contractor mentioned above, during the nine months ended April 30, 2005 and 2004 represented 11.5% and 15.9%, respectively, of consolidated net sales. Gross Profit. Gross profit was $88.9 million and $62.2 million for the nine months ended April 30, 2005 and 2004, respectively, representing an increase of $26.7 million. The increase in gross profit was primarily attributable to the increase in net sales and the gross margin percentage, which increased from 37.9% for the nine months ended April 30, 2004 to 42.4% for the nine months ended April 30, 2005. The nine months ended April 30, 2005 include favorable cumulative gross margin adjustments on two large over-the-horizon microwave system contracts and the MTS contract and the MTS prepaid service time adjustment, as discussed above, which had an aggregate impact of $5.8 million on gross profit compared to favorable cumulative gross margin adjustments during the nine months ended April 30, 2004 of $0.6 million. Excluding the sales and gross profit relating to prior periods from these adjustments, our gross margin percentage still improved dramatically due to increased operating efficiencies. Included in cost of sales for the nine months ended April 30, 2005 and 2004 are provisions for excess and obsolete inventory of $1.3 million and $1.0 million, respectively. As discussed under“Critical Accounting Policies - Provisions for Excess and Obsolete Inventory,” we regularly review our inventory and record a provision for excess and obsolete inventory based on historical usage assumptions and other factors. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $36.1 million and $26.2 million for the nine months ended April 30, 2005 and 2004, respectively, representing an increase of $9.9 million or 37.8%. The increase in expenses is primarily attributable to (i) the increased level of net sales in all three of our business segments, (ii) expenses associated with the Memotec and Tolt businesses that were acquired in May 2004 and February 2005, respectively, and (iii) ongoing costs of compliance with recent governance regulations. As a percentage of consolidated net sales, selling, general and administrative expenses were 17.2% and 15.9% for the nine months ended April 30, 2005 and 2004, respectively. Research and Development Expenses. Research and development expenses were $15.2 million and $11.2 million for the nine months ended April 30, 2005 and 2004, respectively, representing an increase of $4.0 million or 35.7%. Approximately $13.1 million and $10.3 million of such amounts, respectively, related to our telecommunications transmission segment. As an investment for the future, we are continually enhancing our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2005 and 2004, customers reimbursed us $2.6 million and $3.8 million, respectively, which is not reflected in the reported research and development expenses, but is included in consolidated net sales with the related costs included in cost of sales. Amortization of Intangibles. Amortization of intangibles for the nine months ended April 30, 2005 and 2004 was $1.7 million and $1.5 million, respectively. The increase was attributable to the Memotec and Tolt acquisitions. Operating Income. Operating income for the nine months ended April 30, 2005 and 2004 was $35.9 million and $23.4 million, respectively. The $12.5 million or 53.4% increase was the result of the higher net sales and gross profit, discussed above, partially offset by higher operating expenses. Operating income in our telecommunications transmission segment increased to $28.1 million for the nine months ended April 30, 2005 from $21.6 million for the nine months ended April 30, 2004 as a result of increased sales and associated operating efficiencies, as well as $2.5 million of incremental benefit in the fiscal 2005 period compared to the fiscal 2004 period relating to favorable cumulative gross margin adjustments on two large over-the-horizon microwave systems. Our mobile data communications segment generated operating income of $10.1 million for the nine months ended April 30, 2005 compared to $6.1 million for the nine months ended April 30, 2004 as a result of increased sales and associated operating efficiencies and the impact ($2.0 million on operating income) of the cumulative adjustments discussed above in “Gross Profit,” partially offset by increased operating costs, including expenses associated with Tolt and our continued initiation of commercial marketing efforts. Operating income in our RF microwave amplifiers segment increased to $3.5 million for the nine months ended April 30, 2005 from $0.6 million for the nine months ended April 30, 2004 primarily as a result of the significant increase in net sales. Unallocated operating expenses increased to $5.9 million for the nine months ended April 30, 2005 from $5.0 million for the nine months ended April 30, 2004, due primarily to increased compensation expense and increased costs in connection with recent corporate governance regulations. |