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, 2015
 | 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 1, 2015, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 16,119,453 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
(Unaudited)
April 30, 2015 | July 31, 2014 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 142,044,000 | 154,500,000 | ||||
Accounts receivable, net | 67,621,000 | 54,887,000 | |||||
Inventories, net | 68,252,000 | 61,332,000 | |||||
Prepaid expenses and other current assets | 9,754,000 | 9,947,000 | |||||
Deferred tax asset, net | 9,889,000 | 10,178,000 | |||||
Total current assets | 297,560,000 | 290,844,000 | |||||
Property, plant and equipment, net | 16,470,000 | 18,536,000 | |||||
Goodwill | 137,354,000 | 137,354,000 | |||||
Intangibles with finite lives, net | 21,538,000 | 26,220,000 | |||||
Deferred financing costs, net | — | 65,000 | |||||
Other assets, net | 873,000 | 833,000 | |||||
Total assets | $ | 473,795,000 | 473,852,000 | ||||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 15,020,000 | 18,902,000 | ||||
Accrued expenses and other current liabilities | 27,075,000 | 29,803,000 | |||||
Dividends payable | 4,835,000 | 4,844,000 | |||||
Customer advances and deposits | 17,826,000 | 12,610,000 | |||||
Interest payable | — | 29,000 | |||||
Total current liabilities | 64,756,000 | 66,188,000 | |||||
Other liabilities | 3,916,000 | 4,364,000 | |||||
Income taxes payable | 1,778,000 | 2,743,000 | |||||
Deferred tax liability, net | 3,347,000 | 3,632,000 | |||||
Total liabilities | 73,797,000 | 76,927,000 | |||||
Commitments and contingencies (See Note 17) | |||||||
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 31,151,557 shares and 31,016,469 shares at April 30, 2015 and July 31, 2014, respectively | 3,115,000 | 3,102,000 | |||||
Additional paid-in capital | 426,255,000 | 421,240,000 | |||||
Retained earnings | 412,477,000 | 409,443,000 | |||||
841,847,000 | 833,785,000 | ||||||
Less: | |||||||
Treasury stock, at cost (15,033,317 shares and 14,857,582 shares at April 30, 2015 and July 31, 2014, respectively) | (441,849,000 | ) | (436,860,000 | ) | |||
Total stockholders’ equity | 399,998,000 | 396,925,000 | |||||
Total liabilities and stockholders’ equity | $ | 473,795,000 | 473,852,000 | ||||
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, | ||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||
Net sales | $ | 71,633,000 | 88,905,000 | 229,826,000 | 257,772,000 | ||||||||
Cost of sales | 39,325,000 | 50,559,000 | 124,318,000 | 145,679,000 | |||||||||
Gross profit | 32,308,000 | 38,346,000 | 105,508,000 | 112,093,000 | |||||||||
Expenses: | |||||||||||||
Selling, general and administrative | 15,005,000 | 17,320,000 | 46,557,000 | 49,867,000 | |||||||||
Research and development | 8,582,000 | 8,899,000 | 28,267,000 | 25,664,000 | |||||||||
Amortization of intangibles | 1,561,000 | 1,560,000 | 4,682,000 | 4,724,000 | |||||||||
25,148,000 | 27,779,000 | 79,506,000 | 80,255,000 | ||||||||||
Operating income | 7,160,000 | 10,567,000 | 26,002,000 | 31,838,000 | |||||||||
Other expenses (income): | |||||||||||||
Interest expense | 72,000 | 1,993,000 | 406,000 | 6,009,000 | |||||||||
Interest income and other | (107,000 | ) | (256,000 | ) | (281,000 | ) | (757,000 | ) | |||||
Income before provision for income taxes | 7,195,000 | 8,830,000 | 25,877,000 | 26,586,000 | |||||||||
Provision for income taxes | 2,235,000 | 2,955,000 | 8,107,000 | 9,423,000 | |||||||||
Net income | $ | 4,960,000 | 5,875,000 | 17,770,000 | 17,163,000 | ||||||||
Net income per share (See Note 4): | |||||||||||||
Basic | $ | 0.31 | 0.39 | 1.10 | 1.08 | ||||||||
Diluted | $ | 0.30 | 0.32 | 1.08 | 0.92 | ||||||||
Weighted average number of common shares outstanding – basic | 16,202,000 | 15,200,000 | 16,220,000 | 15,882,000 | |||||||||
Weighted average number of common and common equivalent shares outstanding – diluted | 16,382,000 | 21,764,000 | 16,468,000 | 22,324,000 | |||||||||
Dividends declared per issued and outstanding common share as of the applicable dividend record date | $ | 0.30 | 0.30 | 0.90 | 0.875 | ||||||||
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, 2015 AND 2014
(Unaudited)
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Stockholders' Equity | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||
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 | |||||||||||||||||||
Common stock issued for net settlement of stock-based awards | 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 | |||||||||||||
Balance as of July 31, 2014 | 31,016,469 | $ | 3,102,000 | $ | 421,240,000 | $ | 409,443,000 | 14,857,582 | $ | (436,860,000 | ) | $ | 396,925,000 | |||||||||||||
Equity-classified stock award compensation | — | — | 3,642,000 | — | — | — | 3,642,000 | |||||||||||||||||||
Proceeds from exercise of options | 49,200 | 5,000 | 1,412,000 | — | — | — | 1,417,000 | |||||||||||||||||||
Proceeds from issuance of employee stock purchase plan shares | 25,768 | 2,000 | 705,000 | — | — | — | 707,000 | |||||||||||||||||||
Common stock issued for net settlement of stock-based awards | 60,120 | 6,000 | (426,000 | ) | — | — | — | (420,000 | ) | |||||||||||||||||
Cash dividends declared | — | — | — | (14,567,000 | ) | — | — | (14,567,000 | ) | |||||||||||||||||
Accrual of dividend equivalents | — | — | — | (169,000 | ) | — | — | (169,000 | ) | |||||||||||||||||
Net income tax shortfall from settlement of stock-based awards | — | — | (248,000 | ) | — | — | — | (248,000 | ) | |||||||||||||||||
Reversal of deferred tax asset associated with debt converted to shares of common stock | — | — | (58,000 | ) | — | — | — | (58,000 | ) | |||||||||||||||||
Reversal of deferred tax assets associated with expired and unexercised stock-based awards | — | — | (12,000 | ) | — | — | — | (12,000 | ) | |||||||||||||||||
Repurchases of common stock | — | — | — | — | 175,735 | (4,989,000 | ) | (4,989,000 | ) | |||||||||||||||||
Net income | — | — | — | 17,770,000 | — | — | 17,770,000 | |||||||||||||||||||
Balance as of April 30, 2015 | 31,151,557 | $ | 3,115,000 | $ | 426,255,000 | $ | 412,477,000 | 15,033,317 | $ | (441,849,000 | ) | $ | 399,998,000 | |||||||||||||
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, | |||||||
2015 | 2014 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 17,770,000 | 17,163,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization of property, plant and equipment | 4,896,000 | 5,033,000 | |||||
Amortization of intangible assets with finite lives | 4,682,000 | 4,724,000 | |||||
Amortization of stock-based compensation | 3,642,000 | 3,086,000 | |||||
Deferred financing costs | 65,000 | 1,028,000 | |||||
Change in fair value of contingent earn-out liability | — | (239,000 | ) | ||||
Loss on disposal of property, plant and equipment | 3,000 | 16,000 | |||||
Provision for allowance for doubtful accounts | 315,000 | 198,000 | |||||
Provision for excess and obsolete inventory | 1,962,000 | 2,214,000 | |||||
Excess income tax benefit from stock-based award exercises | (140,000 | ) | (49,000 | ) | |||
Deferred income tax benefit | (1,103,000 | ) | (2,988,000 | ) | |||
Changes in assets and liabilities: | |||||||
Accounts receivable | (13,049,000 | ) | (15,307,000 | ) | |||
Inventories | (8,729,000 | ) | (4,892,000 | ) | |||
Prepaid expenses and other current assets | (225,000 | ) | (3,108,000 | ) | |||
Other assets | (40,000 | ) | 60,000 | ||||
Accounts payable | (3,882,000 | ) | (2,044,000 | ) | |||
Accrued expenses and other current liabilities | (3,152,000 | ) | (251,000 | ) | |||
Customer advances and deposits | 5,063,000 | 3,116,000 | |||||
Other liabilities | (608,000 | ) | 216,000 | ||||
Interest payable | (29,000 | ) | 1,500,000 | ||||
Income taxes payable | 242,000 | 1,313,000 | |||||
Net cash provided by operating activities | 7,683,000 | 10,789,000 | |||||
Cash flows from investing activities: | |||||||
Purchases of property, plant and equipment | (2,833,000 | ) | (4,536,000 | ) | |||
Net cash used in investing activities | (2,833,000 | ) | (4,536,000 | ) | |||
Cash flows from financing activities: | |||||||
Cash dividends paid | (14,581,000 | ) | (13,779,000 | ) | |||
Repurchases of common stock | (4,989,000 | ) | (58,122,000 | ) | |||
Proceeds from exercises of stock options | 1,417,000 | 3,444,000 | |||||
Proceeds from issuance of employee stock purchase plan shares | 707,000 | 670,000 | |||||
Excess income tax benefit from stock-based award exercises | 140,000 | 49,000 | |||||
Fees related to line of credit | — | (75,000 | ) | ||||
Payment of contingent consideration related to business acquisition | — | (49,000 | ) | ||||
Net cash used in financing activities | (17,306,000 | ) | (67,862,000 | ) | |||
Net decrease in cash and cash equivalents | (12,456,000 | ) | (61,609,000 | ) | |||
Cash and cash equivalents at beginning of period | 154,500,000 | 356,642,000 | |||||
Cash and cash equivalents at end of period | $ | 142,044,000 | 295,033,000 | ||||
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, | |||||||
2015 | 2014 | ||||||
Supplemental cash flow disclosures: | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 117,000 | 3,264,000 | ||||
Income taxes | $ | 8,970,000 | 11,100,000 | ||||
Non-cash investing and financing activities: | |||||||
Cash dividends declared but unpaid (including accrual of dividend equivalents) | $ | 5,115,000 | 4,600,000 | ||||
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, 2015 and 2014 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, 2014 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”). During the nine months ended April 30, 2015, we adopted FASB:
ASU No. 2013-04, which provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements, for which the total amount of the obligation is fixed at the reporting date. Our adoption of this ASU did not have any impact on our consolidated financial statements and or disclosures.
ASU No. 2013-05, which requires a parent company that ceases to have a controlling interest in a subsidiary or group of assets that is a non profit entity or business within a foreign entity, to release any cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Our adoption of this ASU did not have any impact on our consolidated financial statements.
ASU No. 2013-07, which clarifies that an entity should apply the liquidation basis of accounting when liquidation is imminent, as defined. This ASU also provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. Our adoption of this ASU did not have any impact on our consolidated financial statements.
ASU No. 2013-11, which amends the presentation requirements of ASC 740, "Income Taxes," and requires that unrecognized tax benefits, or portions of unrecognized tax benefits, relating to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward be presented in the financial statements as a reduction to the associated deferred tax asset. See Note (10) "Income Taxes" for further information about the impact of adopting this ASU.
ASU No. 2014-17, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. Our adoption of this ASU did not have any impact on our consolidated financial statements.
ASU No. 2015-08, which amends various paragraphs in ASC 805, "Business Combinations," as a result of the issuance of SEC Staff Accounting Bulletin No. 115 and guidance on push down accounting. We adopted this ASU, as required, in May 2015. Our adoption of this ASU did not have any impact on our consolidated financial statements.
7
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) Fair Value Measurements and Financial Instruments
As of April 30, 2015 and July 31, 2014, we had approximately $3,129,000 and $4,628,000, respectively, consisting primarily 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 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.
As of April 30, 2015 and July 31, 2014, other than our cash and cash equivalents, we have no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value. If we acquire different types of assets or incur different types of liabilities in the future, we might be required to use FASB ASC fair value methodologies other than quoted market prices.
(4) 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 outstanding and dilutive, during each respective period.
As of April 30, 2014, we had $191,499,000 of our 3.0% convertible senior notes outstanding, all of which were redeemed or repurchased in May 2014. 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 settlement 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 and nine months ended April 30, 2015 reflects a reduction of approximately 83,000 and 27,000 shares as a result of the repurchase of our common shares during the respective periods. Weighted average basic and diluted shares outstanding for the three and nine months ended April 30, 2014 reflects a reduction of approximately 482,000 and 657,000 shares as a result of the repurchase of our common shares during the respective periods. See Note (16) – “Stockholders’ Equity” for more information on our stock repurchase program.
Weighted average stock options outstanding to purchase 685,000 and 566,000 shares for the three months ended April 30, 2015 and 2014, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive. Weighted average stock options outstanding to purchase 477,000 and 898,000 shares for the nine months ended April 30, 2015 and 2014, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.
Our EPS calculations exclude 124,000 and 92,000 weighted average RSUs with performance measures (which we refer to as performance shares) outstanding for the three months ended April 30, 2015 and 2014, respectively, and 118,000 and 78,000 weighted average performance shares outstanding for the nine months ended April 30, 2015 and 2014, 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.
Liability-classified stock-based awards, when outstanding, 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, | ||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||
Numerator: | |||||||||||||
Net income for basic calculation | $ | 4,960,000 | 5,875,000 | 17,770,000 | 17,163,000 | ||||||||
Effect of dilutive securities: | |||||||||||||
Interest expense (net of tax) on 3.0% convertible senior notes | — | 1,117,000 | — | 3,351,000 | |||||||||
Numerator for diluted calculation | $ | 4,960,000 | 6,992,000 | 17,770,000 | 20,514,000 | ||||||||
Denominator: | |||||||||||||
Denominator for basic calculation | 16,202,000 | 15,200,000 | 16,220,000 | 15,882,000 | |||||||||
Effect of dilutive securities: | |||||||||||||
Stock-based awards | 180,000 | 290,000 | 248,000 | 218,000 | |||||||||
Conversion of 3.0% convertible senior notes | — | 6,274,000 | — | 6,224,000 | |||||||||
Denominator for diluted calculation | 16,382,000 | 21,764,000 | 16,468,000 | 22,324,000 | |||||||||
(5) Accounts Receivable
Accounts receivable consist of the following at:
April 30, 2015 | July 31, 2014 | ||||||
Billed receivables from commercial customers | $ | 27,340,000 | 31,681,000 | ||||
Billed receivables from the U.S. government and its agencies | 11,259,000 | 10,316,000 | |||||
Unbilled receivables on contracts-in-progress | 29,779,000 | 13,517,000 | |||||
Total accounts receivable | 68,378,000 | 55,514,000 | |||||
Less allowance for doubtful accounts | 757,000 | 627,000 | |||||
Accounts receivable, net | $ | 67,621,000 | 54,887,000 | ||||
Of the unbilled receivables at April 30, 2015 and July 31, 2014, $27,990,000 and $9,990,000, respectively, relates to our two large over-the-horizon microwave system contracts with our large U.S. prime contractor customer (the majority of which related to our North African country end-customer). The remaining unbilled receivables include $1,242,000 and $770,000 at April 30, 2015 and July 31, 2014, respectively, due from the U.S. government and its agencies. We had virtually no retainage included in unbilled receivables at April 30, 2015 and $120,000 of retainage at July 31, 2014. In the opinion of management, substantially all of the unbilled receivables at April 30, 2015 will be billed and collected within one year.
As of April 30, 2015 and July 31, 2014, 41.0% and 18.0%, respectively of total accounts receivable was due from one large U.S. prime contractor customer (the majority of which related to our North African country end-customer).
9
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(6) Inventories
Inventories consist of the following at:
April 30, 2015 | July 31, 2014 | ||||||
Raw materials and components | $ | 52,438,000 | 50,423,000 | ||||
Work-in-process and finished goods | 32,162,000 | 27,218,000 | |||||
Total inventories | 84,600,000 | 77,641,000 | |||||
Less reserve for excess and obsolete inventories | 16,348,000 | 16,309,000 | |||||
Inventories, net | $ | 68,252,000 | 61,332,000 | ||||
At April 30, 2015 and July 31, 2014, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $2,964,000 and $1,000,000, respectively.
At April 30, 2015 and July 31, 2014, $507,000 and $654,000, respectively, of inventory related to contracts from third party commercial customers who outsource their manufacturing to us.
(7) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at:
April 30, 2015 | July 31, 2014 | ||||||
Accrued wages and benefits | $ | 10,126,000 | 12,410,000 | ||||
Accrued warranty obligations | 8,293,000 | 8,618,000 | |||||
Accrued commissions and royalties | 2,768,000 | 3,215,000 | |||||
Other | 5,888,000 | 5,560,000 | |||||
Accrued expenses and other current liabilities | $ | 27,075,000 | 29,803,000 | ||||
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, | |||||||
2015 | 2014 | ||||||
Balance at beginning of period | $ | 8,618,000 | 7,797,000 | ||||
Provision for warranty obligations | 3,255,000 | 5,364,000 | |||||
Charges incurred | (3,580,000 | ) | (4,176,000 | ) | |||
Balance at end of period | $ | 8,293,000 | 8,985,000 | ||||
10
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(8) 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 term. 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.
As of April 30, 2015, the amount of the acquisition-related restructuring reserve is as follows:
Cumulative Activity Through April 30, 2015 | |||
Present value of estimated facility exit costs at August 1, 2008 | $ | 2,100,000 | |
Cash payments made | (7,225,000 | ) | |
Cash payments received | 7,953,000 | ||
Accreted interest recorded | 1,289,000 | ||
Liability as of April 30, 2015 | 4,117,000 | ||
Amount recorded as accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet | 467,000 | ||
Amount recorded as other liabilities in the Condensed Consolidated Balance Sheet | $ | 3,650,000 | |
As of July 31, 2014, the present value of the estimated facility exit costs was $3,773,000. During the nine months ended April 30, 2015, we made cash payments of $829,000 and we received cash payments of $967,000. Interest accreted for the three and nine months ended April 30, 2015 and 2014 was $71,000 and $206,000, respectively and $62,000 and $182,000, 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, 2015 | |||
Future lease payments to be made in excess of anticipated sublease payments | $ | 4,117,000 | |
Interest expense to be accreted in future periods | 751,000 | ||
Total remaining net cash payments | $ | 4,868,000 | |
In addition to our Radyne acquisition-related restructuring accrual, we have $182,000 in accrued expenses and other current liabilities in our Condensed Consolidated Balance Sheet as of April 30, 2015 related to our fiscal 2012 plan to wind-down our mobile data communications segment's microsatellite product line.
11
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(9) Credit Facility
We have an uncommitted $15,000,000 secured credit facility (the "Credit Facility") with one bank that provides for the extension of credit to us in the form of revolving loans, including letters of credit and standby 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 $15,000,000. Subject to covenant limitations, the Credit Facility may be used for working capital, capital expenditures and other general corporate purposes. The Credit Facility, which expires October 31, 2015, can be terminated by us or the bank at any time without penalty. At April 30, 2015, we had $3,233,000 of standby letters of credit outstanding related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit.
Interest expense recorded during the three months ended April 30, 2014 was $157,000 (including amortization of deferred financing costs), all of which related to our $100,000,000 committed revolving credit facility that expired on October 31, 2014. There was no interest expense recorded during the three months ended April 30, 2015. During the nine months ended April 30, 2015 and 2014 interest expense was $198,000 and $510,000, respectively, all of which related to the expired revolving credit facility.
(10) Income Taxes
Excluding the impact of any discrete tax items, our fiscal 2015 effective tax rate is expected to approximate 34.75%. This rate reflects the extension of the federal research and experimentation credit through December 31, 2014.
At April 30, 2015 and July 31, 2014, total unrecognized tax benefits were $2,873,000 and $2,743,000, respectively, including interest of $64,000 and $40,000, respectively. As of April 30, 2015, $1,778,000 of our unrecognized tax benefits were recorded as non-current income taxes payable in our Condensed Consolidated Balance Sheet. The remaining unrecognized tax benefits of $1,095,000 were presented as an offset to the associated non-current deferred tax asset in our Condensed Consolidated Balance Sheet, as required by ASU No. 2013-11, which we adopted prospectively during the nine months ended April 30, 2015. As of July 31, 2014, all of our unrecognized tax benefits were recorded as non-current income taxes payable in our Consolidated Balance Sheet. Of the total unrecognized tax benefits at April 30, 2015 and July 31, 2014, $2,182,000 and $2,152,000, 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 2012 through 2014 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.
12
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(11) 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 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.
As of April 30, 2015, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 7,462,030 shares (net of 2,822,062 expired and canceled awards), of which an aggregate of 5,067,578 have been exercised or converted into common stock, substantially all of which related to stock options.
As of April 30, 2015, the following stock-based awards, by award type, were outstanding:
April 30, 2015 | ||
Stock options | 2,164,433 | |
Performance shares | 170,841 | |
RSUs and restricted stock | 50,675 | |
Share units | 8,503 | |
Total | 2,394,452 | |
Our ESPP, approved by our stockholders 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, 2015, we have cumulatively issued 580,511 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, | ||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||
Cost of sales | $ | 71,000 | 57,000 | 204,000 | 194,000 | ||||||||
Selling, general and administrative expenses | 1,005,000 | 860,000 | 2,963,000 | 2,463,000 | |||||||||
Research and development expenses | 168,000 | 153,000 | 475,000 | 429,000 | |||||||||
Stock-based compensation expense before income tax benefit | 1,244,000 | 1,070,000 | 3,642,000 | 3,086,000 | |||||||||
Estimated income tax benefit | (432,000 | ) | (394,000 | ) | (1,283,000 | ) | (1,143,000 | ) | |||||
Net stock-based compensation expense | $ | 812,000 | 676,000 | 2,359,000 | 1,943,000 | ||||||||
13
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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, 2015, unrecognized stock-based compensation of $8,786,000, net of estimated forfeitures of $608,000, is expected to be recognized over a weighted average period of 3.0 years. Total stock-based compensation capitalized and included in ending inventory at both April 30, 2015 and July 31, 2014 was $68,000. There were no liability-classified stock-based awards outstanding as of April 30, 2015 and July 31, 2014.
Stock-based compensation expense, by award type, is summarized as follows:
Three months ended April 30, | Nine months ended April 30, | ||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||
Stock options | $ | 778,000 | 668,000 | 2,267,000 | 2,035,000 | ||||||||
Performance shares | 308,000 | 264,000 | 883,000 | 671,000 | |||||||||
ESPP | 52,000 | 47,000 | 158,000 | 135,000 | |||||||||
RSUs and restricted stock | 106,000 | 67,000 | 306,000 | 203,000 | |||||||||
Share units | — | 15,000 | 28,000 | 27,000 | |||||||||
Equity-classified stock-based compensation expense | 1,244,000 | 1,061,000 | 3,642,000 | 3,071,000 | |||||||||
Liability-classified stock-based compensation expense (SARs) | — | 9,000 | — | 15,000 | |||||||||
Stock-based compensation expense before income tax benefit | 1,244,000 | 1,070,000 | 3,642,000 | 3,086,000 | |||||||||
Estimated income tax benefit | (432,000 | ) | (394,000 | ) | (1,283,000 | ) | (1,143,000 | ) | |||||
Net stock-based compensation expense | $ | 812,000 | 676,000 | 2,359,000 | 1,943,000 | ||||||||
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.
14
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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, | |||||||
2015 | 2014 | ||||||
Actual income tax benefit recorded for the tax deductions relating to the settlement of stock-based awards | $ | 1,032,000 | 342,000 | ||||
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 | 892,000 | 280,000 | |||||
Excess income tax benefit recorded as an increase to additional paid-in capital | 140,000 | 62,000 | |||||
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 | — | 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 | $ | 140,000 | 49,000 | ||||
As of April 30, 2015 and July 31, 2014, the amount of hypothetical tax benefits related to stock-based awards, recorded as a component of additional paid-in capital, was $17,314,000 and $17,574,000, 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, 2015, we recorded a $260,000 reduction to additional paid-in capital and accumulated hypothetical tax benefits, which primarily represents net income tax shortfalls recognized from the settlement of stock-based awards during the respective period. During the nine months ended April 30, 2014, we recorded a $2,306,000 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 period.
15
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Stock Options
The following table summarizes the Plan's activity during the nine months ended April 30, 2015:
Awards (in Shares) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||
Outstanding at July 31, 2014 | 2,132,896 | $ | 28.17 | ||||||||||
Granted | 253,000 | 33.94 | |||||||||||
Expired/canceled | (9,900 | ) | 29.10 | ||||||||||
Exercised | (146,963 | ) | 26.43 | ||||||||||
Outstanding at October 31, 2014 | 2,229,033 | 28.94 | |||||||||||
Granted | 154,025 | 33.76 | |||||||||||
Expired/canceled | (10,800 | ) | 29.20 | ||||||||||
Exercised | (137,525 | ) | 28.06 | ||||||||||
Outstanding at January 31, 2015 | 2,234,733 | 29.32 | |||||||||||
Granted | 3,000 | 29.31 | |||||||||||
Expired/canceled | (14,600 | ) | 32.71 | ||||||||||
Exercised | (58,700 | ) | 28.80 | ||||||||||
Outstanding at April 30, 2015 | 2,164,433 | $ | 29.31 | 7.13 | $ | 1,763,000 | |||||||
Exercisable at April 30, 2015 | 671,335 | $ | 28.20 | 5.28 | $ | 537,000 | |||||||
Vested and expected to vest at April 30, 2015 | 2,021,995 | $ | 29.30 | 7.09 | $ | 1,621,000 | |||||||
Stock options outstanding as of April 30, 2015 have exercise prices ranging between $24.35 - $33.94. The total intrinsic value relating to stock options exercised during the three months ended April 30, 2015 and 2014 was $265,000 and $533,000, respectively. The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2015 and 2014 was $2,224,000 and $965,000, respectively. Stock options granted during the nine months ended April 30, 2015 and 2014 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, 2015 and 2014.
During the nine months ended April 30, 2015 and 2014, at the election of certain holders of vested stock options, 293,988 and 88,755 stock options, respectively, were net settled upon exercise. As a result, 47,532 and 5,488 net shares of our common stock were issued after reduction of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements during the nine months ended April 30, 2015 and 2014, respectively.
The estimated per-share weighted average grant-date fair value of stock options granted during the three and nine months ended April 30, 2015 was $4.53 and $6.13, respectively, and $5.91 and $5.51, respectively, during the three and nine months ended April 30, 2014, 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, | |||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||
Expected dividend yield | 4.09 | % | 3.98 | % | 3.55 | % | 4.03 | % | ||||
Expected volatility | 27.00 | % | 32.00 | % | 28.12 | % | 32.83 | % | ||||
Risk-free interest rate | 1.37 | % | 1.49 | % | 1.61 | % | 1.39 | % | ||||
Expected life (years) | 5.22 | 5.31 | 5.45 | 5.43 | ||||||||
16
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 $1.20 per share for grants in the three and nine months ended April 30, 2015. We estimate expected volatility by considering the historical volatility of our stock, the implied volatility of publicly-traded call options on our stock 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, 2014 | 180,097 | $ | 26.20 | ||||||||
Granted | 60,378 | 33.97 | |||||||||
Converted to common stock | (13,376 | ) | 27.75 | ||||||||
Forfeited | (248 | ) | 31.44 | ||||||||
Outstanding at October 31, 2014 | 226,851 | 28.17 | |||||||||
Granted | 5,916 | 33.94 | |||||||||
Converted to common stock | — | — | |||||||||
Forfeited | (248 | ) | 31.44 | ||||||||
Outstanding at January 31, 2015 | 232,519 | 28.31 | |||||||||
Granted | — | — | |||||||||
Converted to common stock | — | — | |||||||||
Forfeited | (2,500 | ) | 33.94 | ||||||||
Outstanding at April 30, 2015 | 230,019 | $ | 28.25 | $ | 6,648,000 | ||||||
Vested at April 30, 2015 | 23,308 | $ | 27.09 | $ | 674,000 | ||||||
Vested and expected to vest at April 30, 2015 | 202,491 | $ | 28.26 | $ | 5,852,000 | ||||||
The total intrinsic value relating to fully-vested awards converted into our common stock during the nine months ended April 30, 2015 and 2014 was $504,000 and $110,000, respectively. 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 since fiscal 2014 principally vest over a three year performance period, if pre-established performance goals are attained or as specified pursuant to the Plan and related agreements. As of April 30, 2015, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level. During the nine months ended April 30, 2015, our Board of Directors determined that the pre-established performance goals for performance shares granted in fiscal 2013 had been attained, and as a result, the first tranche of 5,568 performance shares vested and converted into 4,149 shares of our common stock, after reduction of shares retained to satisfy deferral requirements.
17
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 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, 2014 and 2015 are entitled to dividend equivalents unless forfeited before vesting occurs; however, performance shares granted in fiscal 2013 were not entitled to such dividend equivalents until our Board of Directors determined that the pre-established performance goals were met. Share units granted prior to fiscal 2014 are not entitled to dividend equivalents. Share units granted in fiscal 2014 and thereafter 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. During the nine months ended April 30, 2015, we accrued $169,000 of dividend equivalents and paid out $5,000. As of April 30, 2015 and July 31, 2014, accrued dividend equivalents were $280,000 and $116,000, respectively. Such amounts were recorded as a reduction to retained earnings.
Cash payments to remit employees' minimum statutory tax withholding requirements related to the net settlement of stock-based awards for the nine months ended April 30, 2015 and 2014 were $420,000 and $122,000, respectively, which is reported as a cash outflow from operating activities in our Condensed Consolidated Statements of Cash Flows for each respective period.
18
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(12) 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, | |||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||
United States | ||||||||||||
U.S. government | 37.5 | % | 27.4 | % | 29.7 | % | 28.1 | % | ||||
Commercial | 11.9 | % | 10.3 | % | 12.5 | % | 12.9 | % | ||||
Total United States | 49.4 | % | 37.7 | % | 42.2 | % | 41.0 | % | ||||
International | ||||||||||||
North African country | 17.3 | % | 22.4 | % | 15.6 | % | 16.3 | % | ||||
Other international | 33.3 | % | 39.9 | % | 42.2 | % | 42.7 | % | ||||
Total International | 50.6 | % | 62.3 | % | 57.8 | % | 59.0 | % | ||||
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.
International sales for the three months ended April 30, 2015 and 2014 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $36,243,000 and $55,370,000, respectively. International sales for the nine months ended April 30, 2015 and 2014 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $132,767,000 and $152,054,000, respectively.
Sales to a U.S. prime contractor customer represented approximately 17.0% and 15.2% of consolidated net sales for the three and nine months ended April 30, 2015, respectively, and 22.5% and 16.3% for the three and nine months ended April 30, 2014, respectively. Almost all of these sales related to our North African country end-customer.
For the three and nine months ended April 30, 2015 and 2014, 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.
19
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(13) 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 function for purposes of FASB ASC 280 consists of our President and Chief Executive Officer and our Executive Chairman.
While our results of operations are primarily reviewed on a consolidated basis, the chief operating decision makers also manage 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.
Mobile data communications products and services substantially relate to our support of the U.S. Army's BFT-1 and 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.
Segment information is presented in the tables below:
Three months ended April 30, 2015 | |||||||||||||||||
Telecommunications Transmission | RF Microwave Amplifiers | Mobile Data Communications | Unallocated | Total | |||||||||||||
Net sales | $ | 45,642,000 | 19,676,000 | 6,315,000 | — | $ | 71,633,000 | ||||||||||
Operating income (loss) | 7,283,000 | 1,254,000 | 2,642,000 | (4,019,000 | ) | 7,160,000 | |||||||||||
Interest income and other (expense) | (6,000 | ) | 6,000 | 4,000 | 103,000 | 107,000 | |||||||||||
Interest expense | 72,000 | — | — | — | 72,000 | ||||||||||||
Depreciation and amortization | 2,198,000 | 940,000 | 78,000 | 1,255,000 | 4,471,000 | ||||||||||||
Expenditure for long-lived assets, including intangibles | 403,000 | 117,000 | 149,000 | 19,000 | 688,000 | ||||||||||||
Total assets at April 30, 2015 | 237,811,000 | 95,217,000 | 6,213,000 | 134,554,000 | 473,795,000 | ||||||||||||
20
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 | ||||||||||||
Nine months ended April 30, 2015 | |||||||||||||||||
Telecommunications Transmission | RF Microwave Amplifiers | Mobile Data Communications | Unallocated | Total | |||||||||||||
Net sales | $ | 150,865,000 | 60,086,000 | 18,875,000 | — | $ | 229,826,000 | ||||||||||
Operating income (loss) | 26,498,000 | 3,286,000 | 8,218,000 | (12,000,000 | ) | 26,002,000 | |||||||||||
Interest income and other (expense) | (61,000 | ) | (19,000 | ) | 10,000 | 351,000 | 281,000 | ||||||||||
Interest expense | 208,000 | — | — | 198,000 | 406,000 | ||||||||||||
Depreciation and amortization | 6,607,000 | 2,725,000 | 220,000 | 3,668,000 | 13,220,000 | ||||||||||||
Expenditure for long-lived assets, including intangibles | 1,683,000 | 791,000 | 293,000 | 66,000 | 2,833,000 | ||||||||||||
Total assets at April 30, 2015 | 237,811,000 | 95,217,000 | 6,213,000 | 134,554,000 | 473,795,000 | ||||||||||||
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 | ||||||||||||
21
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Unallocated expenses result from such corporate expenses as executive compensation, accounting, legal and other regulatory compliance related costs. In addition, unallocated expenses for the three and nine months ended April 30, 2015 and 2014 include $1,244,000 and $3,642,000, respectively, and $1,070,000 and $3,086,000, respectively, of stock-based compensation expense. Interest expense for the three and nine months ended April 30, 2014 primarily reflects interest on our 3.0% convertible senior notes which were settled in May 2014. Interest expense for both the nine months ended April 30, 2015 and 2014 includes interest on a committed $100,000,000 secured revolving credit facility that expired on October 31, 2014 and amortization of deferred financing costs, neither of which is allocated to the operating segments. Depreciation and amortization includes amortization of stock-based compensation. In addition, unallocated expenses for the nine months ended April 30, 2015 include $585,000 of expenses related to our strategic alternatives analysis which we concluded in December 2014. There were no such expenses during the three months ended April 30, 2015 or the three and nine months ended April 30, 2014. Unallocated assets at April 30, 2015 consist principally of cash and deferred tax assets.
Intersegment sales for the three months ended April 30, 2015 and 2014 by the telecommunications transmission segment to the RF microwave amplifiers segment were $824,000 and $521,000, respectively. Intersegment sales for the nine months ended April 30, 2015 and 2014 by the telecommunications transmission segment to the RF microwave amplifiers segment were $1,833,000 and $1,286,000, respectively.
Intersegment sales for the three months ended April 30, 2015 and 2014 by the telecommunications transmission segment to the mobile data communications segment were $127,000 and $41,000, respectively. Intersegment sales for the nine months ended April 30, 2015 and 2014 by the telecommunications transmission segment to the mobile data communications segment were $464,000 and $213,000, respectively.
Intersegment sales for the three and nine months ended April 30, 2014 by the RF microwave amplifiers segment to the telecommunications transmission segment were $3,000 and $137,000, respectively. There were no intersegment sales for the three and nine months ended April 30, 2015 by the RF microwave amplifiers segment to the telecommunications transmission segment.
Substantially all of our long-lived assets are located in the U.S. and all intersegment sales are eliminated in consolidation and are excluded from the tables above.
In December 2014, our Board of Directors named a new President and Chief Executive Officer, succeeding our former President and Chief Executive Officer who is currently serving as Executive Chairman of our Board of Directors. Our new President and Chief Executive Officer was, and continues to be, a member of our Board of Directors. In March 2015, our President and Chief Executive Officer initiated an assessment of our operations to determine if changes in our business approach or operations would help us better serve our customers and potentially reduce our annual operating expenses. In connection with this review, in May 2015, we formed a joint venture consisting solely of our domestic operating subsidiaries whose main purpose is to further facilitate collaboration and allow us to propose on new opportunities (such as large U.S. government solicitations) with a unified approach. We also expanded, and expect to continue to expand, our corporate marketing and business development function to enhance our focus on existing and untapped market opportunities. This assessment of our operations is continuing and future changes may result in a change in our management approach which in turn may change the way we define our reportable operating segments, as such terms are defined by FASB ASC 280.
(14) Goodwill
The carrying amount of goodwill by segment as of April 30, 2015 and July 31, 2014 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 | ||||||||
22
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In accordance with FASB ASC 350, “Intangibles - Goodwill and Other,” we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods.
On August 1, 2014 (the first day of our fiscal 2015), we performed a qualitative assessment (commonly referred to as a "Step Zero" test) to determine if it was more likely than not that the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we evaluated overall business and macroeconomic conditions since the date of our last quantitative assessment, which was on August 1, 2013. We also considered in our qualitative assessment, among other things, expectations of projected revenues and cash flows, assumptions impacting the weighted average cost of capital, trends in market multiples, changes in our stock price and changes in the carrying values of our reporting units with goodwill. In addition, we also considered that our last quantitative assessment utilized sensitized revenue projections to account for our belief that global business conditions were expected to be volatile over the projected period. Based on this evaluation, we concluded that our goodwill was likely not impaired and we did not perform a quantitative Step One assessment. In the future, we will either perform a qualitative Step Zero assessment or a quantitative Step One assessment. A quantitative Step One assessment involves determining the fair value of each reporting unit using market participant assumptions. If we believe that the carrying value of a reporting unit with goodwill exceeds its estimated fair value, we will perform a quantitative Step Two assessment. 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, each of our three operating segments constitutes a reporting unit and we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the reporting unit.
During both our second and third quarters of fiscal 2015, we experienced significant softness in bookings for our satellite earth station products in many geographic regions, in particular Russia and certain Middle Eastern countries. We believe that order flow from our customers in certain oil producing countries has been negatively impacted by volatile business conditions including a decline in oil prices and the strength of the U.S. dollar, the currency in which virtually all of our sales are denominated. Both lower oil prices and a stronger U.S. dollar lower the purchasing power of many of our international customers. Although it is difficult to gauge when our bookings will increase from current levels, we believe that the ongoing softness in bookings for our satellite earth station products we have experienced is short-term. In addition to softness in orders for our satellite earth station products, we have experienced a significant shift of revenues and operating income associated with several large over-the-horizon microwave system opportunities, related to both the U.S. government and new international customers, from fiscal 2015 to fiscal 2016.
If assumed revenue growth is not achieved in future periods, our telecommunications transmission and RF microwave amplifiers reporting units could be at risk of failing Step One of the goodwill impairment test and goodwill and intangibles assigned to the respective reporting units could be impaired. If our estimates or related assumptions change or other events and circumstances change (e.g., 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 in future periods.
We continue to operate in difficult business conditions (both in the U.S. and internationally) and such conditions 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. In addition, 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 the fourth quarter of fiscal 2015.
As discussed in "Note (13) Segment Information," our Board of Directors named a new President and Chief Executive Officer, succeeding our former President and Chief Executive Officer who is currently serving as Executive Chairman of our Board of Directors. The annual goodwill impairment assessment is based on several factors requiring judgment and is based on how our President and Chief Executive Officer and our Executive Chairman manage the business.
23
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In March 2015, our President and Chief Executive Officer initiated an assessment of our operations to determine if changes in our business approach or operations would help us better serve our customers and potentially reduce our annual operating expenses. In connection with this review, we may, in the future, change our management approach which in turn may change the way we define our reporting units, as such term is defined by FASB ASC 350. A change in our management approach may require us to perform an interim goodwill impairment test and ultimately record impairment charges in a future period.
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2015 (the start of our fiscal 2016). Any impairment charges that we may record in the future could be material to our results of operations and financial condition.
(15) Intangible Assets
Intangible assets with finite lives as of April 30, 2015 and July 31, 2014 are as follows:
April 30, 2015 | |||||||||||||
Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Technologies | 11.8 | $ | 47,370,000 | 38,533,000 | $ | 8,837,000 | |||||||
Customer relationships | 10.0 | 29,831,000 | 20,244,000 | 9,587,000 | |||||||||
Trademarks and other | 20.0 | 5,794,000 | 2,680,000 | 3,114,000 | |||||||||
Total | $ | 82,995,000 | 61,457,000 | $ | 21,538,000 | ||||||||
July 31, 2014 | |||||||||||||
Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Technologies | 11.8 | $ | 47,370,000 | 36,240,000 | $ | 11,130,000 | |||||||
Customer relationships | 10.0 | 29,831,000 | 18,031,000 | 11,800,000 | |||||||||
Trademarks and other | 20.0 | 5,794,000 | 2,504,000 | 3,290,000 | |||||||||