UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
(Mark One)
 | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 30, 2014
 | 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)
Delaware | 11-2139466 | |
(State or other jurisdiction of incorporation /organization) | (I.R.S. Employer Identification Number) | |
68 South Service Road, Suite 230, Melville, NY | 11747 | |
(Address of principal executive offices) | (Zip Code) | |
(631) 962-7000 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | Accelerated filer | |
Non-accelerated filer | | Smaller reporting company | |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes NoAPPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 3, 2014, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 16,033,816 shares.
COMTECH TELECOMMUNICATIONS CORP. INDEX | |||
Page | |||
PART I. FINANCIAL INFORMATION | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II. OTHER INFORMATION | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 4. | |||
Item 6. | |||
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2014 | July 31, 2013 | ||||||
Assets | (Unaudited) | ||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 295,033,000 | 356,642,000 | ||||
Accounts receivable, net | 65,024,000 | 49,915,000 | |||||
Inventories, net | 68,316,000 | 65,482,000 | |||||
Prepaid expenses and other current assets | 8,734,000 | 7,428,000 | |||||
Deferred tax asset, net | 10,585,000 | 10,184,000 | |||||
Total current assets | 447,692,000 | 489,651,000 | |||||
Property, plant and equipment, net | 19,820,000 | 20,333,000 | |||||
Goodwill | 137,354,000 | 137,354,000 | |||||
Intangibles with finite lives, net | 27,781,000 | 32,505,000 | |||||
Deferred financing costs, net | 139,000 | 1,093,000 | |||||
Other assets, net | 819,000 | 879,000 | |||||
Total assets | $ | 633,605,000 | 681,815,000 | ||||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Convertible senior notes, current | $ | 191,499,000 | 200,000,000 | ||||
Accounts payable | 16,346,000 | 18,390,000 | |||||
Accrued expenses and other current liabilities | 29,357,000 | 29,892,000 | |||||
Dividends payable | 4,513,000 | 4,531,000 | |||||
Customer advances and deposits | 18,041,000 | 14,749,000 | |||||
Interest payable | 2,902,000 | 1,529,000 | |||||
Income taxes payable | 8,000 | — | |||||
Total current liabilities | 262,666,000 | 269,091,000 | |||||
Other liabilities | 4,256,000 | 3,958,000 | |||||
Income taxes payable | 2,886,000 | 2,963,000 | |||||
Deferred tax liability, net | 1,148,000 | 1,741,000 | |||||
Total liabilities | 270,956,000 | 277,753,000 | |||||
Commitments and contingencies (See Note 19) | |||||||
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 29,503,570 shares and 29,066,792 shares at April 30, 2014 and July 31, 2013, respectively | 2,950,000 | 2,907,000 | |||||
Additional paid-in capital | 377,239,000 | 363,888,000 | |||||
Retained earnings | 406,713,000 | 403,398,000 | |||||
786,902,000 | 770,193,000 | ||||||
Less: | |||||||
Treasury stock, at cost (14,459,804 shares and 12,608,501 shares at April 30, 2014 and July 31, 2013, respectively) | (424,253,000 | ) | (366,131,000 | ) | |||
Total stockholders’ equity | 362,649,000 | 404,062,000 | |||||
Total liabilities and stockholders’ equity | $ | 633,605,000 | 681,815,000 | ||||
See accompanying notes to condensed consolidated financial statements.
2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended April 30, | Nine months ended April 30, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||
Net sales | $ | 88,905,000 | 69,856,000 | 257,772,000 | 235,386,000 | ||||||||
Cost of sales | 50,559,000 | 38,429,000 | 145,679,000 | 129,916,000 | |||||||||
Gross profit | 38,346,000 | 31,427,000 | 112,093,000 | 105,470,000 | |||||||||
Expenses: | |||||||||||||
Selling, general and administrative | 17,320,000 | 15,374,000 | 49,867,000 | 47,617,000 | |||||||||
Research and development | 8,899,000 | 9,080,000 | 25,664,000 | 28,407,000 | |||||||||
Amortization of intangibles | 1,560,000 | 1,582,000 | 4,724,000 | 4,746,000 | |||||||||
27,779,000 | 26,036,000 | 80,255,000 | 80,770,000 | ||||||||||
Operating income | 10,567,000 | 5,391,000 | 31,838,000 | 24,700,000 | |||||||||
Other expenses (income): | |||||||||||||
Interest expense | 1,993,000 | 2,009,000 | 6,009,000 | 6,150,000 | |||||||||
Interest income and other | (256,000 | ) | (287,000 | ) | (757,000 | ) | (878,000 | ) | |||||
Income before provision for income taxes | 8,830,000 | 3,669,000 | 26,586,000 | 19,428,000 | |||||||||
Provision for income taxes | 2,955,000 | 817,000 | 9,423,000 | 6,776,000 | |||||||||
Net income | $ | 5,875,000 | 2,852,000 | 17,163,000 | 12,652,000 | ||||||||
Net income per share (See Note 5): | |||||||||||||
Basic | $ | 0.39 | 0.17 | 1.08 | 0.74 | ||||||||
Diluted | $ | 0.32 | 0.17 | 0.92 | 0.69 | ||||||||
Weighted average number of common shares outstanding – basic | 15,200,000 | 16,731,000 | 15,882,000 | 17,141,000 | |||||||||
Weighted average number of common and common equivalent shares outstanding – diluted | 21,764,000 | 16,827,000 | 22,324,000 | 23,221,000 | |||||||||
Dividends declared per issued and outstanding common share as of the applicable dividend record date | $ | 0.30 | 0.275 | 0.875 | 0.825 | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED APRIL 30, 2014 AND 2013
(Unaudited)
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Stockholders' Equity | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||
Balance as of July 31, 2012 | 28,931,679 | $ | 2,893,000 | $ | 361,458,000 | $ | 404,227,000 | 11,564,059 | $ | (339,177,000 | ) | $ | 429,401,000 | |||||||||||||
Equity-classified stock award compensation | — | — | 2,246,000 | — | — | — | 2,246,000 | |||||||||||||||||||
Proceeds from exercise of options | 32,850 | 4,000 | 483,000 | — | — | — | 487,000 | |||||||||||||||||||
Proceeds from issuance of employee stock purchase plan shares | 31,708 | 3,000 | 691,000 | — | — | — | 694,000 | |||||||||||||||||||
Cash dividends declared | — | — | — | (14,106,000 | ) | — | — | (14,106,000 | ) | |||||||||||||||||
Net excess income tax benefit from settlement of stock-based awards | — | — | 85,000 | — | — | — | 85,000 | |||||||||||||||||||
Reversal of deferred tax assets associated with expired and unexercised stock-based awards | — | — | (2,993,000 | ) | — | — | — | (2,993,000 | ) | |||||||||||||||||
Repurchases of common stock | — | — | — | — | 940,293 | (24,232,000 | ) | (24,232,000 | ) | |||||||||||||||||
Net income | — | — | — | 12,652,000 | — | — | 12,652,000 | |||||||||||||||||||
Balance as of April 30, 2013 | 28,996,237 | $ | 2,900,000 | $ | 361,970,000 | $ | 402,773,000 | 12,504,352 | $ | (363,409,000 | ) | $ | 404,234,000 | |||||||||||||
Balance as of July 31, 2013 | 29,066,792 | $ | 2,907,000 | $ | 363,888,000 | $ | 403,398,000 | 12,608,501 | $ | (366,131,000 | ) | $ | 404,062,000 | |||||||||||||
Equity-classified stock award compensation | — | — | 3,051,000 | — | — | — | 3,051,000 | |||||||||||||||||||
Equity-classified stock awards issued | — | — | 139,000 | — | — | — | 139,000 | |||||||||||||||||||
Proceeds from exercise of options | 131,175 | 13,000 | 3,431,000 | — | — | — | 3,444,000 | |||||||||||||||||||
Proceeds from issuance of employee stock purchase plan shares | 29,735 | 3,000 | 667,000 | — | — | — | 670,000 | |||||||||||||||||||
Issuance of common stock for vested stock-based awards, net of minimum withholding tax and deferrals | 8,984 | 1,000 | (123,000 | ) | — | — | — | (122,000 | ) | |||||||||||||||||
Debt converted to shares of common stock | 266,884 | 26,000 | 8,492,000 | — | — | — | 8,518,000 | |||||||||||||||||||
Cash dividends declared | — | — | — | (13,768,000 | ) | — | — | (13,768,000 | ) | |||||||||||||||||
Accrual of dividend equivalents | — | — | — | (80,000 | ) | — | — | (80,000 | ) | |||||||||||||||||
Net income tax shortfall from settlement of stock-based awards | — | — | (373,000 | ) | — | — | — | (373,000 | ) | |||||||||||||||||
Reversal of deferred tax assets associated with expired and unexercised stock-based awards | — | — | (1,933,000 | ) | — | — | — | (1,933,000 | ) | |||||||||||||||||
Repurchases of common stock | — | — | — | — | 1,851,303 | (58,122,000 | ) | (58,122,000 | ) | |||||||||||||||||
Net income | — | — | — | 17,163,000 | — | — | 17,163,000 | |||||||||||||||||||
Balance as of April 30, 2014 | 29,503,570 | $ | 2,950,000 | $ | 377,239,000 | $ | 406,713,000 | 14,459,804 | $ | (424,253,000 | ) | $ | 362,649,000 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |||||||
Nine months ended April 30, | |||||||
2014 | 2013 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 17,163,000 | 12,652,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization of property, plant and equipment | 5,033,000 | 5,959,000 | |||||
Amortization of intangible assets with finite lives | 4,724,000 | 4,746,000 | |||||
Amortization of stock-based compensation | 3,086,000 | 2,245,000 | |||||
Deferred financing costs | 1,028,000 | 1,062,000 | |||||
Change in fair value of contingent earn-out liability | (239,000 | ) | (3,267,000 | ) | |||
Loss on disposal of property, plant and equipment | 16,000 | 32,000 | |||||
Provision for (benefit from) allowance for doubtful accounts | 198,000 | (401,000 | ) | ||||
Provision for excess and obsolete inventory | 2,214,000 | 2,139,000 | |||||
Excess income tax benefit from stock-based award exercises | (49,000 | ) | (90,000 | ) | |||
Deferred income tax (benefit) expense | (2,988,000 | ) | 1,032,000 | ||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (15,307,000 | ) | 8,739,000 | ||||
Inventories | (4,892,000 | ) | (883,000 | ) | |||
Prepaid expenses and other current assets | (3,108,000 | ) | (510,000 | ) | |||
Other assets | 60,000 | 64,000 | |||||
Accounts payable | (2,044,000 | ) | (8,818,000 | ) | |||
Accrued expenses and other current liabilities | (251,000 | ) | (8,754,000 | ) | |||
Customer advances and deposits | 3,116,000 | (1,084,000 | ) | ||||
Other liabilities | 216,000 | 660,000 | |||||
Interest payable | 1,500,000 | 1,500,000 | |||||
Income taxes payable | 1,313,000 | (1,304,000 | ) | ||||
Net cash provided by operating activities | 10,789,000 | 15,719,000 | |||||
Cash flows from investing activities: | |||||||
Purchases of property, plant and equipment | (4,536,000 | ) | (4,017,000 | ) | |||
Net cash used in investing activities | (4,536,000 | ) | (4,017,000 | ) | |||
Cash flows from financing activities: | |||||||
Repurchases of common stock | (58,122,000 | ) | (24,232,000 | ) | |||
Cash dividends paid | (13,779,000 | ) | (14,335,000 | ) | |||
Proceeds from exercises of stock options | 3,444,000 | 487,000 | |||||
Proceeds from issuance of employee stock purchase plan shares | 670,000 | 694,000 | |||||
Excess income tax benefit from stock-based award exercises | 49,000 | 90,000 | |||||
Payment of contingent consideration related to business acquisition | (49,000 | ) | (78,000 | ) | |||
Fees related to line of credit | (75,000 | ) | (25,000 | ) | |||
Net cash used in financing activities | (67,862,000 | ) | (37,399,000 | ) | |||
Net decrease in cash and cash equivalents | (61,609,000 | ) | (25,697,000 | ) | |||
Cash and cash equivalents at beginning of period | 356,642,000 | 367,894,000 | |||||
Cash and cash equivalents at end of period | $ | 295,033,000 | 342,197,000 | ||||
See accompanying notes to condensed consolidated financial statements. | |||||||
(Continued) | |||||||
5
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) | |||||||
Nine months ended April 30, | |||||||
2014 | 2013 | ||||||
Supplemental cash flow disclosures: | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 3,264,000 | 3,263,000 | ||||
Income taxes | $ | 11,100,000 | 7,049,000 | ||||
Non-cash investing and financing activities: | |||||||
Cash dividends declared but unpaid (including accrual of dividend equivalents) | $ | 4,600,000 | 4,544,000 | ||||
Equity-classified stock awards issued | $ | 139,000 | — | ||||
Principal amount of 3.0% convertible senior notes converted into common stock | $ | 8,501,000 | — | ||||
See accompanying notes to condensed consolidated financial statements.
6
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and Subsidiaries (“Comtech,” “we,” “us,” or “our”) as of and for the three and nine months ended April 30, 2014 and 2013 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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. Actual results may differ from those estimates.
Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission (“SEC”), for the fiscal year ended July 31, 2013 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.
(2) Adoption of Accounting Standards and Updates
We are required to prepare our consolidated financial statements in accordance with the Financial Accounting Standards Board's (“FASB”) Accounting Standards Codification (“ASC”) which is the source for all authoritative U.S. generally accepted accounting principles, which is commonly referred to as “GAAP.” The FASB ASC is subject to updates by FASB, which are known as Accounting Standards Updates (“ASUs”).
On August 1, 2013, we adopted FASB ASU No. 2011-11, which requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. In addition, we also adopted ASU No. 2013-01, which clarifies that the scope of ASU No. 2011-11 applies to derivatives accounted for in accordance with Topic 815, "Derivatives and Hedging," including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar arrangement. Our adoption of this ASU, as amended, did not have any impact on our consolidated financial statements.
(3) Reclassifications
Certain reclassifications have been made to previously reported financial statements to conform to our current financial statement format.
(4) Fair Value Measurements and Financial Instruments
In accordance with FASB ASC 825, “Financial Instruments,” we determined that, as of April 30, 2014 and July 31, 2013, the fair value of our 3.0% convertible senior notes was approximately $192,648,000 and $208,080,000, respectively, based on quoted market prices in an active market. As discussed in Note (11) – “3.0% Convertible Senior Notes,” as of May 5, 2014, none of our 3.0% convertible senior notes remain outstanding.
As of April 30, 2014 and July 31, 2013, we had approximately $9,428,000 and $50,182,000, respectively, consisting principally of money market mutual funds which are classified as cash and cash equivalents in our Condensed Consolidated Balance Sheets. These money market mutual funds are recorded at their current fair value. FASB ASC 820, “Fair Value Measurements and Disclosures,” requires us to define fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, using the fair value hierarchy described in FASB ASC 820, we valued our money market mutual funds using Level 1 inputs that were based on quoted market prices.
7
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of April 30, 2014 and July 31, 2013, other than our cash and cash equivalents, we have no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at current fair value. If we acquire different types of assets or incur different types of liabilities in the future, we might be required to use different FASB ASC fair value methodologies.
(5) Earnings Per Share
Our basic earnings per share (“EPS”) is computed based on the weighted average number of shares, including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs"), outstanding during each respective period. Our 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 respective period. Pursuant to FASB ASC 260, "Earnings Per Share," equity-classified stock-based awards that are subject to performance conditions are not considered in our diluted EPS calculations until the respective performance conditions have been satisfied. When calculating our diluted earnings per share, we consider (i) the amount a recipient must pay upon assumed exercise of stock-based awards; (ii) the amount of stock-based compensation cost attributed to future services and not yet recognized; and (iii) the amount of excess tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of in-the-money stock-based awards. This excess tax benefit is the amount resulting from a tax deduction for compensation in excess of compensation expense recognized for financial reporting purposes.
Weighted average basic and diluted shares outstanding for the three months ended April 30, 2014 and 2013 reflects a reduction of approximately 482,000 and 295,000 shares as a result of the repurchase of our common shares during the respective periods. The weighted average basic and diluted shares outstanding for the nine months ended April 30, 2014 and 2013 reflects a reduction of approximately 657,000 and 261,000 shares as a result of the repurchase of our common shares during the respective periods. See Note (18) – “Stockholders’ Equity” for more information on our stock repurchase program.
Weighted average stock options outstanding to purchase 566,000 and 2,635,000 shares for the three months ended April 30, 2014 and 2013, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive. Weighted average stock options outstanding to purchase 898,000 and 2,665,000 shares for the nine months ended April 30, 2014 and 2013, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.
Our diluted EPS calculations exclude 92,000 and 35,000 weighted average RSUs with performance measures (which we refer to as performance shares) outstanding for the three months ended April 30, 2014 and 2013, respectively, and 78,000 and 35,000 weighted average performance shares outstanding for the nine months ended April 30, 2014 and 2013, respectively, as the respective performance conditions had not yet been satisfied. However, the compensation expense related to these awards is included in net income (the numerator) for EPS calculations for each respective period.
Our basic and diluted EPS calculations for the three and nine months ended April 30, 2014 include the impact of the conversions of a portion of our 3.0% convertible senior notes in April 2014. See Note (11) – "3.0% Convertible Senior Notes" for more information on the conversions.
Our diluted EPS calculation for the three months ended April 30, 2013 excludes the effect of 6,035,000 shares and $1,117,000 of interest expense (net of tax) related to our 3.0% convertible senior notes, because their effect would have been anti-dilutive for that period.
Liability-classified stock-based awards do not impact and are not included in the denominator for EPS calculations.
8
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
Three months ended April 30, | Nine months ended April 30, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||
Numerator: | |||||||||||||
Net income for basic calculation | $ | 5,875,000 | 2,852,000 | 17,163,000 | 12,652,000 | ||||||||
Effect of dilutive securities: | |||||||||||||
Interest expense (net of tax) on 3.0% convertible senior notes | 1,117,000 | — | 3,351,000 | 3,351,000 | |||||||||
Numerator for diluted calculation | $ | 6,992,000 | 2,852,000 | 20,514,000 | 16,003,000 | ||||||||
Denominator: | |||||||||||||
Denominator for basic calculation | 15,200,000 | 16,731,000 | 15,882,000 | 17,141,000 | |||||||||
Effect of dilutive securities: | |||||||||||||
Stock-based awards | 290,000 | 96,000 | 218,000 | 103,000 | |||||||||
Conversion of 3.0% convertible senior notes | 6,274,000 | — | 6,224,000 | 5,977,000 | |||||||||
Denominator for diluted calculation | 21,764,000 | 16,827,000 | 22,324,000 | 23,221,000 | |||||||||
(6) Accounts Receivable
Accounts receivable consist of the following at:
April 30, 2014 | July 31, 2013 | ||||||
Billed receivables from commercial customers | $ | 36,956,000 | 40,005,000 | ||||
Billed receivables from the U.S. government and its agencies | 8,892,000 | 8,114,000 | |||||
Unbilled receivables on contracts-in-progress | 19,881,000 | 2,399,000 | |||||
Total accounts receivable | 65,729,000 | 50,518,000 | |||||
Less allowance for doubtful accounts | 705,000 | 603,000 | |||||
Accounts receivable, net | $ | 65,024,000 | 49,915,000 | ||||
Of the $19,881,000 of unbilled receivables at April 30, 2014, approximately $15,044,000 relates to one of our large over-the-horizon microwave system contracts directly with our large U.S. prime contractor customer for our North African country end-customer. We expect all of the $15,044,000 will be billed directly to and collected from our large U.S. prime contractor customer within one year.
The remaining unbilled receivables include $2,881,000 and $699,000 at April 30, 2014 and July 31, 2013, respectively, due from the U.S. government and its agencies. We had virtually no retainage included in unbilled receivables at both April 30, 2014 and July 31, 2013. In the opinion of management, a substantial portion of these unbilled balances will be billed and collected within one year.
As of April 30, 2014, one customer, which is also the large U.S. prime contractor that we perform work for on our two North African country end-customer over-the-horizon microwave system contracts, accounts for 28.4% of total accounts receivable.
9
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(7) Inventories
Inventories consist of the following at:
April 30, 2014 | July 31, 2013 | ||||||
Raw materials and components | $ | 54,327,000 | 52,169,000 | ||||
Work-in-process and finished goods | 30,051,000 | 29,539,000 | |||||
Total inventories | 84,378,000 | 81,708,000 | |||||
Less reserve for excess and obsolete inventories | 16,062,000 | 16,226,000 | |||||
Inventories, net | $ | 68,316,000 | 65,482,000 | ||||
At April 30, 2014 and July 31, 2013, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $1,191,000 and $1,910,000, respectively.
At April 30, 2014 and July 31, 2013, $701,000 and $592,000, respectively, of the inventory above related to contracts from third party commercial customers who outsource their manufacturing to us.
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at:
April 30, 2014 | July 31, 2013 | ||||||
Accrued wages and benefits | $ | 11,569,000 | 11,526,000 | ||||
Accrued warranty obligations | 8,985,000 | 7,797,000 | |||||
Accrued commissions and royalties | 2,930,000 | 4,206,000 | |||||
Accrued business acquisition payments | — | 288,000 | |||||
Other | 5,873,000 | 6,075,000 | |||||
Accrued expenses and other current liabilities | $ | 29,357,000 | 29,892,000 | ||||
Accrued Warranty Obligations
We provide warranty coverage for most of our products 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. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs.
Changes in our product warranty liability were as follows:
Nine months ended April 30, | |||||||
2014 | 2013 | ||||||
Balance at beginning of period | $ | 7,797,000 | 7,883,000 | ||||
Provision for warranty obligations | 5,364,000 | 3,867,000 | |||||
Charges incurred | (4,176,000 | ) | (4,038,000 | ) | |||
Balance at end of period | $ | 8,985,000 | 7,712,000 | ||||
10
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(9) Cost Reduction Actions
Wind-Down of Microsatellite Product Line
During fiscal 2013, we completed our fiscal 2012 plan to wind-down our mobile data communications segment's microsatellite product line. In connection with this plan, we recorded a pre-tax benefit of $56,000 in the three and nine months ended April 30, 2014, resulting from the reversal of previously accrued costs that were lower than expected. For the nine months ended April 30, 2013, we recorded a net pre-tax restructuring charge of $569,000 related to this plan. Almost all of these amounts are reflected in selling, general and administrative expenses in our Condensed Consolidated Statements of Operations.
The activity pertaining to the accruals with respect to this plan, since July 31, 2013, is summarized as follows:
Facility exit costs | Other | Total | ||||||||
Balance as of July 31, 2013 | $ | 413,000 | 50,000 | $ | 463,000 | |||||
Reversals | (56,000 | ) | — | (56,000 | ) | |||||
Payments made | (97,000 | ) | — | (97,000 | ) | |||||
Balance as of April 30, 2014 | $ | 260,000 | 50,000 | $ | 310,000 | |||||
Of the total remaining microsatellite product line wind-down liabilities of $310,000, $252,000 is included in accrued expenses and other current liabilities and $58,000 is included in other long-term liabilities in our Condensed Consolidated Balance Sheet as of April 30, 2014.
Radyne Acquisition-Related Restructuring Plan
In connection with our August 1, 2008 acquisition of Radyne, we adopted a restructuring plan for which we recorded $2,713,000 of estimated restructuring costs. Of this amount, $613,000 related to severance for Radyne employees which was paid in fiscal 2009. The remaining estimated amounts relate to facility exit costs and were determined as follows:
At August 1, 2008 | |||
Total non-cancelable lease obligations | $ | 12,741,000 | |
Less: Estimated sublease income | 8,600,000 | ||
Total net estimated facility exit costs | 4,141,000 | ||
Less: Interest expense to be accreted | 2,041,000 | ||
Present value of estimated facility exit costs | $ | 2,100,000 | |
Our total non-cancelable lease obligations were based on the actual lease term which runs from November 1, 2008 through October 31, 2018. We estimated sublease income based on (i) the terms of a fully executed sublease agreement, whose lease term runs from November 1, 2008 through October 31, 2015 and (ii) our assessment of future uncertainties relating to the commercial real estate market. Based on our assessment of commercial real estate market conditions, we currently believe that it is not probable that we will be able to sublease the facility beyond the current sublease terms. As such, in accordance with grandfathered accounting standards that were not incorporated into the FASB’s ASC, we recorded these costs, at fair value, as assumed liabilities as of August 1, 2008, with a corresponding increase to goodwill.
11
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of April 30, 2014, the amount of the acquisition-related restructuring reserve is as follows:
Cumulative Activity Through April 30, 2014 | |||
Present value of estimated facility exit costs at August 1, 2008 | $ | 2,100,000 | |
Cash payments made | (6,126,000 | ) | |
Cash payments received | 6,667,000 | ||
Accreted interest recorded | 1,018,000 | ||
Net liability as of April 30, 2014 | 3,659,000 | ||
Amount recorded as prepaid expenses in the Condensed Consolidated Balance Sheet | 458,000 | ||
Amount recorded as other liabilities in the Condensed Consolidated Balance Sheet | $ | 4,117,000 | |
As of July 31, 2013, the present value of the estimated facility exit costs was $3,331,000. During the nine months ended April 30, 2014, we made cash payments of $799,000 and we received cash payments of $945,000. Interest accreted for the three and nine months ended April 30, 2014 and 2013 was $62,000 and $182,000, respectively, and $55,000 and $160,000, respectively, and is included in interest expense for each respective fiscal period.
Future cash payments associated with our restructuring plan are summarized below:
As of | |||
April 30, 2014 | |||
Future lease payments to be made in excess of anticipated sublease payments | $ | 4,117,000 | |
Less net cash to be received in next twelve months | (458,000 | ) | |
Interest expense to be accreted in future periods | 1,022,000 | ||
Total remaining net cash payments | $ | 4,681,000 | |
(10) Credit Facility
We have a committed $100,000,000 secured revolving credit facility (the “Credit Facility”) with a syndicate of bank lenders. The Credit Facility, as amended December 6, 2013, expires on October 31, 2014 but may be extended by us to December 31, 2016, subject to certain conditions and compliance with all Credit Facility covenants.
The Credit Facility provides for the extension of credit to us in the form of revolving loans, including letters of credit, at any time and from time to time during its term, in an aggregate principal amount at any time outstanding not to exceed $100,000,000 for both revolving loans and letters of credit, with sub-limits of $15,000,000 for commercial letters of credit and $35,000,000 for standby letters of credit. Subject to covenant limitations, the Credit Facility may be used for acquisitions, equity securities repurchases, dividends, working capital and other general corporate purposes. Since the inception of our Credit Facility in 2009, we have had no revolving loans under the Credit Facility. At April 30, 2014, we had $1,263,000 of standby letters of credit outstanding related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit.
12
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
At our election, borrowings under the Credit Facility will bear interest either at LIBOR plus an applicable margin or at the base rate plus an applicable margin, as amended. The interest rate margin over LIBOR ranges from 1.75 percent up to a maximum amount of 2.50 percent. The base rate is a fluctuating rate equal to the highest of (i) the Prime Rate; (ii) the Federal Funds Effective Rate from time to time plus fifty (50) basis points; and (iii) two hundred (200) basis points in excess of the floating rate of interest determined, on a daily basis, in accordance with the terms of the agreement. The interest rate margin over the base rate ranges from 0.75 percent up to a maximum amount of 1.50 percent. In both cases, the applicable interest rate margin is based on the ratio of our consolidated total indebtedness to our consolidated earnings before interest, taxes, depreciation and amortization (“Consolidated Adjusted EBITDA”). As defined in the Credit Facility, Consolidated Adjusted EBITDA is adjusted for certain items and, in the event of an acquisition with a purchase price in excess of $10,000,000, provides for the inclusion of the last twelve months of consolidated EBITDA of a target.
The Credit Facility contains covenants, including covenants limiting certain debt, certain liens on assets, certain sales of assets and receivables, certain payments (including dividends), certain repurchases of equity securities, certain sale and leaseback transactions, certain guaranties, certain investments and certain minimum levels of cash and cash equivalents. Under certain conditions, the Credit Facility also contains financial condition covenants requiring that we (i) not exceed a maximum ratio of consolidated total indebtedness to Consolidated Adjusted EBITDA (each as defined in the Credit Facility); (ii) not exceed a maximum ratio of consolidated senior secured indebtedness to Consolidated Adjusted EBITDA (each as defined in the Credit Facility); (iii) maintain a minimum fixed charge ratio (as defined in the Credit Facility); (iv) maintain a minimum consolidated net worth; in each case measured on the last day of each fiscal quarter and (v) in the event total consolidated indebtedness (as defined in the Credit Facility) is less than $200,000,000, we must maintain a minimum level of Consolidated Adjusted EBITDA (as defined in the Credit Facility).
At April 30, 2014, had borrowings been outstanding under the Credit Facility, the interest rate would have been approximately 2.65 percent (LIBOR plus 2.50 percent). We are also subject to an undrawn line fee based on the ratio of our consolidated total indebtedness to our Consolidated Adjusted EBITDA, as defined and adjusted for certain items specified in the Credit Facility. Interest expense, including amortization of deferred financing costs, related to our credit facility recorded during the three and nine months ended April 30, 2014 was $157,000 and $510,000, respectively, as compared to $180,000 and $543,000 during the three and nine months ended April 30, 2013, respectively.
As of April 30, 2014, based on our Consolidated Adjusted EBITDA (as defined in the Credit Facility) and our business outlook and related business plans, we believe we will be able to meet or obtain waivers for the applicable financial covenants that we are required to maintain.
(11) 3.0% Convertible Senior Notes
In May 2009, we issued $200,000,000 of our 3.0% 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 $194,541,000 after deducting the initial purchasers' discount and other transaction costs of $5,459,000.
Our 3.0% convertible senior notes bore interest at an annual rate of 3.0%. Pursuant to the terms of the 3.0% convertible senior notes indenture, cash dividends require an adjustment to the conversion rate, effective on the record date.
In April 2014, $8,501,000 principal amount of our 3.0% convertible senior notes were converted by the holders into 266,884 shares of our common stock at a conversion price of $31.85 per share (a conversion rate of 31.3953 shares per $1,000 original principal amount of notes) with a nominal amount of cash paid in lieu of fractional shares. In connection with the partial conversion of the 3.0% convertible senior notes, we recorded a net increase to additional paid-in capital of $8,492,000, which primarily relates to the carrying value of our 3.0% convertible senior notes in excess of the par value of our common stock issued. Accordingly, as of April 30, 2014, $191,499,000 principal amount of our 3.0% convertible senior notes were outstanding, and are reflected as a current liability in our Condensed Consolidated Balance Sheet.
13
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In May 2014, an additional $41,536,000 principal amount of our 3.0% convertible senior notes were converted by the holders into 1,304,020 shares of our common stock at a conversion price of $31.85 per share (a conversion rate of 31.3953 shares per $1,000 original principal amount of notes) with a nominal amount of cash paid in lieu of fractional shares. The remaining $149,963,000 of our 3.0% convertible senior notes were redeemed and repurchased for cash at 100.0% of the principal amount, plus accrued interest. As of May 5, 2014, none of our 3.0% convertible senior notes remain outstanding.
(12) Income Taxes
Excluding the impact of any discrete tax items, our fiscal 2014 effective tax rate is expected to approximate 36.5%. This rate reflects the expiration of the federal research and experimentation credit on December 31, 2013.
At April 30, 2014 and July 31, 2013, total unrecognized tax benefits, all of which were recorded as non-current income taxes payable in our Condensed Consolidated Balance Sheets, were $2,886,000 and $2,963,000, respectively, including interest of $90,000 in both periods. Of these amounts, $2,200,000 and $2,348,000, respectively, net of the reversal of the federal benefit recognized as deferred tax assets relating to state reserves, excluding interest, would positively impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our financial statements. Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense.
Our federal income tax returns for fiscal 2011 through 2013 are subject to potential future IRS audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
(13) Stock Based Compensation
Overview
We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended, (the “Plan”) and our 2001 Employee Stock Purchase Plan (the “ESPP”) and recognize related stock-based compensation for both equity and liability-classified stock-based awards in our consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units (“RSUs”), (iii) RSUs with performance measures (which we refer to as “performance shares”), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, “share units”) and (vi) stock appreciation rights (“SARs”), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations. The aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 8,962,500. Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a stockholder who owns stock representing more than 10.0% of the voting power, no more than five years. We expect to settle all outstanding awards under the Plan and ESPP with new shares, except for SARs which may only be settled with cash.
As of April 30, 2014, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 6,825,057 shares (net of 2,772,830 expired and canceled awards), of which an aggregate of 4,046,532 have been exercised or converted into common stock, substantially all of which related to stock options.
14
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of April 30, 2014, the following stock-based awards, by award type, were outstanding:
April 30, 2014 | ||
Stock options | 2,606,180 | |
Performance shares | 120,696 | |
RSUs and restricted stock | 37,326 | |
Share units | 7,323 | |
SARs | 7,000 | |
Total | 2,778,525 | |
Our ESPP, approved by our shareholders on December 12, 2000, provides for the issuance of 675,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85% of fair market value at the date of issuance. Through April 30, 2014, we have cumulatively issued 545,907 shares of our common stock to participating employees in connection with our ESPP.
Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations:
Three months ended April 30, | Nine months ended April 30, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||
Cost of sales | $ | 57,000 | 15,000 | 194,000 | 134,000 | ||||||||
Selling, general and administrative expenses | 860,000 | 568,000 | 2,463,000 | 1,783,000 | |||||||||
Research and development expenses | 153,000 | 111,000 | 429,000 | 328,000 | |||||||||
Stock-based compensation expense before income tax benefit | 1,070,000 | 694,000 | 3,086,000 | 2,245,000 | |||||||||
Estimated income tax benefit | (394,000 | ) | (255,000 | ) | (1,143,000 | ) | (865,000 | ) | |||||
Net stock-based compensation expense | $ | 676,000 | 439,000 | 1,943,000 | 1,380,000 | ||||||||
Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. Stock-based compensation for liability-classified awards is determined the same way, except that the fair value of liability-classified awards is re-measured 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. At April 30, 2014, unrecognized stock-based compensation of $8,460,000, net of estimated forfeitures of $545,000, is expected to be recognized over a weighted average period of 2.9 years. Total stock-based compensation capitalized and included in ending inventory at April 30, 2014 and July 31, 2013 was $52,000 and $72,000, respectively. Included in accrued expenses at April 30, 2014 and July 31, 2013 is $16,000 and $1,000, respectively, relating to the potential cash settlement of liability-classified SARs.
15
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Stock-based compensation expense, by award type, is summarized as follows:
Three months ended April 30, | Nine months ended April 30, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||
Stock options | $ | 668,000 | 533,000 | 2,035,000 | 1,744,000 | ||||||||
Performance shares | 264,000 | 84,000 | 671,000 | 256,000 | |||||||||
ESPP | 47,000 | 44,000 | 135,000 | 145,000 | |||||||||
RSUs and restricted stock | 67,000 | 27,000 | 203,000 | 87,000 | |||||||||
Share units | 15,000 | 6,000 | 27,000 | 18,000 | |||||||||
Equity-classified stock-based compensation expense | 1,061,000 | 694,000 | 3,071,000 | 2,250,000 | |||||||||
Liability-classified stock-based compensation expense (benefit) (SARs) | 9,000 | — | 15,000 | (5,000 | ) | ||||||||
Stock-based compensation expense before income tax benefit | 1,070,000 | 694,000 | 3,086,000 | 2,245,000 | |||||||||
Estimated income tax benefit | (394,000 | ) | (255,000 | ) | (1,143,000 | ) | (865,000 | ) | |||||
Net stock-based compensation expense | $ | 676,000 | 439,000 | 1,943,000 | 1,380,000 | ||||||||
ESPP stock-based compensation expense primarily relates to the 15% discount offered to employees participating in the ESPP.
The estimated income tax benefit, as shown in the above table, was computed using income tax rates expected to apply when the awards are settled and results in a deferred tax asset which is netted in our long-term deferred tax liability in our Condensed Consolidated Balance Sheet. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting.
The following table reconciles the actual income tax benefit recognized for tax deductions relating to the settlement of stock-based awards to the excess income tax benefit reported as a cash flow from financing activities in our Condensed Consolidated Statements of Cash Flows:
Nine months ended April 30, | |||||||
2014 | 2013 | ||||||
Actual income tax benefit recorded for the tax deductions relating to the settlement of stock-based awards | $ | 342,000 | 159,000 | ||||
Less: Tax benefit initially recognized on settled stock-based awards vesting subsequent to the adoption of accounting standards that require us to expense stock-based awards, excluding income tax shortfalls | 280,000 | 69,000 | |||||
Excess income tax benefit recorded as an increase to additional paid-in capital | 62,000 | 90,000 | |||||
Less: Tax benefit initially disclosed but not previously recognized on settled equity-classified stock-based awards vesting prior to the adoption of accounting standards that require us to expense stock-based awards, excluding income tax shortfalls | 13,000 | — | |||||
Excess income tax benefit from settled equity-classified stock-based awards reported as a cash flow from financing activities in our Condensed Consolidated Statements of Cash Flows | $ | 49,000 | 90,000 | ||||
16
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of April 30, 2014 and July 31, 2013, the amount of hypothetical tax benefits related to stock-based awards, recorded as a component of additional paid-in capital, was $17,675,000 and $19,981,000, respectively. These amounts represent the initial hypothetical tax benefit of $8,593,000 determined upon adoption of ASC 718 (which reflects our estimate of cumulative actual tax deductions for awards issued and settled prior to the August 1, 2005), adjusted for actual excess income tax benefits or shortfalls since that date. During the nine months ended April 30, 2014 and 2013, we recorded $2,306,000 and $2,908,000, respectively, as a net reduction to additional paid-in capital and accumulated hypothetical tax benefits, which primarily represents the reversal of unrealized deferred tax assets associated with certain vested equity-classified stock-based awards that expired during the respective periods.
Stock Options
The following table summarizes the Plan's activity (including SARs) during the nine months ended April 30, 2014:
Awards (in Shares) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||
Outstanding at July 31, 2013 | 3,047,910 | $ | 29.94 | ||||||||||
Granted | 247,000 | 27.23 | |||||||||||
Expired/canceled | (413,240 | ) | 45.66 | ||||||||||
Exercised | (4,050 | ) | 19.54 | ||||||||||
Outstanding at October 31, 2013 | 2,877,620 | 27.46 | |||||||||||
Granted | 11,000 | 31.29 | |||||||||||
Expired/canceled | (52,800 | ) | 27.80 | ||||||||||
Exercised | (91,375 | ) | 27.14 | ||||||||||
Outstanding at January 31, 2014 | 2,744,445 | 27.48 | |||||||||||
Granted | 8,460 | 30.12 | |||||||||||
Expired/canceled | (15,220 | ) | 30.72 | ||||||||||
Exercised | (124,505 | ) | 27.61 | ||||||||||
Outstanding at April 30, 2014 | 2,613,180 | $ | 27.46 | 5.47 | $ | 11,220,000 | |||||||
Exercisable at April 30, 2014 | 1,281,048 | $ | 27.11 | 2.99 | $ | 5,964,000 | |||||||
Vested and expected to vest at April 30, 2014 | 2,554,057 | $ | 27.45 | 5.42 | $ | 10,998,000 | |||||||
17
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Stock options (including SARs) outstanding as of April 30, 2014 have exercise prices ranging between $13.19-$35.79. The total intrinsic value relating to stock options exercised during the three months ended April 30, 2014 and 2013 was $533,000 and $149,000, respectively. The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2014 and 2013 was $965,000 and $413,000, respectively. Stock options granted during the nine months ended April 30, 2014 and 2013 had exercise prices equal to the fair market value of our common stock on the date of grant, a contractual term of ten years and a vesting period of five years. There were no SARs granted or exercised during the three and nine months ended April 30, 2014 and 2013 and no stock options were granted during the three months ended April 30, 2013. The estimated per-share weighted average grant-date fair value of stock options granted during the three and nine months ended April 30, 2014 was $5.91 and $5.51, respectively, and $5.46 during the nine months ended April 30, 2013, which was determined using the Black-Scholes option pricing model, and included the following weighted average assumptions:
Three months ended April 30, | Nine months ended April 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Expected dividend yield | 3.98 | % | N/A | 4.03 | % | 4.29 | % | ||||
Expected volatility | 32.00 | % | N/A | 32.83 | % | 37.00 | % | ||||
Risk-free interest rate | 1.49 | % | N/A | 1.39 | % | 0.61 | % | ||||
Expected life (years) | 5.31 | N/A | 5.43 | 5.31 | |||||||
Expected dividend yield is the expected annual dividend as a percentage of the fair market value of our common stock on the date of grant, based on our Board's annual dividend target at the time of grant, which was increased from $1.10 per share to $1.20 per share during the nine months ended April 30, 2014. We estimate expected volatility by considering the historical volatility of our stock, the implied volatility of publicly-traded call options on our stock, the implied volatility of call options embedded in our 3.0% convertible senior notes (prior to their settlement) and our expectations of volatility for the expected life of stock options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for an instrument which closely approximates the expected term. The expected term is the number of years we estimate that awards will be outstanding prior to exercise and is determined by employee groups with sufficiently distinct behavior patterns. 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. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by recipients of stock-based awards.
Performance Shares, RSUs, Restricted Stock and Share Unit Awards
The following table summarizes the Plan's activity relating to performance shares, RSUs, restricted stock and share units:
Awards (in Shares) | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||
Outstanding at July 31, 2013 | 102,334 | $ | 25.80 | ||||||||
Granted | 68,167 | 24.58 | |||||||||
Converted to common stock | (4,509 | ) | 26.25 | ||||||||
Outstanding at October 31, 2013 | 165,992 | 25.28 | |||||||||
Granted | 4,988 | 31.32 | |||||||||
Forfeited | (9,570 | ) | 24.82 | ||||||||
Outstanding at January 31, 2014 | 161,410 | 25.50 | |||||||||
Granted | 3,935 | 30.34 | |||||||||
Outstanding at April 30, 2014 | 165,345 | $ | 25.61 | $ | 5,250,000 | ||||||
Vested at April 30, 2014 | 12,978 | $ | 27.10 | $ | 412,000 | ||||||
Vested and expected to vest at April 30, 2014 | 159,807 | $ | 25.62 | $ | 5,074,000 | ||||||
18
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Performance shares granted to employees prior to fiscal 2014 vest over a 5.3 year period, beginning on the date of grant if pre-established performance goals are attained, and are convertible into shares of our common stock generally at the time of vesting, on a one-for-one basis for no cash consideration. The performance shares granted to employees during the three and nine months ended April 30, 2014 principally vest over a three year performance period that ends on July 31, 2016, if pre-established performance goals are attained or as specified pursuant to the Plan and related agreement. As of April 30, 2014, the number of outstanding performance shares included in the above table, and the related compensation expense, assume achievement of the pre-established goals at a target level. During the nine months ended April 30, 2014, our Board of Directors determined that the pre-established performance goals for 35,003 performance shares granted in fiscal 2012 had been attained and, as a result, the first tranche of 6,996 performance shares vested and converted into 3,496 net shares of our common stock, after reduction of 1,013 shares retained to satisfy minimum tax withholding and 2,487 shares for deferral requirements.
RSUs and restricted stock granted to non-employee directors have a vesting period of three years and are convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. RSUs granted to employees have a vesting period of five years and are convertible into shares of our common stock generally at the time of vesting, on a one-for-one basis for no cash consideration.
Share units are vested when issued and are convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances.
No RSUs, restricted stock or share units granted to date have been converted into common stock.
The fair value of performance shares, RSUs, restricted stock and share units is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive. RSUs and performance shares granted in fiscal 2012 are not entitled to dividend equivalents. RSUs, performance shares and restricted stock granted in fiscal 2013 and 2014 are entitled to dividend equivalents unless forfeited before vesting occurs; however, performance shares granted in fiscal 2013 are not entitled to such dividend equivalents until our Board of Directors has determined that the pre-established performance goals have been met. Share units granted prior to fiscal 2014 are not entitled to dividend equivalents. Share units granted in fiscal 2014 are entitled to dividend equivalents while the underlying shares are unissued.
Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of conversion of the underlying shares into our common stock. As of April 30, 2014 and July 31, 2013, accrued dividend equivalents were $87,000 and $7,000, respectively. Such amounts were recorded as a reduction to retained earnings.
In June 2014, our Board of Directors authorized the issuance of 208,979 stock-based awards, of which 191,650 were non-qualified stock options and 17,329 were RSUs. Total unrecognized stock-based compensation, net of estimated forfeitures, related to these awards was approximately $1,469,000 and will be expensed in future periods.
19
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(14) Customer and Geographic Information
Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:
Three months ended April 30, | Nine months ended April 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
United States | ||||||||||||
U.S. government | 27.4 | % | 36.9 | % | 28.1 | % | 38.1 | % | ||||
Commercial | 10.3 | % | 16.0 | % | 12.9 | % | 14.1 | % | ||||
Total United States | 37.7 | % | 52.9 | % | 41.0 | % | 52.2 | % | ||||
International | ||||||||||||
North African country | 22.4 | % | 4.0 | % | 16.3 | % | 4.7 | % | ||||
Other international | 39.9 | % | 43.1 | % | 42.7 | % | 43.1 | % | ||||
Total International | 62.3 | % | 47.1 | % | 59.0 | % | 47.8 | % | ||||
Sales to U.S. government end customers include the Department of Defense ("DoD") and intelligence and civilian agencies, as well as sales directly to or through prime contractors.
Excluding sales in our mobile data communications segment, sales to U.S. government end customers were 23.2% and 30.2% for the three months ended April 30, 2014 and 2013, respectively. Excluding sales in our mobile data communications segment, sales to U.S. government end customers were 23.2% and 31.1% for the nine months ended April 30, 2014 and 2013, respectively.
International sales for the three months ended April 30, 2014 and 2013 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $55,370,000 and $32,907,000, respectively. International sales for the nine months ended April 30, 2014 and 2013 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $152,054,000 and $112,596,000, respectively.
For the three and nine months ended April 30, 2014, sales to a prime contractor represented approximately 22.5% and 16.3%, respectively, of consolidated net sales (almost all of which related to our North African country end-customer).
For the three and nine months ended April 30, 2013, except for the U.S. government, no other customer or individual country (including sales to U.S. domestic companies for inclusion in products that will be sold to a foreign country) represented more than 10% of consolidated net sales.
(15) Segment Information
Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280, “Segment Reporting,” 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. Our chief operating decision-maker is our President and Chief Executive Officer.
While our 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) RF microwave amplifiers, and (iii) mobile data communications.
Telecommunications transmission products include satellite earth station products (such as analog and digital modems, frequency converters, power amplifiers, transceivers and voice gateways) and over-the-horizon microwave communications products and systems (such as digital troposcatter modems).
RF microwave amplifier products include traveling wave tube amplifiers and solid-state, high-power narrow and broadband amplifier products that use the microwave and radio frequency spectrums.
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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Mobile data communications products and services substantially relate to our support of the U.S. Army's Blue Force Tracking (“BFT-1”) and the U.S. Army's Movement Tracking System (“MTS”) programs, which are currently in a sustainment mode. We currently perform engineering services and satellite network operations on a cost-plus-fixed-fee basis and program management services on a firm-fixed-price basis and we license certain of our intellectual property to the U.S. Army.
Corporate management defines and reviews segment profitability based on the same allocation methodology as presented in the segment data tables below:
Three months ended April 30, 2014 | |||||||||||||||||
Telecommunications Transmission | RF Microwave Amplifiers | Mobile Data Communications | Unallocated | Total | |||||||||||||
Net sales | $ | 61,235,000 | 22,499,000 | 5,171,000 | — | $ | 88,905,000 | ||||||||||
Operating income (loss) | 10,353,000 | 1,445,000 | 2,318,000 | (3,549,000 | ) | 10,567,000 | |||||||||||
Interest income and other (expense) | 21,000 | (14,000 | ) | 3,000 | 246,000 | 256,000 | |||||||||||
Interest expense | 62,000 | — | — | 1,931,000 | 1,993,000 | ||||||||||||
Depreciation and amortization | 2,193,000 | 939,000 | 62,000 | 1,086,000 | 4,280,000 | ||||||||||||
Expenditure for long-lived assets, including intangibles | 916,000 | 158,000 | 38,000 | — | 1,112,000 | ||||||||||||
Total assets at April 30, 2014 | 251,156,000 | 89,177,000 | 5,811,000 | 287,461,000 | 633,605,000 | ||||||||||||
Three months ended April 30, 2013 | |||||||||||||||||
Telecommunications Transmission | RF Microwave Amplifiers | Mobile Data Communications | Unallocated | Total | |||||||||||||
Net sales | $ | 45,410,000 | 16,169,000 | 8,277,000 | — | $ | 69,856,000 | ||||||||||
Operating income (loss) | 6,261,000 | (121,000 | ) | 2,434,000 | (3,183,000 | ) | 5,391,000 | ||||||||||
Interest income and other (expense) | (2,000 | ) | (10,000 | ) | 3,000 | 296,000 | 287,000 | ||||||||||
Interest expense | 55,000 | — | — | 1,954,000 | 2,009,000 | ||||||||||||
Depreciation and amortization | 2,378,000 | 984,000 | 125,000 | 729,000 | 4,216,000 | ||||||||||||
Expenditure for long-lived assets, including intangibles | 1,359,000 | 130,000 | 71,000 | — | 1,560,000 | ||||||||||||
Total assets at April 30, 2013 | 227,138,000 | 94,832,000 | 13,780,000 | 340,612,000 | 676,362,000 | ||||||||||||
21
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Nine months ended April 30, 2014 | |||||||||||||||||
Telecommunications Transmission | RF Microwave Amplifiers | Mobile Data Communications | Unallocated | Total | |||||||||||||
Net sales | $ | 172,121,000 | 64,737,000 | 20,914,000 | — | $ | 257,772,000 | ||||||||||
Operating income (loss) | 29,550,000 | 3,113,000 | 9,697,000 | (10,522,000 | ) | 31,838,000 | |||||||||||
Interest income and other (expense) | 9,000 | (32,000 | ) | 9,000 | 771,000 | 757,000 | |||||||||||
Interest expense (income) | 182,000 | — | (3,000 | ) | 5,830,000 | 6,009,000 | |||||||||||
Depreciation and amortization | 6,683,000 | 2,827,000 | 199,000 | 3,134,000 | 12,843,000 | ||||||||||||
Expenditure for long-lived assets, including intangibles | 3,830,000 | 415,000 | 284,000 | 7,000 | 4,536,000 | ||||||||||||
Total assets at April 30, 2014 | 251,156,000 | 89,177,000 | 5,811,000 | 287,461,000 | 633,605,000 | ||||||||||||
Nine months ended April 30, 2013 | |||||||||||||||||
Telecommunications Transmission | RF Microwave Amplifiers | Mobile Data Communications | Unallocated | Total | |||||||||||||
Net sales | $ | 144,506,000 | 61,820,000 | 29,060,000 | — | $ | 235,386,000 | ||||||||||
Operating income (loss) | 24,069,000 | 2,242,000 | 8,899,000 | (10,510,000 | ) | 24,700,000 | |||||||||||
Interest income and other (expense) | (37,000 | ) | (39,000 | ) | 15,000 | 939,000 | 878,000 | ||||||||||
Interest expense (income) | 294,000 | — | (6,000 | ) | 5,862,000 | 6,150,000 | |||||||||||
Depreciation and amortization | 7,241,000 | 2,941,000 | 411,000 | 2,357,000 | 12,950,000 | ||||||||||||
Expenditure for long-lived assets, including intangibles | 3,428,000 | 472,000 | 112,000 | 5,000 | 4,017,000 | ||||||||||||
Total assets at April 30, 2013 | 227,138,000 | 94,832,000 | 13,780,000 | 340,612,000 | 676,362,000 | ||||||||||||
Operating income in our telecommunications transmission segment for the nine months ended April 30, 2014 and 2013 includes a benefit of $239,000 and $3,267,000, respectively, related to a change in fair value of the earn-out liability associated with our acquisition of Stampede. There was no such benefit during the three months ended April 30, 2014 and 2013.
Operating income in our mobile data communications segment for the three and nine months ended April 30, 2014 includes a benefit of $56,000 relating to the reversal of previously accrued costs that were lower than expected and, for the nine months ended April 30, 2013, includes a net pre-tax restructuring charge of $569,000 related to the wind-down of our microsatellite product line. There was no such charge or benefit during the three months ended April 30, 2013. See Note (9) - "Cost Reduction Actions."
Unallocated expenses include corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs. In addition, for the three and nine months ended April 30, 2014 and 2013, unallocated expenses include $1,070,000 and $3,086,000, respectively, and $694,000 and $2,245,000, respectively, of stock-based compensation expense. Interest expense (which includes amortization of deferred financing costs) associated with our convertible senior notes and our Credit Facility 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 our long-lived assets are located in the U.S.
22
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Intersegment sales for the three months ended April 30, 2014 and 2013 by the telecommunications transmission segment to the RF microwave amplifiers segment were $521,000 and $361,000, respectively. Intersegment sales for the nine months ended April 30, 2014 and 2013 by the telecommunications transmission segment to the RF microwave amplifiers segment were $1,286,000 and $2,018,000, respectively.
Intersegment sales for the three months ended April 30, 2014 and 2013 by the telecommunications transmission segment to the mobile data communications segment were $41,000 and $18,000, respectively. Intersegment sales for the nine months ended April 30, 2014 and 2013 by the telecommunications transmission segment to the mobile data communications segment were $213,000 and $2,637,000, respectively.
Intersegment sales for both the three months ended April 30, 2014 and 2013 by the RF microwave amplifiers segment to the telecommunications transmission segment were $3,000. Intersegment sales for the nine months ended April 30, 2014 and 2013 by the RF microwave amplifiers segment to the telecommunications transmission segment were $137,000 and $9,000, respectively.
All intersegment sales have been eliminated from the tables above.
(16) Goodwill
The carrying amount of goodwill by segment as of April 30, 2014 and July 31, 2013 are as follows:
Telecommunications Transmission | RF Microwave Amplifiers | Mobile Data Communications | Total | |||||||||||
Goodwill | $ | 107,779,000 | 29,575,000 | 13,249,000 | $ | 150,603,000 | ||||||||
Accumulated impairment | — | — | (13,249,000 | ) | (13,249,000 | ) | ||||||||
Balance | $ | 107,779,000 | 29,575,000 | — | $ | 137,354,000 | ||||||||
In accordance with FASB ASC 350, “Intangibles - Goodwill and Other,” we perform goodwill impairment testing at least annually, unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, each of our three operating segments constitutes a reporting unit and we must make various assumptions in determining the fair values of the reporting unit.
23
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
On August 1, 2013 (the first day of our fiscal 2014), we performed our annual impairment test and estimated the fair value of each of our reporting units based on the income approach (also known as the discounted cash flow (“DCF”) method, which utilizes the present value of cash flows to estimate fair value). The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). We took into account expected challenging global industry and market conditions, including expected significant reductions in the overall budget for U.S. defense spending. As such, although both our telecommunications transmission and RF microwave amplifiers reporting units have historically achieved significant long-term revenue and operating income growth, we assumed growth rate estimates in our projections that were below our actual long-term expectations and below each reporting unit's actual historical growth rate. The discount rates used in our DCF method were based on a weighted-average cost of capital (“WACC”) determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period and reflected our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach and then used the market approach to corroborate this value. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. In each case, the estimated fair value determined under the market approach exceeded our estimate of fair value determined under the income approach. Finally, we compared our estimates to our August 1, 2013 total public market capitalization and assessed implied control premiums. Based on the aforementioned, we concluded that the estimated fair value determined under the income approach for each of our reporting units, as of August 1, 2013, was reasonable. In each case, the estimated fair value exceeded the respective carrying value and, as such, we concluded that the goodwill assigned to our telecommunications transmission and RF microwave amplifiers reporting units, as of August 1, 2013, was not impaired. We also concluded that our telecommunications transmission reporting unit was currently not at risk of failing step one of the goodwill impairment test as prescribed under the ASC. However, we concluded that as of August 1, 2013, our RF microwave amplifiers reporting unit was at risk of failing step one of the goodwill impairment test.
As of August 1, 2013, we determined that our RF microwave amplifiers reporting unit had an estimated fair value in excess of its respective carrying value of at least 13.2%, which represents an increase from the at least 5.0% excess we previously calculated as of January 31, 2013 (when we performed an interim fiscal 2013 impairment test). The increase from 5.0% to 13.2% was primarily driven by a decrease in the WACC from 12.0% to 11.0%. The WACC for any given impairment test is based on current market data as of the respective valuation date. Had we utilized a WACC of 12.0% for the fiscal 2014 annual impairment test, our RF microwave amplifiers reporting unit's estimated fair value would still exceed its carrying value as of August 1, 2013. The WACC of 11.0% used in our annual impairment test for fiscal 2014 was equal to the WACC utilized in our annual impairment test for fiscal 2013.
This estimated fair value of our RF microwave amplifiers reporting unit is closely aligned with the ultimate amount of revenue and operating income that it achieves over the projected period. Our discounted cash flows, for goodwill impairment testing purposes, assumed that, through fiscal 2019, this reporting unit would achieve a compounded annual revenue growth rate of approximately 1.0% and 4.0% from its actual fiscal 2012 and 2013 revenues of $102,497,000 and $86,939,000, respectively. Beyond fiscal 2019, we assumed a long-term revenue growth rate of 3.5% in the terminal year. Given current challenging market conditions, we believe these modest long-term growth rates and the WACC are appropriate to use for our future cash flow assumptions. We also believe that it is possible that our actual revenue growth rates could be significantly higher due to a number of factors, including: (i) continued reliance by our customers on our advanced communications systems; (ii) the continued shift toward information-based, network-centric warfare; and (iii) the need for developing countries to upgrade their communication systems. If we do not at least meet the assumed revenue growth utilized in this goodwill impairment analysis, our RF microwave amplifiers reporting unit will likely fail step one of a goodwill impairment test in a future period. Modest changes in other key assumptions used in our impairment analysis may also result in the requirement to proceed to step two of the goodwill impairment test in future periods. For example, keeping all other variables constant, a 160 basis point increase in the WACC applied to our RF microwave amplifiers reporting unit or an increase to our RF microwave amplifiers carrying value of more than $13,200,000 would likely result in a step one failure. If this reporting unit fails step one in the future, we would be required to perform step two of the goodwill impairment test. If we perform step two, up to $42,113,000 of goodwill and intangibles assigned to this reporting unit could be written off in the period that the impairment is triggered.
24
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Our goodwill impairment analyses for the telecommunications transmission and RF microwave amplifiers reporting units are sensitive to the ultimate spending decisions by our global customers. Accordingly, we will continue to monitor key assumptions and other factors required to be utilized in evaluating impairment of goodwill. It is possible that, during fiscal 2014, business conditions (both in the U.S. and internationally) could deteriorate from the current state and our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate. A significant decline in defense spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a step one interim goodwill impairment test during fiscal 2014 for these two reporting units. In any event, we are required to perform the next annual step one goodwill impairment test on August 1, 2014 (the start of our fiscal 2015). If our assumptions and related estimates change in the future, or if we change our reporting structure or other events and circumstances change (e.g., such as a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests or in other future periods. Any impairment charges that we may take in the future could be material to our results of operations and financial condition.
(17) Intangible Assets
Intangible assets with finite lives as of April 30, 2014 and July 31, 2013 are as follows:
April 30, 2014 | |||||||||||||
Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Technologies | 11.8 | $ | 47,370,000 | 35,476,000 | $ | 11,894,000 | |||||||
Customer relationships | |||||||||||||