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| ISYS > SEC Filings for ISYS > Form 10-Q on 13-Feb-2004 | All Recent SEC Filings |
13-Feb-2004
Quarterly Report
Overview
Integral Systems, Inc. builds satellite ground systems for command and control, integration and test, data processing, and simulation. Since its inception in 1982, the Company has provided ground systems for over 190 different satellite missions for communications, science, meteorology, and earth resource applications. The Company has an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers, and aerospace systems integrators.
The Company has developed innovative software products that reduce the cost and minimize the development risk associated with traditional custom-built systems. The Company believes that it was the first to offer a comprehensive COTS (Commercial Off-the-Shelf) software product line for command and control. As a systems integrator, the Company leverages these products to provide turnkey satellite control facilities that can operate multiple satellites from any manufacturer. These systems offer significant cost savings for customers that have traditionally purchased a separate custom control center for each of their satellites.
Through its wholly owned subsidiary SAT, acquired in August 2000, the Company also offers turnkey systems and software for satellite and terrestrial communications signal monitoring.
In March 2001, the Company formed a wholly owned subsidiary, ISI Europe, with headquarters in Toulouse, France. ISI Europe serves as the focal point for the support of all of Integral's European business.
On January 30, 2002, the Company acquired Newpoint. Newpoint provides equipment monitoring and control software to satellite operators and the telecommunications industry.
In October 2002, the Company acquired RT Logic. RT Logic manufactures telemetry processing components and systems for military applications, including tracking stations, control centers, and range operations.
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COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
Results of Operations
The components of the Company's income statement as a percentage of revenue are depicted in the following table for the three months ended December 31, 2003 and December 31, 2002:
Three Months Ended December 31,
--------------------------------------------------------------------------------
% of % of
2003 Revenue 2002 Revenue
--------------- ------------- --------------- -------------
(in thousands) (in thousands)
Revenue $ 20,054 100.0 $ 19,570 100.0
Cost of Revenue 13,430 67.0 13,953 71.3
-- ------------ - ------------- - -- ------------ - ------------- -
Gross Margin 6,624 33.0 5,617 28.7
Operating Expenses
Selling, General & Admin. (SG&A) 2,857 14.3 2,735 14.0
Research and Development 791 3.9 530 2.7
Product Amortization 761 3.8 747 3.8
Amortization-Intangible Assets 322 1.6 322 1.6
-- ------------ - ------------- - -- ------------ - ------------- -
Income from Operations 1,893 9.4 1,283 6.6
Other Income (Expense) (net) (30 ) (0.1 ) (7 ) (0.1 )
Income Before Income Taxes 1,863 9.3 1,276 6.5
Income Taxes 689 3.4 426 2.2
-- ------------ - ------------- - -- ------------ - ------------- -
Net Income $ 1,174 5.9 $ 850 4.3
-- ------------ - ------------- - -- ------------ - ------------- -
Revenue
The Company earns revenue, both as a prime contractor and a subcontractor, from sales of its products and services through contracts that are funded by the U.S. Government as well as commercial and international organizations.
For the three months ended December 31, 2003 and 2002, the Company's revenues were generated from the following sources:
Three Months Ended
December 31,
-----------------------
Revenue Type 2003 2002
--------------------------- -------- --------
Government Revenue
NOAA 16 % 27 %
Air Force 53 45
Other U.S. Government Users 7 5
-------- -- -------- -
Subtotal 76 77
Commercial Revenue 24 23
-------- -- -------- -
Total 100 % 100 %
-------- -- -------- -
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On a consolidated basis, revenue increased 2.5%, or $480,000, to $20.1 million for the three months ended December 31, 2003, from $19.6 million for the three months ended December 31, 2002. Revenue for the three-month periods ended December 31, 2003 and 2002 for each of the Company's segments is shown in the following table:
Three Months Three Months
Ended Ended Increase/
Dec. 31, 2003 Dec. 31, 2002 (Decrease)
Segment (in thousands) (in thousands) (in thousands)
-------------------------------------------------- --------------- --------------- ----------------
Revenue
Satellite Ground Systems (Integral) $ 14,168 $ 15,007 $ (839 )
Satellite & Terrestrial CSM (SAT) 1,189 486 703
Equip. Monitoring & Control (Newpoint) 611 853 (242 )
Space Communication Systems (RT Logic) 5,314 4,335 979
Elimination (1,228 ) (1,111 ) (117 )
-- ------------ - -- ------------ - --- ------------ -
Total Revenue $ 20,054 $ 19,570 $ 484
-- ------------ - -- ------------ - --- ------------ -
Revenue decreases in the Company's Satellite Ground Systems segment pertain to continued depressed conditions in the overall commercial satellite market which caused revenues from the Company's commercial clients to decrease approximately $1.0 million between the quarters being compared. Revenues derived from the Company's NOAA customer also decreased by approximately $1.9 million between the periods being compared due to decreased orders from this Government customer. Offsetting these decreases were approximately $1.0 million in increased revenues resulting from the Company's contracts with the U.S. Air Force (specifically the CCS-C and SCNC programs) that were awarded in the Spring of 2002. The Company also recorded approximately $700,000 of revenue during the three months ended December 31, 2003 relating to its newly established Antenna division. There were no such revenues recorded during the corresponding three-month period last fiscal year.
Revenue increases for SAT and RT Logic resulted from increased order bookings, while revenue decreases at Newpoint resulted from late deliveries by equipment suppliers for Newpoint's Mercury product.
Despite the year-to-year variances, revenue levels for all Company operations are generally on target with Company guidance provided to investors in December 2003 and are consistent with internally generated operating plans.
Cost of Revenue/Gross Margin
The Company computes gross margin by subtracting cost of revenue from revenue. Included in cost of revenue are direct labor expenses, overhead charges associated with the Company's direct labor base and other costs that can be directly related to specific contract cost objectives, such as travel, consultants, equipment, subcontracts and other direct costs.
Gross margins on contract revenues vary depending on the type of product or service provided. Generally, license revenues related to the sale of the Company's COTS products have the greatest gross margins because of the minimal associated marginal costs to produce. By contrast, gross margins rates for equipment and subcontract pass-throughs seldom exceed 15%. Engineering service gross margins typically range between 20% and 40%. These definitions and ratios generally apply across all segments, although margins on equipment costs for RT Logic are generally greater than the equipment margins in the other segments because RT Logic's business is more hardware intensive.
During the three months ended December 31, 2003, cost of revenue decreased by 3.7% or $520,000, compared to the same period during the prior year, decreasing from $13.9 million during the three months ended December 31, 2002 to $13.4 million during the three months ended December 31, 2003. Gross margin increased from $5.6 million to $6.6 million, an increase of $1.0 million, or 17.9% during the
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periods being compared. Cost of revenue and gross margin for the three months ended December 31, 2003 and 2002 for each of the Company's segments are shown in the following table:
Three Months Three Months
Ended Ended Increase/
Dec. 31, 2003 Dec. 31, 2002 (Decrease)
Segment (in thousands) (in thousands) (in thousands)
------------------------------------------------- --------------- --------------- ----------------
Cost of Revenue
Satellite Ground Systems (Integral) $ 11,430 $ 11,957 $ (527 )
Satellite & Terrestrial CSM (SAT) 634 250 384
Equip. Monitoring & Control (Newpoint) 233 704 (471 )
Space Communication Systems (RT Logic) 2,350 2,145 205
Elimination (1,217 ) (1,103 ) (114 )
-- ------------ - -- ------------ - --- ------------ -
Total Cost of Revenue $ 13,430 $ 13,953 $ (523 )
-- ------------ - -- ------------ - --- ------------ -
Gross Margin
Satellite Ground Systems (Integral) $ 2,738 $ 3,050 $ (312 )
Satellite & Terrestrial CSM (SAT) 555 236 319
Equip. Monitoring & Control (Newpoint) 378 148 230
Space Communication Systems (RT Logic) 2,964 2,190 774
Elimination (11 ) (8 ) (3 )
-- ------------ - -- ------------ - --- ------------ -
Total Gross Margin $ 6,624 $ 5,616 $ 1,008
-- ------------ - -- ------------ - --- ------------ -
The lower gross margin for the Company's Satellite Ground Systems segment is primarily attributable to three factors, all of which are believed by the Company to be non-recurring in nature:
• An overrun on a fixed price contract with NOAA amounting to
approximately $260,000 in the current quarter. The current quarter
loss is additive to the losses on the same contract amounting to
approximately $800,000 recorded last fiscal year.
• Lower quarterly license revenues compared to the same quarter
last fiscal year. Based on current license backlog, license
revenue for fiscal year 2004 in its entirety is expected to
exceed license revenue for fiscal year 2003.
• Cost growth on certain commercial fixed price contracts resulting
in lower gross margins during the current quarter.
As a result of the above, gross margin as a percentage of revenue for the Satellite Ground Systems segment declined from 20.3% to 19.3%.
The increase in gross margin at SAT is due to the increase in revenue noted above, while the increased Gross Margin at Newpoint relates to the effect of cost-cutting measures implemented at the end of fiscal year 2003.
The increase in gross margin at RT Logic pertains to increased revenue levels and a higher content of production oriented contracts that typically generate higher gross margins for this segment than non-production oriented jobs.
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Operating Expenses
Operating Expenses for the three months ended December 31, 2003 and 2002 for each of the Company's segments are shown in the following table:
Three Months Three Months
Ended Ended Increase/
Dec. 31, 2003 Dec. 31, 2002 (Decrease)
Segment (in thousands) (in thousands) (in thousands)
------------------------------------------------ ---------------- ---------------- ----------------
Operating Expenses
Satellite Ground Systems (Integral)
SG&A $ 1,858 $ 1,543 $ 315
R&D 44 30 14
Amortization 611 597 14
Total Satellite Ground Systems (Integral) 2,513 2,170 343
Satellite & Terrestrial CSM (SAT)
SG&A 164 326 (162 ) R&D 203 342 (139 ) Amortization 151 151 0 Total Satellite & Terrestrial CSM (SAT) 518 819 (301 )Equip. Monitoring & Control (Newpoint)
SG&A 268 281 (13 ) R&D 75 0 75 Amortization 31 31 0 Total Equip. Monitoring & Control (Newpoint) 374 312 62Space Communication Systems (RT Logic)
SG&A 579 595 (16 ) R&D 470 158 312 Amortization 291 291 0 Total Space Communication Systems (RT Logic) 1,340 1,044 296
Elimination (14 ) (11 ) (3 )
--- ------------ - --- ------------ - --- ------------ -
Total Operating Expenses $ 4,731 $ 4,334 $ 397
--- ------------ - --- ------------ - --- ------------ -
In the Company's Satellite Ground Systems segment, SG&A expenses increased by approximately $315,000 during the periods being compared. The increase principally pertains to increased marketing and proposal costs relating to new Air Force opportunities. The Company also recorded a bad debt provision of $100,000 during the current three-month period. R&D expenses for this segment were immaterial for both three-month periods. Product amortization increased nominally during the three months ended December 31, 2003 as compared to the three months ended December 31, 2002 due to higher capitalized development costs related to the Company's EPOCH product line.
At SAT, period-to-period operating costs are down approximately $300,000 due to the continuation of cost cutting measures implemented by the Company.
Newpoint's current period SG&A expenses are flat relative to last year's first quarter SG&A expenses while R&D spending increased $75,000 (from zero last fiscal year) due to new product undertakings at this segment.
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RT Logic's current period SG&A expenses are flat relative to last year's first quarter SG&A expenses while R&D spending increased approximately $310,000 due to new product undertakings at this segment.
The current and prior period amortization expenses for both Newpoint and RT Logic relate to the amortization of intangible assets that arose from purchase accounting entries made at the time of each company's acquisition by the Company.
Income from Operations
Income from Operations for the three months ended December 31, 2003 and 2002 for each of the Company's segments is shown in the following table:
Three Months Three Months
Ended Ended Increase/
Dec. 31, 2003 Dec. 31, 2002 (Decrease)
Segment (in thousands) (in thousands) (in thousands)
------------------------------------------------ ---------------- ---------------- ----------------
Income from Operations
Satellite Ground Systems (Integral) $ 225 $ 880 (655 )
Satellite & Terrestrial CSM (SAT) 37 (582 ) 619
Equip. Monitoring & Control (Newpoint) 4 (164 ) 168
Space Communication Systems (RT Logic) 1,624 1,146 478
Elimination 3 3 0
--- ------------ --- ------------ - --- ------------ -
Total Income from Operations $ 1,893 $ 1,283 $ 610
--- ------------ --- ------------ - --- ------------ -
Income from operations during the periods compared decreased by almost $660,000 in the Company's Satellite Ground Systems segment as a result of decreased gross margins described above coupled with increased operating expenses. SAT and Newpoint both posted modest operating profits for the current quarter compared to operating losses for the quarter ended December 31, 2002. Both segments benefited from the effects of prior year cost-cutting measures, while SAT also enjoyed increased revenues for the current period.
RT Logic had increased income from operations due to higher gross margins as described above, partially offset by increased R&D spending.
Other Income/Expense
The changes in other income and expense between the quarters being compared are immaterial.
Income Before Income Taxes/Net Income
Income before income taxes increased by approximately $600,000 to $1.9 million from $1.3 million between the two periods being compared principally due to the increases in income from operations described above.
The Company's effective tax rate increased from 33.3% for the three months ended December 31, 2002 to 37.0% for the three months ended December 31, 2003 principally due to a lower portion of tax exempt income compared to total income.
As a result of the above, net income increased to approximately $1.2 million during the three months ended December 31, 2003 from $850,000 during the three months ended December 31, 2002.
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OUTLOOK
This outlook section contains forward-looking statements, all of which are based on current expectations. There is no assurance that the Company's projections will in fact be achieved and these projections do not reflect any acquisitions or divestitures which may occur in the future. Reference should be made to the various important factors listed under the heading "Forward-Looking Statements" that could cause actual future results to differ materially.
At this time, the Company has a backlog of work to be performed and it may receive additional contract awards based on proposals in the pipeline, although the estimated backlog under the Company's government contracts is not necessarily indicative of revenues that will actually be realized under the contract. Management believes that operating results for future periods will improve based on the following assumptions:
• Demand for satellite technology and related products and services
will continue to expand; and
• Sales of its software products and engineering services will
continue to increase.
As disclosed in its Form 10-K for the fiscal year ending September 30, 2003 the Company was anticipating growth in revenue, operating income, net income, and fully diluted earnings per common share for fiscal year 2004 in its entirety of approximately 10%, 20%, 35%, and 35% respectively over FY03 levels. Although operating income, net income and fully diluted earnings per common share were all slightly less than the Company's internal plan for the three months ended December 31, 2003, the Company believes that it is still on target to meet these previously announced goals for fiscal year 2004 in its entirety.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in 1982, it has been profitable on an annual basis and has generally financed its working capital needs through internally generated funds, supplemented by borrowings under the Company's general line of credit facility with a commercial bank and the proceeds from the Company's initial public offering in 1988. In June 1999, the Company supplemented its working capital position by raising approximately $19.7 million (net) through the private placement of approximately 1.2 million shares of its common stock. In February 2000, the Company raised an additional $40.9 million (net) for use in connection with potential acquisitions and other general corporate purposes through the private placement of 1.4 million additional shares of its common stock. With respect to the capital raised in the private placements, at December 31, 2003, $18.0 million was invested in variable rate State of Maryland debt securities, $10.0 million was invested in Banc of America Preferred Funding Corporation "Dividends Received Eligible Auction Market" preferred stock ("DREAMS"), and $85,000 was invested in common stock of independent third party companies.
For the three months ended December 31, 2003, the Company generated approximately $3.7 million of cash from operating activities and used approximately $710,000 in investing activities. Included in the $710,000 of investing activities is approximately $620,000 used for newly capitalized software development costs, $290,000 used for the purchase of fixed assets, and $170,000 provided by the sale of marketable securities.
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The Company has a line of credit agreement with a local bank for $10.0 million for general corporate purposes. Borrowings under the line are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to 2.4% based on the ratio of funded debt to earnings before interest, taxes and depreciation (EBITDA). The line of credit is secured by the Company's billed and unbilled accounts receivable and has certain financial covenants, including minimum net worth and liquidity ratios. The line expires February 29, 2004. The Company had no balance outstanding at December 31, 2003 under the line of credit. The Company is in the process of renewing the line of credit.
On December 3, 2003, the Company's Board of Directors declared a dividend of three cents per share for stockholders of record as of December 15, 2003. The dividend was paid on January 5, 2004 in the amount of $291,966. The Company has also announced that its Board of Directors has declared a cash dividend of $.03 per share to all stockholders of record as of the close of business on March 3, 2004. The dividend is scheduled to be paid on or about March 30, 2004.
The Company also has access to a $2.0 million equipment lease line of credit that had a balance of approximately $85,000 at December 31, 2003. The outstanding balance is payable over a 29-month period from lease inception and bears interest at a rate of 8.8% per annum.
The Company currently anticipates that its current cash balances, amounts available under its lines of credit and net cash provided by operating activities will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. The Company plans to continue to invest in the on-going development and improvement of its current software products, EPOCH and OASYS, as well as the development of new products through the use of its current cash balances and cash provided by operating activities. The Company believes that the investment in product development for EPOCH and OASYS will be less in fiscal year 2004 than it was in fiscal year 2003.
The Company believes that inflation did not have a material impact on the Company's revenues or income from operations during the three months ended December 31, 2003 or in past fiscal years.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no "off-balance sheet arrangements" as such term is defined in Item 303(a)(4)(ii) of Regulation S-K.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations section, in other parts of this 10-Q, and in this section, including those under the headings "Outlook" and "Liquidity and Capital Resources," are forward looking. In addition, from time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "believe", "expect", "anticipate", "estimate", "continue", or other similar words, including statements as to the intent, belief, or current expectations of the Company and its directors, officers, and management with respect to the Company's future operations, performance, or positions or which contain other forward-looking information. These forward-looking statements are predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. While the Company believes that these statements are and will be accurate, a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's statements. The Company's business is dependent upon general economic conditions and upon various conditions
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specific to its industry, and future trends cannot be predicted with certainty. Particular risks and uncertainties that may effect the Company's business, other than those described elsewhere herein or in our other filings with the Securities and Exchange Commission (the "SEC" or the "Commission"), include the following:
• A significant portion of the Company's revenue is derived from
contracts or subcontracts funded by the U.S. Government, which are
subject to termination without cause, government regulations and
audits, competitive bidding, and the budget and funding process of
the U.S. Government.
• The presence of competitors with greater financial resources and
their strategic response to the Company's new services.
• The potential obsolescence of the Company's services due to the
introduction of new technologies.
• The response of customers to the Company's marketing strategies and services.
• The Company's commercial contracts are subject to strict performance
and other requirements.
• The intense competition in the satellite ground system industry
could harm the Company's financial performance.
• Risks related to the Company's acquisition strategy. In particular, the Company may not be able to find any attractive candidates or it
may find that the acquisition terms proposed by potential
acquisition candidates are not favorable to the Company. In
addition, the Company may compete with other companies for these
acquisition candidates, which competition may make an acquisition
more expensive for the Company. If the Company is unable to
identify and acquire any suitable candidates, the Company may not
be able to find alternative uses for the cash proceeds of its
previous private placements that improve the Company's business,
financial conditions, or results of operations to the extent that
an acquisition could. In addition, the integration of the acquired
business or businesses may be costly and may result in a decrease
in the value of the Company's common stock for the following
reasons, among others:
• the Company may not adequately assess the risks inherent in a
particular acquisition candidate or correctly assess the candidate's
potential contribution to the Company's financial performance;
• the Company may need to divert more management resources to
integration than it planned, which may adversely affect its ability
to pursue other more profitable activities;
• the difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations, integrating
personnel with disparate backgrounds and combining different corporate
cultures;
• the Company may not eliminate as many redundant costs as it
anticipated in selecting acquisition candidates; and an acquisition
candidate may have liabilities or adverse operating issues that the
Company failed to discover through its due diligence prior to the
acquisition.
• Changes in activity levels in the Company's core markets.
• The Company may not be able to effectively manage any continued growth.
• The business is subject to risks associated with international transactions.
• The Company depends upon intellectual property rights and risk
having our rights infringed.
• The estimated backlog is not necessarily indicative of revenues
that will actually be realized under the contracts.
Table of Contents • The Company's quarterly operating results may vary significantly from
quarter to quarter.
• The market price of the Company's common stock may be volatile.
While sometimes presented with numerical specificity, these forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which although considered reasonable by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company's forward-looking statements, many of which are subject to significant uncertainties and contingencies beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of this document. These forward-looking statements are based on current information and expectation, and the Company assumes no obligation to update. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular forward-looking statement should not be regarded as a representation by the Company or any other person that these estimates will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.
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