things, on its ability to keep pace with
such changes and developments and to respond to the sophisticated
requirements of an increasing variety of electronic equipment
users. Many of the Company’s competitors are substantially
larger, and have significantly greater financial, marketing and operating
resources and broader product lines than the Company. A
significant technological breakthrough by others, including smaller
competitors or new companies, could have a material adverse effect on the
Company’s business. In addition, certain of the Company’s customers have
technological capabilities in the Company’s product areas and could choose
to replace the Company’s products with their
own.
|
|
|
International
sales expose the Company to certain risks, including barriers to trade,
fluctuations in foreign currency exchange rates (which may make the
Company’s products less price competitive), political and economic
instability, availability of suitable export financing, export license
requirements, tariff regulations, and other United States (“U.S.”) and
foreign regulations that may apply to the export of the Company’s
products, as well as the generally greater difficulties of doing business
abroad. The Company attempts to reduce the risk of doing
business in foreign countries by seeking contracts denominated in U.S.
dollars, advance or milestone payments, credit insurance and irrevocable
letters of credit in its favor.
|
|
|
The
Company currently provides mobile data communications products and
services to the U.S. government under contracts which can be terminated at
any time and are not subject to automatic renewals or extension. The loss
of these contracts would have a material adverse effect on the Company’s
future business, results of operations and financial
condition.
|
|
(c)
|
Revenue
Recognition
|
Revenue
is generally recognized when the earnings process is complete, upon shipment or
customer acceptance. Revenue from contracts relating to the design,
development or manufacture of complex electronic equipment to a buyer’s
specification or to provide services relating to the performance of such
contracts is generally recognized in accordance with American Institute of
Certified Public Accountants (“AICPA”) Statement of Position No. 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts” (“SOP 81-1”). The Company primarily applies the
percentage-of-completion method and generally recognizes revenue based on the
relationship of total costs incurred to total projected costs, or,
alternatively, based on output measures, such as units delivered or produced.
Profits expected to be realized on such contracts are based on total estimated
sales for the contract compared to total estimated costs, including warranty
costs, at completion of the contract. These estimates are reviewed
and revised periodically throughout the lives of the contracts, and adjustments
to profits resulting from such revisions are made cumulative to the date of the
change. Provision for anticipated losses on uncompleted contracts is
made in the period in which such losses become evident. Long-term, U.S.
government, cost-reimbursable type contracts are also specifically covered by
Accounting Research Bulletin No. 43 “Government Contracts,
Cost-Plus-Fixed-Fee Contracts” (“ARB 43”), in addition to SOP 81-1.
F-9
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
The
Company has historically demonstrated an ability to estimate contract revenues
and expenses in applying the percentage-of-completion method of
accounting. However, there exist risks and uncertainties in
estimating future revenues and expenses, particularly on larger or longer-term
contracts. Changes to such estimates could have a material effect on
the Company’s consolidated financial condition and results of
operations.
Revenue
recognized in excess of amounts billable under long-term contracts accounted for
under the percentage-of-completion method are recorded as unbilled receivables
in the accompanying consolidated balance sheets. Unbilled receivables are
billable upon various events, including the attainment of performance
milestones, delivery of hardware, submission of progress bills based on time and
materials, or completion of the contract.
In the
case of the Company’s mobile data communications segment’s Movement Tracking
System (“MTS”) and Force XXI Battle Command, Brigade and Below command and
control systems (also known as Blue Force Tracking (“BFT”)) contracts with the
U.S. Army, the Company utilizes the percentage-of-completion method. The Company
does not recognize revenue, or record unbilled receivables, until it receives
fully funded orders.
Almost
all of the Company’s U.S. government revenues in fiscal 2008, 2007 and 2006 are
derived from firm fixed-price contracts. Under these types of contracts, the
Company performs for an agreed-upon price and derives benefits from cost
savings, but bears the risk of cost overruns. The Company’s cost-plus-fixed-fee
contracts, which to date have been insignificant, typically provide for
reimbursement of allowable costs incurred plus a negotiated fee.
Most
government contracts have termination for convenience clauses that provide the
customer with the right to terminate the contract at any
time. Historically, the Company has not experienced material contract
terminations or write-offs of unbilled receivables. The Company addresses
customer acceptance provisions in assessing its ability to perform its
contractual obligations under long-term contracts. Historically, the
Company has been able to perform on its long-term contracts.
Revenue
from contracts that contain multiple elements that are not accounted for under
the percentage-of-completion method are accounted for in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue
Arrangements with Multiple Deliverables.” Revenue from these
contracts is allocated to each respective element based on each element’s
relative fair value, if determinable, and is recognized when the respective
revenue recognition criteria for each element are met.
|
(d)
|
Cash and Cash
Equivalents
|
The
Company’s cash equivalents are short-term, highly liquid investments that are
both readily convertible to known amounts of cash and that have insignificant
risk of change in value because of changes in interest rates. The Company’s cash
and cash equivalents, as of July 31, 2008 and 2007, amounted to $410,067,000 and
$342,903,000, respectively, and primarily consist of money market funds and U.S.
Treasury securities (with maturities at the time of purchase of three months or
less). None of the Company's cash equivalents include municipal auction-rate
securities. Cash
equivalents are carried at cost, which approximates fair market
value.
|
(e)
|
Inventories
|
Work-in-process
inventory reflects all accumulated production costs, which are comprised of
direct production costs and overhead, and is reduced by amounts recorded in cost
of sales as the related revenue is recognized. These inventories are reduced to
their estimated net realizable value by a charge to cost of sales in the period
such excess costs are determined.
Raw
materials and components and finished goods inventory are stated at the lower of
cost or market, computed on the first-in, first-out (“FIFO”)
method.
F-10
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
|
(f)
|
Long-Lived
Assets
|
The
Company’s machinery and equipment, which are recorded at cost, are depreciated
or amortized over their estimated useful lives (three to eight years) under the
straight-line method. Capitalized values of properties and leasehold
improvements under leases are amortized over the life of the lease or the
estimated life of the asset, whichever is less.
Goodwill
represents the excess cost of a business acquisition over the fair value of the
net assets acquired. In accordance with the Financial Accounting
Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized. The
Company periodically, at least on an annual basis, reviews goodwill, considering
factors such as projected cash flows and revenue and earnings multiples, to
determine whether the carrying value of the goodwill is impaired. If
the goodwill is deemed to be impaired, the difference between the carrying
amount reflected in the financial statements and the estimated fair value is
recognized as an expense in the period in which the impairment occurs. The
Company defines its reporting units to be the same as its segments.
The
Company assesses the recoverability of the carrying value of its other
long-lived assets, including identifiable intangible assets with finite useful
lives, whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. The Company evaluates the
recoverability of such assets based upon the expectations of undiscounted cash
flows from such assets. If the sum of the expected future undiscounted cash
flows were less than the carrying amount of the asset, a loss would be
recognized for the difference between the fair value and the carrying
amount.
|
(g)
|
Research and
Development Costs
|
The
Company charges research and development costs to operations as incurred, except
in those cases in which such costs are reimbursable under customer funded
contracts. In fiscal 2008, 2007 and 2006, the Company was reimbursed by
customers for such activities in the amount of $7,752,000, $4,170,000 and
$4,409,000, respectively.
|
(h)
|
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. The Company’s policy is to recognize
interest and penalties related to uncertain tax positions in income tax
expense.
In July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting and reporting for uncertainties in income tax law and
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. FIN 48 prescribes a two-step
evaluation process for tax positions. The first step is recognition based on a
determination of whether it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. The second
step is to measure a tax position that meets the more-likely-than-not threshold.
The tax position is measured as the largest amount of benefit that is greater
than 50% likely of being realized upon ultimate settlement. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of
that position is not recognized in the financial statements. The Company adopted
FIN 48 on August 1, 2007 and its adoption had no material impact on the
Company’s consolidated results of operations or financial
condition.
F-11
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
|
(i)
|
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
dilution from potential common stock issuable pursuant to the exercise of
equity-classified stock-based awards and convertible senior notes, if dilutive,
outstanding during each period. Equity-classified stock-based awards to purchase
601,000, 706,000 and 712,000 shares for fiscal 2008, 2007 and 2006,
respectively, were not included in the EPS calculation because their effect
would have been anti-dilutive.
Liability-classified
stock-based awards do not impact and are not included in the denominator for EPS
calculations. In
accordance with EITF Issue No. 04-8, “The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share,” the Company includes the impact of
the assumed conversion of its 2.0% convertible senior notes in calculating
diluted EPS.
The
following table reconciles the numerators and denominators used in the basic and
diluted EPS calculations:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income for basic calculation
|
$ | 76,433,000 | 65,213,000 | 45,269,000 | ||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Interest
expense (net of tax) on
convertible
senior notes
|
1,667,000 | 1,667,000 | 1,662,000 | |||||||||
|
Numerator
for diluted calculation
|
$ | 78,100,000 | 66,880,000 | 46,931,000 | ||||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic calculation
|
24,138,000 | 23,178,000 | 22,753,000 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options
|
807,000 | 1,092,000 | 1,238,000 | |||||||||
|
Conversion
of convertible
senior
notes
|
3,333,000 | 3,333,000 | 3,333,000 | |||||||||
|
Denominator
for diluted calculation
|
28,278,000 | 27,603,000 | 27,324,000 | |||||||||
|
(j)
|
Accounting for
Stock-Based Compensation
|
Effective
August 1, 2005, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment,” which establishes the accounting for employee stock-based
awards. Under the provisions of SFAS No. 123(R), stock-based compensation for
both equity and liability-classified awards is measured at the grant date, based
on the calculated fair value of the award, and is recognized as an expense over
the requisite employee service period (generally the vesting period of the
grant). The fair value of liability-classified awards is remeasured at the end
of each reporting period until the award is settled, with changes in fair value
recognized pro-rata for the portion of the requisite service period
rendered. The Company used the modified prospective method upon
adopting SFAS No. 123(R).
Under the
modified prospective method, SFAS No. 123(R) applies to new awards and to awards
outstanding on the effective date that are subsequently modified or cancelled.
Compensation expense for outstanding awards for which the requisite service had
not been fully rendered as of July 31, 2005 is being recognized over the
remaining service period using the compensation cost calculated for pro forma
disclosure purposes under SFAS No. 123. Through July 31, 2007, the Company
valued graded vesting awards based on vesting tranches. Effective August 1,
2007, the Company values graded vesting awards based on the entire award. The
Company amortizes the fair value of all awards on a straight-line basis over the
total requisite service period. Cumulative compensation expense recognized at
any date will at least equal the grant date fair value of the vested portion of
the
award at that time. Additionally, the Company includes the excess hypothetical
tax benefit related to stock-based awards which were fully vested upon adoption
of SFAS No. 123(R) when calculating earnings per share.
F-12
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
The
Company recognized stock-based compensation for awards issued under the
Company’s Stock Option Plans and the Company’s 2001 Employee Stock Purchase Plan
(the “ESPP”) in the following line items in the Consolidated Statements of
Operations:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cost
of sales
|
$ | 777,000 | 539,000 | 385,000 | ||||||||
|
Selling,
general and administrative expenses
|
8,129,000 | 5,793,000 | 4,585,000 | |||||||||
|
Research
and development expenses
|
1,734,000 | 1,069,000 | 711,000 | |||||||||
|
Stock-based
compensation expense before
income
tax benefit
|
10,640,000 | 7,401,000 | 5,681,000 | |||||||||
|
Income
tax benefit
|
(3,648,000 | ) | (2,394,000 | ) | (1,312,000 | ) | ||||||
|
Net
stock-based compensation expense
|
$ | 6,992,000 | 5,007,000 | 4,369,000 | ||||||||
Of the
total stock-based compensation expense before income tax benefit recognized in
fiscal 2008, 2007 and 2006, $220,000, $170,000 and $163,000, respectively,
relates to stock-based awards issued pursuant to the ESPP. Of the total
stock-based compensation expense before income tax recognized in fiscal 2008,
2007 and 2006, $154,000, $38,000 and $0, respectively, related to awards of
stock appreciation rights (“SARs”). The Company’s liability-classified SARs are
remeasured at fair value at the end of each reporting period.
Stock-based
compensation that was capitalized and included in ending inventory at July 31,
2008, 2007 and 2006 was $215,000, $106,000 and $61,000,
respectively.
The
Company estimates the fair value of stock-based awards using the Black-Scholes
option pricing model. The Black-Scholes option pricing model includes
assumptions regarding dividend yield, expected volatility, expected option terms
and risk-free interest rates. The assumptions used in computing the fair value
of stock-based awards reflect the Company’s best estimates, but involve
uncertainties relating to market and other conditions, many of which are outside
of its control. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by the employees who receive
stock-based awards.
The per
share weighted average grant-date fair value of stock-based awards granted
during fiscal 2008, 2007 and 2006 was $15.66, $10.85 and $14.03, respectively.
In addition to the exercise and grant-date prices of the awards, certain
weighted average assumptions that were used to estimate the fair value of
stock-based awards in the respective periods are listed in the table
below:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected
volatility
|
43.15 | % | 45.14 | % | 51.44 | % | ||||||
|
Risk-free
interest rate
|
4.44 | % | 4.87 | % | 4.20 | % | ||||||
|
Expected
life (years)
|
3.56 | 3.63 | 3.63 | |||||||||
Stock-based
awards granted during fiscal 2008, 2007 and 2006 have exercise prices equal to
the fair market value of the stock on the date of grant, a contractual term of
five years and a vesting period of three years. All stock-based
awards granted through July 31, 2005 had exercise prices equal to the fair
market value of the stock on the date of grant, a contractual term of ten years
and generally a vesting period of five years. The Company settles employee stock
option exercises with new shares. All SARs granted through July 31, 2008 may
only be settled with cash.
The
Company estimates expected volatility by considering the historical volatility
of the Company’s stock, the implied volatility of publicly traded stock options
in the Company’s stock and the Company’s expectations of volatility for the
expected term of stock-based compensation awards. The risk-free
interest rate is based on the U.S. treasury yield curve in effect at the time of
grant. The expected option term is the number of years that the Company
estimates that share-based awards will be outstanding prior to exercise. The
expected life of the awards issued after July 31, 2005 and through July 31, 2007
was determined using the “simplified method”
F-13
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
The
following table provides the components of the actual income tax benefit
recognized for tax deductions relating to the exercise of stock-based
awards:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Actual
income tax benefit recorded for the tax deductions relating to the
exercise of stock-based awards
|
$ | 3,368,000 | 9,366,000 | 4,065,000 | ||||||||
|
Less:
Tax benefit initially recognized on exercised stock-based awards vesting
subsequent to the adoption of SFAS No. 123(R)
|
(962,000 | ) | (754,000 | ) | - | |||||||
|
Excess
income tax benefit recorded as an increase to additional paid-in capital
in the Company’s Consolidated Statements of Stockholders’ Equity and
Comprehensive Income
|
2,406,000 | 8,612,000 | 4,065,000 | |||||||||
|
Less:
Tax benefit initially disclosed but not previously recognized on exercised
equity-classified stock-based awards vesting prior to the adoption of SFAS
No. 123(R)
|
(32,000 | ) | (622,000 | ) | - | |||||||
|
Excess
income tax benefit from exercised equity-classified stock-based awards
reported as a cash flow from financing activities in the Company’s
Consolidated Statements of Cash Flows
|
$ | 2,374,000 | 7,990,000 | 4,065,000 | ||||||||
At July
31, 2008, total remaining unrecognized compensation cost related to unvested
stock-based awards was $10,698,000, net of estimated forfeitures of $701,000.
The net cost is expected to be recognized over a weighted average period of 1.7
years.
In August
2008, the Company authorized, in accordance with the Company’s 2000 Stock
Incentive Plan, 554,100 stock-based awards (including 10,000
SARs). Total unrecognized stock-based compensation, net of estimated
forfeitures, related to these awards was approximately $8,205,000. These awards
have exercise prices equal to the fair market value of the stock on the date of
grant, a contractual term of five years and a vesting period of three
years.
|
(k)
|
Financial
Instruments
|
The
Company believes that the book value of its current monetary assets and
liabilities approximates fair value as a result of the short-term nature of such
assets and liabilities. The Company further believes that the fair market value
of its capital lease obligations does not differ materially from the carrying
value. As of July 31, 2008, the Company estimates the fair market
value of its 2.0% convertible senior notes to be approximately $164,829,000
based on recent trading activity.
|
(l)
|
Use of
Estimates
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. The Company makes significant estimates in many
areas of its accounting, including but not limited to the following: long-term
contracts, stock-based compensation, intangible assets, provision for excess and
obsolete
inventory, allowance for doubtful accounts, warranty obligations and income
taxes. Actual results may differ from those estimates.
F-14
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
|
(m)
|
Comprehensive
Income
|
The
Company has adopted SFAS No. 130, “Reporting Comprehensive Income,” which
requires companies to report all changes in equity during a period, except those
resulting from investment by owners and distribution to owners, for the period
in which they are recognized. Comprehensive income is the total of net income
and all other non-owner changes in equity (or other comprehensive income) such
as unrealized gains/losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive income was the same as net income in fiscal 2008,
2007 and 2006.
|
(n)
|
Reclassifications
|
Certain
reclassifications have been made to previously reported consolidated financial
statements to conform to the fiscal 2008 presentation.
(2) Acquisitions
In August
2006, the Company acquired certain assets and assumed certain liabilities of
Insite Consulting, Inc. (“Insite”), a logistics application software company,
for $3,203,000, including transaction costs of $232,000. In addition to the
guaranteed purchase price, the Company may be required to make certain earn-out
payments based on the achievement of future sales targets. The first part of the
earn-out cannot exceed $1,350,000 and is limited to a five-year period. The
second part of the earn-out, which is for a ten-year period, is unlimited and
based on a per unit future sales target primarily relating to new commercial
satellite-based mobile data communication markets. As of July 31, 2008, no
earn-out payments have been made. Insite has developed the geoOps™ Enterprise
Location Management System, a software-based solution that allows customers to
integrate legacy data systems with near-real time logistics and operational data
systems. Sales and income relating to the Insite assets acquired have not been
material to the Company’s results of operations. This operation was combined
with the Company’s existing business and is part of the mobile data
communications segment.
In
February 2007, the Company acquired certain assets and assumed certain
liabilities of Digicast Networks, Inc. (“Digicast”), a manufacturer of digital
video broadcasting equipment, for $1,000,000. Sales and income related to the
Digicast assets acquired were not material to the Company’s results of
operations. This operation was combined with the Company’s existing business and
is part of the telecommunications transmission segment.
In July
2008, the Company acquired certain assets and assumed certain liabilities of
Verso Technologies (“Verso”), a manufacturer of digital video broadcasting
equipment, for $3,917,000. Sales and income related to the Verso assets acquired
were not material to the Company’s results of operations. This operation was
combined with the Company’s existing business and is part of the
telecommunications transmission segment.
F-15
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
The
Company allocated the purchase price of these acquisitions as
follows:
|
Insite
|
Digicast
|
Verso
|
Estimated Useful Lives
|
||||||||||
|
Fair
value of net tangible assets
acquired
|
$ | 335,000 | 408,000 | 1,338,000 | |||||||||
|
Adjustments
to record intangible
assets at fair value:
|
|||||||||||||
|
Existing
technology
|
447,000 | - | 2,579,000 |
7
years
|
|||||||||
|
Other
intangibles
|
302,000 | 592,000 | - |
1
to 10 years
|
|||||||||
|
Goodwill
|
2,119,000 | - | - |
Indefinite
|
|||||||||
| 2,868,000 | 592,000 | 2,579,000 | |||||||||||
|
Aggregate
purchase price
|
$ | 3,203,000 | 1,000,000 | 3,917,000 | |||||||||
The
allocation of the Verso purchase price is preliminary and is expected to be
completed within one year of the acquisition. The valuation of technology was
based primarily on the discounted capitalization of royalty expense saved
because the Company now owns the asset. The valuation of other intangibles was
primarily based on the value of the discounted cash flows that the related
assets could be expected to generate in the future.
(3)
Accounts
Receivable
Accounts
receivable consist of the following at July 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Billed
receivables from the U.S. government and its agencies
|
$ | 34,911,000 | 38,773,000 | |||||
|
Billed
receivables from commercial customers
|
31,758,000 | 33,859,000 | ||||||
|
Unbilled
receivables on contracts-in-progress
|
4,672,000 | 1,638,000 | ||||||
| 71,341,000 | 74,270,000 | |||||||
|
Less
allowance for doubtful accounts
|
1,301,000 | 685,000 | ||||||
|
Accounts receivable,
net
|
$ | 70,040,000 | 73,585,000 | |||||
Unbilled
receivables on contracts-in-progress include $2,854,000 and $1,308,000 at July
31, 2008 and July 31, 2007, respectively, due from the U.S. government and its
agencies. There was $145,000 and $0 of retainage included in unbilled
receivables at July 31, 2008 and July 31, 2007, respectively. In the opinion of
management, substantially all of the unbilled balances will be billed and
collected within one year.
(4)
Inventories
Inventories consist of the following at
July 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Raw
materials and components
|
$ | 41,047,000 | 32,669,000 | |||||
|
Work-in-process
and finished goods
|
53,120,000 | 37,822,000 | ||||||
| 94,167,000 | 70,491,000 | |||||||
|
Less
reserve for excess and obsolete inventories
|
8,201,000 | 8,504,000 | ||||||
|
Inventories,
net
|
$ | 85,966,000 | 61,987,000 | |||||
Inventories
directly related to long-term contracts, including the Company’s MTS and BFT
contracts with the U.S. Army, were $29,081,000 and $6,547,000 at July 31, 2008
and July 31, 2007, respectively. At July 31, 2008 and July 31, 2007, $4,336,000
and $2,286,000, respectively, of the inventory balance above related to
contracts from third party commercial customers to outsource their
manufacturing.
F-16
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(5) Property, Plant and
Equipment
Property, plant and equipment consist
of the following at July 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Machinery
and equipment
|
$ | 75,800,000 | 64,562,000 | |||||
|
Leasehold
improvements
|
6,275,000 | 5,185,000 | ||||||
|
Equipment
financed by capital lease
|
52,000 | 243,000 | ||||||
| 82,127,000 | 69,990,000 | |||||||
|
Less
accumulated depreciation and amortization
|
47,858,000 | 40,708,000 | ||||||
|
Property, plant and equipment,
net
|
$ | 34,269,000 | 29,282,000 | |||||
Depreciation
and amortization expense on property, plant and equipment amounted to
approximately $9,196,000, $7,536,000 and $6,242,000 for the fiscal years ended
July 31, 2008, 2007 and 2006, respectively.
(6) Accrued Expenses and Other
Current Liabilities
Accrued expenses and other current
liabilities consist of the following at July 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Accrued
wages and benefits
|
$ | 23,680,000 | 20,695,000 | |||||
|
Accrued
warranty obligations
|
12,308,000 | 9,685,000 | ||||||
|
Accrued
commissions and royalties
|
4,882,000 | 6,751,000 | ||||||
|
Accrued
business acquisition payments
|
1,169,000 | 290,000 | ||||||
|
Other
|
7,632,000 | 9,911,000 | ||||||
|
Accrued expenses and other
current liabilities
|
$ | 49,671,000 | 47,332,000 | |||||
The
Company provides warranty coverage for most of its products for a period of at
least one year from the date of shipment. The Company records a liability for
estimated warranty expense based on historical claims, product failure rates and
other factors. Some of the Company’s product warranties are provided under
long-term contracts, the costs of which are incorporated into the Company’s
estimates of total contract costs.
Changes in the Company’s product warranty liability during the fiscal years ended July 31, 2008 and 2007 were as follows:
|
2008
|
2007
|
|||||||
|
Balance
at beginning of period
|
$ | 9,685,000 | 10,468,000 | |||||
|
Provision
for warranty obligations
|
8,131,000 | 5,417,000 | ||||||
|
Reversal
of warranty liability
|
(1,026,000 | ) | (1,056,000 | ) | ||||
|
Charges
incurred
|
(4,482,000 | ) | (5,144,000 | ) | ||||
|
Balance
at end of period
|
$ | 12,308,000 | 9,685,000 | |||||
F-17
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(7) Other
Obligations
Other obligations consist of the
following at July 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Obligations
under capital leases and for technology purchase
|
$ | 108,000 | 243,000 | |||||
|
Less
current installments
|
108,000 | 135,000 | ||||||
| $ | - | 108,000 | ||||||
Other
obligations in fiscal 2007 related to certain equipment and a technology
license. Other obligations at July 31, 2008 only related to a
technology license. The net carrying value of assets acquired under these
obligations was $348,000 and $589,000 at July 31, 2008 and 2007,
respectively.
Future
minimum lease payments under other obligations as of July 31, 2008 are $108,000,
net of $5,000 representing interest at a rate of 8.0%, all of which is
current.
(8) 2.0% Convertible Senior
Notes due 2024
On
January 27, 2004, the Company issued $105,000,000 of its 2.0% convertible senior
notes in a private offering pursuant to Rule 144A under the Securities Act of
1933, as amended. The net proceeds from this transaction were $101,179,000 after
deducting the initial purchaser’s discount and other transaction costs of
$3,821,000.
The notes
bear interest at an annual rate of 2.0% and, during certain periods, the notes
are convertible into shares of the Company's common stock at an initial
conversion price of $31.50 per share (a conversion rate of 31.7460 shares per
$1,000 original principal amount of notes), subject to adjustment in certain
circumstances. The notes may be converted if, during a conversion
period on each of at least 20 trading days, the closing sale price of the
Company’s common stock exceeds 120% of the conversion price in
effect. Upon conversion of the notes, in lieu of delivering common
stock, the Company may, in its discretion, deliver cash or a combination of cash
and common stock. The notes can be converted, at the option of the noteholders,
during the conversion period of September 15, 2008 through December 15, 2008.
Upon receiving notification of a noteholder’s intent to convert, the Company, in
accordance with the provisions of the indenture, will inform the noteholder of
its intention to deliver shares of common stock or cash, or a combination
thereof. The Company may, at its option, redeem some or all of the notes on or
after February 4, 2009. Holders of the notes will have the right to
require the Company to repurchase some or all of the outstanding notes on
February 1, 2011, February 1, 2014 and February 1, 2019 and upon certain events,
including a change in control. If not redeemed by the Company or
repaid pursuant to the holders’ right to require repurchase, the notes mature on
February 1, 2024. The notes have substantive conversion features as defined by
EITF 05-1, “Accounting for the Conversion of an Instrument that Becomes
Convertible Upon the Issuers Exercise of a Call Option.” Accordingly, the
Company will not recognize a gain or loss if it issues common stock upon the
conversion and settlement of these notes.
The 2.0%
interest is payable in cash, semi-annually, through February 1, 2011. After such
date, the 2.0% interest will be accreted into the principal amount of the
notes. Also, commencing with the six-month period beginning February
1, 2009, if the average note price for the applicable trading period equals 120%
or more of the accreted principal amount of such notes, the Company will pay
contingent interest at an annual rate of 0.25%.
F-18
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
The notes
are general unsecured obligations of the Company, ranking equally in right of
payment with all of its other existing and future unsecured senior indebtedness
and senior in right of payment to any of its future subordinated indebtedness.
All of Comtech Telecommunications Corp.’s (the “Parent”) wholly-owned
subsidiaries have issued full and unconditional guarantees in favor of the
holders of the Company’s 2.0% convertible senior notes (the “Guarantor
Subsidiaries”), except for the subsidiary that purchased Memotec, Inc. in fiscal
2004 (the “Non-Guarantor Subsidiary”). These full and unconditional guarantees
are joint and several. Other than supporting the operations of its subsidiaries,
the Parent has no independent assets or operations and there are currently no
significant restrictions on its ability, or the ability of the guarantors, to
obtain funds from each other by dividend or loan. Consolidating financial
information regarding the Parent, the Guarantor Subsidiaries and the
Non-Guarantor Subsidiary can be found in Note 16 to the consolidated financial
statements beginning on page F-30.
The net
proceeds of the offering are being used for working capital and general
corporate purposes and potentially may be used for future acquisitions of
businesses or technologies or repurchases of the Company’s common
stock. The Company filed a registration statement with the Securities
and Exchange Commission (“SEC”), which has become effective, for the resale of
the notes and the shares of common stock issuable upon conversion of the
notes.
(9)
Income Taxes
Income
before provision for income taxes consists of the following:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
U.S.
|
$ | 115,782,000 | 97,215,000 | 68,024,000 | ||||||||
|
Foreign
|
2,391,000 | (816,000 | ) | 2,463,000 | ||||||||
| $ | 118,173,000 | 96,399,000 | 70,487,000 | |||||||||
The
provision for income taxes included in the accompanying consolidated statements
of operations consists of the following:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
– current
|
$ | 39,799,000 | 29,388,000 | 22,085,000 | ||||||||
|
Federal
– deferred
|
(1,627,000 | ) | (628,000 | ) | 854,000 | |||||||
|
State
and local – current
|
4,375,000 | 2,091,000 | 1,539,000 | |||||||||
|
State
and local – deferred
|
(1,045,000 | ) | 509,000 | 85,000 | ||||||||
|
Foreign
– current
|
302,000 | (146,000 | ) | 762,000 | ||||||||
|
Foreign
– deferred
|
(64,000 | ) | (28,000 | ) | (107,000 | ) | ||||||
| $ | 41,740,000 | 31,186,000 | 25,218,000 | |||||||||
F-19
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
The
provision for income taxes differed from the amounts computed by applying the
U.S. Federal income tax rate as a result of the following:
|
Fiscal
Years Ended July 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||||||||
|
Computed
“expected” tax expense
|
$ | 41,361,000 | 35.0 | % | 33,740,000 | 35.0 | % | 24,670,000 | 35.0 | % | ||||||||||||||
|
Increase
(reduction) in income taxes resulting from:
|
||||||||||||||||||||||||
|
Nondeductible
compensation
|
26,000 | 0.1 | 51,000 | 0.1 | 961,000 | 1.4 | ||||||||||||||||||
|
State
and local income taxes, net of Federal benefit
|
2,165,000 | 1.8 | 1,678,000 | 1.8 | 922,000 | 1.3 | ||||||||||||||||||
|
Nondeductible
stock-based compensation
|
585,000 | 0.5 | 529,000 | 0.5 | 615,000 | 0.9 | ||||||||||||||||||
|
Extraterritorial
income exclusion/ domestic production activities deduction
|
(1,817,000 | ) | (1.5 | ) | (1,472,000 | ) | (1.5 | ) | (1,372,000 | ) | (1.9 | ) | ||||||||||||
|
Research
and experimentation credits
|
(1,174,000 | ) | (1.0 | ) | (3,400,000 | ) | (3.5 | ) | (415,000 | ) | (0.6 | ) | ||||||||||||
|
Change
in the beginning of the year valuation allowance for deferred tax
assets
|
(50,000 | ) | (0.1 | ) | (50,000 | ) | (0.1 | ) | (111,000 | ) | (0.2 | ) | ||||||||||||
|
Other
|
644,000 | 0.5 | 110,000 | 0.1 | (52,000 | ) | (0.1 | ) | ||||||||||||||||
| $ | 41,740,000 | 35.3 | % | 31,186,000 | 32.4 | % | 25,218,000 | 35.8 | % | |||||||||||||||
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at July 31, 2008 and 2007 are presented
below.
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for doubtful accounts receivable
|
$ | 484,000 | 210,000 | |||||
|
Intangibles
|
329,000 | 715,000 | ||||||
|
Inventory
and warranty reserves
|
6,922,000 | 5,871,000 | ||||||
|
Compensation
and commissions
|
1,558,000 | 2,632,000 | ||||||
|
State
research and experimentation credits
|
1,162,000 | 1,162,000 | ||||||
|
Stock-based
compensation
|
5,623,000 | 3,057,000 | ||||||
|
Other
|
1,963,000 | 1,134,000 | ||||||
|
Less
valuation allowance
|
(1,262,000 | ) | (1,312,000 | ) | ||||
|
Total
deferred tax assets
|
16,779,000 | 13,469,000 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Convertible
senior notes
|
(9,672,000 | ) | (8,899,000 | ) | ||||
|
Plant
and equipment
|
(2,951,000 | ) | (3,150,000 | ) | ||||
|
Total
deferred tax liabilities
|
(12,623,000 | ) | (12,049,000 | ) | ||||
|
Net
deferred tax assets
|
$ | 4,156,000 | 1,420,000 | |||||
The
Company provides for income taxes under the provisions of SFAS No. 109,
“Accounting for Income Taxes.” SFAS No. 109 requires an asset and
liability based approach in accounting for income taxes. In assessing
the realizability of deferred tax assets and liabilities, management considers
whether it is more likely than not that some portion or all of them will not be
realized. As of July 31, 2008 and 2007, the Company’s deferred tax
asset has been offset by a valuation allowance primarily related to state
research and experimentation credits which may not be utilized in future
periods. The Company must generate approximately $48,800,000 of taxable income
to fully utilize its deferred tax assets. Management believes it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize the net deferred tax assets.
F-20
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
Effective
August 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109” (“FIN No. 48”). Except for additional disclosures included in
the Notes to Consolidated Financial Statements, there was no material impact and
the Company did not record any cumulative-effect adjustment to the opening
balance in retained earnings. In accordance with FIN No. 48, there was no
retrospective application to any prior financial statement periods.
At August
1, 2007 (the date of adoption of FIN No. 48) and July 31, 2008, the total
unrecognized tax benefits, excluding interest, were $3,955,000 and $4,467,000,
respectively. At August 1, 2007 and July 31, 2008, the amount of
unrecognized tax benefits that would impact the Company’s effective tax rate, if
recognized, was $3,955,000 and $2,714,000, respectively. Unrecognized
tax benefits result from income tax positions taken or expected to be taken on
the Company’s income tax returns for which a tax benefit has not been recorded
in the Company’s financial statements. Of the total unrecognized tax benefits,
$2,801,000 and $1,909,000 were recorded as non-current income taxes payable in
the Consolidated Balance Sheets of the Company at August 1, 2007 and July 31,
2008, respectively. The following table summarizes the activity related to the
Company’s unrecognized tax benefits:
|
Balance
as of August 1, 2007
|
$ | 3,955,000 | ||
|
Increase
related to prior periods
|
826,000 | |||
|
Decrease
related to prior periods
|
(123,000 | ) | ||
|
Increase
related to fiscal 2008
|
678,000 | |||
|
Settlements
with taxing authorities
|
(756,000 | ) | ||
|
Expiration
of statute of limitations
|
(113,000 | ) | ||
|
Balance
as of July 31, 2008
|
$ | 4,467,000 |
The
Company’s policy is to recognize interest and penalties relating to uncertain
tax positions in income tax expense. At August 1, 2007 and July 31, 2008,
interest accrued relating to income taxes was $462,000 and $301,000,
respectively, net of the related income tax benefit.
Tax years
prior to fiscal 2003 are not subject to examination by the U.S. Federal tax
authorities. In fiscal 2008, the Internal Revenue Service (“IRS”) completed its
audit of the Company’s Federal income tax returns for fiscal 2004 and fiscal
2005. In addition, it has informed the Company that it will audit the Company’s
Federal income tax return for fiscal 2006. The IRS audits for 2004 and 2005 were
focused on the allowable amount of R&E credits utilized and interest expense
relating to the Company’s 2% convertible senior notes.
If the
final outcome of the fiscal 2006 audit differs materially from the Company’s
original income tax provision, the Company’s results of operations and financial
condition could be materially impacted.
F-21
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(10) Stock Option Plans and
Employee Stock Purchase Plan
The
Company issues stock-based awards pursuant to the following plans:
1993 Incentive Stock Option
Plan – The 1993 Incentive Stock Option Plan, as amended, provided for the
granting to key employees and officers of incentive and non-qualified stock
options to purchase up to 2,345,625 shares of the Company’s common stock at
prices generally not less than the fair market value at the date of grant with
the exception of anyone who, prior to the grant, owns more than 10% of the
voting power, in which case the exercise price cannot be less than 110% of the
fair market value. In addition, it provided formula grants to non-employee
members of the Company’s Board of Directors. The term of the options could be no
more than ten years. However, for incentive stock options granted to any
employee who, prior to the granting of the option, owns stock representing more
than 10% of the voting power, the option term could be no more than five
years.
As of
July 31, 2008, the Company had granted stock-based awards representing the right
to purchase an aggregate of 2,016,218 shares (net of 428,441 canceled awards) at
prices ranging between $0.67 – $5.31 per share, of which 675 are outstanding at
July 31, 2008. To date, 2,015,543 shares have been exercised. Outstanding awards
have been transferred to the 2000 Stock Incentive Plan. The terms applicable to
these awards prior to the transfer continue to apply. The plan was terminated by
the Company’s Board of Directors in December 1999 due to the approval by the
shareholders of the 2000 Stock Incentive Plan.
2000 Stock Incentive
Plan – The 2000 Stock Incentive Plan, as amended, provides for the
granting to all employees and consultants of the Company (including prospective
employees and consultants) non-qualified stock options, SARs, restricted stock,
performance shares, performance units and other stock-based
awards. In addition, employees of the Company are eligible to be
granted incentive stock options. Non-employee directors of the
Company are eligible to receive non-discretionary grants of nonqualified stock
options subject to certain limitations. The aggregate number of
shares of common stock which may be issued may not exceed 6,587,500 plus the
shares that were transferred to the Plan relating to outstanding awards that
were previously granted under the 1982 Incentive Stock Option Plan and the 1993
Incentive Stock Option Plan. The Stock Option Committee of the
Company’s Board of Directors, consistent with the terms of the Plan, will
determine the types of awards to be granted, the terms and conditions of each
award and the number of shares of common stock to be covered by each award.
Grants of incentive and non-qualified stock options may not have a term
exceeding ten years or no more than five years in the case of an incentive stock
option granted to a stockholder who owns stock representing more than 10% of the
voting power.
As of
July 31, 2008, the Company had granted stock-based awards representing the right
to purchase an aggregate of 5,441,222 shares (net of 590,078 canceled awards) at
prices ranging between $3.13 – $51.65 of which 2,518,998 are outstanding at July
31, 2008. As of July 31, 2008, 2,922,224 stock-based awards have been
exercised. All stock-based awards granted through July 31, 2005 had
exercise prices equal to the fair market value of the stock on the date of grant
and a term of ten years. All stock-based awards granted since August
1, 2005 have had exercise prices equal to the fair market value of the stock on
the date of grant and a term of five years.
F-22
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
The
following table summarizes certain stock option plan activity during the three
years ended July 31, 2008:
|
Number
of Shares Underlying Stock-Based Awards
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
Aggregate
Intrinsic
Value
|
||||||||
|
Outstanding
at July 31, 2005
|
2,566,882 | $ | 9.87 | ||||||||
|
Granted
|
706,000 | 35.30 | |||||||||
|
Expired/canceled
|
(108,903 | ) | 16.00 | ||||||||
|
Exercised
|
(244,737 | ) | 7.61 | ||||||||
|
Outstanding
at July 31, 2006
|
2,919,242 | 15.99 | |||||||||
|
Granted
|
716,600 | 27.91 | |||||||||
|
Expired/canceled
|
(197,825 | ) | 14.90 | ||||||||
|
Exercised
|
(938,000 | ) | 10.17 | ||||||||
|
Outstanding
at July 31, 2007
|
2,500,017 | 21.67 | |||||||||
|
Granted
|
622,000 | 42.47 | |||||||||
|
Expired/canceled
|
(42,663 | ) | 27.38 | ||||||||
|
Exercised
|
(559,681 | ) | 11.96 | ||||||||
|
Outstanding
at July 31, 2008
|
2,519,673 | $ | 28.87 |
3.79
|
$ 51,058,000
|
||||||
|
Exercisable
at July 31, 2008
|
722,533 | $ | 22.33 |
3.86
|
$ 19,361,000
|
||||||
|
Expected
to vest at July 31, 2008
|
1,754,661 | $ | 31.63 |
3.76
|
$
30,700,000
|
||||||
Included
in the number of shares underlying stock-based awards outstanding at July 31,
2008, in the above table, are 26,000 SARs with an aggregate intrinsic value of
$291,000.
The total
intrinsic value of stock-based awards exercised during the years ended July 31,
2008, 2007 and 2006 was $21,125,000, $27,302,000 and $6,602,000,
respectively.
2001 Employee Stock Purchase
Plan – The ESPP was approved by the shareholders on December 12, 2000,
and 675,000 shares of the Company’s common stock were reserved for
issuance. The ESPP is intended to provide eligible employees of the
Company the opportunity to acquire common stock in the Company at 85% of fair
market value at date of issuance through participation in the payroll-deduction
based ESPP. Through fiscal 2008, the Company issued 284,743 shares of
its common stock to participating employees in connection with the
ESPP.
F-23
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(11) Customer and Geographic
Information
Sales by
geography and customer type, as a percentage of consolidated net sales, are as
follows:
|
Fiscal
Years Ended July 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
United
States
|
||||||||||||
|
U.S.
government
|
66.4 | % | 61.3 | % | 47.3 | % | ||||||
|
Commercial
customers
|
6.9 | % | 12.5 | % | 17.1 | % | ||||||
|
Total
United States
|
73.3 | % | 73.8 | % | 64.4 | % | ||||||
|
International
|
26.7 | % | 26.2 | % | 35.6 | % | ||||||
International
sales include sales to U.S. domestic companies for inclusion in products that
will be sold to international customers. One customer, a prime contractor,
represented 3.1%, 5.4% and 10.2% of consolidated net sales in fiscal 2008, 2007
and 2006, respectively.
(12) Segment
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 decisions about resources to be allocated and
assessing their 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 operating
segments: (i) telecommunications transmission, (ii) mobile data
communications and (iii) RF microwave amplifiers. Telecommunications
transmission products include satellite earth station products (such as analog
and digital modems, frequency converters, power amplifiers, and voice gateways)
and over-the-horizon microwave communications products and systems. Mobile data
communications products include satellite-based mobile location, tracking and
messaging hardware and related services. RF microwave amplifier products include
solid-state, high-power, broadband amplifier products that use the microwave and
radio frequency spectrums.
Unallocated
expenses result from such corporate expenses as legal, accounting and executive
compensation. In addition, for fiscal 2008, 2007 and 2006, unallocated expenses
include $10,640,000, $7,401,000 and $5,681,000 of stock-based compensation
expense, respectively. Interest expense (which includes amortization of deferred
financing costs) associated with the Company’s 2.0% convertible senior notes is
not allocated to the operating segments. Depreciation and amortization includes
amortization of stock-based compensation. Unallocated assets consist principally
of cash, deferred financing costs and deferred tax assets. Substantially all of
the Company's long-lived assets are located in the U.S.
F-24
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
Corporate
management defines and reviews segment profitability based on the same
allocation methodology as presented in the segment data tables
below.
|
Fiscal
Year Ended July 31, 2008
|
||||||||||||||||||||
|
(in
thousands)
|
Telecommunications
Transmission
|
Mobile
Data Communications
|
RF
Microwave
Amplifiers
|
Unallocated
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | 208,994 | 261,057 | 61,576 | - | $ | 531,627 | |||||||||||||
|
Operating
income (expense)
|
56,688 | 72,796 | 4,410 | (27,103 | ) | 106,791 | ||||||||||||||
|
Interest
income and other
|
156 | 4 | - | 13,905 | 14,065 | |||||||||||||||
|
Interest
expense
|
25 | 12 | - | 2,646 | 2,683 | |||||||||||||||
|
Depreciation
and amortization
|
7,362 | 2,139 | 1,201 | 10,844 | 21,546 | |||||||||||||||
|
Expenditure
for long-lived assets, including intangibles
|
11,834 | 3,705 | 1,588 | 99 | 17,226 | |||||||||||||||
|
Total
assets at July 31, 2008
|
145,290 | 40,519 | 42,363 | 424,948 | 653,120 | |||||||||||||||
|
Fiscal
Year Ended July 31, 2007
|
||||||||||||||||||||
|
(in
thousands)
|
Telecommunications
Transmission
|
Mobile
Data Communications
|
RF
Microwave
Amplifiers
|
Unallocated
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | 219,935 | 189,575 | 36,174 | - | $ | 445,684 | |||||||||||||
|
Operating
income (expense)
|
59,205 | 45,403 | 3,658 | (23,344 | ) | 84,922 | ||||||||||||||
|
Interest
income and other
|
(59 | ) | 22 | - | 14,245 | 14,208 | ||||||||||||||
|
Interest
expense
|
48 | 37 | - | 2,646 | 2,731 | |||||||||||||||
|
Depreciation
and amortization
|
6,995 | 1,556 | 1,392 | 7,586 | 17,529 | |||||||||||||||
|
Expenditure
for long-lived assets, including intangibles
|
8,616 | 5,858 | 1,298 | 114 | 15,886 | |||||||||||||||
|
Total
assets at July 31, 2007
|
118,300 | 48,275 | 34,993 | 354,774 | 556,342 | |||||||||||||||
|
Fiscal
Year Ended July 31, 2006
|
||||||||||||||||||||
|
(in
thousands)
|
Telecommunications
Transmission
|
Mobile
Data Communications
|
RF
Microwave
Amplifiers
|
Unallocated
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | 197,891 | 149,463 | 44,157 | - | $ | 391,511 | |||||||||||||
|
Operating
income (expense)
|
49,797 | 21,730 | 8,311 | (15,907 | ) | 63,931 | ||||||||||||||
|
Interest
income and other
|
48 | 2 | - | 9,193 | 9,243 | |||||||||||||||
|
Interest
expense
|
38 | - | 3 | 2,646 | 2,687 | |||||||||||||||
|
Depreciation
and amortization
|
6,086 | 1,193 | 1,317 | 5,792 | 14,388 | |||||||||||||||
|
Expenditure
for long-lived assets, including
intangibles
|
8,914 | 1,545 | 1,477 | 588 | 12,524 | |||||||||||||||
|
Total
assets at July 31, 2006
|
134,567 | 45,641 | 24,588 | 250,470 | 455,266 | |||||||||||||||
Intersegment
sales in fiscal 2008, 2007 and 2006 by the telecommunications transmission
segment to the RF microwave amplifiers segment were $16,005,000, $6,495,000 and
$7,512,000, respectively. In fiscal 2008, 2007 and 2006, intersegment sales by
the telecommunications transmission segment to the mobile data communications
segment were $123,767,000, $78,319,000 and $55,667,000, respectively.
Intersegment sales have been eliminated from the tables above.
F-25
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(13)
Commitments and
Contingencies
(a) Operating
Leases
The
Company is obligated under noncancellable operating lease agreements, including
satellite lease expenditures relating to its mobile data communications segment
contracts. At July 31, 2008, the future minimum lease payments under operating
leases are as follows:
|
2009
|
$ | 25,095,000 | ||
|
2010
|
4,211,000 | |||
|
2011
|
3,174,000 | |||
|
2012
|
1,692,000 | |||
|
2013
|
1,219,000 | |||
|
Thereafter
|
3,390,000 | |||
|
Total
|
$ | 38,781,000 |
Lease
expense charged to operations was $4,668,000, $3,871,000 and $3,379,000 in
fiscal 2008, 2007 and 2006, respectively. Lease expense excludes satellite lease
expenditures incurred of approximately $22,632,000, $15,456,000 and $13,382,000
in fiscal 2008, 2007 and 2006, respectively, relating to the Company’s mobile
data communications segment. Satellite lease expenditures are allocated to
individual contracts and expensed to cost of sales.
In
December 1991, the Company and a partnership controlled by the Company’s
Chairman, Chief Executive Officer and President entered into an agreement in
which the Company leases from the partnership its Melville, New York production
facility. The lease was for an initial term of ten
years. In December 2001, the Company exercised its option for an
additional ten-year period. For financial reporting purposes, the lease for the
extension period is an operating lease. The annual rentals, of
approximately $570,000 for fiscal 2008, are subject to annual adjustments equal
to the lesser of 5% or the change in the Consumer Price Index.
(b) United States Government
Contracts
Certain
of the Company’s contracts are subject to audit by applicable governmental
agencies. Until such audits are completed, the ultimate profit on
these contracts cannot be determined; however, it is management’s belief that
the final contract settlements will not have a material adverse effect on the
Company’s consolidated financial condition or results of
operations.
(c) Legal
Proceedings
In
October 2007, the Company’s Florida-based subsidiary, Comtech Systems, Inc.
(“CSI”), received a customs export enforcement subpoena from the U.S.
Immigration and Customs Enforcement (“ICE”) branch of the Department of Homeland
Security. The subpoena relates to CSI’s $1,982,000 contract with the Brazilian
Naval Commission (the Brazil contract) and it required the production of all
books, records and documents, including copies of contracts, invoices and
payments related to agreements between CSI, its agent, its subcontractor and the
Brazilian government. The Company believes that the ICE investigation is focused
primarily on whether or not CSI was in compliance with export-related laws and
regulations, including the International Traffic in Arms Regulations (“ITAR”)
and the Export Administration Regulations. CSI produced documents in response to
the subpoena request. Customs
officials have detained certain inventory related to the Brazil contract pending
resolution of this matter.
The Company engaged outside counsel to
assist CSI in its response to the subpoena and related matters and to conduct
its own investigation. Based on the Company’s ongoing investigation into
this matter, it believes that the detained inventory, which consists of
commercial satellite equipment, was not modified or adapted in any way to meet
Brazilian military requirements and was only subject to the jurisdiction of the
Department of Commerce and not the jurisdiction of the U.S. Department of State.
In addition, in order to provide certain defense services, including conducting
factory acceptance testing at CSI’s Florida facility,
F-26
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
the
Company obtained a license (referred to as a Technical Assistance Agreement
(“TAA”)) from the U.S. Department of State. The Company believes that the TAA
authorized all activities under the Brazil contract that were subject to the
jurisdiction of the U.S. Department of State.
The
Company believes that CSI made a good faith effort to comply with applicable
regulations; however, the Company believes that CSI made inadvertent
administrative errors resulting in a TAA that did not become effective on a
timely basis. The administrative errors relate primarily to the execution of
non-disclosure agreements (“NDA”) with certain third country national employees
of CSI’s agent. These individuals have now signed appropriate NDAs, and, in
December 2007, CSI filed an amended TAA with the U.S. Department of State. CSI
has requested that the U.S. Department of State confirm CSI’s and the Company’s
view that the Brazil contract does not require any other State Department
license.
In March
2008, the Enforcement Division of the U.S. Department of State informed the
Company that they were reviewing CSI’s amended TAA. In May 2008, the U.S.
Attorney’s Office in the Middle District of
Florida informed the Company that, based on its conversations with the ICE agent
who initiated the subpoena, it was closing its investigation into the Brazil
matter. In June 2008, the ICE agent informed the Company that he would recommend
that the detained inventory be released back to the Company upon the U.S.
Department of State confirming the Company’s position that a State Department
license for the hardware shipped was not required. In August 2008, the ICE agent
informed the Company that the U.S. Department of State wanted to clarify
certain technical matters and, on its behalf, the ICE agent was going to
interview one of the Company’s engineers. This interview occurred in September
of 2008. The Company remains cautiously optimistic that it will be able to
shortly reship the Brazil inventory to the end-customer.
In
addition to its review of the Brazil contract, in March 2008, the Enforcement
Division of the U.S. Department of State informed the Company that it sought to
confirm the Company’s company-wide ITAR compliance for the five-year period
ended March 2008. In response, the Company expanded its ongoing investigation.
In June 2008, the Company provided detailed information and a summary of its
findings to the U.S. Department of State. In July 2008, the U.S. Department of
State requested supplemental information and the Company responded to its
request. The Company’s findings to date indicate that there were certain
instances of exports and defense services during the five-year period for which
it did not have the appropriate authorization from the U.S. Department of State;
however, none of those instances involved Proscribed Countries as defined by
ITAR. The Company is awaiting additional feedback from the U.S. Department of
State as it relates to all of the aforementioned matters.
Since the
receipt of the original Brazil subpoena in October 2007, the Company has engaged
outside counsel and export consultants to help it assess and improve, as
appropriate, its internal controls with respect to U.S. export control laws and
regulations and laws governing record keeping and dealings with foreign
representatives. In addition, in connection with the Company’s August 1, 2008 acquisition
of Radyne, the Company is expanding its export internal control assessment to
include its newly acquired subsidiaries. To date, the Company has noted
opportunities for improving its procedures to comply with such laws and
regulations, including at its newly acquired Radyne
subsidiaries.
During fiscal 2008, the Company has
taken numerous steps to significantly improve its export control processes,
including the hiring of additional employees who are knowledgeable and
experienced with ITAR and the engagement of an outside export consultant to
conduct additional training. The Company is also in the process of implementing
enhanced formal company-wide ITAR control procedures, including at its newly
acquired Radyne subsidiaries. Because the Company’s assessments are continuing,
the Company expects to remediate, improve and enhance its internal controls
relating to exports throughout fiscal 2009.
F-27
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
Because the above matters are ongoing,
the Company cannot determine the ultimate outcome of these matters. Violations
of U.S. export control-related laws and regulations could result in civil or
criminal fines and/or penalties and/or result in an injunction against the
Company, all of which could, in the aggregate, materially impact its business,
results of operations and cash flows. Should the Company identify a material
weakness relating to its compliance, the ongoing costs of remediation could be
material. In addition, inventory related to the Brazil contract (including the
inventory that has been detained) had a net book value of $1,110,000 as of July
31, 2008. If this inventory is permanently seized or not returned to the
Company timely, or the Company can not resell the inventory to
other customers, the Company would be required to write-off the value of this
inventory in a future accounting period.
(d) Employment and Change of
Control Agreements
The
Company has an employment agreement with its Chairman of the Board, Chief
Executive Officer and President. The employment agreement generally provides for
an annual salary and bonus award. The Company has also entered into change of
control agreements with certain of its officers. All of the agreements may
require payments, in certain circumstances, in the event of a change in control
of the Company.
(14)
Stockholder Rights
Plan
On
December 15, 1998, the Company’s Board of Directors approved the adoption of a
stockholder rights plan in which one stock purchase right (“Right”) was
distributed as a dividend on each outstanding share of the Company’s common
stock to stockholders of record at the close of business on January 4,
1999. Under the plan, the Rights will be exercisable only if
triggered by a person or group’s acquisition of 15% or more of the Company’s
common stock. If triggered, each Right, other than Rights held by the
acquiring person or group, would entitle its holder to purchase a specified
number of the Company’s common shares for 50% of their market value at that
time. Unless a 15% acquisition has occurred, the Rights may be redeemed by the
Company at any time prior to the termination date of the plan.
This
Right to purchase common stock at a discount will not be triggered by a person
or group’s acquisition of 15% or more of the common stock pursuant to a tender
or exchange offer which is for all outstanding shares at a price and on terms
that the Company’s Board of Directors determines (prior to acquisition) to be
adequate and in the best interest of the Company and its
stockholders. The Rights will expire on December 15,
2008.
F-28
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(15)
Intangible
Assets
Intangible
assets with finite lives arising from acquisitions as of July 31, 2008 and 2007
are as follows:
|
July
31, 2008
|
||||||||||||||||
|
Weighted
Average Amortization Period
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||||||
|
Existing
technology
|
6.95 | $ | 16,401,000 | 11,897,000 | $ | 4,504,000 | ||||||||||
|
Proprietary,
core and licensed technology
|
8.31 | 5,851,000 | 3,189,000 | 2,662,000 | ||||||||||||
|
Other
|
5.61 | 975,000 | 636,000 | 339,000 | ||||||||||||
|
Total
|
$ | 23,227,000 | 15,722,000 | $ | 7,505,000 | |||||||||||
|
July
31, 2007
|
||||||||||||||||
|
Weighted
Average Amortization Period
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||||||
|
Existing
technology
|
7.22 | $ | 12,903,000 | 11,168,000 | $ | 1,735,000 | ||||||||||
|
Proprietary,
core and licensed technology
|
8.31 | 5,851,000 | 2,326,000 | 3,525,000 | ||||||||||||
|
Other
|
5.61 | 975,000 | 518,000 | 457,000 | ||||||||||||
|
Total
|
$ | 19,729,000 | 14,012,000 | $ | 5,717,000 | |||||||||||
Amortization
expense for the years ended July 31, 2008, 2007 and 2006 was $1,710,000,
$2,592,000 and $2,465,000, respectively. The estimated amortization
expense for the fiscal years ending July 31, 2009, 2010, 2011, 2012 and 2013 is
$2,072,000, $1,957,000, $1,545,000, $631,000 and $524,000,
respectively.
The
changes in carrying amount of goodwill by segment for the years ended July 31,
2008 and 2007 are as follows:
|
Telecommunications
|
Mobile
Data
|
RF
Microwave
|
||||||||||||||
|
Transmission
|
Communications
|
Amplifiers
|
Total
|
|||||||||||||
|
Balance
at July 31, 2006
|
$ | 8,817,000 | 5,005,000 | 8,422,000 | $ | 22,244,000 | ||||||||||
|
Acquisition
of Insite
|
- | 2,143,000 | - | 2,143,000 | ||||||||||||
|
Balance
at July 31, 2007
|
8,817,000 | 7,148,000 | 8,422,000 | 24,387,000 | ||||||||||||
|
Acquisition
of Insite (See Note 2)
|
- | (24,000 | ) | - | (24,000 | ) | ||||||||||
|
Balance
at July 31, 2008
|
$ | 8,817,000 | 7,124,000 | 8,422,000 | $ | 24,363,000 | ||||||||||
F-29
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(16) Consolidating Financial
Information
The
consolidating financial information presented below reflects information
regarding the Parent, the Guarantor Subsidiaries and the Non-Guarantor
Subsidiary of the Company’s 2.0% convertible senior notes. Tolt is included in
the guarantor column for all periods presented. The Parent’s expenses associated
with supporting the operations of its subsidiaries are allocated to the
respective Guarantor Subsidiaries and Non-Guarantor Subsidiary. The
consolidating financial information presented herein is not utilized by the
chief operating decision-maker in making operating decisions and assessing
performance.
The
following reflects the consolidating balance sheet as of July 31,
2008:
|
Parent
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 408,065,000 | - | 4,056,000 | (2,054,000 | ) | $ | 410,067,000 | ||||||||||||
|
Accounts
receivable, net
|
- | 67,777,000 | 2,263,000 | - | 70,040,000 | |||||||||||||||
|
Inventories,
net
|
- | 84,032,000 | 1,934,000 | - | 85,966,000 | |||||||||||||||
|
Prepaid
expenses and other current assets
|
1,953,000 | 3,209,000 | 1,404,000 | (675,000 | ) | 5,891,000 | ||||||||||||||
|
Deferred
tax asset – current
|
1,243,000 | 8,783,000 | - | - | 10,026,000 | |||||||||||||||
|
Total
current assets
|
411,261,000 | 163,801,000 | 9,657,000 | (2,729,000 | ) | 581,990,000 | ||||||||||||||
|
Property,
plant and equipment, net
|
740,000 | 32,763,000 | 766,000 | - | 34,269,000 | |||||||||||||||
|
Investment
in subsidiaries
|
318,292,000 | 5,721,000 | - | (324,013,000 | ) | - | ||||||||||||||
|
Goodwill
|
- | 23,416,000 | 947,000 | - | 24,363,000 | |||||||||||||||
|
Intangibles
with finite lives, net
|
- | 4,388,000 | 3,117,000 | - | 7,505,000 | |||||||||||||||
|
Deferred
tax asset – non-current
|
- | - | 206,000 | (206,000 | ) | - | ||||||||||||||
|
Deferred
financing costs, net
|
1,357,000 | - | - | - | 1,357,000 | |||||||||||||||
|
Other
assets, net
|
3,266,000 | 352,000 | 18,000 | - | 3,636,000 | |||||||||||||||
|
Intercompany
receivables
|
- | 171,277,000 | - | (171,277,000 | ) | - | ||||||||||||||
|
Total
assets
|
$ | 734,916,000 | 401,718,000 | 14,711,000 | (498,225,000 | ) | $ | 653,120,000 | ||||||||||||
|
Liabilities
and Stockholders’ Equity
|
||||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 1,597,000 | 30,874,000 | 1,006,000 | (2,054,000 | ) | $ | 31,423,000 | ||||||||||||
|
Accrued
expenses and other current liabilities
|
12,241,000 | 36,551,000 | 879,000 | - | 49,671,000 | |||||||||||||||
|
Customer
advances and deposits
|
- | 13,254,000 | 2,033,000 | - | 15,287,000 | |||||||||||||||
|
Current
installments of other obligations
|
- | 108,000 | - | - | 108,000 | |||||||||||||||
|
Interest
payable
|
1,050,000 | - | - | - | 1,050,000 | |||||||||||||||
|
Income
taxes payable
|
- | - | 675,000 | (675,000 | ) | - | ||||||||||||||
|
Total
current liabilities
|
14,888,000 | 80,787,000 | 4,593,000 | (2,729,000 | ) | 97,539,000 | ||||||||||||||
|
Convertible
senior notes
|
105,000,000 | - | - | - | 105,000,000 | |||||||||||||||
|
Income
taxes payable – non-current
|
1,909,000 | - | - | - | 1,909,000 | |||||||||||||||
|
Deferred
tax liability – non-current
|
3,437,000 | 2,639,000 | - | (206,000 | ) | 5,870,000 | ||||||||||||||
|
Intercompany
payables
|
166,880,000 | - | 4,397,000 | (171,277,000 | ) | - | ||||||||||||||
|
Total
liabilities
|
292,114,000 | 83,426,000 | 8,990,000 | (174,212,000 | ) | 210,318,000 | ||||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||||||
|
Stockholders’
equity:
|
||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | |||||||||||||||
|
Common
stock
|
2,460,000 | 4,000 | - | (4,000 | ) | 2,460,000 | ||||||||||||||
|
Additional
paid-in capital
|
186,246,000 | 81,410,000 | 5,187,000 | (86,597,000 | ) | 186,246,000 | ||||||||||||||
|
Retained
earnings
|
254,281,000 | 236,878,000 | 534,000 | (237,412,000 | ) | 254,281,000 | ||||||||||||||
| 442,987,000 | 318,292,000 | 5,721,000 | (324,013,000 | ) | 442,987,000 | |||||||||||||||
|
Less:
|
||||||||||||||||||||
|
Treasury
stock
|
(185,000 | ) | - | - | - | (185,000 | ) | |||||||||||||
|
Total
stockholders’ equity
|
442,802,000 | 318,292,000 | 5,721,000 | (324,013,000 | ) | 442,802,000 | ||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 734,916,000 | 401,718,000 | 14,711,000 | (498,225,000 | ) | $ | 653,120,000 | ||||||||||||
F-30
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(16) Consolidating Financial
Information (continued)
The
following reflects the consolidating balance sheet as of July 31,
2007:
|
Parent
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 340,617,000 | 983,000 | 1,303,000 | - | $ | 342,903,000 | |||||||||||||
|
Accounts
receivable, net
|
- | 66,240,000 | 7,345,000 | - | 73,585,000 | |||||||||||||||
|
Inventories,
net
|
- | 61,337,000 | 650,000 | - | 61,987,000 | |||||||||||||||
|
Prepaid
expenses and other current assets
|
1,868,000 | 4,311,000 | 555,000 | - | 6,734,000 | |||||||||||||||
|
Deferred
tax asset – current
|
645,000 | 8,735,000 | - | - | 9,380,000 | |||||||||||||||
|
Total
current assets
|
343,130,000 | 141,606,000 | 9,853,000 | - | 494,589,000 | |||||||||||||||
|
Property,
plant and equipment, net
|
844,000 | 27,796,000 | 642,000 | - | 29,282,000 | |||||||||||||||
|
Investment
in subsidiaries
|
248,952,000 | 4,755,000 | - | (253,707,000 | ) | - | ||||||||||||||
|
Goodwill
|
- | 23,440,000 | 947,000 | - | 24,387,000 | |||||||||||||||
|
Intangibles
with finite lives, net
|
- | 4,972,000 | 745,000 | - | 5,717,000 | |||||||||||||||
|
Deferred
tax asset – non-current
|
- | - | 190,000 | (190,000 | ) | - | ||||||||||||||
|
Deferred
financing costs, net
|
1,903,000 | - | - | - | 1,903,000 | |||||||||||||||
|
Other
assets, net
|
56,000 | 386,000 | 22,000 | - | 464,000 | |||||||||||||||
|
Intercompany
receivables
|
- | 126,210,000 | - | (126,210,000 | ) | - | ||||||||||||||
|
Total
assets
|
$ | 594,885,000 | 329,165,000 | 12,399,000 | (380,107,000 | ) | $ | 556,342,000 | ||||||||||||
|
Liabilities
and Stockholders’ Equity
|
||||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 374,000 | 25,616,000 | 147,000 | - | $ | 26,137,000 | |||||||||||||
|
Accrued
expenses and other current liabilities
|
10,340,000 | 36,378,000 | 614,000 | - | 47,332,000 | |||||||||||||||
|
Customer
advances and deposits
|
- | 15,189,000 | 4,867,000 | - | 20,056,000 | |||||||||||||||
|
Current
installments of other obligations
|
- | 135,000 | - | - | 135,000 | |||||||||||||||
|
Interest
payable
|
1,050,000 | - | - | - | 1,050,000 | |||||||||||||||
|
Income
taxes payable
|
3,283,000 | - | (487,000 | ) | - | 2,796,000 | ||||||||||||||
|
Total
current liabilities
|
15,047,000 | 77,318,000 | 5,141,000 | - | 97,506,000 | |||||||||||||||
|
Convertible
senior notes
|
105,000,000 | - | - | - | 105,000,000 | |||||||||||||||
|
Other
obligations, less current installments
|
- | 108,000 | - | - | 108,000 | |||||||||||||||
|
Deferred
tax liability – non-current
|
5,363,000 | 2,787,000 | - | (190,000 | ) | 7,960,000 | ||||||||||||||
|
Intercompany
payables
|
123,707,000 | - | 2,503,000 | (126,210,000 | ) | - | ||||||||||||||
|
Total
liabilities
|
249,117,000 | 80,213,000 | 7,644,000 | (126,400,000 | ) | 210,574,000 | ||||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||||||
|
Stockholders’
equity:
|
||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | |||||||||||||||
|
Common
stock
|
2,402,000 | 4,000 | - | (4,000 | ) | 2,402,000 | ||||||||||||||
|
Additional
paid-in capital
|
165,703,000 | 81,410,000 | 5,187,000 | (86,597,000 | ) | 165,703,000 | ||||||||||||||
|
Retained
earnings (deficit)
|
177,848,000 | 167,538,000 | (432,000 | ) | (167,106,000 | ) | 177,848,000 | |||||||||||||
| 345,953,000 | 248,952,000 | 4,755,000 | (253,707,000 | ) | 345,953,000 | |||||||||||||||
|
Less:
|
||||||||||||||||||||
|
Treasury
stock
|
(185,000 | ) | - | - | - | (185,000 | ) | |||||||||||||
|
Total
stockholders’ equity
|
345,768,000 | 248,952,000 | 4,755,000 | (253,707,000 | ) | 345,768,000 | ||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 594,885,000 | 329,165,000 | 12,399,000 | (380,107,000 | ) | $ | 556,342,000 | ||||||||||||
F-31
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(16) Consolidating Financial
Information (continued)
The
following reflects the consolidating statement of operations for the year ended
July 31, 2008:
|
Parent
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Net
sales
|
$ | - | 513,430,000 | 18,671,000 | (474,000 | ) | $ | 531,627,000 | ||||||||||||
|
Cost
of sales
|
- | 288,737,000 | 8,424,000 | (474,000 | ) | 296,687,000 | ||||||||||||||
|
Gross
profit
|
- | 224,693,000 | 10,247,000 | - | 234,940,000 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Selling,
general and administrative
|
- | 79,355,000 | 6,612,000 | - | 85,967,000 | |||||||||||||||
|
Research
and development
|
- | 37,660,000 | 2,812,000 | - | 40,472,000 | |||||||||||||||
|
Amortization
of intangibles
|
- | 1,503,000 | 207,000 | - | 1,710,000 | |||||||||||||||
| - | 118,518,000 | 9,631,000 | - | 128,149,000 | ||||||||||||||||
|
Operating
income
|
- | 106,175,000 | 616,000 | - | 106,791,000 | |||||||||||||||
|
Other
expense (income):
|
||||||||||||||||||||
|
Interest
expense
|
2,646,000 | 37,000 | - | - | 2,683,000 | |||||||||||||||
|
Interest
income and other
|
(13,905,000 | ) | (85,000 | ) | (75,000 | ) | - | (14,065,000 | ) | |||||||||||
|
Income
before provision for benefit from income taxes and equity in undistributed
earnings of subsidiaries
|
11,259,000 | 106,223,000 | 691,000 | - | 118,173,000 | |||||||||||||||
|
Provision
for (benefit from) income taxes
|
4,166,000 | 37,849,000 | (275,000 | ) | - | 41,740,000 | ||||||||||||||
|
Net
earnings before equity in undistributed earnings (loss) of
subsidiaries
|
7,093,000 | 68,374,000 | 966,000 | - | 76,433,000 | |||||||||||||||
|
Equity
in undistributed earnings of subsidiaries
|
69,340,000 | 966,000 | - | (70,306,000 | ) | - | ||||||||||||||
|
Net
income
|
$ | 76,433,000 | 69,340,000 | 966,000 | (70,306,000 | ) | $ | 76,433,000 | ||||||||||||
The
following reflects the consolidating statement of operations for the year ended
July 31, 2007:
|
Parent
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Net
sales
|
$ | - | 436,075,000 | 10,045,000 | (436,000 | ) | $ | 445,684,000 | ||||||||||||
|
Cost
of sales
|
- | 247,364,000 | 5,461,000 | (436,000 | ) | 252,389,000 | ||||||||||||||
|
Gross
profit
|
- | 188,711,000 | 4,584,000 | - | 193,295,000 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Selling,
general and administrative
|
- | 69,613,000 | 3,699,000 | - | 73,312,000 | |||||||||||||||
|
Research
and development
|
- | 30,633,000 | 1,836,000 | - | 32,469,000 | |||||||||||||||
|
Amortization
of intangibles
|
- | 2,415,000 | 177,000 | - | 2,592,000 | |||||||||||||||
| - | 102,661,000 | 5,712,000 | - | 108,373,000 | ||||||||||||||||
|
Operating
income (loss)
|
- | 86,050,000 | (1,128,000 | ) | - | 84,922,000 | ||||||||||||||
|
Other
expense (income):
|
||||||||||||||||||||
|
Interest
expense
|
2,646,000 | 73,000 | 12,000 | - | 2,731,000 | |||||||||||||||
|
Interest
income and other
|
(14,245,000 | ) | 76,000 | (39,000 | ) | - | (14,208,000 | ) | ||||||||||||
|
Income
(loss) before provision for benefit from income taxes and equity in
undistributed earnings (loss) of subsidiaries
|
11,599,000 | 85,901,000 | (1,101,000 | ) | - | 96,399,000 | ||||||||||||||
|
Provision
for (benefit from) income taxes
|
4,292,000 | 27,253,000 | (359,000 | ) | - | 31,186,000 | ||||||||||||||
|
Net
earnings (loss) before equity in undistributed earnings (loss) of
subsidiaries
|
7,307,000 | 58,648,000 | (742,000 | ) | - | 65,213,000 | ||||||||||||||
|
Equity
in undistributed earnings (loss) of subsidiaries
|
57,906,000 | (742,000 | ) | - | (57,164,000 | ) | - | |||||||||||||
|
Net
income (loss)
|
$ | 65,213,000 | 57,906,000 | (742,000 | ) | (57,164,000 | ) | $ | 65,213,000 | |||||||||||
F-32
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(16) Consolidating Financial
Information (continued)
The
following reflects the consolidating statement of operations for the year ended
July 31, 2006:
|
Parent
|
Guarantor Subsidiaries
|
Non-Guarantor Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Net
sales
|
$ | - | 377,003,000 | 14,971,000 | (463,000 | ) | $ | 391,511,000 | ||||||||||||
|
Cost
of sales
|
- | 227,042,000 | 5,631,000 | (463,000 | ) | 232,210,000 | ||||||||||||||
|
Gross
profit
|
- | 149,961,000 | 9,340,000 | - | 159,301,000 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Selling,
general and administrative
|
- | 61,467,000 | 5,604,000 | - | 67,071,000 | |||||||||||||||
|
Research
and development
|
- | 24,392,000 | 1,442,000 | - | 25,834,000 | |||||||||||||||
|
Amortization
of intangibles
|
- | 2,288,000 | 177,000 | - | 2,465,000 | |||||||||||||||
| - | 88,147,000 | 7,223,000 | - | 95,370,000 | ||||||||||||||||
|
Operating
income
|
- | 61,814,000 | 2,117,000 | - | 63,931,000 | |||||||||||||||
|
Other
expense (income):
|
||||||||||||||||||||
|
Interest
expense
|
2,646,000 | 41,000 | - | - | 2,687,000 | |||||||||||||||
|
Interest
income and other
|
(9,193,000 | ) | (60,000 | ) | 10,000 | - | (9,243,000 | ) | ||||||||||||
|
Income
before provision for income taxes and equity in undistributed earnings of
subsidiaries
|
6,547,000 | 61,833,000 | 2,107,000 | - | 70,487,000 | |||||||||||||||
|
Provision
for income taxes
|
2,435,000 | 22,133,000 | 650,000 | - | 25,218,000 | |||||||||||||||
|
Net
earnings before equity in undistributed earnings of
subsidiaries
|
4,112,000 | 39,700,000 | 1,457,000 | - | 45,269,000 | |||||||||||||||
|
Equity
in undistributed earnings of subsidiaries
|
41,157,000 | 1,457,000 | - | (42,614,000 | ) | - | ||||||||||||||
|
Net
income
|
$ | 45,269,000 | 41,157,000 | 1,457,000 | (42,614,000 | ) | $ | 45,269,000 | ||||||||||||
F-33
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(16) Consolidating Financial
Information (continued)
The
following reflects the consolidating statement of cash flows for the year ended
July 31, 2008:
|
Parent
|
Guarantor
Subsidiaries
|
Non-Guarantor
Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||||||
|
Net
income
|
$ | 76,433,000 | 69,340,000 | 966,000 | (70,306,000 | ) | $ | 76,433,000 | ||||||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||||||||||
|
Depreciation
and amortization of property, plant and equipment
|
203,000 | 8,766,000 | 227,000 | - | 9,196,000 | |||||||||||||||
|
Amortization
of intangible assets with finite lives
|
- | 1,503,000 | 207,000 | - | 1,710,000 | |||||||||||||||
|
Amortization
of stock-based compensation
|
4,377,000 | 6,106,000 | 157,000 | - | 10,640,000 | |||||||||||||||
|
Amortization
of deferred financing costs
|
546,000 | - | - | - | 546,000 | |||||||||||||||
|
Loss
on disposal of property, plant and equipment
|
- | 6,000 | - | - | 6,000 | |||||||||||||||
|
Provision
for allowance for doubtful accounts
|
- | 663,000 | 60,000 | - | 723,000 | |||||||||||||||
|
Provision
for excess and obsolete inventory
|
- | 2,402,000 | 12,000 | - | 2,414,000 | |||||||||||||||
|
Excess
income tax benefit from stock award exercises
|
(2,374,000 | ) | - | - | - | (2,374,000 | ) | |||||||||||||
|
Deferred
income tax benefit
|
(2,524,000 | ) | (196,000 | ) | (16,000 | ) | - | (2,736,000 | ) | |||||||||||
|
Equity
in undistributed earnings of subsidiaries
|
(69,340,000 | ) | (966,000 | ) | - | 70,306,000 | - | |||||||||||||
|
Intercompany
accounts
|
49,391,000 | (51,282,000 | ) | 1,891,000 | - | - | ||||||||||||||
|
Changes
in assets and liabilities, net of effects of acquisitions:
|
||||||||||||||||||||
|
Accounts
receivable
|
- | (2,200,000 | ) | 5,022,000 | - | 2,822,000 | ||||||||||||||
|
Inventories
|
- | (24,988,000 | ) | (50,000 | ) | - | (25,038,000 | ) | ||||||||||||
|
Prepaid
expenses and other current assets
|
(85,000 | ) | 301,000 | (355,000 | ) | 188,000 | 49,000 | |||||||||||||
|
Other
assets
|
1,000 | 34,000 | 4,000 | - | 39,000 | |||||||||||||||
|
Accounts
payable
|
1,224,000 | 5,333,000 | 858,000 | (2,054,000 | ) | 5,361,000 | ||||||||||||||
|
Accrued
expenses and other current liabilities
|
732,000 | 462,000 | 41,000 | - | 1,235,000 | |||||||||||||||
|
Customer
advances and deposits
|
- | (1,935,000 | ) | (2,834,000 | ) | - | (4,769,000 | ) | ||||||||||||
|
Deferred
service revenue
|
- | - | - | - | - | |||||||||||||||
|
Income
taxes payable
|
1,032,000 | - | 675,000 | (188,000 | ) | 1,519,000 | ||||||||||||||
|
Net
cash provided by operating activities
|
59,616,000 | 13,349,000 | 6,865,000 | (2,054,000 | ) | 77,776,000 | ||||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||
|
Purchases
of property, plant and equipment
|
(100,000 | ) | (13,739,000 | ) | (225,000 | ) | - | (14,064,000 | ) | |||||||||||
|
Purchase
of other intangibles with finite lives
|
- | (193,000 | ) | - | - | (193,000 | ) | |||||||||||||
|
Payments
for business acquisitions
|
(2,042,000 | ) | (265,000 | ) | (3,887,000 | ) | - | (6,194,000 | ) | |||||||||||
|
Net
cash used in investing activities
|
(2,142,000 | ) | (14,197,000 | ) | (4,112,000 | ) | - | (20,451,000 | ) | |||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||
|
Principal
payments on other obligations
|
- | (135,000 | ) | - | - | (135,000 | ) | |||||||||||||
|
Excess
income tax benefit from stock award exercises
|
2,374,000 | - | - | - | 2,374,000 | |||||||||||||||
|
Proceeds
from exercises of stock options
|
6,696,000 | - | - | - | 6,696,000 | |||||||||||||||
|
Proceeds
from issuance of employee stock purchase plan shares
|
904,000 | - | - | - | 904,000 | |||||||||||||||
|
Net
cash provided by (used in) financing activities
|
9,974,000 | (135,000 | ) | - | - | 9,839,000 | ||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
67,448,000 | (983,000 | ) | 2,753,000 | (2,054,000 | ) | 67,164,000 | |||||||||||||
|
Cash
and cash equivalents at beginning of period
|
340,617,000 | 983,000 | 1,303,000 | - | 342,903,000 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 408,065,000 | - | 4,056,000 | (2,054,000 | ) | $ | 410,067,000 | ||||||||||||
F-34
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(16) Consolidating Financial
Information (continued)
The
following reflects the consolidating statement of cash flows for the year ended
July 31, 2007:
|
Parent
|
Guarantor
Subsidiaries
|
Non-Guarantor
Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||||||
|
Net
income (loss)
|
$ | 65,213,000 | 57,906,000 | (742,000 | ) | (57,164,000 | ) | $ | 65,213,000 | |||||||||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||||||||||||||
|
Depreciation
and amortization of property, plant and equipment
|
185,000 | 7,129,000 | 222,000 | - | 7,536,000 | |||||||||||||||
|
Amortization
of intangible assets with finite lives
|
- | 2,415,000 | 177,000 | - | 2,592,000 | |||||||||||||||
|
Amortization
of stock-based compensation
|
2,932,000 | 4,430,000 | 39,000 | - | 7,401,000 | |||||||||||||||
|
Amortization
of deferred financing costs
|
546,000 | - | - | - | 546,000 | |||||||||||||||
|
Loss
on disposal of property, plant and equipment
|
- | 201,000 | 2,000 | - | 203,000 | |||||||||||||||
|
Benefit
from allowance for doubtful accounts
|
- | (308,000 | ) | (67,000 | ) | - | (375,000 | ) | ||||||||||||
|
Provision
for (benefit from) excess and obsolete inventory
|
- | 4,519,000 | (28,000 | ) | - | 4,491,000 | ||||||||||||||
|
Excess
income tax benefit from stock award exercises
|
(7,990,000 | ) | - | - | - | (7,990,000 | ) | |||||||||||||
|
Deferred
income tax expense (benefit)
|
562,000 | (693,000 | ) | (16,000 | ) | - | (147,000 | ) | ||||||||||||
|
Equity
in undistributed (earnings) loss of subsidiaries
|
(57,906,000 | ) | 742,000 | - | 57,164,000 | - | ||||||||||||||
|
Intercompany
accounts
|
70,268,000 | (70,861,000 | ) | 593,000 | - | - | ||||||||||||||
|
Changes
in assets and liabilities, net of effects of acquisitions:
|
||||||||||||||||||||
|
Restricted
cash securing letter of credit obligations
|
- | 1,003,000 | - | - | 1,003,000 | |||||||||||||||
|
Accounts
receivable
|
- | 93,000 | (3,256,000 | ) | - | (3,163,000 | ) | |||||||||||||
|
Inventories
|
- | (4,196,000 | ) | (622,000 | ) | - | (4,818,000 | ) | ||||||||||||
|
Prepaid
expenses and other current assets
|
(767,000 | ) | 1,302,000 | (43,000 | ) | - | 492,000 | |||||||||||||
|
Other
assets
|
- | 73,000 | - | - | 73,000 | |||||||||||||||
|
Accounts
payable
|
(16,000 | ) | (1,881,000 | ) | (303,000 | ) | - | (2,200,000 | ) | |||||||||||
|
Accrued
expenses and other current liabilities
|
3,657,000 | 3,116,000 | (1,165,000 | ) | - | 5,608,000 | ||||||||||||||
|
Customer
advances and deposits
|
- | 11,687,000 | 4,825,000 | - | 16,512,000 | |||||||||||||||
|
Deferred
service revenue
|
- | (9,896,000 | ) | - | - | (9,896,000 | ) | |||||||||||||
|
Income
taxes payable
|
7,467,000 | - | (1,311,000 | ) | - | 6,156,000 | ||||||||||||||
|
Net
cash provided by (used in) operating activities
|
84,151,000 | 6,781,000 | (1,695,000 | ) | - | 89,237,000 | ||||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||
|
Purchases
of property, plant and equipment
|
(115,000 | ) | (11,618,000 | ) | (342,000 | ) | - | (12,075,000 | ) | |||||||||||
|
Purchase
of other intangibles with finite lives
|
- | (38,000 | ) | - | - | (38,000 | ) | |||||||||||||
|
Payments
for business acquisitions
|
- | (3,937,000 | ) | - | - | (3,937,000 | ) | |||||||||||||
|
Net
cash used in investing activities
|
(115,000 | ) | (15,593,000 | ) | (342,000 | ) | - | (16,050,000 | ) | |||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||
|
Principal
payments on other obligations
|
- | (154,000 | ) | - | - | (154,000 | ) | |||||||||||||
|
Excess
income tax benefit from stock award exercises
|
7,990,000 | - | - | - | 7,990,000 | |||||||||||||||
|
Proceeds
from exercises of stock options
|
9,535,000 | - | - | - | 9,535,000 | |||||||||||||||
|
Proceeds
from issuance of employee stock purchase plan shares
|
758,000 | - | - | - | 758,000 | |||||||||||||||
|
Net
cash provided by (used in) financing activities
|
18,283,000 | (154,000 | ) | - | - | 18,129,000 | ||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
102,319,000 | (8,966,000 | ) | (2,037,000 | ) | - | 91,316,000 | |||||||||||||
|
Cash
and cash equivalents at beginning of period
|
238,298,000 | 9,949,000 | 3,340,000 | - | 251,587,000 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 340,617,000 | 983,000 | 1,303,000 | - | $ | 342,903,000 | |||||||||||||
F-35
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(16) Consolidating Financial
Information (continued)
The
following reflects the consolidating statement of cash flows for the year ended
July 31, 2006:
|
Parent
|
Guarantor
Subsidiaries
|
Non-Guarantor
Subsidiary
|
Consolidating
Entries
|
Consolidated
Total
|
||||||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||||||
|
Net
income
|
$ | 45,269,000 | 41,157,000 | 1,457,000 | (42,614,000 | ) | $ | 45,269,000 | ||||||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||||||||||
|
Depreciation
and amortization of property, plant and equipment
|
111,000 | 6,019,000 | 112,000 | - | 6,242,000 | |||||||||||||||
|
Amortization
of intangible assets with finite lives
|
- | 2,289,000 | 176,000 | - | 2,465,000 | |||||||||||||||
|
Amortization
of stock-based compensation
|
2,176,000 | 3,495,000 | 10,000 | - | 5,681,000 | |||||||||||||||
|
Amortization
of deferred financing costs
|
546,000 | - | - | - | 546,000 | |||||||||||||||
|
Loss
on disposal of property, plant and equipment
|
- | 35,000 | 1,000 | - | 36,000 | |||||||||||||||
|
Provision
for allowance for doubtful accounts
|
- | 556,000 | 192,000 | - | 748,000 | |||||||||||||||
|
Provision
for excess and obsolete inventory
|
- | 1,981,000 | 49,000 | - | 2,030,000 | |||||||||||||||
|
Excess
income tax benefit from stock award exercises
|
(4,065,000 | ) | - | - | - | (4,065,000 | ) | |||||||||||||
|
Deferred
income tax expense (benefit)
|
1,013,000 | (74,000 | ) | (107,000 | ) | - | 832,000 | |||||||||||||
|
Equity
in undistributed earnings of subsidiaries
|
(41,157,000 | ) | (1,457,000 | ) | - | 42,614,000 | - | |||||||||||||
|
Intercompany
accounts
|
7,876,000 | (9,822,000 | ) | 1,946,000 | - | - | ||||||||||||||
|
Changes
in assets and liabilities, net of effects of acquisition:
|
||||||||||||||||||||
|
Restricted
cash securing letter of credit obligations
|
31,000 | - | - | - | 31,000 | |||||||||||||||
|
Accounts
receivable
|
- | (11,775,000 | ) | (2,968,000 | ) | - | (14,743,000 | ) | ||||||||||||
|
Inventories
|
- | (17,860,000 | ) | (49,000 | ) | - | (17,909,000 | ) | ||||||||||||
|
Prepaid
expenses and other current assets
|
(213,000 | ) | (2,262,000 | ) | (316,000 | ) | - | (2,791,000 | ) | |||||||||||
|
Other
assets
|
(56,000 | ) | (195,000 | ) | (9,000 | ) | - | (260,000 | ) | |||||||||||
|
Accounts
payable
|
39,000 | 4,392,000 | 329,000 | - | 4,760,000 | |||||||||||||||
|
Accrued
expenses and other current liabilities
|
1,181,000 | 5,271,000 | 1,281,000 | - | 7,733,000 | |||||||||||||||
|
Customer
advances and deposits
|
- | (1,780,000 | ) | 42,000 | - | (1,738,000 | ) | |||||||||||||
|
Deferred
service revenue
|
- | 1,686,000 | - | - | 1,686,000 | |||||||||||||||
|
Income
taxes payable
|
6,953,000 | - | 824,000 | - | 7,777,000 | |||||||||||||||
|
Net
cash provided by operating activities
|
19,704,000 | 21,656,000 | 2,970,000 | - | 44,330,000 | |||||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||
|
Purchases
of property, plant and equipment
|
(587,000 | ) | (11,387,000 | ) | (353,000 | ) | - | (12,327,000 | ) | |||||||||||
|
Purchase
of other intangibles with finite lives
|
- | (197,000 | ) | - | - | (197,000 | ) | |||||||||||||
|
Payments
for business acquisition
|
- | (1,000,000 | ) | - | - | (1,000,000 | ) | |||||||||||||
|
Net
cash used in investing activities
|
(587,000 | ) | (12,584,000 | ) | (353,000 | ) | - | (13,524,000 | ) | |||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||
|
Principal
payments on other obligations
|
- | (234,000 | ) | - | - | (234,000 | ) | |||||||||||||
|
Excess
income tax benefit from stock award exercises
|
4,065,000 | - | - | - | 4,065,000 | |||||||||||||||
|
Proceeds
from exercises of stock options
|
1,863,000 | - | - | - | 1,863,000 | |||||||||||||||
|
Proceeds
from issuance of employee stock purchase plan shares
|
674,000 | - | - | - | 674,000 | |||||||||||||||
|
Net
cash provided by (used in) financing activities
|
6,602,000 | (234,000 | ) | - | - | 6,368,000 | ||||||||||||||
|
Net
increase in cash and cash equivalents
|
25,719,000 | 8,838,000 | 2,617,000 | - | 37,174,000 | |||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
212,579,000 | 1,111,000 | 723,000 | - | 214,413,000 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 238,298,000 | 9,949,000 | 3,340,000 | - | $ | 251,587,000 | |||||||||||||
F-36
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
(17) Unaudited Quarterly
Financial Data
The
following is a summary of unaudited quarterly operating results (amounts in
thousands, except per share data):
|
Fiscal 2008
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | 115,055 | 152,030 | 138,068 | 126,474 | 531,627 | ||||||||||||||
|
Gross
profit
|
50,478 | 66,325 | 60,532 | 57,605 | 234,940 | |||||||||||||||
|
Net
income
|
14,694 | 25,469 | 19,305 | 16,965 | 76,433 | |||||||||||||||
|
Diluted
income per share
|
$ | 0.54 | 0.91 | 0.70 | 0.61 | 2.76 | ||||||||||||||
|
Fiscal 2007
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | 97,070 | 111,383 | 119,417 | 117,814 | 445,684 | ||||||||||||||
|
Gross
profit
|
39,375 | 49,850 | 51,575 | 52,495 | 193,295 | |||||||||||||||
|
Net
income
|
10,827 | 18,171 | 19,128 | 17,087 | 65,213 | |||||||||||||||
|
Diluted
income per share
|
$ | 0.41 | 0.68 | 0.71 | 0.63 | 2.42 | * | |||||||||||||
|
Fiscal 2006
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | 106,567 | 95,741 | 88,997 | 100,206 | 391,511 | ||||||||||||||
|
Gross
profit
|
40,204 | 41,091 | 34,213 | 43,793 | 159,301 | |||||||||||||||
|
Net
income
|
11,464 | 13,304 | 8,722 | 11,779 | 45,269 | |||||||||||||||
|
Diluted
income per share
|
$ | 0.43 | 0.50 | 0.33 | 0.45 | 1.72 | * | |||||||||||||
|
|
*
|
Income
per share information for the full fiscal year may not equal the total of
the quarters within the year as a result of
rounding.
|
(18) Subsequent
Events
In August
2008, the Company acquired Radyne Corporation (“Radyne”) for a preliminary
aggregate purchase price of approximately $231,684,000 (including estimated
transaction costs and liabilities assumed for outstanding share-based awards).
Radyne designs, manufactures, sells, integrates and installs products, systems
and software used for the transmission and reception of data and video over
satellite, troposcatter, microwave and cable communication networks. The
acquisition will be accounted for in the first quarter of fiscal
2009.
The
Company believes that the acquisition of Radyne resulted in the following
strategic benefits:
|
-
|
Strengthened
its leadership position in its satellite earth station product line in its
telecommunications transmission
segment;
|
|
-
|
More
than doubled the size of its RF microwave amplifiers segment by expanding
its amplifier product portfolio and immediately positioning it as a
leader, not only in the solid-state amplifier market but also in the
satellite earth station traveling wave tube amplifier
market;
|
|
-
|
Broadened
the number of products and services that its mobile data communications
segment can offer by allowing it to market additional mobile tracking
products as well as design and manufacture microsatellites and related
components; and
|
|
-
|
Further
diversified its overall global customer base and expanded its addressable
markets.
|
In
connection with the acquisition, the Company immediately adopted a restructuring
plan and is currently in the process of closing Radyne’s Phoenix, Arizona
manufacturing facility and integrating that operation into the Company’s
high-volume technology manufacturing center located in Tempe, Arizona. In
addition, Radyne’s corporate functions, which were co-located in Radyne’s
Phoenix, Arizona manufacturing facility, will be moved to the Company’s
Melville, New York corporate office.
F-37
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements, Continued
In
connection with the realization of operating synergies, the Company
preliminarily estimates that it will incur approximately $9,600,000 of
restructuring costs, of which approximately $8,700,000 relates to
possible exit costs related to the shut-down of Radyne's Phoenix,
Arizona manufacturing facility. The Company has already incurred
$800,000 of severance costs for Radyne employees who were notified
that they were being terminated on August 1, 2008. The
Company is in preliminary negotiations with a tenant who subleases, from it, a
portion of the manufacturing facility, and is interested in subleasing the
remaining portion of this facility from the Company. If the negotiations with
this tenant are successful, the Company’s actual net costs related to the
shut-down of the manufacturing facility will be significantly lower. If the
negotiations with this tenant are not successful, the Company intends to perform
an assessment of whether or not it will be able to sublease the Phoenix, Arizona
facility for the remaining duration of the lease, and at what rent, if any, it
might be able to receive, given the poor real-estate market conditions in the
Phoenix, Arizona area as well as uncertainties relating to the local economic
environment. The
Company anticipates that it will be able to capitalize these costs as part of
purchase accounting in accordance with Emerging Issues Task Force 95-3,
“Recognition of Liabilities in Connection with a Purchase Business Combination
(“EITF 95-3”).
From an
operational and financial reporting perspective, as of August 1, 2008, Radyne’s
satellite electronics and video encoders and decoder product lines are now part
of the Company’s telecommunications transmission segment, Radyne’s TWTA and KPA
amplifier product portfolios are now part of the Company’s RF microwave
amplifiers segment and Radyne’s microsatellites and SENS product lines are now
part of the Company’s mobile data communications segment.
The
Company accounts for business combinations in accordance with FASB Statement
No. 141, "Business Combinations" (“SFAS No. 141”). In
accordance with SFAS No. 141, the preliminary aggregate purchase price for
Radyne was allocated to amortizable intangible assets and acquired in-process
research and development ("IPR&D") based upon their respective preliminary
estimated fair values as of August 1, 2008, as set forth below:
|
Preliminary
Fair Value
|
Estimated Useful Lives
|
||||
|
Preliminary
fair value adjustments to amortizable intangible assets and
IPR&D:
|
|||||
|
Inventory
step-up
|
$ | 1,520,000 |
6
months
|
||
|
IPR&D
|
6,200,000 |
Expensed
immediately
|
|||
|
Customer
relationships
|
29,600,000 |
10
years
|
|||
|
Core
technologies
|
19,900,000 |
7
to 15 years
|
|||
|
Trademarks
and other
|
5,600,000 |
2
to 20 years
|
|||
|
Total
|
$ | 62,820,000 | |||
The
preliminary estimates in the above table are based on available information,
certain assumptions and preliminary valuation work and may change upon
finalization. The primary areas of the purchase price allocation that
are not yet finalized relate to the specifically identifiable intangible values
(including IPR&D), goodwill, income taxes, and restructuring costs. The
Company expects the allocation will be finalized within one year.
Based on
this preliminary allocation, the annual amortization of the above fair value
adjustments will approximate $6,600,000 in the Company’s fiscal 2009
consolidated statements of operations, of which $5,100,000 (to be recorded as
operating expenses) is related to amortization of intangibles and $1,500,000 (to
be recorded as cost of sales) is related to the estimated fair value step-up of
inventory acquired.
In
addition, in August 2008 (the start of the Company’s fiscal 2009) and in
accordance with SFAS No. 141, the Company expects to record the $6,200,000 of
amortization associated with IPR&D.
F-38
COMTECH
TELECOMMUNICATIONS CORP.
AND
SUBSIDIARIES
Valuation
and Qualifying Accounts and Reserves
Fiscal
Years Ended July 31, 2008, 2007 and 2006
|
Column A
|
Column
B
|
Column
C Additions
|
Column
D
|
Column
E
|
||||||||||||||||
|
Description
|
Balance
at beginning of period
|
Charged
to cost and expenses
|
Charged
to other accounts - describe
|
Transfers
(deductions)
-
describe
|
Balance
at end of period
|
|||||||||||||||
|
Allowance
for doubtful accounts -
|
||||||||||||||||||||
|
accounts
receivable:
|
||||||||||||||||||||
|
Year
ended July 31,
|
||||||||||||||||||||
|
2008
|
$ | 685,000 | 723,000 | (A) | - | (107,000 | ) (B) | $ | 1,301,000 | |||||||||||
|
2007
|
1,376,000 | (375,000 | )(A) | - | (316,000 | ) (B) | 685,000 | |||||||||||||
|
2006
|
636,000 | 748,000 | (A) | - | (8,000 | ) (B) | 1,376,000 | |||||||||||||
|
Inventory
reserves:
|
||||||||||||||||||||
|
Year
ended July 31,
|
||||||||||||||||||||
|
2008
|
$ | 8,504,000 | 2,414,000 | (C) | - | (2,717,000 | ) (D) | $ | 8,201,000 | |||||||||||
|
2007
|
6,123,000 | 4,491,000 | (C) | - | (2,110,000 | ) (D) | 8,504,000 | |||||||||||||
|
2006
|
6,509,000 | 2,030,000 | (C) | - | (2,416,000 | ) (D) | 6,123,000 | |||||||||||||
|
(A)
|
Provision
for (benefit from) doubtful
accounts.
|
|
(B)
|
Write-off
of uncollectible receivables.
|
|
(C)
|
Provision
for excess and obsolete
inventory.
|
|
(D)
|
Write-off
of inventory
|
S-1