We have filed additional patent applications for certain apparatus and processes we believe we have invented covering key features of the location services, wireless text alerts, SMS Center, mobile-originated data and E911 network software. There is no assurance that ourany patent applicationsapplication will result in a patent being issued by the U.S. Patent and Trademark Office or other patent offices, nor is there any guarantee that any issued patent will be valid and enforceable. Additionally, foreign patent rights may or may not be available or pursued in any technology area for which U.S. patent applications have been filed.
Our businesses are highly competitive and are characterized by rapid technological change. Some of our competitors are substantially larger, have significantly greater financial, marketing, research and development, technological and operating resources and broader product lines than we have. Other companies are developing new technologies and the shift towards open standards such as IP-based satellite networks will likely result in increased competition. A significant technological breakthrough by others, including new companies, our existing competitors and our customers, could have a material adverse effect on our business. Our growth and financial conditionfuture success depends on, among other things, our ability to keep pace with such changes and developments and to respond to the increasing variety of electronic equipment users and transmission technologies.
Some large defense-based companies, such as Northrop Grumman Corporation, have subsidiaries or divisions that compete against us in one or more business segments. In addition, new and potential competitors are always emerging. Certain of our customers, such as prime contractors who currently outsource their engineering and manufacturing requirements to us, have technological capabilities in our product areas and could choose to replace our products with products they develop. In some cases, we partner or team with companies (both large and mid-tier) to compete against other teams for large defense programs. In some cases, these same companies may be among our competitors.
Listed below, in alphabetical order, are some of our competitors in each of our two business segments:
Corporate Responsibility and Sustainability
We recognize the need for driving corporate responsibility within our organization, throughout our supplier network and in our communities. To drive this responsibility, we will continue to target effective corporate governance, ethical behavior in the workplace and social responsibility, while also updating and enhancing this focus with initiatives, such as:
•refreshing the roles and responsibilities of the committees of our Board of Directors, including with the establishment of an Environment, Social and Governance ("ESG") task force supervised by our Board of Directors,
•developing a company-wide People Strategy to foster and promote workplace talent and diversity, and
•organizing a company-wide strategic sourcing group that will be accountable for tracking and driving resource reduction targets, such as resource-efficient manufacturing, reduction of hazardous substances, and take-back, recycling and reuse of products.
Human Capital
We realize that our employees are one of our most valuable assets and believe our success depends on the talent we attract and retain, which is why we are developing what we call our People Strategy. We are passionate about building meaningful employee engagement and happiness in a variety of ways that will be addressed in our People Strategy, including providing a foundation for a diverse, inclusive and equitable workplace where employees feel they belong; developing and promoting talent; supporting a competitive benefits program; and enforcing the importance of our employees’ health, safety and wellness.
Diversity, Equity, Inclusion and Belonging
We believe a diverse, equitable, inclusive workplace is critical to our ability to develop innovative solutions and is key to the future of our success. We encourage employees to be inspired and strive for them to feel like they belong. We focus on expanding our diverse workforce by reaching out to institutions promoting the employment of minorities, attending recruiting events aimed at attracting talent of diverse heritage and veteran backgrounds, as well as by considering diversity of our workforce during our talent, promotion, and succession planning. Through these and other efforts, during fiscal 2022, two additional female executives were hired onto our executive leadership team, including our first female Chief Operating Officer. Three female professionals were also recently appointed to our Board of Directors ("Board") (which currently consists of 37.5% female and 62.5% male Board members). Additionally, in fiscal 2022, a member of our executive leadership team was recognized as an honoree for diversity in business based on such individual's efforts in our organization and the community.
Our leadership team identified several company-wide diversity initiatives such as celebrating Black History Month, Asian American Pacific Islander Heritage Month, International Women’s Day and Pride Month, where employees and their families are encouraged to participate, celebrate, and showcase their views, culture, and history on our social media and company-wide communication platforms. When unique stories are celebrated, employees feel connected in meaningful ways and support each other to reach our full potential.
Employee Workforce as of July 31, 2022
| | | | | | | | | | | |
| Women | People of Color | Veterans | People with Disabilities |
| 23% | 36%* | 8% | 5% |
*People of Color include employees who identify with any race other than white.
Talent
To meet and execute our strategic business goals, we are focused on sourcing, attracting, and retaining top talent, especially those with engineering, science, and technical backgrounds. We recognize and reward performance while continually developing, engaging and retaining high-performing employees. We have made significant investments to provide ongoing training and career development by offering courses on our online learning management system. We offer job-specific skills training to promote and develop advancement within the organization and to enhance skills. Training in and compliance with our Standards of Business Conduct and Trade and FCPA compliance is also mandatory among our employees.
Through certain government contracts that we participate in, we partner with our end customer to provide enlisted, active military personnel (whose service is expected to end within 6 months) onsite training to help them with a successful transition to a civilian life. Also, in an effort to retain and attract new talent, we partner with local universities to hire interns throughout our organization. During fiscal 2022, we engaged several interns throughout the company with interests ranging from procurement, engineering, and legal practice.
Employees
At July 31, 2017,2022, we had 1,8131,993 employees (including temporary employees and contractors), 1,0751,143 of whom were engaged in production and production support, 386498 in research and development and other engineering support, and 352 in marketing and administrative functions. None of our U.S. based employees are represented by a labor union. Of our 1,993 employees, 496 employees are based outside of the United States, including 148 employees in the United Kingdom, 139 employees in India and 138 employees in Canada. We believe that our employee relations are good.
We strive to maintain a robust health, safety and wellness program to ensure a healthy work environment, promote workforce resiliency, and enhance business value. We encourage employee participation to identify opportunities for improvement and review and monitor our performance with safety committees on the local level. Local safety committees identify safety programs and ensure completion of all training and target learning objectives.
We continue to review our business models to support flexible working arrangements, where possible, to meet the needs of our employees and our business. We continue to review CDC guidelines to monitor safety measures in all facilities in light of the continuing COVID-19 pandemic.
Employee wellness is important to Comtech. All employees and their households have access to an employee assistance program, as well as a health advocate program to help with all aspects of benefits, family life, financial concerns, legal issues and transition to retirement. Assistance is available 365 days per year, 24 hours per day.
We rigorously review our benefit and compensation plans to maintain competitive packages that reflect the wellness needs of our workforce and the marketplace. These programs include 401(k) plans, health and welfare benefits, among many others. We support pay equity for all employees within the same geographic area, experience level, and performance standards.
Environment
We encourage our employees to respect our environment. To compound these efforts, we offer recycling bins at our facilities and encourage employees to use environmentally friendly commuting options such as mass transit (providing company sponsored mass transit cards) and share ride programs. Where appropriate, we also consider work from home arrangements to eliminate commuting altogether. In 2022, we celebrated Earth Day in our company by encouraging our global employees to participate in environmentally-focused initiatives and then share their activities on social media.
U.S. Government Contracts and Security Clearances
The U.S. government operates on an October-to-September fiscal year. Generally, in February of each year, the President of the United States presents to the U.S. Congress ("Congress") the proposed budget for the upcoming fiscal year and from February through September of each year, the appropriations and authorization committees of Congress review the President’s budget proposals and establish the funding levels for the upcoming fiscal year. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies. Thereafter, we can receive orders pursuant to sole-source or competitively awarded contracts, which we describe below.
The U.S. government may be unable to complete its budget process before the end of any given government fiscal year and when the fiscal budget is not approved in a timely manner, the U.S. government is required either to shut down or be funded pursuant to a so-called "continuing resolution" that authorizes agencies of the U.S. government to continue operations but does not authorize new spending initiatives, either of which could result in reduced or delayed orders or payments for products and services we provide.
Sole-source contracts are generally awarded to a single contractor without a formal competition when a single contractor is deemed to have an expertise or technology superior to that of competing contractors or when there is an urgent need by the U.S. government that cannot wait for a full competitive process. Potential suppliers compete informally through research and development and marketing efforts. Competitively-bid contracts are awarded based on a formal proposal evaluation established by the procuring agency and interested contractors prepare bids. Competitively-bid contracts are awarded after a formal bid and proposal competition among suppliers.
The U.S. government has a stated policy direction to reduce the number of sole-source contract awards across all procuring agencies. In addition, the U.S. government is increasing the use of multiple-award IDIQ contracts to increase its procurement options. IDIQ contracts allow the U.S. government to select a group of eligible contractors for the same program. When the government awards IDIQ contracts to multiple bidders under the same program, a company that has already competed to be selected as a participant in the program must subsequently compete for individual delivery orders. As a result of this U.S. government shift toward multiple award IDIQ contracts, we expect to face greater competition for future U.S. government contracts and, at the same time, greater opportunities for us to participate in program areas that we do not currently participate in.
As a U.S. government contractor and subcontractor, we are subject to a variety of rules and regulations, such as the Federal Acquisition Regulations ("FAR"). Individual agencies can also have acquisition regulations. For example, the Department of Defense implements the FAR through the Defense Federal Acquisition Regulation supplement (commonly known as "DFARs"). For all Federal government entities, the FAR regulates the phases of any product or service acquisition, including: acquisition planning, competition requirements, contractor qualifications, protection of source selection and vendor information, and acquisition procedures. In addition, the FAR addresses the allowability of supplier costs, while Cost Accounting Standards address how those costs can be allocated to contracts. The FAR also subjects suppliers to audits and other government reviews. These reviews cover issues such as cost, performance and accounting practices relating to our contracts. The government may challenge a supplier's costs and fees. Suppliers are also required to comply with the National Industrial Security Program Operating Manual which relates to requirements regardingthe handling of classified materials and programs.programs and is administered by the Defense Counterintelligence and Security Agency (“DCSA”). Suppliers who do not comply with these various regulations may lose and/or become ineligible for facility security clearances and/or participation in classified programs.
Under firm fixed-price contracts, we perform for an agreed-upon price and we can derive benefits from cost savings, but bear the risk of cost overruns. Our cost-reimbursable type contracts typically provide for reimbursement of allowable costs incurred plus a negotiated fee. Cost-plus-incentive-fee orders typically provide for sharing with the U.S. government savings accrued from orders performed for less than the target costs and costs incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost), and for the supplier to carry the entire burden of costs exceeding the negotiated ceiling price.
In fiscal 2017, $180.02022, $132.6 million or 32.7%27.2% of our consolidated net sales were to the U.S. government (including sales to prime contractors to the U.S. government). Of this amount, firm fixed-price and cost-reimbursable type contracts (including fixed-fee, incentive-fee and time and material type contracts) accounted for approximately $135.4$105.5 million and $44.6$27.1 million, respectively.
Regulatory Matters
In addition to the rules and regulations that pertain to us as a U.S. government contractor and subcontractor, we are also subject to a variety of local, state and federal governmental regulations.
Our products that are incorporated into wireless communications systems must comply with various government regulations, including those of the FCC. Our manufacturing facilities, which may store, handle, emit, generate and dispose of hazardous substances that are used in the manufacture of our products, are subject to a variety of local, state and federal regulations, including those issued by the Environmental Protection Agency. Our products are also subject to European Union directives related to the recycling of electrical and electronic equipment.
Our international sales are subject to U.S. and foreign regulations such as the Arms Export Control Act, the International Emergency Economic Powers Act ("IEEPA"), the International Traffic in Arms Regulations ("ITAR"), the Export Administration Regulations ("EAR") and the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC"). If we are unable, the Department of Commerce ("DoC") as well as other applicable laws relating to receive appropriatetrade, export authorizations incontrols and foreign corrupt practices, the future, we may be prohibited from sellingviolation of which could adversely affect our products and services internationally, which may limit our sales and have a material adverse effect on our business, results of operations and financial condition.operations. We must comply with all applicable export control laws and regulations of the U.S. and other countries. Certain of our products and systems may require licenses from U.S. government agencies for export from the U.S., and some of our products are not permitted to be exported. We cannot be certain that we will be able to obtain necessary export licenses, and such failure would materially adversely affect our operations. If we are unable to receive appropriate export authorizations in the future, we may be prohibited from selling our products and services internationally, which may limit our sales and have a material adverse effect on our business, results of operations and financial condition. In addition, in certain cases, U.S. export controls also severely limit unlicensed technical discussions, such as discussions with any persons who are not U.S. citizens or permanent residents. As a result, in cases where we may need an export license, our ability to compete against a non-U.S. domiciled foreign company that may not be subject to the same U.S. laws may be materially adversely affected. In addition, we are subject to the Foreign Corrupt Practices Act ("FCPA") and other local laws that generally bar bribes or unreasonable gifts to foreign governments or officials. Violations of these laws or regulations could result in significant sanctions, including disgorgement of profits, fines, and criminal sanctions against us, our officers, our directors, or our employees, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. A violation of any of the regulations enumerated above could materially adversely affect our business, financial condition and results of operations. Additionally, changes in regulatory requirements which could further restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the IEEPA or similar legislation could negatively impact our business.
In the past, we have self-reported violations of ITARexport control laws or regulations to the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC"), DoC and had an ITAR compliance audit performed by an independent auditor at the request of the DDTC. Although the audit found no violations of ITAR,OFAC. In addition, we committedhave made various commitments to the DDTCU.S. government agencies that oversee trade and export matters that we would enhance andwill maintain certain policies and procedures and we have establishedincluding maintaining a company-wide Office of Trade Compliance.Compliance and conducting ongoing internal assessments and reporting any future violations to those agencies.
In October 2014, we self-disclosed to OFAC that we learned during a routine assessment of the adequacy of our export control compliance procedures that we had inadvertently neglected to obtain an OFAC license for a shipment of modems to a Canadian customer who, we learned after the transaction had begun, intended to incorporate our modems in a communication system the ultimate end user of which was the Sudan Civil Aviation Authority. OFAC regulations prohibit U.S. persons from doing business directly or indirectly in Sudan and from facilitating transactions by non-U.S. persons which would be illegal if done by a U.S. person. In late 2015, OFAC issued an administrative subpoena to us seeking further information about the previous voluntarily disclosed transaction and any other transactions involving Sudan. We responded to the subpoena, including alerting OFAC to Comtech’s repair of three modems for a customer in Lebanon after which time the modems were rerouted to Sudan without Comtech’s knowledge. OFAC has not responded to our submission of further information and we cannot predict when the agency will complete its review and determine whether any violations occurred. See "Risk Factors - Risks Related to our Business-Our international sales and operations are subject to risks of conducting business in foreign countries, including applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations. We cannot be certain that we will be able to obtain necessary export licenses, and such failure would materially adversely affect our operations."
Our financial reporting, corporate governance, public disclosure and compliance practices are governed by laws such as the Sarbanes-Oxley Act of 2002, Dodd-Frank Act of 2010, and rules and regulations issued by the SEC. The SEC has adopted rules which require, among other things, public companies to conduct certain inquiries to determine whether or not Conflict Minerals (as that term is defined in the SEC rules) that are necessary to the functionality of their manufactured products or their product's production processes originated in a Covered Country (as that term is defined in the SEC rules) and ultimately file a report with the SEC. Conflict Minerals are widely used in many industries, including the telecommunications industry and almost all of our products include component parts purchased from third partythird-party suppliers and we must rely heavily on information received from suppliers to determine the origin of those materials. We have implemented a due diligence program consistent with the Organization for Economic Co-operation and Development guidelines to collect information concerning the country of origin of Conflict Minerals and in that regard, have adopted a policy that requires our suppliers (both public and private) to commit to a code of conduct relating to the responsible sourcing of minerals and to establish a policy to reasonably assure that the products they manufacture do not contain Conflict Minerals that originated in a Covered Country. Efforts to comply with this SEC rule have resulted in additional costs to us and, we believe, to our suppliers. As such, the availability of raw materials used in our operations could be negatively impacted and/or raw material prices could increase. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage and could harm our reputation.
Laws and regulations have been enacted that affect companies conducting business on the Internet, including the European General Data Protection Regulation ("GDPR"). The GDPR imposes certain privacy related requirements on companies that receive or process personal data of residents of the European Union that are currently different than those in the United States and include significant penalties for non-compliance. Similarly, there are several legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for personal data protection. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. Our costs to comply with the GDPR as well any other similar laws and regulations that emerge may negatively impact our business.
ITEM 1A. RISK FACTORS
Forward-Looking Statements
The following describes major risks to our business and should be considered carefully. Any of these factors could significantly and negatively affect our business, prospects, financial condition, or operating results, which could cause the trading prices of our equity securities to decline. The risks described below are not the only risks we may face. Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, could also negatively affect us.
Summary of Risk Factors
The following is a summary of the principal risks that could significantly and negatively affect our business, prospects, financial conditions, or operating results. For a more complete discussion of the material risks facing our business, please see below:
Global Risks Related
•We are unable to predict the extent to which the ongoing COVID-19 pandemic and related supply chain constraints will continue to adversely impact our Businessbusiness operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.
•Our fiscal 2018 business outlook is difficult to forecast and operating results are subject to significant fluctuations and are likely to be volatile.
Our new orders (sometimes referred to herein as bookings), net sales and operating results may vary significantly from period to period due to a number of factors including: sales mix; fluctuating market demand; price competition; new product introductions by our competitors; fluctuations in foreign currency exchange rates; unexpected changes in the timing of delivery of components or subsystems; the financial performance of acquisitions; new accounting standards relating to acquisitions, revenue recognition and leasing; political instability; regulatory developments; changes in income tax rates or tax credits; the price and expected volatility of our stock (which will impact, among other items, the amount of stock-based compensation expense we may record); and general global economic conditions.
We have experienced, and will experience in the future, significant fluctuations in new orders, net sales and operating results from period to period. A large portion of our Commercial Solutions segment net sales are derived from products such as satellite earth station equipment and certain traveling wave tube amplifier products that generally have short lead times. As a result, bookings and backlog related to these products are extremely sensitive to short-term fluctuations in customer demand.
A large portion of our Government Solutions segment net sales are derived in part from large U.S. Government programs or large foreign government opportunities that are subject to lengthy sales cycles and are therefore difficult to predict.
In fiscal 2016, we completed our acquisition of TeleCommunication Systems, Inc. ("TCS"), the largest acquisition in our history. Fiscal 2016 included five months of TCS operations. Fiscal 2017 included the operations of TCS for a twelve-month period. As such, fiscal 2018 is expected to be the first comparative twelve month fiscal period including TCS operations. Although the integration of TCS into our business is largely complete, our ability to accurately forecast future performance will continue to be dependent upon our ability to fully familiarize ourselves with the variability of the business and environment in which TCS operates. Although we expect to continue to realize strategic, operational and financial benefits as a result of the TCS acquisition, we cannot be certain whether, and to what extent, such benefits will be achieved in the future. In particular, the ongoing success of the TCS acquisition will depend on maintaining the efficiencies and cost savings we have achieved to date, and no assurances can be given that we will be able to continue to do so.
Our ongoing tactical shift in our Government Solutions segment toward pursuing contracts with higher margins may not prove successful.
We continue to execute on our shift in efforts in our Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche products with higher margins. Although we are beginning to see the benefits of this strategy, in the short-term, this strategy has resulted, and may continue to result, in lower net sales and operating income, in dollars, in our Government Solutions segment. Although we believe this tactical shift will ultimately yield higher operating income, in dollars, as well as higher operating income as a percentage of net sales, we may not be able to successfully execute this strategy, which could have a material adverse effect on our business, results of operations and financial condition.
•If global economic business and political conditions deteriorate as compared to the current environment it could have a material adverse impact on our business outlook and our business, operating results and financial condition.
For the past several years, many of the end-markets•New and ongoing challenges relating to current supply chain constraints and impacts from inflation, including for satellite ground station and troposcatter components, could adversely impact our productsrevenue, gross margins and servicesfinancial results.
•We have been significantlysignificant operations in locations which could be materially and adversely impacted by adverse global economic conditions. For example, many of our international end-customers are located in emerging and developing countries that continue to undergo sweeping economic and political changes. Many governments around the world have also cut their spending budgets and are under pressure to further reduce them. In recent years, global oil and natural gas prices plunged, significantly impairing the ability of our customers in the oilevent of a terrorist attack or other significant disruptions (including natural disasters).
•The military conflict between Russia and gas producing regions ofUkraine, and the worldglobal response to invest in telecommunications products and infrastructure. Additionally, the relative strength of the U.S. dollar against many international currencies, as compared to several years ago, has negatively impacted the purchasing power for many of our international end-customers because virtually all of our sales are denominated in U.S. dollars. We generate significant sales from Brazil, Russia, India and China as well as other emerging and developing countries.
The business environment in the past several years resulted in the suppression of end-market demand for many of our satellite earth station products. Although economic conditions have improved, we continue to believe that nearly all of our customers are challenged by capital and operating budget constraints and a difficult credit environment. The impact, severity and duration of these conditions are impossible to predict with precision. Many of our international customers (including our Middle Eastern and African customers) rely on European bank financing to procure funding for large systems, many of which include our equipment. We believe that European financing has been and continues to be difficult to obtain. Volatility of interest rates may cause our customers to be reluctant to spend funds required to purchase our equipment or projects could be postponed or canceled.
In 2016, the U.K. held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit.” As a result of the referendum, it is expected that the British government will negotiate the terms of the U.K.’s future relationships with European Union member states. Adverse consequences concerning Brexit or the European Union could include deterioration in global economic conditions, instability in global financial markets, political uncertainty, volatility in currency exchange rates, or adverse changes in the cross-border agreements currently in place, any of which could have an adverse impact on our financial results in the future.
In the past, our overall business has not been immune from adverse economic conditions. Although business conditions in fiscal 2017 improved as compared to prior years and were relatively stable during fiscal 2017, if political conditions around the world become unstable or additional economic sanctions are imposed on some of our end-customers, it could adversely impact our sales. If business conditions become adverse, our business could be impacted in a number of ways, including:revenues, gross margins and financial results.
Business Risks
Difficulty in forecasting our results of operations - It•Our backlog is difficultsubject to accurately forecast our results of operations during adverse conditions as we cannot predict the severitycustomer cancellation or the duration of such conditions or the impact it could havemodification.
•Contract cost growth on our current and prospective customers. If our current or prospective customers materially postpone, reduce or even forgo purchases of our products and servicesfirm fixed-price contracts exposes us to a greater extent than we anticipate, our business outlook will prove to be inaccurate.
Additional reductions in telecommunications equipment and systems spending may occur - Our businesses have been negatively affected by uncertain economic environments in the overall market and, more specifically, in the telecommunications sector. Our customers have reduced their budgets for spending on telecommunications equipment and systems and in some cases postponed or reduced the purchase of our products and systems. In the future, our customers may reduce their spending on telecommunications equipment and systems which would negatively impact both of our operating segments. If this occurs, it would adversely affect our business outlook, net sales, profitability and the recoverabilitypotential loss of future business and other risks.
•Our business is highly dependent on the budgetary decisions of our assets, including intangible assets such as goodwill.
government customers.
•Our customers may not be able to obtain financing - Although many of our products are relatively inexpensive when compared to the total systems or networks that they are incorporated into, our sales are affected by our customers' ability to obtain the financing they may require to build out their total systems or networks and fund ongoing operations. Many of our emerging market customers obtain financing for network build-outs from European commercial banks and/or governments. Our customers' inability to obtain sufficient financing would adversely affect our net sales. In addition, if the current economic environment and lack of financing results in insolvencies for our customers, it would adversely impact the recoverability of our accounts receivable which would, in turn, adversely impact our results of operations.
Although the integration of the fiscal 2016 TCS acquisition into our business is largely complete, we may not realize the anticipated benefits from the TCS acquisition, the acquisition may ultimately not be successful and ongoing activity may continue to divert our resources and management attention.
The acquisition of TCS continues to have a number of unique risks, including:
We may not be able to continue to manage organizational changes associatedcontracts with the TCS acquisition - As of February 1, 2016,U.S. government are subject to unique business, commercial and government audit risks.
•Our dependence on sales to international customers exposes us to unique business, commercial and export compliance audit risks.
•A change in connectionour relationship with the acquisition of TCS, we reorganized our business into two reportable operating segments: Commercial Solutions and Government Solutions. Although this integration is largely complete, we may further change our business and organizational structure and streamline and further consolidate certain business processes to achieve greater operating efficiencies. The acquisition of TCS has significantly expanded the types of products and services that we sell, expanded the businesses in which we engage, and increased the number of facilities we operate, thereby presenting us with significant challenges in managing the substantial increase in scale of our business. These challenges include the integration of a large number of systems, both operational and administrative. We may not be able to successfully manage these organizational changes and the unanticipated disruption to our business that might result from these changeswireless carrier customers could have a material adverse effect oneffect.
•A change by wireless carrier partners in the pricing and other terms by which they offer our business, results of operation and financial condition. In addition, the diversion of our management’s attentionproducts to these matters and away from other business concernstheir end-customers could have a material adverse effect onaffect.
Strategic Growth Risks
•We face a number of risks relating to the expected long-term growth of our business, resultsbusiness.
•Loss of operation and financial condition.
We may experience a lossour executive officers or adverse effect on customer relationships - The acquisition of TCS may adversely affect the relationships that the combined company has with its customers, service providers and employees. As a result of the acquisition, we may experience a loss of, or changes to, TCS’s relationships with its customers or Comtech’s legacy customers, which could negatively impact our business outlook. Our future growth depends in part on expanding relationships with key distribution channels for TCS products such as Next Generation 911 solutions. If we are unable to capitalize on those relationships or if we lose existing relationships, it could have a material adverse effect on our business, results of operation and financial condition.
The loss ofother key personnel or other changes to our inability to attract and retain personnelmanagement team could adversely affectdisrupt our future business, operations and financial results.growth plans or harm our business.
Our future success will depend in large part•We must service the debt and maintain compliance with various covenants under a Credit Facility that imposes restrictions on our ability to hire and retain a sufficient number of qualified personnel, particularly in sales and marketing and research and development. If we are unable to do so, our business could be harmed.business.
We have incurred indebtedness under a Secured Credit Facility, and may not be able to service that debt in the future.
In connection with the acquisition of TCS, we entered into a Secured Credit Facility, as amended June 6, 2017, which provides for borrowing availability of up to $400.0 million. As of July 31, 2017, we had approximately $196.5 million of borrowings under the Secured Credit Facility, as amended, of which $139.1 million is from an original $250.0 million Term Loan A and $57.4 million of drawings under a $150.0 million revolving credit line.
The Secured Credit Facility, as amended, requires quarterly payments and repayment in full by February 23, 2021. If we do not have sufficient funds to repay our debt when due, it may be necessary to refinance our debt through additional debt or equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on such refinancing, increases in interest expense could have a material adverse effect on our business, results of operation and financial condition.
If we are unable to meet future debt service obligations or refinance our debt on acceptable terms, we may be forced to dispose of assets on disadvantageous terms, potentially resulting in losses, as we have pledged substantially all of our assets to the lenders as security for our payment obligations.
Our Secured Credit Facility, as amended June 6, 2017, contains various covenants that impose restrictions on us that may limit our ability to plan for or respond to changes in our business and, as a result, may reduce our profitability.
Our Secured Credit Facility, as amended, contains various affirmative and negative covenants that may restrict our ability to, among other things, permit liens on our property, change the nature of our business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person.
As of July 31, 2017, our Leverage Ratio (as defined in the Secured Credit Facility, as amended) was 2.84x TTM Consolidated EBITDA (as defined in the Secured Credit Facility, as amended) compared to the maximum allowable Leverage Ratio of 3.75x TTM Consolidated EBITDA. In fiscal 2018, the maximum allowable Leverage Ratio will decrease each quarter until reaching 3.00x TTM Consolidated EBITDA in the fourth quarter of fiscal 2018, with no further reductions thereafter. Our Fixed Charge Coverage Ratio (as defined in the Secured Credit Facility, as amended) as of July 31, 2017 was 1.95x compared to the minimum required Fixed Charge Coverage Ratio of 1.25x, which will not change for the remaining term of the Secured Credit Facility, as amended. Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Secured Credit Facility, as amended, for the foreseeable future. However, there can be no assurance that we will be able to meet such covenants. Our ability to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations. Our substantial debt obligations could impede, restrict or delay the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business. For example:
we may be required to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows for other purposes, including business development efforts, capital expenditures, dividends or strategic acquisitions;
if we are not able to generate sufficient cash flows to meet our substantial debt service obligations or to fund our other liquidity needs, we may have to take actions such as selling assets or raising additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and joint ventures, or restructuring our debt;
we may not be able to fund future working capital, capital investments and other business activities;
we may not be able to pay dividends or make certain other distributions;
we may become more vulnerable in the event of a downturn in our business or a worsening of general economic or industry-specific conditions; and
our flexibility in planning for, or reacting to, changes in our business and industry may be limited, thereby placing us at a competitive disadvantage compared to our competitors that have less indebtedness.
Future acquisitions•Acquisitions of companies and investments could prove difficult to integrate, disrupt our business, dilute stockholder value or adversely affect operating results or the market price of our common stock.
We expect to continue to consider future acquisitions and investments as part of our growth plans. Future acquisitions or investments may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of large amounts of debt, increases to amortization expense and future write-offs of intangibles acquired. Acquisitions and investments involve risks that include failing to:
properly evaluate the technology;
accurately forecast the financial impact of the transaction, including accounting charges and transaction expenses;
integrate the technologies, products and services, research and development, sales and marketing, support and other operations;
integrate and retain key management personnel and other key employees;
retain and cross-sell to acquired customers; and
combine potentially different corporate cultures.
Acquisitions and investments could also:
divert management’s attention away from the operation of our businesses;
result in significant goodwill and intangibles write-offs in the event an acquisition or investment does not meet expectations; and
increase expenses, including expenses of managing the growth of such acquired businesses.
There can be no assurance that any future acquisition or investment will be successful within the anticipated time frame, or at all, will be as valuable as the amount we eventually pay to acquire it, and will not adversely affect our business, results of operations or financial condition. In addition, if we consummate future acquisitions using our equity securities or securities convertible into our equity securities, existing stockholders may be diluted, which could have a material adverse effect on the market price of our common stock.
Our business is highly dependent on the budgetary decisions of our government customers, including the U.S. government (including prime contractors to the U.S. government), and changes in the U.S. government’s fiscal policies or budgetary priorities may have a material adverse effect on our business, operating results and financial condition.
During our fiscal years ended July 31, 2017, 2016 and 2015, sales to the U.S. government (including sales to prime contractors to the U.S. government) were $180.0 million, $167.5 million and $94.0 million or 32.7%, 40.8% and 30.6% of our consolidated net sales, respectively. In addition, a large portion of our existing backlog consists of orders related to U.S. government contracts and our business outlook for fiscal 2018 and beyond depends, in part, on new orders from the U.S. government, which is currently under extreme budgetary pressures.
We rely on particular levels of U.S. government spending on our communication solutions, and our receipt of future orders depends in large part on continued funding by the U.S. government for the programs in which we participate. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Government contracts are conditioned upon the continuing availability of congressional appropriations and Congress’s failure to appropriate funds, or Congress’s actions to reduce or delay spending on, or reprioritize its spending away from, U.S. government programs which we participate in, could negatively affect our results of operations. Because many of the items we sell to the U.S. government are included in large programs realized over a period of several years, it is difficult, if not impossible, to determine specific amounts that are or will be appropriated for our products and services. As such, our assessments relating to the impact of changes in U.S. government spending may prove to be incorrect.
The federal debt limit continues to be actively debated as plans for long-term national fiscal policy are discussed. The outcome of these debates, including sequestration or mandated reductions which are currently in effect, could have a significant impact on defense spending broadly and programs we support in particular. The failure of Congress to approve future budgets and/or increase the debt ceiling of the U.S. on a timely basis could delay or result in the loss of contracts for the procurement of our products and services and we may be asked or required to continue to perform for some period of time on certain of our U.S. government contracts, even if the U.S. government is unable to make timely payments. A decrease in Department of Defense or Department of Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending could have a material adverse effect on our business, results of operation and financial condition. Considerable uncertainty exists regarding how budget reductions will be applied and what challenges the reductions will present.
Ultimately the U.S. government may be unable to timely complete its budget process or fully agree upon spending priorities. If the U.S. government budget process results in a prolonged shutdown or prolonged operation under a continuing resolution, we may experience delayed orders, delayed payments and declines in net sales, profitability and cash flows. We may experience related supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. All of the aforementioned conditions and factors could, in the aggregate, have a material adverse effect on our business, results of operation and financial condition. Additionally, cost cutting, efficiency initiatives, reprioritization, other affordability analyses, and changes in budgetary priorities by our governmental customers, including the U.S. government, could adversely impact both of our operating segments. We are unable to predict the impact these or similar events could have on our business, financial position, results of operations or cash flows.
Our contracts with the U.S. government are subject to unique business, commercial and government audit risks.
We depend on the U.S. government for a significant portion of our revenues. Our contracts with the U.S. government are subject to unique business and commercial risks, including:
unexpected contract or project terminations or suspensions;
unpredictable order placements, reductions, delays or cancellations;
higher than expected final costs, particularly relating to software and hardware development, for work performed under contracts where we commit to specified deliveries for a fixed-price; and
unpredictable cash collections of unbilled receivables that may be subject to acceptance of contract deliverables by the customer and contract close out procedures, including government audit and approval of final indirect rates.
Although we take steps to mitigate our risk with respect to contracts with the U.S. government, we may not be able to do so in every instance for any of the following reasons, among others:
Our U.S. government contracts can easily be terminated by the U.S. government - Our U.S. government contracts can be terminated by the U.S. government for its convenience or upon an event of default by us. Termination for convenience provisions provide us with little to no recourse: our potential recovery of costs incurred or costs committed, potential settlement expenses and hypothetical profit on work completed prior to termination.
Our U.S. government contracts are subject to funding by the U.S. Congress - U.S. government contracts are conditioned upon the continuing approval by Congress of the necessary funding. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. Consequently, at the beginning of a major program, the contract may not be fully funded, and additional monies are normally committed to the contract only if, and when, appropriations are made by Congress for future fiscal years. Delays or changes in funding can impact the timing of awards or lead to changes in program content. We obtain certain of our U.S. government contracts through a competitive bidding process. There can be no assurance that we will win additional contracts or that actual contracts that are awarded will ultimately be profitable.
We can be disqualified as a supplier to the U.S. government - As a supplier to the U.S. government, we must comply with numerous regulations, including those governing security, contracting practices and classified information. Failure to comply with these regulations and practices could result in fines being imposed against us or our suspension for a period of time from eligibility for bidding on, or for award of, new government contracts. If we are disqualified as a supplier to government agencies, we would lose most, if not all, of our U.S. government customers and revenues from sales of our products would decline significantly.
In addition, all of our U.S. government contracts can be audited by the Defense Contract Audit Agency ("DCAA") and other U.S. government agencies and we can be subject to penalties arising from post-award contract audits (sometimes referred to as a Truth in Negotiations Act or "TINA" audit) or cost audits in which the value of our contracts may be reduced. If costs are found to be improperly allocated to a specific contract, those costs will not be reimbursed, and any such costs already reimbursed would be required to be refunded. Although we record contract revenues based upon costs we expect to realize upon final audit, we cannot predict the outcome of any such future audits and adjustments and we may be required to materially reduce our revenues or profits upon completion and final negotiation of audits. Negative audit findings could also result in termination of a contract, forfeiture of profits, suspension of payments, fines and suspension or debarment from U.S. government contracting or subcontracting for a period of time.
Our dependence on sales to international customers exposes us to unique business, commercial and export compliance audit risks.
Sales for use by international customers (including sales to U.S. companies for inclusion in products that will be sold to international customers) represented approximately 28.4%, 30.0% and 56.2% of our consolidated net sales for the fiscal years ended July 31, 2017, 2016 and 2015, respectively, and we expect that international sales will continue to be a significant portion of our consolidated net sales for the foreseeable future. These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price-competitive), political and economic instability, exposure to public health epidemics, availability of suitable export financing, tariff regulations, and other U.S. and foreign regulations that may apply to the export of our products. Although we take steps to mitigate our risk with respect to international sales, we may not be able to do so in every instance for any of the following reasons, among others:
We may not be able to continue to structure our international contracts to reduce risk - We attempt to reduce the risk of doing business in foreign countries by seeking subcontracts with large systems suppliers, contracts denominated in U.S. dollars, advance or milestone payments and irrevocable letters of credit in our favor. However, we may not be able to reduce the economic risk of doing business in foreign countries in all instances. In such cases, billed and unbilled receivables relating to international sales are subject to increased collectability risk and may result in significant write-offs, which could have a material adverse effect on our business, results of operation and financial condition. In addition, foreign defense contracts generally contain provisions relating to termination at the convenience of the government.
We rely on a limited number of international sales agents - In some countries, we rely upon one or a small number of sales agents, exposing us to risks relating to our contracts with, and related performance of, those agents. We attempt to reduce our risk with respect to sales agents by establishing additional foreign sales offices where it is practical and by engaging, where practicable, more than one independent sales representative in a territory. It is our policy to require all sales agents to operate in compliance with applicable laws, rules and regulations. Violations of any of these laws, rules or regulations, and other business practices that are regarded as unethical, could interrupt the sales of our products and services, result in the cancellation of orders or the termination of customer relationships, and could damage our reputation, any of which developments could have a material adverse effect on our business, results of operation and financial condition.
We currently price virtually all of our products in U.S. dollars - Today, virtually all of our sales are denominated in U.S. dollars. Over the last few years, the U.S. dollar has strengthened significantly against many international currencies. As such, many of our international customers experienced a drop in their purchasing power as it relates to their ability to purchase our products. To date, we have not materially changed our selling prices and have experienced lower sales volumes. Although monetary conditions in fiscal 2017 improved as compared to recent years, it is possible, that the U.S. dollar will strengthen from current levels against many international currencies. If this occurs, our customers may reduce their spending or postpone purchases of our products and services to a greater extent than we currently anticipate which could have a material adverse effect on our business, results of operation and financial condition.
We must comply with all applicable export control laws and regulations of the U.S. and other countries - Certain of our products and systems may require licenses from U.S. government agencies for export from the U.S., and some of our products are not permitted to be exported. In addition, in certain cases, U.S. export controls also severely limit unlicensed technical discussions, such as discussions with any persons who are not U.S. citizens or permanent residents. As a result, in cases where we may need a license, our ability to compete against a non-U.S. domiciled foreign company that may not be subject to the same U.S. laws may be materially adversely affected. U.S. laws and regulations applicable to us include the Arms Export Control Act, the IEEPA, the ITAR, the EAR and the trade sanctions laws and regulations administered by the U.S. Treasury Department's Office of Foreign Asset Control ("OFAC").
We must comply with the FCPA and similar laws elsewhere - We are subject to the FCPA and other foreign laws prohibiting corrupt payments to government officials, which generally bar bribes or unreasonable gifts to foreign governments or officials. Violations of these laws or regulations could result in significant sanctions, including disgorgement of profits, fines, criminal sanctions against us, our officers, our directors, or our employees, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. A violation of any of the regulations enumerated above could materially adversely affect our business, financial condition and results of operations. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, agents, or subsidiaries will not violate our policies. Additionally, changes in regulatory requirements which could restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the IEEPA or similar legislation could negatively impact our business. For the fiscal years ended July 31, 2017, 2016 and 2015, we have conducted virtually no business with states designated as sponsors of terrorism.
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• | We must maintain a company-wide Office of Trade Compliance - In the past, we have self-reported violations of ITAR to the DDTC and had an ITAR compliance audit performed by an independent auditor at the request of the DDTC. Although the audit found no violations of ITAR, we committed to the DDTC that we would enhance and maintain certain policies and procedures and we have established a company-wide Office of Trade Compliance. In October 2014, we self-disclosed to OFAC that we learned during a routine assessment of the adequacy of our export control compliance procedures that we had inadvertently neglected to obtain an OFAC license for a shipment of modems to a Canadian customer who, we learned after the transaction had begun, intended to incorporate our modems in a communication system the ultimate end user of which was the Sudan Civil Aviation Authority. OFAC regulations prohibit U.S. persons from doing business directly or indirectly in Sudan and from facilitating transactions by non-U.S. persons which would be illegal if done by a U.S. person. In late 2015, OFAC issued an administrative subpoena to us seeking further information about the previous voluntarily disclosed transaction and any other transactions involving Sudan. We have responded to the subpoena, including alerting OFAC to Comtech’s repair of three modems for a customer in Lebanon after which time the modems were rerouted to Sudan without Comtech’s knowledge.OFAC has not responded to our submission of further information and we cannot predict when the agency will complete its review and determine whether any violations occurred. While OFAC could decide not to impose penalties and only issue a no action or cautionary letter, we could face civil and criminal penalties and may suffer reputational harm if we are found to have violated U.S. sanctions laws. Even though we take precautions to prevent transactions with U.S. sanction targets, any such measures, or any new measures we may implement in the future, may be ineffective. As a result, there is risk that in the future we could provide our products to or permit our products to be downloaded or accessed by such targets despite these precautions. This could result in negative consequences to us, including government investigations, penalties and reputational harm.
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We may be subject to future export compliance audits - We continue to implement policies and procedures to ensure that we comply with all applicable export control laws and regulations. In the future, we may be subjected to compliance audits in the future that may uncover improper or illegal activities that would subject us to material remediation costs, civil and criminal fines and/or penalties and/or an injunction. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Each of these outcomes could, individually or in the aggregate, have a material adverse effect on our business, results of operation and financial condition. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In addition, in order to ship our products into and implement our services in some countries, the products must satisfy the technical requirements of that particular country. If we were unable to comply with such requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, results of operation and financial condition.
•Our investments in recorded goodwill and other intangible assets could be impaired as a result of future business conditions, a deterioration of the global economy or if we change our reporting unit structure.
As of July 31, 2017, goodwill recorded on our Consolidated Balance Sheet aggregated $290.6 million. Additionally, as of July 31, 2017, net intangibles recorded on our Consolidated Balance Sheet aggregated $261.9 million.Cybersecurity Risks
For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Government Solutions and Commercial Solutions segment each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. Reporting units are defined by how our President and Chief Executive Officer ("CEO") manages the business, which includes resource allocation decisions. 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350 "Intangibles - Goodwill and Other." A change to our management approach may require us to perform an interim goodwill impairment test and possibly record impairment charges in a future period.
In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first fiscal quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), pursuant to our adoption of FASB ASU No. 2017-04 in fiscal 2017, we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
On August 1, 2017 (the first day of our fiscal 2018), we performed our annual quantitative assessment and estimated the fair value of each of our reporting units using a combination of the income and market approaches. Based on our quantitative evaluation, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least 17.8% and 52.9%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. It is possible that, during fiscal 2018 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, 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 or our common stock price could decline. A significant decline in our customers' 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 an interim quantitative assessment during fiscal 2018 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial Solutions or Government Solutions reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired.
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2018 (the start of our fiscal 2019). If our assumptions and related estimates change in the future, or if we change our reporting unit structure 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 when we perform these tests, or in other future periods.
In addition to our impairment analysis of goodwill, we also review net intangibles with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangibles were recoverable as of July 31, 2017. Any impairment charges that we may record in the future could be material to our results of operation and financial condition.
•We could be negatively impacted by a systemssystem failure, breach, attack or security breach through cyber-attack, cyber intrusion or otherwise, by other significant disruption of our IT networks or those we operate for certain customers, or third partythird-party data center facilities, servers and related systems.
Similar to all companies in our industry, we are under constant risk of security breaches and other significant attacks on and disruptions of our IT networks and related systems, including third party data center facilities, whether through actual breaches, cyber-attacks or cyber intrusions via the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization. Actual security breaches or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, have increased in recent years and have become more complex. Our IT network and systems, as well as third party data center facilities, have been and, we believe, continue to be under constant attack. We face an added risk of a security breach or other significant disruption to certain of our equipment used on some of our customer’s IT networks and related systems which may involve managing and protecting information relating to national security and other sensitive government functions. We may incur significant costs to prevent and respond to actual breaches, cyber-attacks and other systems disruptions.
As a communications company, and particularly as a government contractor and a provider of 911 systems, we face a heightened risk of a security breach or disruption from actual breaches, cyber-attacks and other threats to gain unauthorized access to our and our customers' proprietary or classified information on our IT networks, third party data center facilities and related systems and to certain of our equipment used on some of our customer’s IT networks and related systems. These types of information and IT networks and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. Although we make significant efforts to maintain the security and integrity of these types of information and IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that actual security breaches or disruptions will not be successful or damaging. Even the most well protected information, networks, data centers, systems and facilities remain potentially vulnerable because security breaches, particularly cyber-attacks and intrusions, or disruptions have occurred and will occur again in the future. Techniques used in such breaches and cyber-attacks are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. In some cases, the resources of foreign governments may be behind such attacks. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk.
A security breach or other significant disruption involving these types of information and IT networks and related systems could:
Disrupt the proper functioning of these networks, data center facilities and systems and therefore our operations and/or those of certain of our customers;
Result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or our customers, including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
Compromise national security and other sensitive government functions;
Require significant management attention and resources to remedy the damages that result; and
Damage our reputation with our customers (particularly agencies of the U.S. government) and the public generally.
In addition, the cost of continually defending against cyber-attacks and actual breaches has increased in recent years and future costs and any or all of the foregoing could have a material adverse effect on our business, results of operation and financial condition.
•The measures we have implemented to secure information we collect and store or enable access to may be breached, whichbreached.
Legal, Regulatory and Litigation Risks
•Changes in U.S. federal, state and foreign tax law could cause us to breach agreements with our partners and expose us to potential investigation and penalties by authorities and potential claims for contract breach, product liability damages, credits, penalties or termination by persons whose information was disclosed.
We take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store and to prevent unauthorized access to third party data to which we enable access through our products, but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access despite our efforts. If such unauthorized disclosure or access does occur, we may be required to notify persons whose information was disclosed or accessed under existing and proposed laws. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We also may be subject to claims of breach of contract for such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed. If there is a security breach or if there is an inappropriate disclosure of any of these types of information, we could be exposed to investigations, litigation, fines and penalties. Remediation of and liability for loss or misappropriation of end user or employee personal information could have a material adverse effect onadversely affect our business results of operation and financial condition. Even if we were not held liable for such event, a security breach or inappropriate disclosure of personal, private or confidential information could harm our reputation and our relationships with current and potential customers and end users. Even the perception of a security risk could inhibit market acceptance of our products and services. We may be required to invest additional resources to protect against damages caused by any actual or perceived disruptions of our services. We may also be required to provide information about the location of an end user’s mobile device to government authorities, which could result in public perception that we are providing the government with intelligence information and deter some end users from using our services. Any of these developments could have a material adverse effect on our business, results of operation and financial condition.
•Our U.S. Federal,federal, state and foreign tax returns are subject to audit and a resulting tax assessment or settlement could have a material adverse effect on our business, results of operationoperations and financial condition. Significant judgment is required in determining the provision for income taxes.
The final determination of tax examinations and any related litigation could be materially different than what is reflected in historical income tax provisions and accruals. Our federal income tax returns for fiscal 2015 and 2016 remain subject to potential future Internal Revenue Service ("IRS") audits. In addition, TCS's federal income tax returns for calendar years 2013 through 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential future IRS audits. In addition to income tax audits, TCS is subject to ongoing state and local tax audits by the Washington State Department of Revenue and the City of Seattle. Although adjustments relating to past audits of our federal tax returns (including the recent audit of fiscal 2014) were immaterial, a resulting tax assessment or settlement for other periods or other jurisdictions that may be selected for future audit could have a material adverse effect on our business, consolidated results of operation and financial condition.
We have significant operations in Arizona, Florida, California, Washington State, New York and other locations which could be materially and adversely impacted in the event of a terrorist attack and government responses thereto or significant disruptions (including natural disasters) to our business.
Terrorist attacks, the U.S. and other governments' responses thereto, and threats of war could materially adversely impact our business, results of operation and financial condition. For example, our 911, hosted location-based services and satellite teleport services operations depend on our ability to maintain our computer and equipment and systems in effective working order, and to protect our systems against damage from fire, natural disaster, power loss, telecommunications failure, sabotage, unauthorized access to our system or similar events. Although all of our mission-critical systems and equipment are designed with built-in redundancy and security, any unanticipated interruption or delay in our operations or breach of security could have a material adverse effect on our business, results of operation and financial condition. Our property and business interruption insurance may not be adequate to compensate us for any losses that may occur in the event of a terrorist attack, threat, system failure or a breach of security. Insurance may not be available to us at all or, if available, may not be available to us on commercially reasonable terms.
We operate a high-volume technology manufacturing center located in Tempe, Arizona. We expect intercompany manufacturing to increase from current levels in future periods and we intend to maximize the use of our high-volume technology manufacturing center by continuing to seek contracts with third parties to outsource a portion of their manufacturing to us. A terrorist attack or similar future event may disrupt our operations or those of our customers or suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. If a natural disaster or other business interruption occurred with respect to our high-volume technology manufacturing center, we do not have immediate access to other manufacturing facilities and, as a result, our business, results of operation and financial condition would be materially adversely affected.
We design and manufacture our over-the-horizon microwave equipment and systems in Florida, where major hurricanes have occurred in the past, and traveling wave tube amplifiers in Santa Clara, California, an area close to major earthquake fault lines, and also manufacture amplifiers in Melville, New York, an area subject to hurricanes. Additionally, certain of our Commercial Solutions segment activities are conducted in Washington State which is also near a fault line. Our operations in these and other locations (such as in our high-volume technology manufacturing center located in Tempe, Arizona), could be subject to natural disasters or other significant disruptions, including hurricanes, tornadoes, typhoons, tsunamis, floods, earthquakes, fires, water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts, telecommunications failures, and other natural and man-made disasters or disruptions.
We cannot be sure that our systems will operate appropriately if we experience hardware or software failure, intentional disruptions of service by third parties, an act of God or an act of war. A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could involve material costs and distract management from operating our business.
In the event of any such disaster or other disruption, we could experience disruptions or interruptions to our operations or the operations of our suppliers, distributors, resellers or customers; destruction of facilities; and/or loss of life, all of which could materially increase our costs and expenses and materially adversely affect our business, results of operation and financial condition.
•We may be subject to environmental liabilities.
We engage in manufacturing and are subject to a variety of local, state and federal laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. We are also subject to the Restriction of Hazardous Substance ("RoHS") directive which restricts the use of lead, mercury and other substances in electrical and electronic products. The failure to comply with current or future environmental requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could have a material adverse effect on our business, results of operation and financial condition. In addition, the handling, treatment or disposal of hazardous substances by us or our predecessors may have resulted, or could in the future result, in contamination requiring investigation or remediation, or lead to other liabilities, any of which could have a material adverse effect on our business, results of operation and financial condition.
•The success of our business is dependent on compliance with FCC rules and regulations and similar foreign laws and regulations.
Many of our products are incorporated into wireless communications systems that must comply with various U.S. government regulations, including those of the FCC, as well as similar international laws and regulations. As a result, our business faces increased risks including the following:
We must obtain various licenses from the FCC - We operate FCC licensed teleports that are subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. We cannot guarantee that the FCC will grant renewals when our existing licenses expire, nor are we assured that the FCC will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses. We may, in the future, be required to seek FCC or other government approval if foreign ownership of our stock exceeds certain specified criteria. Failure to comply with these policies could result in an order to divest the offending foreign ownership, fines, denial of license renewal and/or license revocation proceedings against the licensee by the FCC, or denial of certain contracts from other U.S. government agencies.
We are dependent on the allocation and availability of frequency spectrum - Adverse regulatory changes related to the allocation and availability of frequency spectrum and in the military standards and specifications that define the current satellite networking environment, could materially harm our business by: (i) restricting development efforts by us and our customers, (ii) making our current products less attractive or obsolete, or (iii) increasing the opportunity for additional competition. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards and reassign bandwidth for these products and services. The reduced number of available frequencies for other products and services and the time delays inherent in the government approval process of new products and services have caused, and may continue to cause, our customers to cancel, postpone or reschedule their installation of communications systems including their satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave communication systems. This, in turn, could have a material adverse effect on our sales of products to our customers. Changes in, or our failure to comply with, applicable laws and regulations could materially adversely harm our business, results of operation, and financial condition.
Our future growth is dependent, in part, on developing NG911 compliant products - The FCC requires that certain location information be provided to network operators for public safety answering points when a subscriber makes a 911 call. Technical failures, greater regulation by federal, state or foreign governments or regulatory authorities, time delays or the significant costs associated with developing or installing improved location technology could slow down or stop the deployment of our mobile location products. If deployment of improved location technology is delayed, stopped or never occurs, market acceptance of our products and services may be materially adversely affected. Because we rely on some third-party location technology instead of developing all of the technology ourselves, we have little or no influence over its improvement. The technology employed with NG911 services generally anticipates a migration to internet-protocol (“IP”) based communication. Since many companies are proficient in IP-based communication protocols, the barriers to entry to providing NG911 products and services are lower than exist for the traditional switch-based protocols. If we are unable to develop unique and proprietary solutions that are superior to and more cost effective than other market offers, our 911 business could get replaced by new market entrants, resulting in a material adverse effect on our business, results of operation and financial condition.
Under the FCC’s mandate, our 911 business is dependent on state and local governments- Under the FCC’s mandate, wireless carriers are required to provide 911 services only if state and local governments request the service. As part of a state or local government’s decision to request 911, they have the authority to develop cost recovery mechanisms. However, cost recovery is no longer a condition to wireless carriers’ obligation to deploy the service. If state and local governments do not widely request that 911 services be provided or we become subject to significant pressures from wireless carriers with respect to pricing of 911 services, our 911 business would be harmed and future growth of our business would be reduced.
•Regulation of the mobile communications industry and VoIP is evolving, and unfavorable changes or our failure to comply with existing and potential new legislation or regulations could harm our business and operating results.
As the mobile industry continues to evolve, we believe greater regulation by federal, state or foreign governments or regulatory authorities is likely and we face certain risks including:
We must adhere to existing and potentially new privacy rules related to mobile-location based services - We believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing our ability to utilize this information for the purpose of continued improvement of the overall mobile subscriber experience. In order for mobile location products and services to function properly, wireless carriers must locate their subscribers and store information on each subscriber’s location. Although data regarding the location of the wireless user resides only on the wireless carrier’s systems, users may not feel comfortable•Ongoing compliance with the idea that the wireless carrier knowsprovisions of securities laws, related regulations and can track their location. Carriers will need to obtain subscribers’ permission to gatherfinancial reporting standards could unexpectedly materially increase our costs and use the subscribers’ personal information, or they may not be able to provide customized mobile location services which those subscribers might otherwise desire. If subscribers view mobile location services as an annoyance or a threat to their privacy, thatcompliance related expenses.
•Indemnification provisions in our contracts could reduce demand for our products and services and have a material adverse effect on our business,consolidated results of operationoperations, financial position, or cash flows.
•We are, from time to time, and financial condition.
We may face increased compliance costs in connection with health and safety requirements for mobile devices - If wireless handsets pose health and safety risks, we may becould become a party to additional litigation or subject to new regulationsclaims.
•Protection of our intellectual property is limited and demand forpursuing infringers of our patents and other intellectual property rights can be costly.
•Third parties may claim we are infringing their intellectual property rights and we could be prevented from selling our products, and services may decrease. Media reportsor suffer significant litigation expense, even if these claims have suggested that certain radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Concerns over radio frequency emissions may have the effect of discouraging the use of wireless handsets, which would decrease demand for our services. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless handsets. In addition, interest groups have requested that the FCC investigate claims that wireless technologies pose health concerns and cause interference with airbags, hearing aids and other medical devices. There also are some safety risks associated with the use of wireless handsets while driving. Concerns over these safety risks and the effect of any legislation that may be adopted in response to these risks could limit our ability to market and sell our products and services.
no merit.
The regulatory environment for VoIP services is developing - The FCC has determined that VoIP services are not subject to the same regulatory scheme as traditional wireline and wireless telephone services. If the regulatory environment for VoIP services evolves in a manner other than the way we anticipate, our 911 business would be significantly harmed and future growth of our business would be significantly reduced. For example, the regulatory scheme for wireless and wireline service providers requires those carriers to allow service providers such as us to have access to certain databases that make the delivery of a 911 call possible. No such requirements exist for VoIP service providers, so carriers could prevent us from continuing to provide VoIP 911 service by denying us access to the required databases.
Competitive Risks
•All of our business activities are subject to rapid technological change, new entrants, the introduction of other distribution models and long development and testing periods each of which may harm our competitive position, render our product or service offerings obsolete and require us to continuously develop technology and/or obtain licensed technology in order to compete successfully.position.
We are engaged in business activities characterized by rapid technological change, evolving industry standards, frequent new product announcements and enhancements, and changing customer demands. The introduction of products and services on future industry standards embodying new technologies such as multi-frequency time-division multiple access ("MF-TDMA") based technologies could render any of our products and services obsolete or non-competitive. The successful execution of our business strategy is contingent upon wireless network operators launching and maintaining mobile location services, our ability to maintain a technically skilled development and engineering team, our ability to create new network software products and adapt our existing products to rapidly changing technologies, industry standards and customer needs. As a result of the complexities inherent in our product offerings, new technologies may require long development and testing periods. Additionally, new products may not achieve market acceptance or our competitors could develop alternative technologies that gain broader market acceptance than our products. If we are unable to develop and introduce technologically advanced products that respond to evolving industry standards and customer needs, or if we are unable to complete the development and introduction of these products on a timely and cost effective basis, it could have a material adverse effect on our business, results of operation and financial condition or could result in our technology becoming obsolete.
New entrants seeking to gain market share by introducing new technology and new products may make it more difficult for us to sell our products and services and could create increased pricing pressure, reduced profit margins, increased sales and marketing expenses, or the loss of market share or expected market share, any of which could have a material adverse effect on our business, results of operation and financial condition. For example, many companies are developing new technologies and the shift towards open standards such as IP-based satellite networks will likely result in increased competition and some of our products may become commoditized. Our DoubleTalk® Carrier-in-Carrier® bandwidth compression technology is licensed by us from a third party that maintains patents associated with the technology. Other competitors have developed similar technologies and some may have also licensed parts or all of this compression technology.
Our Commercial Solutions segment provides various technologies that are utilized on mobile phones. Applications from competitors for location-based or text-based messaging platforms may be preloaded on mobile devices by original equipment manufacturers, or OEMs, or offered by OEMs directly. Increased competition from providers of location-based services which do not rely on a wireless carrier may result in fewer wireless carrier subscribers electing to purchase their wireless carrier’s branded location-based services, which could harm our business and revenue. In addition, these location-based or text-based services may be offered for free or on a onetime fee basis, which could force us to reduce monthly subscription fees or migrate to a onetime fee model to remain competitive. We may also lose end users or face erosion in our average revenue per user if these competitors deliver their products without charge to the consumer by generating revenue from advertising or as part of other applications or services.
Our expected growth and our financial position depends on, among other things, our ability to keep pace with such changes and developments and to respond to the increasing variety of electronic equipment users and transmission technologies. We may not have the financial or technological resources to keep pace with such changes and developments or be successful in our research and development and we may not be able to identify and respond to technological improvements made by our competitors in a timely or cost-effective fashion. Any delays could result in increased costs of development or redirect resources from other projects. In addition, we cannot provide assurances that the markets for our products, systems, services or technologies will develop as we currently anticipate. The failure of our products, systems, services or technologies to gain market acceptance could significantly reduce our net sales and harm our business.
•Our business is highly competitive, we are reliant upon the success of our partners, and some of our competitors have significantly greater resources than we do, which could result in a loss of customers, market share and/or market acceptance.
Our business is highly competitive. We will continue to invest in research and development for the introduction of new and enhanced products and services designed to improve capacity, data processing rates and features. We must also continue to develop new features and to improve functionality of our software. Research and development in our industry is complex, expensive and uncertain. We believe that we must continue to dedicate a significant amount of resources to research and development efforts to maintain our competitive position. If we continue to expend a significant amount of resources on research and development, but our efforts do not lead to the successful introduction of product and service enhancements that are competitive in the marketplace, our business, results of operation and financial condition could be materially adversely affected.
Several of our potential competitors are substantially larger than we are and have greater financial, technical and marketing resources than we do. In particular, larger competitors have certain advantages over us which could cause us to lose customers and impede our ability to attract new customers, including: larger bases of financial, technical, marketing, personnel and other resources; more established relationships with wireless carriers and government customers; more funds to deploy products and services; and the ability to lower prices (or not charge any price) of competitive products and services because they are selling larger volumes. Furthermore, we cannot be sure that our competitors will not develop competing products, systems, services or technologies that gain market acceptance in advance of our products, systems, services or technologies, or that our competitors will not develop new products, systems, services or technologies that cause our existing products, systems, services or technologies to become non-competitive or obsolete, which could adversely affect our results of operations.
Our Commercial Solutions segment provides Safety and Security Technologies to various state and local municipalities and to a large extent, we are reliant on the success of our wireless partners and distributors to meet our growth objectives. In some cases, our wireless partners may have different objectives or our distributors may not be successful. For example, in February 2016, AT&T, one of our largest partners publicly announced a new nationwide service that is focused on the adoption of NG911 services and that such new service will be deployed in collaboration with a competitor. In fiscal 2018, we were informed by two of our large distributors that they did not win two large programs which included our NG911 solutions and that AT&T was awarded both programs. Going forward, we intend to continue to work with our partners and expand our direct and indirect sales and distribution channel in this area. If we are not successful in doing so, we may not be able to achieve our long-term business goals.
Contract cost growth on our fixed price contracts, including most of our government contracts, cost reimbursable type contracts and other contracts that cannot be justified as an increase in contract value due from customers exposes us to reduced profitability and the potential loss of future business and other risks.
A substantial portion of our products and services are sold under fixed-price contracts. Fixed-price contracts inherently have more risk than flexibly priced contracts. This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price increases or other increases in the cost of performance. Future events could result in either upward or downward adjustments to those estimates which could negatively impact our profitability. Operating margin is materially adversely affected when contract costs that cannot be billed to the customer are incurred. This cost growth can occur if initial estimates used for calculating the contract price were incorrect, or if estimates to complete increase. To a lesser extent, we provide products and services under cost reimbursable type contracts which carry the entire burden of costs exceeding a negotiated contract ceiling price.
The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to complete. A significant change in an estimate on one or more programs could have a material adverse effect on our business, results of operation and financial condition.
Ongoing compliance with the provisions of securities laws, related regulations and financial reporting standards could unexpectedly materially increase our costs and compliance related expenses.
Because we are a publicly traded company, we are required to comply with provisions of securities laws, related regulations and financial reporting standards. Because securities laws, related regulations and financial reporting standards pertaining to our business are relatively complex, our business faces increased risks including the following:
If we identify a material weakness in the future, our costs may unexpectedly increase - Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are required to furnish a report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K. Our independent registered public accountants are required to attest to and provide a separate opinion. To issue our report, we document our internal control design and the testing processes that support our evaluation and conclusion, and then we test and evaluate the results. There can be no assurance, however, that we will be able to remediate material weaknesses, if any, that may be identified in future periods, or maintain all of the controls necessary for continued compliance. There likewise can be no assurance that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
We acquired TCS on February 23, 2016 and have integrated TCS into our existing internal controls over financial reporting. We continue to make changes and related enhancements to the TCS controls as part of our evaluation of the effectiveness of our internal controls over financial reporting. Although we do not expect to experience significant changes in internal control over financial reporting, we may identify significant deficiencies or material weaknesses and incur additional costs in the future.
Stock-based compensation accounting standards could negatively impact our stock - Since our inception, we have used stock-based awards as a fundamental component of our employee compensation packages. We believe that stock-based awards directly motivate our employees to maximize long-term stockholder value and, through the use of long-term vesting, encourage employees to remain with us. We apply the provisions of Accounting Standards Codification ("ASC") 718, "Compensation - Stock Compensation," which requires us to record compensation expense in our statement of operations for employee and director stock-based awards using a fair value method. In the first quarter of fiscal 2018, we adopted FASB ASU No. 2016-09 which modified certain aspects of ASC 718, including the requirement to recognize excess tax benefits and shortfalls in the income statement. The ongoing application of this standard will have a significant effect on our reported earnings, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the value of stock-based awards (including long-term performance shares which are subject to the achievement of three-year goals which are based on several performance metrics). The ongoing application of this standard could impact the future value of our common stock and may result in greater stock price volatility. To the extent that this accounting standard makes it less attractive to grant stock-based awards to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could have a material adverse effect on our business, results of operation and financial condition.
We must adopt new complex revenue recognition rules - The accounting rules and regulations that we must comply with are complex. Accounting rules and regulations are continually changing in ways that could materially impact our financial statements. The FASB has recently issued new guidance for revenue recognition. The new guidance replaces the prior revenue recognition guidance in its entirety. We have not yet selected a transition method and continue to evaluate the impact that this guidance will have on our business, results of operation and financial condition. This evaluation and the implementation must be completed by August 1, 2018 (our first quarter of fiscal 2019). Due to the complexity of the new standard and our organizational structure, we may not be able to complete such timely. Regardless of the transition method, the application of this new guidance may result in certain adjustments to our financial statements, which could have a material adverse effect on our net income. Because of the uncertainty of the estimates, judgments and assumptions associated with our accounting policies, we cannot provide any assurances that we will not make subsequent significant adjustments to our consolidated financial statements.
Changes in securities laws, regulations and financial reporting standards are increasing our costs - The Sarbanes-Oxley Act of 2002 required changes in some of our corporate governance, public disclosure and compliance practices. These changes have resulted in increased costs. The SEC has promulgated and proposed new rules on a variety of subjects including the requirement to use the interactive data format eXtensible Business Reporting Language (commonly referred to as "XBRL") in our financial statements, which we began including in our quarterly reports filed with the SEC in the first quarter of fiscal 2011, and the possibility that we would be required to adopt International Financial Reporting Standards ("IFRS"). In April 2016, as part of its Disclosure Effectiveness Initiative, the SEC published a concept release which considers various business and financial disclosures that public companies make in investor reports and seeks the public’s input on ways to further improve that disclosure. The issues raised by the SEC in the concept release have the potential to dramatically change the way in which companies prepare and deliver disclosure to investors and the burdens of preparing that disclosure. In August 2012, the SEC adopted new rules establishing additional disclosure, supply chain verification and reporting requirements regarding a public company's use of Conflict Minerals procured from Covered Countries (as both of those terms are defined by the SEC). These SEC rules and reporting requirements have resulted in us incurring additional costs to document and perform supplier due diligence. As these rules impact our suppliers, the availability of raw materials used in our operations could be negatively impacted and/or raw material prices could increase. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage and could harm our reputation.
Our costs to comply with the aforementioned and other regulations continue to increase and we may have to add additional accounting staff, engage consultants or change our internal practices, standards and policies which could significantly increase our costs to comply with ongoing or future requirements. In addition, the NASDAQ Stock Market LLC ("NASDAQ") routinely changes its requirements for companies, such as us, that are listed on NASDAQ. These changes (and potential future changes) have increased and may increase our legal and financial compliance costs, including making it more difficult and more expensive for us to obtain director and officer liability insurance or maintain our current liability coverage. We believe that these new and proposed laws and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our Audit Committee, and qualified executive officers.
Our backlog is subject to customer cancellation or modification and such cancellation could result in a decline in sales and increased provisions for excess and obsolete inventory.
We currently have a backlog of orders, mostly under contracts that our customers may modify or terminate. Almost all of the contracts in our backlog (including firm orders previously received from the U.S. government) are subject to cancellation at the convenience of the customer or for default in the event that we are unable to perform under the contract. A portion of our backlog is determined based on contracts received from our customers (such as the U.S. government and large telephone companies) and in certain cases, is computed by multiplying the most recent month’s contract or revenue by the months remaining under the existing long-term agreements, which we consider to be the best available information for anticipating revenue under those agreements. There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The actual receipt and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual receipt of revenue on contracts included in backlog may never occur or may change because a program schedule could change, the program could be canceled, a contract could be reduced, modified or terminated early, or an option that we had assumed would be exercised not being exercised.
A significant portion of the backlog from our U.S. commercial customers relates to large, multi-year contracts to provide state and local governments (and their agencies) with safety and security solutions. Although the contracts themselves represent legal, binding obligations of these governments, funding is often subject to the approval of budgets (for example, on an annual or bi-annual basis). Although funding for these multi-year contracts are dependent on future budgets being approved, we include the full estimated value of these large, multi-year contracts in our backlog given the critical nature of the services being provided and the positive historical experience of our state and local government customers passing their respective budgets.
We record a provision for excess and obsolete inventory based on historical and future usage trends and other factors, including the consideration of the amount of backlog we have on hand at any particular point in time. If orders in our backlog are canceled or modified, our estimates of future product demand may prove to be inaccurate, in which case we may have understated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory is overvalued, we will be required to recognize such costs in our financial statements at the time of such determination. Any such charges could be materially adverse to our results of operations and financial condition.
We face a number of risks relating to the expected growth of our business. Our business and operating results may be negatively impacted if we are unable to manage this growth.
These risks include:
The loss of key technical or management personnel could adversely affect our business - Our future success depends on the continued contributions of key technical management personnel. Many of our key technical management personnel would be difficult to replace, and are not subject to employment or non-competition agreements. We currently have research and development employees in areas that are located a great distance away from our U.S. headquarters. Managing remote product development operations is difficult and we may not be able to manage the employees in these remote centers successfully. Our expected growth and future success will depend, in large part, upon our ability to attract and retain highly qualified engineering, sales and marketing personnel. Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense. Although we believe that we have been successful to date in recruiting and retaining key personnel, we may not be successful in attracting and retaining the personnel we will need to grow and operate profitably. Also, the management skills that have been appropriate for us in the past may not continue to be appropriate if we grow and diversify.
We may not be able to improve our processes and systems to keep pace with anticipated growth - The future growth of our business may place significant demands on our managerial, operational and financial resources. In order to manage that growth, we must be prepared to improve and expand our management, operational and financial systems and controls. We also need to continue to recruit and retain personnel and train and manage our employee base. We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions. If we are not able to timely and effectively manage our growth and maintain the quality standards required by our existing and potential customers, it could have a material adverse effect on our business, results of operation and financial condition.
Our markets are highly competitive and there can be no assurance that we can continue our success - The markets for our products are highly competitive. There can be no assurance that we will be able to continue to compete successfully or that our competitors will not develop new technologies and products that are more effective than our own. We expect the Department of Defense’s increased use of commercial off-the-shelf products and components in military equipment will encourage new competitors to enter the market. Also, although the implementation of advanced telecommunications services is in its early stages in many developing countries, we believe competition will continue to intensify as businesses and foreign governments realize the market potential of telecommunications services. Many of our competitors have financial, technical, marketing, sales and distribution resources greater than ours.
We may not be able to obtain sufficient components to meet expected demand - Our dependence on component availability, government furnished equipment, subcontractors and key suppliers, including the core manufacturing expertise of our high-volume technology manufacturing center located in Tempe, Arizona, exposes us to risk. Although we obtain certain components and subsystems from a single source or a limited number of sources, we believe that most components and subsystems are available from alternative suppliers and subcontractors. A significant interruption in the delivery of such items, however, could have a material adverse effect on our business, results of operation and financial condition. In addition, if our high-volume technology manufacturing center located in Tempe, Arizona is unable to produce sufficient product or maintain quality, it could have a material adverse effect on our business, results of operation and financial condition.
Our ability to maintain affordable credit insurance may become more difficult - In the normal course of our business, we purchase credit insurance to mitigate some of our domestic and international credit risk. Although credit insurance remains generally available, upon renewal, it may become more expensive to obtain or may not be available for existing or new customers in certain international markets and it might require higher deductibles than in the past. If we acquire a company with a different customer base, we may not be able to obtain credit insurance for those sales. As such, there can be no assurance that, in the future, we will be able to obtain credit insurance on a basis consistent with our past practices.
•We rely upon various third partythird-party companies and their technology to provide services to our customers and if we are unable to obtain such services at reasonable prices, or at all, our gross margins and our ability to provide the services of our wireless applications business could be materially adversely affected.customers.
Risks from our reliance with these third parties include:
The loss of mapping and third party content - The wireless data services provided to our customers are dependent on real-time, continuous feeds from map data, points of interest data, traffic information, gas prices, theater, event and weather information from vendors and others. Any disruption of this third-party content from our satellite feeds or backup landline feeds or other disruption could result in delays in our subscribers’ ability to receive information. We obtain this data that we sell to our customers from companies owned by current and potential competitors, who may act in a manner that is not in our best interest. If our suppliers of this data or content were to enter into exclusive relationships with other providers of location-based services or were to discontinue providing such information and we were unable to replace them cost effectively, or at all, our ability to provide the services of our wireless applications business would be materially adversely affected. Our gross margins may also be materially adversely affected if the cost of third party data and content increases substantially.
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Third party data centers or third party networks may fail - Many products and services of our advanced communication solutions, in particular our public safety and enterprise technology solutions, are provided through a combination of our servers, which we house at third party data centers, and the networks of our wireless carrier partners. As such, our business relies to a significant degree on the efficient and uninterrupted operation of the third-party data centers we use. Our hosted data centers are currently located in third party facilities located in the Irvine and San Francisco, California areas, and we may use others as required. We also use third party data center facilities in the Phoenix, Arizona area to provide for disaster recovery. Network failures, disruptions or capacity constraints in our third-party data center facilities or in our servers maintained at their location could affect the performance of the products and services of our wireless applications and 911 business and harm our reputation and our revenue. The ability of our subscribers to receive critical location and business information requires timely and uninterrupted connections with our wireless network carriers. Any disruption from our satellite feeds or backup landline feeds could also result in delays in our subscribers’ ability to receive information.
We must integrate our technologies and routinely upgrade them - We may not be able to upgrade our location-based services platform to support certain advanced features and functionality without obtaining technology licenses from third parties. Obtaining these licenses may be costly and may delay the introduction of such features and functionality, and these licenses may not be available on commercially favorable terms, or at all. Problems and delays in development or delivery as a result of issues with respect to design, technology, licensing and patent rights, labor, learning curve assumptions, or materials and components could prevent us from achieving contractual obligations. In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. The inability to offer advanced features or functionality, or a delay in our ability to upgrade our location-based services platform, may materially adversely affect demand for our products and services and, consequently, have a material adverse effect on our business, results of operation and financial condition.
We rely upon “open-source” software - We have incorporated some types of open-source software into our products, allowing us to enhance certain solutions without incurring substantial additional research and development costs. Thus far, we have encountered no unanticipated material problems arising from our use of open-source software. However, as the use of open-source software becomes more widespread, certain open-source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce the fees we charge for our products, which could have a material adverse effect on our business, results of operation and financial condition.
Indemnification provisions in our contracts could have a material adverse effect on our consolidated results of operations, financial position, or cash flows.
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. Some customers seek indemnification under their contractual arrangements with the Company for claims and other costs associated with defending lawsuits alleging infringement of patents through their use of our products and services, and the use of our products and services in combination with products and services of other vendors.
In some cases, we have agreed to assume the defense of the case. In others, the Company will negotiate with these customers in good faith because the Company believes its technology does not infringe the cited patents and due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation. It is not possible to determine the maximum potential amount the Company may spend under these agreements due to the unique facts and circumstances involved in each particular agreement.
For example, we have accrued certain costs related to Vehicle IP, LLC ("Vehicle IP") which filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware (the "District Court"). TCS is defending our customer. Substantive settlement conversations have occurred but, to date, the parties have been unable to reach a settlement. For additional information, see "Notes to Consolidated Financial Statements - Note (14)(b) Commitments and Contingencies - Legal Proceedings, Other Matters and Final Settlements" included in "Part II - Item 8.- Financial Statements and Supplementary Data," included in this Annual Report on Form 10-K.
The Company's assessments related to indemnification provisions are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company's consolidated financial statements in a future fiscal period.
We are, from time to time, and could become a party to additional litigation or subject to claims, including product liability claims, relating to our software, government investigations and other proceedings that could cause us to incur unanticipated expenses and otherwise have a material adverse effect on our business, results of operation and financial condition.
We are, from time to time, involved in commercial disputes and civil litigation relating to our businesses. Our agreements with customers may require us to indemnify such customers. Direct claims against us or claims against our customers may relate to defects in or non-conformance of our products, or our own acts of negligence and non-performance. Occasionally, we are called upon also to provide information in connection with litigation involving other parties or government investigations. Product liability and other forms of insurance are expensive and may not be available in the future. We cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to a future claim. In many cases, we are unable to obtain insurance and are self-insured. Any such claim could have a material adverse effect on our business, results of operation and financial condition.
•Because our software may contain defects or errors, and our hardware products may incorporate defective components, our sales could decrease if these defects or errors adversely affect our reputation or delay shipments of our products.
Products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Our products may not be error or defect free after delivery to customers, which could damage our reputation, cause revenue losses, result in the rejection of our products or services, divert development resources and increase service and warranty costs, each of which could have a material adverse effect on our business, results of operation and financial condition.
Software products, such as our 911 call handling software solutions, must meet the stringent technical requirements of our customers and we must satisfy our warranty obligations to our customers. Our 911 call handling software product is a small product line, developed by TCS more than ten years ago and older versions of this software remain deployed by certain end-customers. In August 2016, AT&T, a distributor of this small TCS product line informed us that they do not believe we met certain contractual specifications related to performance and usability and has requested a refund of certain payments made by them. Our Consolidated Balance Sheet as of July 31, 2017 includes an estimate of our warranty liability associated with this issue which was determined based on a review of contractual obligations, settlement discussions with AT&T and estimates of costs to enhance the software. We believe our customer support plan, which includes an intention to continue to support end-customers in exchange for an annual customer support fee, has mitigated the negative reputational impact of this issue. In fiscal 2017, we generated approximately $5.5 million of such fees, of which a significant portion was derived from our relationship with AT&T. Sales in fiscal 2018 for this product line are expected to be similar to what we achieved in fiscal 2017. Although we expect to resolve this issue amicably with AT&T, we may not be able to do so.
Our hardware products are also subject to warranty obligations and integrate a wide variety of components from different vendors. We must quickly develop new products and product enhancements to keep pace with the rapidly changing software and telecommunications markets in which we operate.
Protection of our intellectual property is limited and pursuing infringers of our patents and other intellectual property rights can be costly.
Our businesses rely, in large part, upon our proprietary scientific and engineering know-how and production techniques. We rely on a combination of patent, copyright, trademark, service mark, trade secret and unfair competition laws, restrictions in licensing agreements, confidentiality provisions and various other contractual provisions to protect our intellectual property and related proprietary rights, but these legal means provide only limited protection. Although a number of patents have been issued to us and we have obtained a number of other patents as a result of our acquisitions, we cannot assure you that our issued patents will be upheld if challenged by another party. Additionally, with respect to any patent applications which we have filed, we cannot assure you that any patents will be issued as a result of these applications.
The departure of any of our key management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us or the failure to achieve our intellectual property objectives could have a material adverse effect on our business, results of operation and financial condition. Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may fail to do so. In addition, the laws of certain countries in which our products are or may be sold may not protect our products or intellectual property rights to the same extent as the laws of the U.S.
Our ability to protect our intellectual property rights is also subject to the terms of future government contracts. We cannot assure you that the federal government will not demand greater intellectual property rights or restrict our ability to disseminate intellectual property. We are also a member of standards-setting organizations and have agreed to license some of our intellectual property to other members on fair and reasonable terms to the extent that the license is required to develop non-infringing products.
Pursuing infringers of our proprietary rights could result in significant litigation costs, and any failure to pursue infringers could result in our competitors utilizing our technology and offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S. Protecting our know-how is difficult especially after our employees or those of our third-party contract service providers end their employment or engagement. Attempts may be made to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent the misappropriation of our technology or prevent others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult and expensive. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. The costs and diversion of resources could significantly harm our business. If we fail to protect our intellectual property, we may not receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on it.
Third parties may claim we are infringing their intellectual property rights and we could be prevented from selling our products, or suffer significant litigation expense, even if these claims have no merit.
Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may claim that we, our products, operations or any products or technology we obtain from other parties are infringing their intellectual property rights, and we may be unaware of intellectual property rights of others that may cover some of our assets, technology and products. From time to time we receive letters from third parties who allege we are infringing their intellectual property and ask us to license such intellectual property. We review the merits of each such letter and respond as we deem appropriate.
From time to time our customers are parties to allegations of intellectual property infringement claims based on our customers’ incorporation and use of our products and services, which may lead to demands from our customers for us to indemnify them for costs in defending those allegations. Any litigation regarding patents, trademarks, copyrights or intellectual property rights, even those without merit, and the related indemnification demands of our customers, can be costly and time consuming, and divert our management and key personnel from operating our business. The complexity of the technology involved and inherent uncertainty and cost of intellectual property litigation increases our risks. If any third party has a meritorious or successful claim that we are infringing its intellectual property rights, we may be forced to change our products or enter into licensing arrangements with third parties, which may be costly or impractical. This also may require us to stop selling our products as currently engineered, which could harm our competitive position. We also may be subject to significant damages or injunctions that prevent the further development and sale of certain of our products or services and may result in a material loss of revenue.
From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Some open source licenses contain requirements that we make available source code for modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software products with open source software in a certain manner, we could under certain of the open source licenses, be required to release our proprietary source code. Open source license terms may be ambiguous and many of the risks associated with usage of open source cannot be eliminated, and could if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our products and client applications, discontinue the sale of our products or services in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could materially adversely affect our business, results of operation, and financial condition.
If our wireless carrier partners change the pricing and other terms by which they offer our products to their end-customers or do not continue to provide our services at all, our business, results of operation, and financial condition could be materially adversely affected. Additionally, potential future business combinations among wireless network operators could result in a loss of revenue for our business.
We generate a significant portion of our revenue from customers that are wireless carriers such as AT&T and Verizon. In addition, a portion of our revenue is derived from subscription fees that we receive from our wireless carrier partners for end users who subscribe to our service on a standalone basis or in a bundle with other services. To date, a relatively small number of end users have subscribed for our services in connection with their wireless plans compared to the total number of mobile phone users. Our future growth depends heavily on achieving significantly increased subscriber adoption of the wireless communication solutions we sell either through standalone subscriptions to our solutions or as part of bundles from our existing wireless carrier partners. Our success also depends on achieving widespread deployment of our solutions by attracting and retaining additional wireless carrier partners. Future revenue will depend on the pricing and quality of those services and subscriber demand for those services, which may vary by market, and the level of subscriber turnover experienced by our wireless carrier partners. If subscriber turnover increases more than we anticipate, our financial results could be materially adversely affected.
Poor performance in or disruptions of the services including in our advanced communication solutions could harm our reputation, delay market acceptance of our services and subject us to liabilities (including breach of contract claims brought by our customers and third-party damages claims brought by end-users). Our wireless carrier agreements and certain customers require us to meet specific requirements including operational uptime requirements or be subject to penalties.
If we are unable to meet contractual requirements with our wireless carrier partners, such as AT&T, they could terminate our agreements or we may be required to refund a portion of monthly subscriptions fees they have paid us.
Although we have a long history of providing services to many of our wireless carrier partners, from time to time, we routinely perform services without a multi-period contract while we negotiate new and extended contract terms and pricing. These negotiations are complex and may take long periods of time. Ultimately, if we are not successful in obtaining multi-period contract terms, or even a new contract, our revenues could be suddenly and materially reduced.
Competitors offer technology that has functionality similar to ours for free, under different business models. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these location-based services to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful for us and could have a material adverse effect on our business, results of operation and financial condition.
The telecommunications industry generally is currently undergoing a consolidation phase. Many of our customers, specifically wireless carrier customers of our Commercial Solutions segment, have or may become the target of acquisitions. If the number of our customers is significantly reduced as a result of this consolidation trend, or if the resulting companies do not utilize our product offerings, our business, results of operation and financial condition could be materially adversely affected.
Risks Related to our Common Stock
•Our stock price is volatile.
•Future issuances of our shares of common stock could dilute a stockholder's ownership interest in Comtech and reduce the market price of our shares of common stock.
•Actions of activist stockholders could impact the pursuit of our business strategies and adversely affect our results of operations, financial condition and/or share price.
•Provisions in our corporate documents and Delaware law could delay or prevent a change in control of Comtech.
•A disruption in our Common Stock dividend program could negatively impact our stock price.
Global Risks
The ongoing COVID-19 pandemic and related supply chain constraints have impacted our business, operating results and financial condition, as well as the operations and financial performance of many of the customers and suppliers in industries that we serve. We are unable to predict the extent to which the pandemic, supply chain constraints and related effects will adversely impact our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.
The COVID-19 pandemic and related disease control measures have significantly impacted the global economy and has created significant supply chain constraints. These issues have had and could continue to have adverse effects on our business, financial position, results of operations and cash flows. Although there has been an increase in vaccinations throughout the United States, vaccinations internationally have progressed at a slower rate and the impact of new strains of the virus are uncertain. The situation is changing rapidly and there may be additional impacts of which we are currently unaware. The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which cannot be predicted.
Poor business conditions due to the COVID-19 pandemic have resulted in the suppression of end-market demand for many of our products such as satellite ground station technologies and other short-lead time products. Because the timing, impact, severity and duration of these conditions are impossible to predict and remain ongoing, there is a risk that such conditions will have an adverse effect on our future consolidated results of operations, in particular in light of ongoing global supply chain disruptions, part shortages and extended lead times for components. The impact of the pandemic on our business has included or could in the future include:
•disruptions to or restrictions on our ability to ensure the continuous manufacture and supply of our products and services, including insufficiency of our existing inventory levels;
•temporary closures or reductions in operational capacity of our facilities or the facilities of our direct or indirect suppliers or customers;
•permanent closures of our direct and indirect suppliers, resulting in adverse effects to our supply chain;
•temporary shortages of skilled employees available to staff manufacturing, production and assembly facilities due to stay at home orders in many markets and travel restrictions within as well as into and out of countries;
•increases in operational expenses and other costs related to requirements implemented to mitigate the impact of the pandemic on our business and workforce;
•supply chain disruptions, including increased freight costs;
•delays or limitations on the ability of our customers to perform or make timely payments;
•cancellations in our backlog;
•reductions in short- and long-term demand for our products, or other disruptions in technology buying patterns;
•adverse effects on economies and financial markets globally or in various markets throughout the world, potentially leading to a prolonged economic downturn or reductions in business and consumer spending, which may adversely affect our results of operations and cause difficulty in managing inventory levels;
•delays to and/or lengthening of our sales or development cycles or qualification activity;
•challenges for us, our direct and indirect suppliers and our customers in obtaining financing due to turmoil in financial markets;
•workforce disruptions due to illness, quarantines, governmental actions, other restrictions, and/or the social distancing measures to mitigate the impact of COVID-19 at certain of our locations around the world in an effort to protect the health and well-being of our employees, customers, suppliers and of the communities in which we operate (including potential returns to restricting the number of employees attending events or meetings in person, limiting the number of people in our buildings and factories at any one time, restricting access to our facilities, suspending employee travel and meeting in person with customers);
•increased vulnerability to cyberattacks due to the significant number of employees working remotely; and
•our management team continuing to commit significant time, attention and resources to monitoring the COVID-19 pandemic and seeking to mitigate its effects on our business and workforce.
The ultimate extent of the impact of COVID-19 and supply chain constraints on our business, financial condition and results of operations will depend on future developments, which are still highly uncertain and cannot be predicted at this time. These impacts, individually or in the aggregate, have had and could continue to have adverse effects on our business, results of operations and financial condition. Such effect may be exacerbated in the event the pandemic, the measures taken in response to it, and their effects, persist for an extended period of time, or if there are periodic resurgences of COVID-19.
New and ongoing challenges relating to current supply chain constraints and impacts from inflation, including for satellite ground station and troposcatter components, could adversely impact our revenue, gross margins and financial results.
The global supply chain for certain raw materials and components, including those used in our satellite ground station and troposcatter equipment, has experienced significant strain in recent periods. The constrained supply environment has adversely affected, and could further affect, availability and lead times of raw materials and components, thereby impeding our ability to meet customer demand in circumstances where we cannot timely secure supply of components that meet our quality standards. Even when raw materials and components are available, they often come with higher prices reflecting an imbalance between supply and demand, as well as inflationary pressures affecting global markets.
The effects of the COVID-19 pandemic, inflation, labor challenges and the ongoing conflict between Russia and Ukraine have caused, and we expect will continue to cause further delays in the supply chain. Despite our attempts to mitigate the impact on our business, constrained supply conditions have and are expected to continue to adversely impact our costs of goods sold and may impact the timing and amount of revenue we realize. During fiscal 2022, we experienced disruptions in our supply chain relating to later-than-expected delivery of certain key components from several suppliers that adversely impacted our revenue in fiscal 2022. In addition, the ongoing supply chain issues have affected the quality of the components we receive. Certain parts received in fiscal 2022 did not meet our quality specifications and we were unable to use them.
We obtain certain components and subsystems from a single source or a limited number of sources. Some of our single source suppliers, particularly those that provide satellite ground station and troposcatter components, have reported to us that they are having disruptions in their respective supply chains. These single source components, which includes items such as cooling fans and power supplies, are in limited supply. In some cases, we have now depleted our stock inventory and we are on waiting lists to obtain additional components. In order to ship certain items during fiscal 2023, we must obtain additional components to produce certain finished goods. We continue to seek new suppliers and inventory elsewhere. In light of current challenges in the supply chain, we may not be able to qualify alternate suppliers for our components.
Heading into our fiscal 2023, we have a significant portion of our targeted revenues in our backlog. However, if shipments from our backlog are delayed or we are unable to obtain expected orders or components, our business outlook will prove to be inaccurate. These aforementioned supply chain constraints, and their related challenges could result in future shortages, increased material costs or use of cash, engineering design changes, and delays in new product introductions, each of which could adversely impact our revenue, gross margins and financial results. There can be no assurance that the impacts of all the aforementioned conditions will not continue, or worsen, in the future.
Our business outlook is difficult to forecast and operating results are subject to significant fluctuations and are likely to be volatile.
Historically, our business outlook is difficult to forecast and backlog (sometimes referred to herein as orders or bookings), net sales and operating results may vary significantly from period to period due to a number of factors including: sales mix; fluctuating market demand; start-up costs associated with the opening of our two new high-volume technology manufacturing centers; price competition; new product introductions by us or our competitors; customer bankruptcies; changing customer partnering procurement strategies; fluctuations in foreign currency exchange rates; unexpected changes in the timing of delivery of components or subsystems; the financial performance and impact of acquisitions; new accounting standards; political instability; regulatory developments; changes in income tax rates or tax credits; the price and expected volatility of our stock (which will impact, among other items, the amount of stock-based compensation expense we may record); general global economic conditions, and the impact of natural disasters or global pandemics.
We have experienced, and will experience in the future, significant fluctuations in bookings, net sales and operating results from period to period. For example, a sudden change in global economic conditions (or a worsening of the COVID-19 pandemic as described above) could have an immediate impact on a large portion of our net sales, a large amount of which are derived from products such as satellite ground station technologies, amplifier products and mission-critical technologies that generally have short order and lead times. Similarly, sales of certain of our public safety and location technologies are subject to sudden changes in wireless carrier procurement strategies, including decisions to sole-source such solutions or to perform such solutions internally. As a result, bookings and backlog related to these solutions are extremely sensitive to short-term fluctuations in customer demand.
In addition, a large portion of our consolidated net sales are derived in part from large U.S. federal and state government programs or large foreign government opportunities that are subject to lengthy sales cycles (including funding requirements) and are therefore difficult to predict.
If global economic business and political conditions deteriorate as compared to the current environment it could have an adverse impact on our business outlook and our business, operating results and financial condition.
Many of the end-markets for our products and services may be significantly impacted for other issues that result in adverse global economic conditions. For example, many of our international end-customers are in emerging and developing countries that are subject to sweeping economic and political changes. Many governments around the world are under pressure to reduce their spending. In recent years, global oil and natural gas prices have been volatile and have significantly impaired the ability of certain of our government customers in the oil and gas producing regions of the world to invest in telecommunications products and infrastructure. Additionally, the relative strength of the U.S. dollar against many international currencies has negatively impacted the purchasing power for many of our international end-customers because most of our sales are denominated in U.S. dollars. We generate significant sales from many emerging and developing countries and any such reduced purchasing power of our customers could adversely impact our sales and backlog.
In addition, many of our international customers (including our Middle Eastern and African customers) rely on European bank or government financing to procure funding for large systems, many of which include our equipment. We believe that European financing has been and will continue to be difficult to obtain. Volatility of financing conditions may cause our customers to be reluctant to spend funds required to purchase our equipment and could cause their projects to be postponed or canceled. In addition, if an adverse economic environment and lack of financing results in insolvencies for our customers, it would adversely impact the recoverability of our accounts receivable and/or inventories which would, in turn, adversely impact our results of operations.
The United Kingdom ("U.K.") exited from the European Union ("E.U.") on January 31, 2020. Such exit, commonly referred to as "Brexit," has created and may continue to create economic and political uncertainties and impacts that could have an adverse effect on our business, operations and profitability. Although the U.K. and E.U. entered a trade agreement for goods that was approved by the European Parliament in April 2021, there is no guarantee that it will remain in force as other cross-border issues remain contested. We maintain production, engineering and sales facilities in the U.K. and adverse consequences of Brexit could result in a deterioration in global economic conditions, instability in global financial markets, political and regulatory uncertainty, volatility in currency exchange rates, or adverse changes in the cross-border agreements currently in place, any of which could have an adverse impact on our financial results in the future.
We believe that the current global economic business environment is unstable and sudden negative changes could result in the immediate suppression of end-market demand for many of our products such as satellite ground station technologies and other short-lead time products. The timing, impact, severity and duration of these conditions are difficult to predict. If U.S. or global economic conditions deteriorate, or political conditions become unstable, or additional economic sanctions are imposed on some of our end-customers, it could adversely impact our business in a number of ways. In the past, our businesses have been negatively affected by uncertain economic environments in the overall market and, more specifically, in the telecommunications sector. Our customers have reduced their budgets for spending on telecommunications equipment and systems and in some cases postponed or reduced the purchase of our products and systems. In the future, our customers may again reduce their spending on telecommunications equipment and systems which would negatively impact both of our operating segments. If this occurs, it would adversely affect our business outlook, net sales, profitability and the recoverability of our assets, including intangible assets such as goodwill.
We have significant operations in Arizona, Florida, California, Washington State, Maryland, New York and other locations which could be materially and adversely impacted in the event of a terrorist attack and government responses thereto or significant disruptions (including natural disasters) to our business.
Terrorist attacks, the U.S. and other governments' responses thereto, and threats of war could adversely impact our business, results of operations and financial condition. For example, our 911 hosted location-based services and satellite teleport services operations depend on our ability to maintain our computer and equipment and systems in effective working order, and to protect our systems against damage from fire, natural disaster, terrorist attack, power loss, telecommunications failure, sabotage, unauthorized access to our system or similar events.
Any unanticipated interruption or delay in our operations or breach of security could have an adverse effect on our business, results of operations and financial condition. Our property and business interruption insurance may not be adequate to compensate us for any losses that may occur in the event of a terrorist attack, threat, system failure or a breach of security. Insurance may not be available to us at all or, if available, may not be available to us on commercially reasonable terms.
We currently, and intend to continue to, operate a high-volume technology manufacturing center located in Arizona. The COVID-19 pandemic, a terrorist attack or similar future event may disrupt our operations or those of our customers or suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. If a natural disaster or other business interruption occurred with respect to our high-volume technology manufacturing center, we do not have immediate access to other manufacturing facilities and, as a result, our business, results of operations and financial condition could be materially adversely affected. To support our long-term business goals for our satellite earth station product line, in fiscal 2021, we commenced a 15-year lease for a new 146,000 square foot facility in Chandler, Arizona and began shifting production of our satellite earth station products from our existing Tempe, Arizona locations. If we are unable to have a smooth transition to our new facility, production and deliveries of our products may be impacted and we may incur unexpected costs.
We design and manufacture our over-the-horizon microwave equipment and systems in Florida, where major hurricanes have occurred in the past, and amplifiers in Santa Clara, California, an area close to major earthquake fault lines, and also manufacture amplifiers in Melville, New York, an area subject to hurricanes. Additionally, certain of our Terrestrial and Wireless Networks segment activities are conducted in Washington State near a fault line. We maintain operations in Maryland near a U.S. Navy facility which may be more prone to a terrorist attack. Our operations in these and other locations (such as in our high-volume technology manufacturing center located in Arizona and our antenna production facility in the United Kingdom), could be subject to natural disasters or other significant disruptions, including hurricanes, tornadoes, typhoons, tsunamis, floods, earthquakes, fires, water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts, telecommunications failures, and other natural and man-made disasters or disruptions.
We cannot be sure that our systems will operate appropriately if we experience hardware or software failure, intentional disruptions of service by third parties, an act of God or an act of war. A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could involve material costs and distract management from operating our business.
In the event of any such disaster or other disruption, we could experience disruptions or interruptions to our operations or the operations of our suppliers, distributors, resellers or customers; destruction of facilities; and/or loss of life, all of which could materially increase our costs and expenses and adversely affect our business, results of operations and financial condition.
In addition, the COVID-19 pandemic has resulted in travel restrictions and business shutdowns both domestically and globally, including in locations in which we have significant operations. These or any further political, governmental or other actions to contain the spread or treat the impact of COVID-19, and the resulting developments, are highly uncertain and unpredictable and could result in social, economic and labor instability. These uncertainties could have an adverse effect on the continuity of our business and our financial condition, the results of operations and cash flows.
The military conflict between Russia and Ukraine, and the global response to it could adversely impact our revenues, gross margins and financial results.
The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in Russia. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts, adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geo-political instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes, export control law restrictions, and logistics restrictions including closures of air space, and could increase the costs, risks and adverse impacts from these new challenges. We may also be the subject of increased cyber-attacks as a result of the conflict.
The military conflict between Russia and Ukraine has impacted our sales pipeline and continues to have significant repercussions for our business. Although sales into Russia represented approximately 1% of our consolidated net sales in fiscal 2022 and 2021, consolidated net sales into Russia in fiscal 2023 and beyond were expected to significantly grow. As a result of the economic sanctions against Russia, we are assuming no new sales in Russia in fiscal 2023 and the foreseeable future.
As a result of this conflict, in fiscal 2022, certain customers (including the U.S. and Ukrainian government) paused procurement and deployment of satellite and troposcatter communication systems, and instead began purchasing war-fighting equipment.
For example, we had several opportunities to provide wireless communication systems (including troposcatter systems) to Ukraine for a variety of both defense and communications uses. Funding for these systems was expected to be provided by Ukraine and by the U.S. government and these items were expected to be awarded and shipped in the second half of fiscal 2022. As result of the conflict in Ukraine, it has become difficult to predict the timing or dollar amount of these types of awards. Additionally, funding for opportunities with other customers that we expected to book and ship has also been shifted to other programs and/or temporarily delayed as a result of changes in defense spending priorities.
Prior to this conflict, we maintained a small group of employees in Moscow, Russia who supported certain UHP-branded satellite communications products. We are actively hiring new employees, expanding our Canadian operations and shifting certain commercial software development and support activities outside of Russia. However, as we are currently in an environment where software engineering talent is already in high demand and commands a premium, we expect to incur additional annual expenses in connection with this personnel shift for our UHP products. We may not be able to timely ramp up our operations in Canada or elsewhere on a sufficient scale to support anticipated growth of our UHP products, which could adversely impact future revenues, gross margins and operations.
Business Risks
Our backlog is subject to customer cancellation or modification and such cancellations could result in a decline in sales and increased provisions for excess and obsolete inventory.
We currently have a backlog of orders, mostly under contracts that our customers may modify or terminate. Almost all of the contracts in our backlog (including firm orders previously received from the U.S. government) are subject to cancellation at the convenience of the customer or for default in the event that we are unable to perform under the contract.
In some cases, such as contracts received from large U.S. based telecommunication companies, our backlog is computed by multiplying the most recent month’s contract or revenue by the months remaining under the existing long-term agreements, which we consider to be the best available information for anticipating revenue under those agreements. Also, a significant portion of the backlog from our U.S. commercial customers relates to large, multi-year contracts to provide state and local governments (and their agencies) with public safety and location technology solutions. Funding of these contracts is often subject to the approval of budgets (for example, on an annual or bi-annual basis). Although funding for these multi-year contracts are dependent on future budgets being approved, we include the full estimated value of these large, multi-year contracts in our backlog given the critical nature of the services being provided and the positive historical experience of our state and local government customers passing their respective budgets.
There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, particularly during periods of economic instability. Nor can there be any assurance that any contract included in backlog will be profitable. The actual amount and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual recognition of revenue on contracts included in backlog may never occur or may change because a program schedule could change; a customer may not follow up with order details (e.g., delivery instructions), fluctuations in currency exchange rates after an order is placed could cause our products to become too expensive for a foreign customer; a customer’s program could be canceled, a contract could be reduced, modified or terminated early due to changes in a customer’s priorities; funding may not be included in future budgets; actual indirect rates being reimbursed on U.S. government contracts may ultimately be less than those indirect rates included in our initial proposals; or an option that we had assumed would be exercised is not exercised.
We record a provision for excess and obsolete inventory based on historical and projected usage trends and other factors, including the consideration of the amount of backlog we have on hand at any particular point in time. If orders in our backlog are canceled or modified, our estimates of future product demand may prove to be inaccurate, in which case we may have understated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory is overvalued, we will be required to recognize such costs in our financial statements at the time of such determination. Any such charges could be materially adverse to our results of operations and financial condition.
Contract cost growth on our firm fixed-price contracts, including most of our government contracts, cost reimbursable type contracts and other contracts that cannot be justified as an increase in contract value due from customers exposes us to reduced profitability and the potential loss of future business and other risks.
A substantial portion of our products and services are sold under firm fixed-price contracts. Firm fixed-price contracts inherently have more risk than flexibly priced contracts. This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price increases or other increases in the cost of performance. Future events could result in either upward or downward adjustments to those estimates which could negatively impact our profitability. Operating margin could be materially adversely affected when contract costs that cannot be billed to the customer are incurred. This cost growth can occur if initial estimates used for calculating the contract price were incorrect, or if estimates to complete increase. To a lesser extent, we provide products and services under cost reimbursable type contracts which carry the entire burden of costs exceeding a negotiated contract ceiling price.
The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to complete. A significant change in an estimate on one or more programs could have a material adverse effect on our business, results of operations and financial condition.
Our business is highly dependent on the budgetary decisions of our government customers, including the U.S. government (including prime contractors to the U.S. government), and changes in the U.S. government’s fiscal policies or budgetary priorities may have a material adverse effect on our business, operating results and financial condition.
During our fiscal years ended July 31, 2022, 2021 and 2020, sales to the U.S. government (including sales to prime contractors to the U.S. government) were $132.6 million, $201.1 million and $223.4 million or 27.2%, 34.6% and 36.2% of our consolidated net sales, respectively. In addition, a large portion of our existing backlog consists of orders related to U.S. government contracts and our Business Outlook for Fiscal 2023 and beyond depends, in part, on significant new orders from the U.S. government, which undergoes extreme budgetary pressures from time to time.
We rely on particular levels of U.S. government spending on our communication solutions, and our receipt of future orders depends in large part on continued funding by the U.S. government for the programs in which we participate. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Government contracts are conditioned upon the continuing availability of congressional appropriations and Congress’s failure to appropriate funds, or Congress’s actions to reduce or delay spending on, or reprioritize its spending away from, U.S. government programs which we participate in, could negatively affect our results of operations. Because many of the items we sell to the U.S. government are included in large programs realized over a period of several years, it is difficult, if not impossible, to determine specific amounts that are or will be appropriated for our products and services. As such, our assessments relating to the impact of changes in U.S. government spending may prove to be incorrect.
The federal debt limit continues to be actively debated as plans for long-term national fiscal policy are discussed. The outcome of these discussions could have a significant impact on defense spending broadly and programs we support in particular. The failure of Congress to approve future budgets and/or increase the debt ceiling of the U.S. on a timely basis could delay or result in the loss of contracts for the procurement of our products and services and we may be asked or required to continue to perform for some period of time on certain of our U.S. government contracts, even if the U.S. government is unable to make timely payments. A decrease in Department of Defense or Department of Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved (such as the withdrawal of troops from Afghanistan or other parts of the world), or changes in payment patterns of our customers as a result of changes in U.S. government spending could have an adverse effect on our business, results of operations and financial condition.
It is possible that a shutdown of the U.S. government may occur, or interim budgets may be adopted. As such, we may experience delayed orders, delayed payments and adverse impacts on our results of operations. We may experience related supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. Moreover, an outbreak of a pandemic such as the COVID-19 pandemic and associated quarantines, closures and travel restrictions may cause temporary or long-term disruptions in our supply chain and distribution systems. All of the aforementioned conditions and factors could, in the aggregate, have a material adverse effect on our business, results of operations and financial condition. Additionally, cost cutting, efficiency initiatives, reprioritization, other affordability analyses, and changes in budgetary priorities by our governmental customers, including the U.S. government, could adversely impact both of our operating segments. We are unable to predict the impact these or similar events could have on our business, financial position, results of operations or cash flows.
Our contracts with the U.S. government are subject to unique business, commercial and government audit risks.
We depend on the U.S. government for a significant portion of our revenues. Our contracts with the U.S. government are subject to unique business and commercial risks, including:
•unexpected contract or project terminations or suspensions;
•unpredictable order placements, reductions, accelerations, delays or cancellations;
•higher than expected final costs, particularly relating to software and hardware development, for work performed under contracts where we commit to specified deliveries for a fixed-price; and
•unpredictable cash collections of unbilled receivables that may be subject to acceptance of contract deliverables by the customer and contract close out procedures, including government audit and approval of final indirect rates.
Although we take steps to mitigate our risk with respect to contracts with the U.S. government, we may not be able to do so in every instance for any of the following reasons, among others:
•Our U.S. government contracts can easily be terminated by the U.S. government - Our U.S. government contracts can be terminated by the U.S. government for its convenience or upon an event of default by us. Termination for convenience provisions provide us with little to no recourse related to: our potential recovery of costs incurred or costs committed, potential settlement expenses and hypothetical profit on work completed prior to termination.
•Our U.S. government contracts are subject to funding by the U.S. Congress - Our U.S. government contracts are conditioned upon the continuing approval by Congress of the necessary funding. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. Consequently, at the beginning of a major program, the contract may not be fully funded, and additional monies are normally committed to the contract only if, and when, appropriations are made by Congress for future fiscal years. Delays or changes in funding can impact the timing of awards or lead to changes in program content. We obtain certain of our U.S. government contracts through a competitive bidding process. There can be no assurance that we will win additional contracts or that actual contracts that are awarded will ultimately be profitable.
•We can be disqualified as a supplier to the U.S. government - As a supplier to the U.S. government, we must comply with numerous regulations, including those governing security, contracting practices and classified information. Failure to comply with these regulations and practices could result in fines being imposed against us or our suspension for a period of time from eligibility for bidding on, or for award of, new government contracts. If we are disqualified as a supplier to government agencies, we would lose most, if not all, of our U.S. government customers and revenues from sales of our products would decline significantly.
•Our employees may not be able to obtain and maintain the required security clearances for the facilities in which we perform sensitive government work - Certain of our U.S. government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances. If we cannot maintain or obtain the required security clearances for our facilities and our employees, or obtain these clearances in a timely manner, we may be unable to perform certain U.S. government contracts. Further, loss of a facility clearance, or an employee’s failure to obtain or maintain a security clearance, could result in a U.S. government customer terminating an existing contract or choosing not to renew a contract. Lack of required clearances could also impede our ability to bid on or win new U.S. government contracts. This could damage our reputation and adversely affect our business, financial condition and results of operations.
In addition, all of our U.S. government contracts can be audited by the Defense Contract Audit Agency ("DCAA") and other U.S. government agencies and we can be subject to penalties arising from post-award contract audits (sometimes referred to as a Truth in Negotiations Act or "TINA" audit) or cost audits in which the value of our contracts may be reduced. If costs are found to be improperly allocated to a specific contract, those costs will not be reimbursed, and any such costs already reimbursed would be required to be refunded. TCS underwent audits by the DCAA for periods prior to Comtech’s fiscal 2016 acquisition of TCS. The DCAA has informed us that it is proposing retroactive contracts adjustments that, if finalized and issued, would result in the need for us to provide a refund to the U.S. government of approximately $2.4 million. We disagree with the DCAA’s assessment and would vigorously protest any adjustment, but ultimately an adjustment may be issued. Although we record contract revenues based upon costs we expect to realize upon final audit, we cannot predict the outcome of any such future audits and adjustments, and we may be required to materially reduce our revenues or profits upon completion and final negotiation of audits. Negative audit findings could also result in termination of a contract, forfeiture of profits, suspension of payments, fines and suspension or debarment from U.S. government contracting or subcontracting for a period of time.
Our dependence on sales to international customers exposes us to unique business, commercial and export compliance audit risks.
Sales for use by international customers (including sales to U.S. companies for inclusion in products that will be sold to international customers) represented approximately 25.0%, 23.9% and 23.5% of our consolidated net sales for the fiscal years ended July 31, 2022, 2021 and 2020, respectively, and we expect that international sales will continue to be a significant portion of our consolidated net sales for the foreseeable future. These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price-competitive), political and economic instability, exposure to public health epidemics, availability of suitable export financing, tariff regulations, and other U.S. and foreign regulations that may apply to the export of our products. Although we take steps to mitigate our risk with respect to international sales, we may not be able to do so in every instance for any of the following reasons, among others:
•We may not be able to continue to structure our international contracts to reduce risk - We attempt to reduce the risk of doing business in foreign countries by seeking subcontracts with large systems suppliers, contracts denominated in U.S. dollars, advance or milestone payments and irrevocable letters of credit in our favor. However, we may not be able to reduce the economic risk of doing business in foreign countries in all instances. In such cases, billed and unbilled receivables relating to international sales are subject to increased collectability risk and may result in significant write-offs, which could have a material adverse effect on our business, results of operations and financial condition. In addition, foreign defense contracts generally contain provisions relating to termination at the convenience of the government.
•We rely on a limited number of international sales agents - In some countries, we rely upon one or a small number of sales agents, exposing us to risks relating to our contracts with, and related performance of, those agents. We attempt to reduce our risk with respect to sales agents by establishing additional foreign sales offices where it is practical and by engaging, where practicable, more than one independent sales representative in a territory. It is our policy to require all sales agents to operate in compliance with applicable laws, rules and regulations. Violations of any of these laws, rules or regulations, and other business practices that are regarded as unethical, could interrupt the sales of our products and services, result in the cancellation of orders or the termination of customer relationships, and could damage our reputation, any of which developments could have a material adverse effect on our business, results of operations and financial condition.
•We must comply with all applicable export control laws and regulations of the U.S. and other countries - Certain of our products and systems may require licenses from U.S. government agencies for export from the U.S., and some of our products are not permitted to be exported. In addition, in certain cases, U.S. export controls also severely limit unlicensed technical discussions, such as discussions with any persons who are not U.S. citizens or permanent residents. As a result, in cases where we may need a license, our ability to compete against a non-U.S. domiciled foreign company that may not be subject to the same U.S. laws may be materially adversely affected. U.S. laws and regulations applicable to us include the Arms Export Control Act, the IEEPA, the ITAR, the EAR and the trade sanctions laws and regulations administered by the U.S. Treasury Department's OFAC.
•We must comply with the FCPA and similar laws elsewhere - We are subject to the FCPA and other foreign laws prohibiting corrupt payments to government officials, which generally bar bribes or unreasonable gifts to foreign governments or officials. Violations of these laws or regulations could result in significant sanctions, including disgorgement of profits, fines, criminal sanctions against us, our officers, our directors, or our employees, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. A violation of any of the regulations enumerated above could materially adversely affect our business, financial condition and results of operations. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, agents, or subsidiaries will not violate our policies. Additionally, changes in regulatory requirements which could restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the IEEPA or similar legislation could negatively impact our business. For the fiscal years ended July 31, 2022, 2021 and 2020, we conducted no business with states designated as sponsors of terrorism.
•We must maintain a company-wide Office of Trade Compliance - In the past, we have self-reported violations of export control laws or regulations to the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC"), DoC and OFAC. In addition, we have made various commitments to U.S. government agencies that oversee trade and export matters and have committed that we will maintain certain policies and procedures including maintaining a company-wide Chief Trade Compliance Officer and Office of Trade Compliance and conducting ongoing internal assessment and reporting any future violations to those agencies. Even though we take precautions to avoid engaging in transactions that may violate U.S. export control laws or regulations, including trade sanctions, those measures may not be effective in every instance. If it is determined that we have violated U.S. export control laws or regulations or trade regulations, civil and criminal penalties could apply, and we may suffer reputational harm.
•We are subject to future export compliance audits - We continue to implement policies and procedures to ensure that we comply with all applicable export control laws and regulations. We may be subject to future compliance audits that uncover improper or illegal activities that would subject us to material remediation costs, civil and criminal fines and/or penalties and/or an injunction. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Each of these outcomes could, individually or in the aggregate, have a material adverse effect on our business, results of operations and financial condition. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In addition, in order to ship our products into and implement our services in some countries, the products must satisfy the technical requirements of that particular country. If we were unable to comply with such requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, results of operations and financial condition.
•We may be affected by the future imposition of tariffs and trade restrictions - The current U.S. administration has generally not amended the trade policies and tariffs on imported products from the prior administration, and has increased sanctions against Russia. Our inability to effectively manage the negative impacts of U.S. and foreign trade policies, including, in connection with our business with customers outside of the United States or with newly sanctioned entities could adversely affect our business and financial results.
A change in our relationship with our large wireless carrier customers could have a material adverse effect on our business, results of operations and financial condition.
Although we have a long history of providing services to many of our wireless carrier partners, a change in purchasing or procurement strategies by a wireless carrier partner could result in the loss of business from that partner. Additionally, from time to time, we routinely perform services without a multi-period contract while we negotiate new and extended contract terms and pricing. These negotiations are complex and may take long periods of time. Even when we successfully negotiate a multi-period contract, our wireless carrier contracts, such as the ones with Verizon which collectively accounted for 11.1% of our sales in fiscal 2022, provide for terminations with notice and provide a mechanism for the wireless carrier to renegotiate lower fees and/or change services. Fee pressure from these carriers is constant and ongoing. Thus, even when we obtain a multi-period contract term, our revenues could be suddenly and materially reduced.
Competitors offer technology that has functionality similar to ours for free, under different business models. Competition from such free offerings may reduce our revenue and harm our business. If our wireless carrier partners or our competition can offer such technology to their subscribers or customers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful for us and could have a material adverse effect on our business, results of operations and financial condition.
If our wireless carrier partners change the pricing and other terms by which they offer our products to their end-customers or do not continue to provide our services at all or renegotiate lower fees with us, our business, results of operations, and financial condition could be suddenly and materially adversely affected.
We generate a significant portion of our revenue from customers that are wireless carriers. In addition, a portion of our revenue is derived from subscription fees that we receive from our wireless carrier partners for end-users who subscribe to our service on a standalone basis or in a bundle with other services. Future revenue will depend on the pricing and quality of those services and subscriber demand for those services, which may vary by market, and the level of subscriber turnover experienced by our wireless carrier partners. If subscriber turnover increases more than we anticipate, our financial results could be materially adversely affected.
Poor performance in or disruptions of the services included in our advanced communication solutions could harm our reputation, delay market acceptance of our services and subject us to liabilities (including breach of contract claims brought by our customers and third-party damages claims brought by end-users). Our wireless carrier agreements and certain customers require us to meet specific requirements including operational uptime requirements or be subject to penalties.
If we are unable to meet contractual requirements with our wireless carrier partners, they could terminate our agreements or we may be required to refund a portion of monthly subscriptions fees they have paid us.
Strategic Growth Risks
We face a number of risks relating to the expected long-term growth of our business. Our business and operating results may be negatively impacted if we are unable to manage this growth.
Our business is uniquely subject to certain risks related to its long term growth. These risks include:
•The loss of key technical and/or management personnel could adversely affect our business - Our future success depends on the continued contributions of key technical and management personnel. The management skills that have been appropriate for us in the past may not continue to be appropriate if we grow and diversify. Filling new positions may be difficult in the current competitive labor market. Moreover, many of our key and technical management personnel would be difficult to replace and are not subject to employment or non-competition agreements. We currently have research and development employees in areas that are located a great distance away from our U.S. headquarters and some work out of their respective homes. Managing remote product development operations is difficult and we may not be able to manage the employees in these remote centers successfully. Our expected growth and future success will depend, in large part, upon our ability to attract and retain highly qualified engineering, sales and marketing personnel. Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense. Although we believe that we have been successful to date in recruiting and retaining key personnel, we may not be successful in attracting and retaining the personnel we will need to grow and operate profitably, especially in the current competitive labor market.
•We may not be able to improve our processes and systems to keep pace with anticipated growth - The future growth of our business may place significant demands on our managerial, operational, production and financial resources. In order to manage that growth, we must be prepared to improve and expand our management, operational and financial systems and controls, as well as our production capabilities. We also need to continue to recruit and retain personnel and train and manage our employee base. We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions. Our planned moves to new high volume manufacturing facility in Chandler, Arizona may be delayed and subject to unforeseen costs (both capital and operational), which could impede our ability to complete customer orders and thereby have a material adverse effect on our business, results of operations and financial condition. If we are not able to timely and effectively manage our growth and maintain the quality standards required by our existing and potential customers, it could have an adverse effect on our business, results of operations and financial condition.
•Our markets are highly competitive and there can be no assurance that we can continue to compete effectively - The markets for our products are highly competitive. There can be no assurance that we will be able to continue to compete successfully on price or other terms, or that our competitors will not develop new technologies and products that are more effective than our own. We expect the Department of Defense’s increased use of commercial off-the-shelf products and components in military equipment will encourage new competitors to enter the market. Also, although the implementation of advanced telecommunications services is in its early stages in many developing countries, we believe competition will continue to intensify as businesses and foreign governments realize the market potential of telecommunications services. Many of our competitors have financial, technical, marketing, sales and distribution resources greater than ours. Recently, we have seen increased requests for proposals from large wireless carriers for sole-source solutions and have responded to several such requests. In order to induce retention of existing customer contracts and obtain business on a sole-source basis, we may ultimately agree to adjust pricing on a retroactive basis. If our sole-source proposals are rejected in favor of a competitor’s proposal, it could result in the termination of existing contracts, which could have a material adverse effect on our business, results of operations and financial condition.
•We may not be able to obtain sufficient components to meet expected demand - Our dependence on component availability, government furnished equipment, subcontractors and key suppliers, including the core manufacturing expertise of our high-volume technology manufacturing center located in Arizona exposes us to risk. Although we obtain certain components and subsystems from a single source or a limited number of sources, we believe that most components and subsystems are available from alternative suppliers and subcontractors. During the past three years, partly driven by the COVID-19 pandemic and as a result of overall increased industry-wide demand, lead times for many components have increased as well as freight costs. In addition, threats of or actual tariffs could limit our ability to obtain certain parts on a cost-effective basis, or at all. A significant interruption in the delivery of such items could have an adverse effect on our business, results of operations and financial condition. Similarly, if our high-volume technology manufacturing center located in Arizona is unable to produce sufficient product or maintain quality, it could have a material adverse effect on our business, results of operations and financial condition.
•Our ability to maintain affordable credit insurance may become more difficult - In the normal course of our business, we purchase credit insurance to mitigate some of our domestic and international credit risk. Although credit insurance remains generally available, upon renewal, it may become more expensive to obtain or may not be available for existing or new customers in certain international markets and it might require higher deductibles than in the past. If we acquire a company with a different customer base, we may not be able to obtain credit insurance for those sales. As such, there can be no assurance that, in the future, we will be able to obtain credit insurance on a basis consistent with our past practices.
Loss of our executive officers or other key personnel or other changes to our management team could disrupt our operations and growth plans or harm our business.
We depend on the efforts of our executive officers and certain key personnel. Any unplanned turnover or our failure to develop an adequate succession plan or business continuity plan for one or more of our executive officers, including our Chief Executive Officer (“CEO”), or other key positions could deplete our institutional knowledge base and erode our competitive advantage. The loss or limited availability of the services of one or more of our executive officers or other key personnel, or our inability to recruit and retain qualified executive officers or other key personnel in the future, could, at least temporarily, have an adverse effect on our operating results and financial condition. Leadership transitions can be inherently difficult to manage, and an inadequate transition may cause disruption to our business an growth plans, including to our relationships with our customers and employees.
We have incurred indebtedness under a Credit Facility, and may incur substantial additional indebtedness in the future, and may not be able to service that debt in the future and we must maintain compliance with various covenants that impose restrictions on our business.
On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders, replacing our prior Credit Agreement dated as of February 23, 2016. The Credit Facility provides a senior secured loan facility of up to $550.0 million consisting of: (i) a revolving loan facility with a borrowing limit of $300.0 million; (ii) an accordion feature allowing us to borrow up to an additional $250.0 million; (iii) a $35.0 million letter of credit sublimit; and (iv) a swingline loan credit sublimit of $25.0 million. The obligations under the Credit Facility are secured by substantially all of our tangible and intangible assets.
As of July 31, 2022, the amount outstanding under our Credit Facility was $130.0 million, which is reflected in the non-current portion of long-term debt on our Consolidated Balance Sheet. As of July 31, 2022, we also had $0.6 million of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts.
The Credit Facility matures on October 31, 2023. If we do not have sufficient funds to repay our debt when due, it may be necessary to refinance our debt through additional debt or equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on such refinancing, increases in interest expense could have a material adverse effect on our business, results of operations and financial condition.
Our Credit Facility contains various affirmative and negative covenants that may restrict our ability to, among other things, permit liens on our property, change the nature of our business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person.
We anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future, however, there can be no assurance that we will be able to meet these covenants.
Further, our ability to comply with covenants, terms of and conditions our facility may be affected by events beyond our control. Failure to comply with covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations. Our substantial debt obligations could impede, restrict or delay the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business. For example:
•we may be required to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows for other purposes, including but not limited to business development efforts, capital expenditures, dividends or strategic acquisitions;
•if we are not able to generate sufficient cash flows to meet our substantial debt service obligations or to fund our other liquidity needs, we may have to take actions such as selling assets or raising additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and joint ventures, restructuring our debt and other capital-intensive activities;
•we may not be able to fund future working capital, capital investments and other business activities;
•we may not be able to pay dividends or make certain other distributions;
•we may become more vulnerable in the event of a downturn in our business or a worsening of general economic or industry-specific conditions; and
•our flexibility in planning for, or reacting to, changes in our business and industry may be limited, thereby placing us at a competitive disadvantage compared to our competitors that have less indebtedness.
Moreover, we may incur substantial additional indebtedness in the future to fund acquisitions or to fund other activities for general business purposes. If additional new debt is added to the current or planned debt levels, the related risks that we now face could intensify. A substantial increase in our indebtedness could also have a negative impact on our credit ratings. In this regard, failure to maintain our credit ratings could adversely affect the interest rate available to us in future financings, as well as our liquidity, competitive position and access to capital markets. Any decision regarding future borrowings will be based on the facts and circumstances existing at the time, including market conditions and our credit ratings.
The holders of our Series A Preferred Convertible Stock have a majority vote consent right over our ability to amend, restate, or replace the Credit Agreement on terms that are materially different to those of the Credit Agreement or that adversely affect the Company’s ability to fulfill its repurchase obligations of the Series A Preferred Convertible Stock. If we need to amend, restate or replace the Credit Agreement on materially different terms or terms adverse to the interests of the holders of our Series A Preferred Convertible Stock, and we are unable to obtain the consent of such holders, we may be unable to obtain required financing or liquidity on favorable terms, or at all.
Acquisitions of companies and investments could prove difficult to integrate, disrupt our business, dilute stockholder value or adversely affect operating results or the market price of our common stock.
We expect to continue to evaluate other acquisitions and investments as part of our growth plans. Such efforts may not result in an acquisition or ultimately be beneficial to us.
Future acquisitions or investments may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of large amounts of debt, increases to amortization expense and future write-offs of the acquired intangibles. Acquisitions and investments involve risks that include failing to:
•properly evaluate the technology;
•accurately forecast the financial impact of the transaction, including accounting charges and transaction expenses;
•integrate the technologies, products and services, research and development, sales and marketing, support and other operations;
•integrate and retain key management personnel and other key employees;
•retain and cross-sell to acquired customers; and
•combine potentially different corporate cultures.
Acquisitions and investments could also:
•divert management’s attention away from the operation of our businesses;
•result in significant goodwill and intangibles write-offs in the event an acquisition or investment does not meet expectations; and
•increase expenses, including expenses of managing the growth of such acquired businesses.
There can be no assurance that any future acquisition or investment will be successful within the anticipated time frame, or at all, will be as valuable as the amount we pay to acquire it, and will not adversely affect our business, results of operations or financial condition. In addition, if we consummate future acquisitions using our equity securities or securities convertible into our equity securities, existing stockholders may be diluted, which could have a material adverse effect on the market price of our common stock.
Foreign acquisitions and investments are regularly subject to scrutiny by the U.S. government and its agencies, such as the Committee on Foreign Investment in the United States (“CFIUS”) and the Defense Counterintelligence and Security Agency (“DCSA”) and our role as a U.S. federal contractor escalates such scrutiny, in particular, with respect to compliance with industrial security requirements. Failure to comply with the requirements of the U.S. government could result in fines being imposed against us or our suspension for a period of time of authority to operate under certain government programs or from eligibility for bidding on, or for award of, new government contracts, which could have a material adverse effect on our business, results of operations and financial condition.
Our investments in recorded goodwill and other intangible assets could be impaired as a result of future business conditions, a deterioration of the global economy or if we change our reporting unit structure.
As of July 31, 2022, goodwill recorded on our Consolidated Balance Sheet aggregated $347.7 million. Additionally, as of July 31, 2022, net intangibles recorded on our Consolidated Balance Sheet aggregated $247.3 million.
For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Satellite and Space Communications and Terrestrial and Wireless Networks segments each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. Reporting units are defined by how our Chief Executive Officer ("CEO") manages the business, which includes resource allocation decisions. 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350 "Intangibles - Goodwill and Other." A change to our management approach may require us to perform an interim goodwill impairment test and possibly record impairment charges in a future period.
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. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
As a result of our segment restructuring in the fourth quarter of fiscal 2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed an interim, quantitative assessment as of July 29, 2022 and estimated the fair value of each of our reporting units, both before and after the change, using a combination of the income and market approaches. Based on our quantitative evaluations, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 18.4% and 11.6%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. Given its proximity to our next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim, quantitative assessment to conclude that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment as of August 1, 2022.
It is possible that, during fiscal 2023 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, 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, or our common stock price could fluctuate. Such fluctuation could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global business activity.
A significant decline in our customers' 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 quantitative assessment during fiscal 2023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired.
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2023 (the start of our fiscal 2024). If our assumptions and related estimates change in the future, or if we change our reporting unit structure 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 when we perform these tests, or in other future periods. In addition to our impairment analysis of goodwill, we also review net intangibles with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangibles were recoverable as of July 31, 2022. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.
Cybersecurity Risks
We could be negatively impacted by a system failure, lack of or failure of redundant system components, security breach through cyber-attack, cyber intrusion or otherwise, by other significant disruption of our IT networks or those we operate for certain customers, or third-party data center facilities, servers and related systems. If any such events occur, we may have to reimburse our customers for damages that they may have incurred, pay contract penalties, or provide refunds.
Similar to all companies in our industry, we are under constant cyber-attack and are subject to an ongoing risk of security breaches and disruptions of our IT networks and related systems, including third-party data center facilities, whether through actual breaches, cyber-attacks (including ransomware) or cyber intrusions via the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization. Actual security breaches or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, have increased in recent years and have become more complex. Our IT networks and systems, as well as third-party data center facilities, have been and, we believe will continue to be under constant attack. We face an added risk of a security breach or other significant disruption to certain of our equipment used on some of our customers' IT networks and related systems which may involve managing and protecting information relating to public safety agencies, wireless carriers as well as national security and other sensitive government functions. Many of our systems have, or are required to have, system redundancies and back-up; in some cases, we may not have sufficient redundancy and/or redundancy and/or back-ups may fail. We may incur significant costs to prevent and respond to system failures, failure of redundant system components, actual breaches, cyber-attacks and other systems disruptions.
As a communications company, and particularly as a government contractor and a provider of public safety and location technologies (including 911 hosted systems), we face a heightened risk of a security breach or disruption from actual breaches, cyber-attacks and other threats to gain unauthorized access to our and our customers' proprietary or classified information on our IT networks, third-party data center facilities and related systems and to certain of our equipment used on some of our customers' IT networks and related systems. These types of information, IT networks and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. There can be no assurance that our security efforts and measures will be effective or that actual security breaches or disruptions will not be successful or damaging. Techniques used in such breaches and cyber-attacks are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. In some cases, the resources of foreign governments may be behind such attacks. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk.
A security breach or other significant disruption (including as a result of a lack of redundancy and/or failure of such redundancy) involving these types of information, IT networks and related systems could:
•Disrupt the proper functionality of these networks, data center facilities and systems and therefore our operations and/or those of certain of our customers;
•Result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or our customers, including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
•Compromise national security and other sensitive government functions;
•Require significant management attention and resources to remedy the damage that results;
•Require us to make payments to our customers to reimburse them for damages, pay them penalties or provide refunds; and
•Damage our reputation with our customers (particularly agencies of the U.S. government) and the public generally.
In addition, the cost of continually defending against cyber-attacks and actual breaches has increased in recent years and future costs and any or all of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
The measures we have implemented to secure information we collect and store or enable access to may be breached, which could cause us to breach agreements with our partners and expose us to potential investigation and penalties by authorities and potential claims for contract breach, product liability damages, credits, penalties or termination by persons whose information was disclosed.
We take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store and to prevent unauthorized access to third-party data to which we enable access through our products, but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access despite our efforts. If such unauthorized disclosure or access does occur, we may be required to notify persons whose information was disclosed or accessed under existing and proposed laws. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. In the event of such disclosure, we also may be subject to claims of breach of contract, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed. If there is a security breach or if there is an inappropriate disclosure of any of these types of information, we could be exposed to investigations, litigation, fines and penalties. Remediation of and liability for loss or misappropriation of end user or employee personal information could have a material adverse effect on our business, results of operations and financial condition. Even if we were not held liable for such event, a security breach or inappropriate disclosure of personal, private or confidential information could harm our reputation and our relationships with current and potential customers and end users. Even the perception of a security risk could inhibit market acceptance of our products and services. We may be required to invest additional resources to protect against damage caused by any actual or perceived disruptions of our services. We may also be required to provide information about the location of an end user’s mobile device to government authorities, which could result in public perception that we are providing the government with intelligence information and deter some end users from using our services. Any of these developments could have a material adverse effect on our business, results of operations and financial condition.
Legal, Regulatory and Litigation Risks
Changes in U.S. federal, state and foreign tax law could adversely affect our business and financial condition.
The laws, rules, and regulations dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have immediate and/or retroactive application) could adversely affect us or holders of our common stock. In recent years, many changes have been made to applicable tax laws and changes are likely to continue to occur in the future. It cannot be predicted whether, when, in what form, or with what effective dates, new tax laws may be enacted, or regulations and rulings may be enacted, promulgated or issued under existing or new tax laws, which could result in an increase in our tax liability or require changes in the manner in which we operate in order to minimize or mitigate any adverse effects of changes in tax law or in the interpretation thereof.
Our U.S. federal, state and foreign tax returns are subject to audit and a resulting tax assessment or settlement could have a material adverse effect on our business, results of operations and financial condition. Significant judgment is required in determining the provision for income taxes.
The final determination of tax examinations and any related litigation could be materially different than what is reflected in historical income tax provisions and accruals.
Our U.S. federal income tax returns for fiscal 2019 through 2021 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2018 are subject to audit. In addition to income tax audits, TCS is subject to ongoing state excise tax audits by the Washington State Department of Revenue. Although adjustments relating to past audits of our federal income tax returns were immaterial, a tax assessment or settlement for other periods or other jurisdictions that may be selected for future audit could have a material adverse effect on our business, consolidated results of operations and financial condition.
We may be subject to environmental liabilities.
We engage in manufacturing and are subject to a variety of local, state and federal laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. We are also subject to the Restriction of Hazardous Substance ("RoHS") directive which restricts the use of lead, mercury and other substances in electrical and electronic products. The failure to comply with current or future environmental requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes, cessation of operations or reputational damage that could have a material adverse effect on our business, results of operations and financial condition. In addition, the handling, treatment or disposal of hazardous substances by us or our predecessors may have resulted, or could in the future result, in contamination requiring investigation or remediation, or lead to other liabilities, any of which could have a material adverse effect on our business, results of operations and financial condition.
The success of our business is dependent on compliance with FCC rules and regulations and similar foreign laws and regulations.
Many of our products are incorporated into wireless communications systems that must comply with various U.S. government regulations, including those of the FCC, as well as similar international laws and regulations. As a result, our business faces increased risks including the following:
•We must obtain various licenses from the FCC - We operate FCC licensed teleports that are subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. We cannot guarantee that the FCC will grant renewals when our existing licenses expire, nor are we assured that the FCC will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses. We may, in the future, be required to seek FCC or other government approval if foreign ownership of our stock exceeds certain specified criteria. Failure to comply with these policies could result in an order to divest the offending foreign ownership, fines, denial of license renewal and/or license revocation proceedings against the licensee by the FCC, or denial of certain contracts from other U.S. government agencies.
•We are dependent on the allocation and availability of frequency spectrum - Adverse regulatory changes related to the allocation and availability of frequency spectrum and in the military standards and specifications that define the current satellite networking environment, could materially harm our business by: (i) restricting development efforts by us and our customers, (ii) making our current products less attractive or obsolete, or (iii) increasing the opportunity for additional competition. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards and reassign bandwidth for these products and services. The reduced number of available frequencies for other products and services and the time delays inherent in the government approval process of new products and services have caused, and may continue to cause, our customers to cancel, postpone or reschedule their installation of communications systems including their satellite, over-the-horizon microwave, or terrestrial line-of-sight microwave communication systems. This, in turn, could have a material adverse effect on our sales of products to our customers. Changes in, or our failure to comply with, applicable laws and regulations could materially adversely harm our business, results of operations, and financial condition.
•Our future growth is dependent, in part, on developing NG-911 compliant products - The FCC requires that certain location information be provided to network operators for public safety answering points when a subscriber makes a 911 call. Technical failures, greater regulation by federal, state or foreign governments or regulatory authorities, time delays or the significant costs associated with developing or installing improved location technology could slow down or stop the deployment of our mobile location products. If deployment of improved location technology is delayed, stopped or never occurs, market acceptance of our products and services may be materially adversely affected. Because we rely on some third-party location technology instead of developing all of the technology ourselves, we have little or no influence over its improvement. The technology employed with NG-911 services generally anticipates a migration to internet-protocol ("IP") based communication. Since many companies are proficient in IP-based communication protocols, the barriers to entry to providing NG-911 products and services are lower than for traditional switch-based protocols. If we are unable to develop unique and proprietary solutions that are superior to and/or more cost effective than other market offers, our 911 business could get replaced by new market entrants, resulting in a material adverse effect on our business, results of operations and financial condition.
•Under the FCC’s mandate, our 911 business is dependent on state and local governments- Under the FCC’s mandate, wireless carriers are required to provide 911 services only if state and local governments request the service. As part of a state or local government’s decision to request 911, they have the authority to develop cost recovery mechanisms. However, cost recovery is no longer a condition to wireless carriers’ obligation to deploy the service. If state and local governments do not widely request that 911 services be provided or we become subject to significant pressures from wireless carriers with respect to pricing of 911 services, our 911 business would be harmed and future growth of our business would be reduced.
Regulation of the mobile communications industry and VoIP is evolving, and unfavorable changes or our failure to comply with existing and potential new legislation or regulations could harm our business and operating results.
As the mobile communications industry continues to evolve, we believe greater regulation by federal, state or foreign governments or regulatory authorities is likely and we face certain risks including:
•We must adhere to existing and potentially new privacy rules - We believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing our ability to utilize this information in the resale of certain of our products. In order for mobile location products and services to function properly, wireless carriers must locate their subscribers and store information on each subscriber’s location. Although data regarding the location of the wireless user resides only on the wireless carrier’s systems, users may not feel comfortable with the idea that the wireless carrier knows and can track their location. Carriers will need to obtain subscribers’ permission to gather and use the subscribers’ personal information, or they may not be able to provide customized mobile location services which those subscribers might otherwise desire. If subscribers view mobile location services as an annoyance or a threat to their privacy, that could reduce demand for our products and services and have a material adverse effect on our business, results of operations and financial condition.
Over the past several years, there have been a number of laws and regulations enacted that affect companies conducting business on the Internet, including the European General Data Protection Regulation ("GDPR"). The GDPR imposes certain privacy related requirements on companies that receive or process personal data of residents of the European Union that are currently different than those in the United States and include significant penalties for non-compliance. Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for personal data protection. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. Our costs to comply with the GDPR as well any other similar laws and regulations that emerge may negatively impact our business.
•We may face increased compliance costs in connection with health and safety requirements for mobile devices - If wireless handsets pose health and safety risks, we may be subject to new regulations and demand for our products and services may decrease. Media reports have suggested that certain radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Concerns over radio frequency emissions may have the effect of discouraging the use of wireless handsets, which would decrease demand for our services. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless handsets. In addition, interest groups have requested that the FCC investigate claims that wireless technologies pose health concerns and cause interference with airbags, hearing aids and other medical devices. There also are some safety risks associated with the use of wireless handsets while driving. Concerns over these safety risks and the effect of any legislation that may be adopted in response to these risks could limit our ability to market and sell our products and services, which could negatively impact our business, consolidated results of operations and financial condition.
•The regulatory environment for VoIP services is developing - The FCC has determined that VoIP services are not subject to the same regulatory scheme as traditional wireline and wireless telephone services. If the regulatory environment for VoIP services evolves in a manner other than the way we anticipate, our 911 business would be significantly harmed and future growth of our business would be significantly reduced. For example, the regulatory scheme for wireless and wireline service providers requires those carriers to allow service providers such as us to have access to certain databases that make the delivery of a 911 call possible. No such requirements exist for VoIP service providers, so carriers could prevent us from continuing to provide VoIP 911 service by denying us access to the required databases.
Ongoing compliance with the provisions of securities laws, related regulations and financial reporting standards could unexpectedly materially increase our costs and compliance related expenses.
Because we are a publicly traded company, we are required to comply with provisions of securities laws, related regulations and financial reporting standards. Because securities laws, related regulations and financial reporting standards pertaining to our business are relatively complex, our business faces increased risks including the following:
•If we identify a material weakness in the future, our costs may unexpectedly increase - Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are required to furnish a report of management’s assessment of the effectiveness of our internal controls as part of our Form 10-K. Our independent registered public accountants are required to attest to and provide a separate opinion. To issue our report, we document our internal control design and the testing processes that support our evaluation and conclusion, and then we test and evaluate the results. There can be no assurance, however, that we will be able to remediate material weaknesses, if any, that may be identified in future periods, or maintain all of the controls necessary for continued compliance. There likewise can be no assurance that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
•Stock-based compensation accounting standards could negatively impact our stock - Since our inception, we have used stock-based awards as a fundamental component of our employee compensation packages. We believe that stock-based awards directly motivate our employees to maximize long-term stockholder value and, through the use of long-term vesting, encourage employees to remain with us. We apply the provisions of ASC 718, "Compensation - Stock Compensation," which requires us to record compensation expense in our statement of operations for employee and director stock-based awards using a fair value method. In the first quarter of fiscal 2018, we adopted FASB ASU No. 2016-09 which modified certain aspects of ASC 718, including the requirement to recognize excess tax benefits and shortfalls in the income statement. The ongoing application of this standard will have a significant effect on our reported earnings, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the value of stock-based awards (including long-term performance shares which are subject to the achievement of three-year goals which are based on several performance metrics). The ongoing application of this standard could impact the future value of our common stock and may result in greater stock price volatility. To the extent that this accounting standard makes it less attractive to grant stock-based awards to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could have a material adverse effect on our business, results of operations and financial condition.
Also, as further discussed in "Notes to Consolidated Financial Statements - Note (1) - Summary of Significant Accounting and Reporting Policies" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K, the accounting rules and regulations that we must comply with are complex and are continually changing in ways that could materially impact our financial statements. We must comply with these new rules on a go-forward basis. Because of the uncertainties of the estimates, judgments and assumptions associated with new accounting standards, as well as with any future guidance or interpretations related to them, we may incur additional costs and cannot provide any assurances that we will be able to comply with such complex rules.
Our costs to comply with the aforementioned and other regulations continue to increase and we may have to add additional accounting staff, engage consultants or change our internal practices, standards and policies which could significantly increase our costs to comply with ongoing or future requirements. In addition, the Nasdaq Stock Market LLC ("Nasdaq") routinely changes its requirements for companies, such as us, that are listed on Nasdaq. These changes (and potential future changes) have increased and may increase our legal and financial compliance costs, including making it more difficult and more expensive for us to obtain director and officer liability insurance or maintain our current liability coverage. We believe that these new and proposed laws and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our Audit Committee, and qualified executive officers.
Indemnification provisions in our contracts could have a material adverse effect on our consolidated results of operations, financial position, or cash flows.
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. Some customers seek indemnification under their contractual arrangements with us for claims and other costs associated with defending lawsuits alleging infringement of patents through their use of our products and services, and the use of our products and services in combination with products and services of other vendors.
In some cases, we have agreed to assume the defense of the case. In others, we will negotiate with these customers in good faith because we believe our technology does not infringe the cited patents or due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation. It is not possible to determine the maximum potential amount we may spend under these agreements due to the unique facts and circumstances involved in each particular agreement.
Our assessments related to indemnification provisions are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more of these matters could have a material adverse effect on our consolidated financial statements in a future period.
We are, from time to time, and could become a party to additional litigation or subject to claims, including product liability claims, employee claims, government investigations and other proceedings that could cause us to incur unanticipated expenses and otherwise have a material adverse effect on our business, results of operations and financial condition.
We are, from time to time, involved in commercial disputes and civil litigation relating to our businesses.
Our agreements with customers may require us to indemnify such customers. Direct claims against us or claims against our customers may relate to defects in or non-conformance of our products, or our own acts of negligence and non-performance. Occasionally, we are called upon also to provide information in connection with litigation involving other parties or government investigations. Product liability and other forms of insurance are expensive and may not be available in the future.
We cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to a future claim. In many cases, we are unable to obtain insurance and are self-insured. Any such claim, including any out of pocket payments we are required to make and the costs of the defense against such claim, could result in material costs and have an adverse effect on our business, results of operations and financial condition.
For additional information related to these lawsuits, see "Notes to Consolidated Financial Statements - Note (12)(a) - Commitments and Contingencies - Legal Proceedings and Other Matters" included in "Part II - Item 8.- Financial Statements and Supplementary Data," included in this Form 10-K.
Protection of our intellectual property is limited and pursuing infringers of our patents and other intellectual property rights can be costly.
Our businesses rely, in large part, upon our proprietary scientific and engineering know-how and production techniques. We rely on a combination of patent, copyright, trademark, service mark, trade secret and unfair competition laws, restrictions in licensing agreements, confidentiality provisions and various other contractual provisions to protect our intellectual property and related proprietary rights, but these legal means provide only limited protection. We cannot guarantee that our issued and acquired patents will be upheld if challenged by another party. Additionally, with respect to any patent applications which we have filed, we cannot guarantee that any patents will be issued as a result of these applications.
The departure of any of our key management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us or the failure to achieve our intellectual property objectives could have an adverse effect on our business, results of operations and financial condition. Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may fail to do so. In addition, the laws of certain countries in which our products are or may be sold may not protect our products or intellectual property rights to the same extent as the laws of the U.S.
Our ability to protect our intellectual property rights is also subject to the terms of future government contracts. We cannot assure you that the federal government will not demand greater intellectual property rights or restrict our ability to disseminate intellectual property. We are also a member of standards-setting organizations and have agreed to license some of our intellectual property to other members on fair and reasonable terms to the extent that the license is required to develop non-infringing products.
Pursuing infringers of our proprietary rights could result in significant litigation costs, and any failure to pursue infringers could result in our competitors utilizing our technology and offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S. Protecting our know-how is difficult especially after our employees or those of our third-party contract service providers end their employment or engagement. Attempts may be made to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent the misappropriation of our technology or prevent others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult and expensive. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. The costs and diversion of resources could significantly harm our business. If we fail to protect our intellectual property, we may not receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on it.
Third parties may claim we are infringing their intellectual property rights and we could be prevented from selling our products, or suffer significant litigation expense, even if these claims have no merit.
Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may claim that we, our products, operations or any products or technology we obtain from other parties are infringing their intellectual property rights, and we may be unaware of intellectual property rights of others that may impact some of our assets, technology and products.
From time to time our customers are parties to allegations of intellectual property infringement claims based on our customers’ incorporation and use of our products and services, which may lead to demands from our customers for us to indemnify them for costs in defending those allegations. Any litigation regarding patents, trademarks, copyrights or intellectual property rights, even those without merit, and the related indemnification demands of our customers, can be costly and time consuming, and divert our management and key personnel from operating our business. The complexity of the technology involved, and inherent uncertainty and cost of intellectual property litigation increases our risks. If any third party has a meritorious or successful claim that we are infringing its intellectual property rights, we may be forced to change our products or enter into licensing arrangements with third parties, which may be costly or impractical. This also may require us to stop selling our products as currently engineered, which could harm our competitive position. We also may be subject to significant damages or injunctions that prevent the further development and sale of certain of our products or services and may result in a material loss of revenue.
From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Some open source licenses contain requirements that we make available source code for modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software products with open source software in a certain manner, we could under certain of the open source licenses, be required to release our proprietary source code. Open source license terms may be ambiguous and many of the risks associated with usage of open source software cannot be eliminated, and could if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our products and client applications, discontinue the sale of our products or services in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, results of operations, and financial condition.
Competitive Risks
All of our business activities are subject to rapid technological change, new entrants, the introduction of other distribution models and long development and testing periods each of which may harm our competitive position, render our product or service offerings obsolete and require us to continuously develop technology and/or obtain licensed technology in order to compete successfully.
We are engaged in business activities characterized by rapid technological change, evolving industry standards, frequent new product announcements and enhancements, and changing customer demands. The introduction of products and services or future industry standards embodying new technologies, such as multi-frequency time division multiple access ("MF-TDMA") based technologies could render any of our products and services obsolete or non-competitive. The successful execution of our business strategy is contingent upon wireless network operators launching and maintaining mobile location services, our ability to maintain a technically skilled development and engineering team, our ability to create new network software products and adapt our existing products to rapidly changing technologies, industry standards and customer needs. As a result of the complexities inherent in our product offerings, new technologies may require long development and testing periods. Additionally, new products may not achieve market acceptance or our competitors could develop alternative technologies that gain broader market acceptance than our products. If we are unable to develop and introduce technologically advanced products that respond to evolving industry standards and customer needs, or if we are unable to complete the development and introduction of these products on a timely and cost effective basis, it could have a material adverse effect on our business, results of operations and financial condition or could result in our technology becoming obsolete.
New entrants seeking to gain market share by introducing new technology and new products may make it more difficult for us to sell our products and services and could create increased pricing pressure, reduced profit margins, increased sales and marketing expenses, or the loss of market share or expected market share, any of which could have a material adverse effect on our business, results of operations and financial condition. For example, many companies are developing new technologies and the shift towards open standards such as IP-based satellite networks will likely result in increased competition and some of our products may become commoditized as a result.
Our Terrestrial and Wireless Networks segment provides various technologies that are utilized on mobile phones. Applications from competitors for location-based or text-based messaging platforms may be preloaded on mobile devices by original equipment manufacturers, or OEMs, or offered by OEMs directly. Increased competition from providers of location-based services which do not rely on a wireless carrier may result in fewer wireless carrier subscribers electing to purchase their wireless carrier’s branded location-based services, which could harm our business and revenue. In addition, these location-based or text-based services may be offered for free or on a one-time fee basis, which could force us to reduce monthly subscription fees or migrate to a one-time fee model to remain competitive. We may also lose end users or face erosion in our average revenue per user if these competitors deliver their products without charge to the consumer by generating revenue from advertising or as part of other applications or services.
Our expected growth and our financial position depends on, among other things, our ability to keep pace with such changes and developments and to respond to the increasing variety of electronic equipment users and transmission technologies. We may not have the financial or technological resources to keep pace with such changes and developments or be successful in our research and development and we may not be able to identify and respond to technological improvements made by our competitors in a timely or cost-effective fashion. Any delays could result in increased costs of development or redirect resources from other projects. In addition, we cannot provide assurances that the markets for our products, systems, services or technologies will develop as we currently anticipate. The failure of our products, systems, services or technologies to gain market acceptance could significantly reduce our net sales and harm our business.
Our business is highly competitive, we are reliant upon the success of our partners, and some of our competitors have significantly greater resources than we do, which could result in a loss of customers, market share and/or market acceptance.
Our business is highly competitive. We will continue to invest in research and development for the introduction of new and enhanced products and services designed to improve capacity, data processing rates and features. We must also continue to develop new features and to improve functionality of our software. Research and development in our industry is complex, expensive and uncertain. We believe that we must continue to dedicate a significant amount of resources to research and development efforts to maintain our competitive position. If we continue to expend a significant amount of resources on research and development, but our efforts do not lead to the successful introduction of product and service enhancements more quickly than our competitors that are competitive in the marketplace, our business, results of operations and financial condition could be materially adversely affected.
Several of our potential competitors are substantially larger than we are and have greater financial, technical and marketing resources than we do. In particular, larger competitors have certain advantages over us which could cause us to lose customers and impede our ability to attract new customers, including: larger bases of financial, technical, marketing, personnel and other resources; more established relationships with wireless carriers and government customers; more funds to deploy products and services; and the ability to lower prices of (or not charge any price for) competitive products and services because they are selling larger volumes. Furthermore, we cannot be sure that our competitors will not develop competing products, systems, services or technologies that gain market acceptance in advance of our products, systems, services or technologies, or that our competitors will not develop new products, systems, services or technologies that cause our existing products, systems, services or technologies to become non-competitive or obsolete, which could adversely affect our results of operations.
Our Terrestrial and Wireless Networks segment provides public safety and location technologies to various state and local municipalities and to a large extent, we are reliant on the success of our wireless partners and distributors to meet our growth objectives. In some cases, our wireless partners may have different objectives, or our distributors may not be successful. We also began an evaluation and repositioning of certain of our location technology solutions within our Terrestrial and Wireless Networks segment in order to focus on providing higher-margin solution offerings and increase our penetration into the public safety space. To date, we have ceased offering certain location technology solutions, have worked with customers to wind-down certain legacy contracts and have not renewed certain contracts. Going forward, we intend to continue to work with our partners and expand our direct and indirect sales and distribution channels in this area. If we are not successful in doing so, we may not be able to achieve our long-term business goals.
We rely upon various third-party companies and their technology to provide services to our customers and if we are unable to obtain such services at reasonable prices, or at all, our gross margins and our ability to provide the services of our wireless applications business could be materially adversely affected.
We rely on various third-party companies and their technology in our business. Risks from our reliance with these third parties include:
•The loss of mapping and third-party content - The wireless data services provided to our customers are dependent on real-time, continuous feeds from map data, points of interest data, traffic information, gas prices, theater, event and weather information from vendors and others. Any disruption of this third-party content from our satellite feeds or backup landline feeds or other disruption could result in delays in our subscribers’ ability to receive information. We obtain this data that we sell to our customers from companies owned by current and potential competitors, who may act in a manner that is not in our best interest. If our suppliers of this data or content were to enter into exclusive relationships with other providers of location-based services or were to discontinue providing such information and we were unable to replace them cost effectively, or at all, our ability to provide the services of our wireless applications business would be materially adversely affected. Our gross margins may also be materially adversely affected if the cost of third-party data and content increases substantially.
•Third-party data centers or third-party networks may fail - Many products and services of our advanced communication solutions, in particular our public safety and location technology solutions, are provided through a combination of our servers, which are hosted at third-party data centers, and on the networks, as well as within the data centers of our wireless carrier partners. Our business relies to a significant degree on the efficient and uninterrupted operation of the third-party data centers, customer data centers, and cloud providers we use. Network failures, disruptions or capacity constraints in our third-party data center facilities or in our servers maintained at their location could affect the performance of the products and services of our wireless applications and 911 business and harm our reputation and our revenue. The ability of our subscribers to receive critical location and business information requires timely and uninterrupted connections with our wireless network carriers. Any disruption from our satellite feeds or backup landline feeds could also result in delays in our subscribers’ ability to receive information.
•We must integrate our technologies and routinely upgrade them - We may not be able to upgrade our location services platform to support certain advanced features and functionality without obtaining technology licenses from third parties. Obtaining these licenses may be costly and may delay the introduction of such features and functionality, and these licenses may not be available on commercially favorable terms, or at all. Problems and delays in development or delivery as a result of issues with respect to design, technology, licensing and patent rights, labor, learning curve assumptions, or materials and components could prevent us from achieving contractual obligations. In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. The inability to offer advanced features or functionality, or a delay in our ability to upgrade our location-based services platform, may materially adversely affect demand for our products and services and, consequently, have a material adverse effect on our business, results of operations and financial condition.
•We rely upon "open-source" software - We have incorporated some types of open-source software into our products, allowing us to enhance certain solutions without incurring substantial additional research and development costs. Thus far, we have encountered no unanticipated material problems arising from our use of open-source software. However, as the use of open-source software becomes more widespread, certain open-source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce the fees we charge for our products, which could have a material adverse effect on our business, results of operations and financial condition.
Because our software may contain defects or errors, and our hardware products may incorporate defective components, our sales could decrease if these defects or errors adversely affect our reputation or delay shipments of our products.
Products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Software products, such as our 911 call handling software solutions, must meet stringent customer technical requirements and we must satisfy our warranty obligations to our customers. Our hardware products are also subject to warranty obligations and integrate a wide variety of components from different vendors.
Our products including software may not be error or defect free after delivery to customers, which could damage our reputation, cause revenue losses, result in the rejection of our products or services, divert development resources and increase service and warranty costs, each of which could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to our Common Stock
Our stock price is volatile.
The stock market in general and the stock prices of technology-based companies, in particular, experience extreme volatility that often is unrelated to the operating performance of any specific public company. The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate significantly in the future as well. Factors that could have a significant impact on the market price of our stock include, among others:
our ability to successfully integrate TCS and manage our combined company;
•strategic transactions, such as acquisitions and divestures;divestures by us and our competitors;
•our ability to successfully integrate and manage recent acquisitions;
•our issuance of potentially dilutive equity or equity-type securities;
•our issuance of debt;
•our ability to successfully access equity and debt capital markets;
•future announcements concerning us or our competitors;
•shareholder activism involving our common stock, board of directors or corporate governance;
•receipt or non-receipt of substantial orders for products and services;
•quality deficiencies in services or products;
•results of technological innovations;
innovations and new commercial products;
•changes in recommendations of securities analysts;
•government regulations;
•changes in the status or outcome of government audits;
•proprietary rights or product or patent litigation;
•changes in U.S. government policies;
•changes in economic conditions generally, particularly in the telecommunications sector;terrestrial and wireless networks and satellite and space communications markets;
•changes in securities market conditions, generally;
•changes in prevailing interest rates;
•changes in the status of litigation and legal matters (including changes in the status of export matters);
cyber-attacks;•cyber attacks;
•energy blackouts;
•acts of terrorism or war;
•inflation or deflation; and
•rumors or allegations regarding our financial disclosures or practices.practices; and
•the ongoing and future effects of the COVID-19 pandemic.
Shortfalls in our sales or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock.
Future issuances of our shares of common stock could dilute a stockholder's ownership interest in Comtech and reduce the market price of our shares of common stock.
In addition to potential issuances of our shares of common stock associated with acquisitions, in the future, we may issue additional securities to raise capital. We may also acquire interests in other companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute a stockholder's ownership interest in Comtech and have an adverse impact on the price of our common stock.
Actions of activist stockholders could impact the pursuit of our business strategies and adversely affect our results of operations, financial condition and/or share price.
Our Board of Directors and management team value constructive input from investors, regularly engage in dialogue with our stockholders, and are committed to acting in the best interests of all of our stockholders; however, we have been, and may in the future be, subject to actions, campaigns, or proposals that may not align with our business strategies or the interests of our other stockholders. Accordingly, there is no assurance that the actions taken by the Board of Directors and management in seeking to maintain constructive engagement with certain stockholders will be successful in preventing the occurrence of stockholder activist campaigns.
Campaigns by activist stockholders to effect changes at publicly traded companies often demand that companies undertake or pursue financial restructuring, increase debt, issue special dividends, repurchase shares, or undertake sales of assets or other transactions, including strategic transactions. Campaigns may also be initiated by activist stockholders advocating for particular environmental or social causes. Activist stockholders who disagree with the composition of a company’s board of directors, or with its strategy and/or management often seek to involve themselves in the governance and strategic direction of a company through various activities. As discussed elsewhere in this report, we have been, and may in the future be, subject to activities and campaigns initiated by activist stockholders.
Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could divert the attention of our Board of Directors, management team and employees from the management of our operations and the pursuit of our business strategies. Further, actions of activist stockholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. Perceived uncertainties as to our future direction, strategy or leadership created as a consequence of activist stockholder campaigns or initiatives may result in the loss of potential business opportunities and make it more difficult to attract and retain investors, customers, employees, and other business partners. Also, we could be required to incur significant expenses related to any activist stockholder matters (included but not limited to legal fees, fees for financial advisors, fees for public relation advisors and proxy solicitation expenses). As a result, activist stockholder campaigns could adversely affect our business, results of operations, financial condition and/or share price in ways that can be difficult to predict or foresee.
Even if we are successful in any proxy contest or in defending against any unsolicited takeover attempt, our business could be adversely affected by any such proxy contest or unsolicited takeover attempt due to:
•perceived uncertainties as to future direction may result in the loss of potential acquisitions, collaborations or other strategic opportunities, and may make it more difficult to attract and retain qualified personnel, customers, suppliers, and other business partners;
•if individuals are elected or appointed to our Board of Directors with a specific agenda or who do not agree with our strategic plan, the ability of our Board of Directors to function effectively could be adversely affected, which could in turn adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our stockholders, and/or adversely affect our business, operating results and financial condition.
We cannot predict, and no guarantees can be given, as to the outcome or timing of any matters relating to the foregoing actions by stockholders and our responses thereto or the ultimate impact on our business, liquidity, financial condition or results of operations. Any of these matters or any further actions by stockholders and our responses thereto may impact and result in volatility or stagnation of our share price.
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of Comtech.
We have taken a number of actions that could have the effect of discouraging, delaying or preventing a merger, acquisition or acquisitiondivestiture involving Comtech that our stockholders may consider favorable.
For example, we currently have a classified board and the employment contract with our President and CEO and agreements with other of our executive officers provide for substantial payments in certain circumstances or in the event of a change of control of Comtech. In the future, we may adopt a stockholder rights plan which could cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder who attempts to acquire us on terms not approved by our Board of Directors.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, this statute provides that, except in certain limited circumstances, a corporation shall not engage in any "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, for purposes of Section 203 of the Delaware General Corporation Law, an "interested stockholder" is a person who, together with affiliates, owns, or within three years did own, 15% or more of the corporation's voting stock. This provision could have the effect of delaying or preventing a change in control of Comtech.
A disruption in our Common Stock dividend program could negatively impact our stock price.
We have paid quarterly common stock dividends every quarter since September 2010.
Our ability to continue to pay quarterly dividends with respect to our Common Stock will depend on our ability to generate sufficient cash flows from operations in the future and maintain compliance with our Secured Credit Facility, as amended.Facility. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Future Common Stock dividends remain subject to compliance with financial covenants under the Company's Securedour Credit Facility, as amended, as well as Board approval.approval and certain voting rights of holders of our Series A Convertible Preferred Stock. Our Board of Directors may, at its discretion, decrease the targeted annual dividend amount or entirely discontinue the payment of dividends at any time.
Additionally, our ability to declare and pay common stock dividends and make other distributions with respect to our capital stock may also be restricted by the terms of our Secured Credit Facility, as amended, and may be restricted by the terms of financing arrangements that we enter into in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We consider our facilities to be well maintained and adequate for current and planned production requirements. All of our manufacturing facilities, including those that serve the military market, must comply with stringent customer specifications. We employ formal quality management programs and other training programs, including the International Standard Organization’s quality procedure registration programs.
Historically, we have not owned any material properties or facilities and have relied upon a strategy of leasing. We do not currently own any material properties. The following table lists our primary leased facilities at July 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Location | | | | Property Type | | Square Footage | | Lease Expiration |
Commercial Solutions SegmentSatellite and Space Communications | | | | | | | | |
Tempe,Chandler, Arizona | | (A)A | | Manufacturing and Engineering | | 161,000146,000 |
| | February 2021July 2036 |
Phoenix,Tempe, Arizona | | (B)A | | General office (currently vacated)Manufacturing and Engineering | | 75,000136,000 |
| | October 2018Various |
| Orlando, Florida | | B | | Manufacturing and Engineering | | 99,000 | | | April 2026 |
| Hampshire, UK | | C | | Manufacturing and Engineering | | 77,000 | | | November 2030 |
| Santa Clara, California | | D | | Manufacturing and Engineering | | 47,000 | | | April 2026 |
| Melville, New York | | E | | Manufacturing and Engineering | | 45,000 | | | December 2031 |
| Various facilities | | F | | Support, Engineering and Sales | | 22,000 | | | Various |
| Cypress, California | | G | | Support, Engineering and Sales | | 28,000 | | | July 2025 |
| Plano, Texas | | G | | R&D and Engineering | | 12,000 | | | August 2025 |
| Saint-Laurent, Canada | | H | | Manufacturing, Engineering, Sales and General Office | | 12,000 | | | June 2029 |
| | | | | | 624,000 | | | |
| Terrestrial and Wireless Networks | | | | | | | | |
| Seattle, Washington | | (C)I | | Network Operations, R&D, Engineering and Sales | | 57,00058,000 |
| | December 2022October 2033 |
Santa Clara, CaliforniaStoughton, Massachusetts | | (D)J | | Manufacturing and EngineeringNetwork Operations | | 47,00026,000 |
| | April 2019March 2025 |
Various facilitiesLake Forest, California | | (E)K | | Engineering and General Office | | 35,000 |
| | Various |
Aliso Viejo, California | | (F) | | R&D and Engineering | | 29,00018,000 |
| | December 2017July 2023 |
Greenwood Village, ColoradoAnnapolis, Maryland | | (F)K | | Network Operations | | 17,000 |
| | July 2020 |
Moscow, Idaho | | (G) | | Support, Engineering and Sales | | 13,00017,000 |
| | February 2020July 2026 |
Annapolis, MarylandGatineau, Canada | | (F)L | | Support,Network Operations, R&D, Engineering, and Sales | | 12,000 |
| | July 2019 |
Fremont, California | | (G) | | Support, Engineering and Sales | | 10,000 |
| | April 2020 |
Germantown, Maryland | | (H) | | Engineering and General Office | | 6,00016,000 |
| | May 2025October 2024 |
| Chicago, Illinois | | L | | General Office | | 462,0004,000 |
| | September 2024 |
Government Solutions Segment | | | | | | 139,000 | | |
Orlando, Florida | | (I) | | Manufacturing and Engineering | | 99,000 |
| | April 2026 |
Tampa, Florida | | (F) | | Manufacturing | | 46,000 |
| | April 2022 |
Melville, New York | | (J) | | Manufacturing and Engineering | | 45,000 |
| | December 2021 |
Torrance, California | | (F) | | Support, Engineering and Sales | | 35,000 |
| | January 2018 |
Germantown, Maryland | | (H) | | Engineering and General Office | | 26,000 |
| | May 2025 |
Various facilities | | (K) | | Support, Engineering and Sales | | 14,000 |
| | Various |
Richardson, Texas | | (F) | | R&D and Engineering | | 13,000 |
| | July 2020 |
Annapolis, Maryland | | (F) | | Support, Engineering and Sales | | 12,000 |
| | July 2019 |
Manassas, Virginia | | (F) | | Support, Engineering and Sales | | 11,000 |
| | November 2017 |
| | | | | | 301,000 |
| | |
Corporate | | | | | | | | |
Annapolis, Maryland | | (F) | | General Office and common areas | | 19,000 |
| | July 2019 |
Melville, New York | | (L) | | Corporate headquarters and general office | | 9,600 |
| | August 2027 |
| | | | | | 28,600 |
| | |
| | | | | | | | |
Total Square Footage | | | | | | 791,600 |
| | |
| |
(A)Corporate | Although primarily used for our satellite earth station product lines, which are part of the Commercial Solutions segment, both of our business segments utilize, from time to time, our high-volume technology manufacturing facilities located in Tempe, Arizona. These manufacturing facilities utilize state-of-the-art design and production techniques, including analog, digital and RF microwave production, hardware assembly and full service engineering. Our leases for these facilities expire from fiscal 2018 through fiscal 2021. We have the option to extend the lease terms for up to an additional five-year period. |
| | | | | | |
(B)Annapolis, Maryland | As a result of the | K | | General Office and Common Areas | | 2,000 | | | July 2026 |
| Melville, New York | | M | | Corporate Headquarters and General Office | | 9,600 | | | August 1, 2008 Radyne acquisition, we also assumed a lease of building space in Phoenix, Arizona that was previously used for manufacturing. In connection with our fiscal 2009 Radyne acquisition restructuring plan, we vacated and subleased this space through October 2015. We are currently seeking to sublease this space.2027 |
| | | | | | 11,600 | | | |
(C) | Our office in Seattle, Washington is used primarily for servicing and hosting our wireless and VoIP E9-1-1 public safety support services. |
| | | | | | |
(D)Total Square Footage | Our Commercial Solutions segment manufactures our traveling wave tube amplifiers in a leased manufacturing facility located in Santa Clara, California. Our Commercial Solutions segment also operates a small office in the United Kingdom with a lease that expires in October 2021. |
| |
(E) | Our Commercial Solutions segment also leases an additional twelve facilities, three of which are located in the U.S. The U.S. facilities aggregate 7,000 square feet and are primarily utilized for engineering and general office use. Our Commercial Solutions segment also operates nine small offices in Brazil, Canada, China, India, Singapore, Australia and the United Kingdom, all of which aggregate 28,000 square feet and are primarily utilized for customer support, engineering and sales. |
| |
(F) | We have leases for facilities in Annapolis, Maryland, Aliso Viejo, California, and Greenwood Village, Colorado used primarily for the design and development of our software based systems and applications and network operations. Major manufacturing and engineering facilities for our Government Solutions segment are in Tampa, Florida, Torrance, California, Richardson, Texas and Manassas, Virginia. We are currently finalizing plans to move our Aliso Viejo, California and Torrance, California office facilities to new facilities when the current leases expire. In addition, we are in the process of closing our Manassas, Virginia facility.774,600 | | | |
| |
(G) | Our offices in Moscow, Idaho and Fremont, California are primarily used for research and development, engineering and sales of our satellite earth station products. |
A.Although primarily used for our satellite ground station equipment product lines, which are part of the Terrestrial and Wireless Networks segment, both of our business segments utilize, from time to time, our high-volume technology manufacturing facilities in Arizona. These manufacturing facilities utilize state-of-the-art design and production techniques, including analog, digital and RF microwave production, hardware assembly and full-service engineering.
| |
(H) | Our Government Solutions segment leases a 32,000 square foot facility located in Germantown, Maryland which is primarily used for BFT-1 sustainment activities, engineering and general office use. Our Government Solutions segment occupies 26,000 feet of the facility with the remainder utilized by our Commercial Solutions segment. |
| |
(I) | Our Government Solutions segment manufactures our over-the-horizon microwave systems in a leased facility in Orlando, Florida. This business also leases a small office in North Africa. |
| |
(J) | Our Government Solutions segment manufactures our solid-state, high-power, broadband amplifiers in a 45,000 square foot engineering and manufacturing facility on more than two acres of land in Melville, New York and an 8,000 square foot facility in Topsfield, Massachusetts. We lease the New York facility from a partnership controlled by our President and CEO. The lease provides for our use of the premises as they exist through December 2021 with an option to renew for an additional ten-year period. We have a right of first refusal in the event of a sale of the facility. Our Massachusetts lease is currently on a month-to-month basis. |
47
| |
(K) | Our Government Solutions segment also leases an additional four facilities located in the U.S. that are primarily used for engineering, sales and software development. Our leases for these facilities expire from fiscal 2018 through fiscal 2021. |
| |
(L) | Our corporate headquarters are located in an office building complex in Melville, New York. The lease provides for our use of the premises through August 2027. |
To support our long-term business goals, in fiscal 2021, we commenced a 15-year lease for a new 146,000 square foot facility in Chandler, Arizona. In fiscal 2022, we began shifting operations related to the production of our satellite ground station products from our existing manufacturing locations, such as Tempe, Arizona, to this new facility. We also signed a new 10-year lease in the United Kingdom to expand our Satellite and Space segment's international manufacturing capabilities. This facility is expected to support the production of X/Y satellite tracking antennas that can be used in connection with the thousands of new LEO, MEO and large HTS satellite constellations reportedly being launched over the next several years. COVID-19 and global supply chain disruptions have delayed efforts to get our new technology manufacturing centers fully operational and have increased our start-up costs. Relocation to the Chandler, Arizona facility is expected to be completed in fiscal 2023, at which point we will reduce our Tempe, Arizona footprint to approximately 20,000 square feet through January 2027.
B.Our Satellite and Space Communications segment engineers and manufactures our over-the-horizon microwave systems and mission-critical satellite equipment in a leased facility in Orlando, Florida.
C.Our Satellite and Space Communications segment currently leases two manufacturing facilities in Hampshire, United Kingdom where we manufacture our high precision full motion fixed and mobile X/Y satellite tracking antennas, RF feeds, reflectors and radomes.
D.Our Satellite and Space Communications segment manufactures certain amplifiers in a leased manufacturing facility located in Santa Clara, California.
E.Our Satellite and Space Communications segment manufactures certain of our solid-state, high-power amplifiers in a 45,000 square foot engineering and manufacturing facility on more than two acres of land in Melville, New York and an 8,000 square foot facility in Topsfield, Massachusetts. We lease the New York facility from a partnership controlled by our former CEO. Our Massachusetts lease is currently on a month-to-month basis and therefore excluded from the table above.
F.Our Satellite and Space Communications segment leases an additional seven facilities, four of which aggregate 16,000 square feet and are located in the U.S. with the remaining three facilities aggregating 6,000 square feet located in Singapore, China and India. All are primarily utilized for engineering, sales, software development, customer support, and general office use.
G.Our Satellite and Space Communications segment maintains office space in Cypress, California and Plano, Texas used primarily for R&D, engineering, sales and customer support.
H.Our Satellite and Space Communications segment maintains office space in Saint-Laurent, Canada, used primarily for sales, engineering, manufacturing and general office use.
I.Our Terrestrial and Wireless Networks segment maintains office space in Seattle, Washington used primarily for servicing and hosting our VoIP and VoWiFi E911 and NG-911 services, and related emerging technologies.
J.Our Terrestrial and Wireless Networks segment maintains office space in Stoughton, Massachusetts used primarily for servicing certain of our state and local municipality NG-911 customers.
K.We have leases for facilities in Annapolis, Maryland and Lake Forest, California used primarily for the design and development of our software-based systems and applications and network operations for our Terrestrial and Wireless Networks segment.
L.Our Terrestrial and Wireless Networks segment maintains office space in Gatineau, Canada and Chicago, Illinois that are utilized for network operations, R&D, engineering, sales of our public safety and location technology solutions and general office use.
M.Our corporate headquarters are located in an office building complex in Melville, New York.
The terms for all of our leased facilities are generally for multi-year periods and we believe that we will be able to renew these leases or find comparable facilities elsewhere.
Also, in fiscal 2022, as part of our environmental related initiatives, we were able to reduce our total company-wide square footage of our various facilities by 78,000 sq ft. or 9.1%.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated herein by reference to the "Notes to Consolidated Financial Statements –Note (14)(b)(12)(a) - Commitments and Contingencies – Legal Proceedings and Other Matters and Final Settlements" included in "Part II - Item 8.- Financial Statements and Supplementary Data," included inof this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Performance Graph and Cumulative Total Return
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the S&P’s&P 500 Index and the NASDAQNasdaq Telecommunications Index for each of the last five fiscal years ended July 31, assuming an investment of $100 at the beginning of such period and the reinvestment of any dividends. The comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
Our common stock trades on the NASDAQNasdaq Stock Market LLC ("NASDAQ"Nasdaq") under the symbol "CMTL."
The following table shows the quarterly range of the high and low sale prices for our common stock as reported by the NASDAQ. Such prices do not include retail markups, markdowns or commissions.
|
| | | | | | | |
| | | Common Stock |
| | | High | | Low |
| Fiscal Year Ended July 31, 2016 | | | | |
| First Quarter | | $ | 29.31 |
| | 20.30 |
|
| Second Quarter | | 25.85 |
| | 17.27 |
|
| Third Quarter | | 25.09 |
| | 18.01 |
|
| Fourth Quarter | | 24.93 |
| | 11.24 |
|
| | | | | |
| Fiscal Year Ended July 31, 2017 | | |
| | |
|
| First Quarter | | $ | 13.84 |
| | 9.84 |
|
| Second Quarter | | 12.81 |
| | 9.52 |
|
| Third Quarter | | 15.25 |
| | 10.53 |
|
| Fourth Quarter | | 19.80 |
| | 13.75 |
|
Dividends
Since September 2010, we have paid quarterly dividends.dividends on shares of our common stock. On October 6, 2016,4, 2021, December 9, 2021, March 10, 2022 and June 9, 2022, our Board of Directors declared a cash dividend of $0.30$0.10 per common share, which was paid on November 22, 2016.12, 2021, February 18, 2022, May 20, 2022 and August 19, 2022, respectively. On December 7, 2016, March 8, 2017 and June 7, 2017,September 29, 2022, our Board of Directors declared a dividend of $0.10 per common share, which were paid on February 17, 2017, May 19, 2017 and August 18, 2017, respectively.
On September 27, 2017, our Board of Directors declared acash dividend of $0.10 per common share, payable on November 17, 201718, 2022 to stockholders of record at the close of business on October 18, 2017.
The Board of Directors is currently targeting fiscal 2018 quarterly dividend payments of $0.10 per19, 2022. Future common share. Futurestock dividends remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.approval and certain voting rights of holders of our Series A Convertible Preferred Stock.
The Board of Directors is currently targeting fiscal 2023 quarterly dividend payments of $0.10 per common share. Future common stock dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval, and certain voting rights of holders of our Series A Convertible Preferred Stock.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any of our equity securities during the fiscal year ended July 31, 2017.
As2022. On September 29, 2020, our Board of July 31, 2017 and September 26, 2017, we wereDirectors authorized to repurchase up to an additional $8.7 million of our common stock, pursuant to a new $100.0 million stock repurchase program, that was authorized bywhich replaced our Board of Directors.prior program. The new $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, and may be made pursuant to SEC Rule 10b5-1 trading plans.or by other means in accordance with federal securities laws. We had approximately 27.6 million shares of Common Stock outstanding as of July 31, 2022.
Approximate Number of Equity Security Holders
As of September 22, 2017,23, 2022, there were approximately 819801 holders of our common stock. Such number of record owners was determined from our stockholder records and does not include beneficial owners whose shares of our common stock are held in the name of various security holders, dealers and clearing agencies.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA[RESERVED]
The following table shows selected historical consolidated financial data for our Company.
Detailed historical financial information is included in the audited consolidated financial statements for fiscal 2017, 2016 and 2015.
|
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, (In thousands, except per share amounts) |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Statement of Operations Data: | | | | | | | | | | |
| Net sales | | $ | 550,368 |
| | 411,004 |
| | 307,289 |
| | 347,150 |
| | 319,797 |
|
| Cost of sales | | 332,183 |
| | 239,767 |
| | 168,405 |
| | 195,712 |
| | 178,967 |
|
| Gross profit | | 218,185 |
| | 171,237 |
| | 138,884 |
| | 151,438 |
| | 140,830 |
|
| | | | | | | | | | | |
| Expenses: | | |
| | |
| | |
| | |
| | |
|
| Selling, general and administrative | | 116,080 |
| | 94,932 |
| | 62,680 |
| | 67,147 |
| | 63,265 |
|
| Research and development | | 54,260 |
| | 42,190 |
| | 35,916 |
| | 34,108 |
| | 36,748 |
|
| Amortization of intangibles | | 22,823 |
| | 13,415 |
| | 6,211 |
| | 6,285 |
| | 6,328 |
|
| Settlement of intellectual property litigation | | (12,020 | ) | | — |
| | — |
| | — |
| | — |
|
| Acquisition plan expenses | | — |
| | 21,276 |
| | — |
| | — |
| | — |
|
| | | 181,143 |
| | 171,813 |
| | 104,807 |
| | 107,540 |
| | 106,341 |
|
| | | | | | | | | | | |
| Operating income (loss) | | 37,042 |
| | (576 | ) | | 34,077 |
| | 43,898 |
| | 34,489 |
|
| | | | | | | | | | | |
| Other expenses (income): | | |
| | |
| | |
| | |
| | |
|
| Interest expense | | 11,629 |
| | 7,750 |
| | 479 |
| | 6,304 |
| | 8,163 |
|
| Interest income and other | | (68 | ) | | (134 | ) | | (405 | ) | | (913 | ) | | (1,167 | ) |
| | | | | | | | | | | |
| Income (loss) before provision for (benefit from) income taxes | | 25,481 |
| | (8,192 | ) | | 34,003 |
| | 38,507 |
| | 27,493 |
|
| | | | | | | | | | | |
| Provision for (benefit from) income taxes | | 9,654 |
| | (454 | ) | | 10,758 |
| | 13,356 |
| | 9,685 |
|
| | | | | | | | | | | |
| Net income (loss) | | $ | 15,827 |
| | (7,738 | ) | | 23,245 |
| | 25,151 |
| | 17,808 |
|
| | | | | | | | | | | |
| Net income (loss) per share: | | |
| | |
| | |
| | |
| | |
|
| Basic | | $ | 0.68 |
| | (0.46 | ) | | 1.43 |
| | 1.58 |
| | 1.05 |
|
| Diluted | | $ | 0.67 |
| | (0.46 | ) | | 1.42 |
| | 1.37 |
| | 0.97 |
|
| | | | | | | | | | | |
| Weighted average number of common shares outstanding – basic | | 23,433 |
| | 16,972 |
| | 16,203 |
| | 15,943 |
| | 16,963 |
|
| | | | | | | | | | | |
| Weighted average number of common and common equivalent shares outstanding – diluted | | 23,489 |
| | 16,972 |
| | 16,418 |
| | 20,906 |
| | 23,064 |
|
| | | | | | | | | | | |
| Dividends declared per issued and outstanding common share as of the applicable dividend record date | | $ | 0.60 |
| | 1.20 |
| | 1.20 |
| | 1.175 |
| | 1.10 |
|
|
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, (In thousands) |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Other Consolidated Operating Data: | | | | | | | | | | |
| Backlog at period-end | | $ | 446,230 |
| | 484,005 |
| | 117,744 |
| | 133,412 |
| | 189,742 |
|
| New orders | | 512,593 |
| | 451,278 |
| | 291,621 |
| | 290,820 |
| | 355,600 |
|
| Research and development expenditures - internal and customer funded | | 81,310 |
| | 59,622 |
| | 45,144 |
| | 47,211 |
| | 41,920 |
|
| Adjusted EBITDA | | 70,705 |
| | 48,062 |
| | 51,761 |
| | 61,336 |
| | 52,242 |
|
|
| | | | | | | | | | | | | | | | |
| | | As of July 31, (In thousands) |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Balance Sheet Data: | | | | | | | | | | |
| Total assets | | $ | 832,063 |
| | 921,196 |
| | 473,877 |
| | 473,852 |
| | 681,815 |
|
| Working capital | | 96,833 |
| | 119,493 |
| | 236,419 |
| | 224,656 |
| | 220,560 |
|
| Debt, including capital leases | | 195,802 |
| | 258,649 |
| | — |
| | — |
| | — |
|
| Convertible senior notes | | — |
| | — |
| | — |
| | — |
| | 200,000 |
|
| Other long-term obligations | | 2,655 |
| | 4,105 |
| | 3,633 |
| | 4,364 |
| | 3,958 |
|
| Stockholders’ equity | | 480,150 |
| | 470,401 |
| | 401,409 |
| | 396,925 |
| | 404,062 |
|
Non-GAAP Financial Data
This Annual Report on Form 10-K contains a Non-GAAP financial metric titled Adjusted EBITDA for the Company, which represents earnings before income taxes, interest (income) and other expense, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, settlement of intellectual property litigation, acquisition plan expenses, restructuring (benefits) charges related to the wind-down of the microsatellite product line and strategic alternatives analysis expenses. In future periods, we expect to incur expenses similar to the aforementioned items and investors should not infer from our presentation of Adjusted EBITDA that these costs are unusual, infrequent or non-recurring. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Adjusted EBITDA is a Non-GAAP financial measure used by management in assessing Comtech’s operating results. Although closely aligned, Comtech's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Secured Credit Facility, as amended) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies, including TeleCommunication Systems, Inc. ("TCS"), prior to our acquisition and, therefore, may not be comparable to similarly titled measures used by other companies. Our Adjusted EBITDA is also a measure frequently requested by Comtech’s investors and analysts.
Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct Comtech’s business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. Adjusted EBITDA should only be considered as a supplement, and not a substitute, to GAAP metrics such as net income. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP in the below table, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring.
The following is a reconciliation of net income (loss), the most comparable GAAP measure, to Adjusted EBITDA:
|
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, (In thousands) |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Adjusted EBITDA: | | | | | | | | | | |
| Net income (loss) | | $ | 15,827 |
| | (7,738 | ) | | 23,245 |
| | 25,151 |
| | 17,808 |
|
| Income taxes | | 9,654 |
| | (454 | ) | | 10,758 |
| | 13,356 |
| | 9,685 |
|
| Interest (income) and other expense | | (68 | ) | | (134 | ) | | (405 | ) | | (913 | ) | | (1,167 | ) |
| Interest expense | | 11,629 |
| | 7,750 |
| | 479 |
| | 6,304 |
| | 8,163 |
|
| Amortization of stock-based compensation | | 8,506 |
| | 4,117 |
| | 4,363 |
| | 4,263 |
| | 3,130 |
|
| Amortization of intangibles | | 22,823 |
| | 13,415 |
| | 6,211 |
| | 6,285 |
| | 6,328 |
|
| Depreciation | | 14,354 |
| | 9,830 |
| | 6,525 |
| | 6,721 |
| | 7,837 |
|
| Settlement of intellectual property litigation | | (12,020 | ) | | — |
| | — |
| | — |
| | — |
|
| Acquisition plan expenses | | — |
| | 21,276 |
| | — |
| | — |
| | — |
|
| Restructuring (benefits) charges related to the wind-down of microsatellite product line | | — |
| | — |
| | — |
| | (56 | ) | | 458 |
|
| Strategic alternatives analysis | | — |
| | — |
| | 585 |
| | 225 |
| | — |
|
| Adjusted EBITDA | | $ | 70,705 |
| | 48,062 |
| | 51,761 |
| | 61,336 |
| | 52,242 |
|
Our historical results prior to February 23, 2016 do not include TCS; as such, you should not rely on period-to-period comparisons as an indicator of future performance as these comparisons may not be meaningful.
ITEM 7. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of Business
We are a leading global provider of advancednext-generation 911 emergency systems ("NG-911") and secure wireless and satellite communications solutions for both commercialtechnologies. We see these two end-markets as part of what Comtech has identified as the “Failsafe Communications Market.” This includes the critical communications infrastructure that people, businesses, and government customers worldwide.governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air – and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions fulfill our customers'customers’ needs for secure wireless communications in some of the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial. We anticipate future growth in our business due to increasing demand for global voice, video and data usage. We provide our solutions to both commercial and governmental customers.
On February 23, 2016 (the first month of our thirdIn the fourth quarter of fiscal 2016),2022, we acquired TeleCommunication Systems, Inc. ("TCS"), a leading provider of commercial solutions (such as public safety systems and enterprise application technologies), and government solutions (such as command and control (also known as Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance ("C4ISR"))) applications. The TCS acquisition was a significant step in our strategy of entering complementary markets and expanding our domestic and international commercial offerings. The integration of TCS was largely completed during fiscal 2017.
We managerevised our business throughsegments to better align them with end-markets for our products and services. Our businesses have been re-organized into two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” All current and prior periods reflected in this Form 10-K have been presented according to these two segments, unless otherwise noted. For more information and for financial information about our business segments, including net sales, operating segments:income, Adjusted EBITDA (a Non-GAAP financial measure), total assets, and our operations outside the United States, refer to "Notes to Consolidated Financial Statements - Note (11) Segment Information" included in "Part II - Item 8 - Financial Statements and Supplementary Data." A description of the segments is provided below:
Commercial•Satellite and Space Communications - is organized into four product areas: Satellite Modem and Amplifier Technologies, Troposcatter and SATCOM Solutions, - serves commercial customers Space Components and smaller governments, such as stateAntennas, and local governments, that require advanced communication technologies to meet their needs.High-Power Amplifiers and Switches. This segment also serves certain large government customers (includingoffers customers: satellite ground station technologies, services and system integration that facilitate the U.S. government) that have requirements for off-the-shelf commercial equipment. We believe this segment is a leading providertransmission of voice, video and data over GEO, MEO and LEO satellite communications (such as satellite earth station modemsconstellations, including solid-state and traveling wave tube power amplifiers, ("TWTA")),modems, VSAT platforms and frequency converters; satellite communications and tracking antenna systems, including high precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; over-the-horizon microwave equipment that can transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET™; solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and procurement and supply chain management of high reliability EEE parts for satellite, launch vehicle and manned space applications.
•Terrestrial and Wireless Networks - is organized into four product areas: Next Generation 911 & Call Delivery, Solacom Call Handling Solutions, Trusted Location and Messaging Solutions, and Cyber Security Training & Services. This segment offers customers SMS Text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points; Next Generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of Next Generation 911 services; call handling applications for Public Safety Answering Points; wireless emergency alerts solutions for network operators; software and equipment for location-based and text messaging services for various applications, including for public safety, systems (such as next generation 911 ("NG911") technologies)commercial and enterprise application technologies (such as a messaginggovernment services, and trusted location-based technologies).
cybersecurity training, skills labs, and competency assessments for both technical and non-technical applications.
Government Solutions - serves large government end-users (including those of foreign countries) that require mission critical technologies and systems. We believe this segment is a leading provider of command and control applications (such as the design, installation and operation of data networks that integrate computing and communications (including both satellite and terrestrial links), ongoing network operation and management support services including telecom expense management, project management and fielding and maintenance solutions related to satellite ground terminals), troposcatter communications (such as digital troposcatter multiplexers, digital over-the-horizon modems, troposcatter systems, and frequency converter systems) and RF power and switching technologies (such as solid state high-power broadband amplifiers, enhanced position location reporting system (or commonly known as "EPLRS") amplifier assemblies, identification friend or foe amplifiers, and amplifiers used in the counteraction of improvised explosive devices).
Our Quarterly Financial Information
Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for under the percentage-of-completion method.over time.
OurIn particular our contracts with the U.S. government can be terminated for convenience by it at any time and orders are subject to unpredictable funding, deployment and technology decisions by the U.S. government. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period.period-to-period due to these factors. As such, comparisons between periods and our current results may not be indicative of a trend or future performance.
Our historical results prior to February 23, 2016 do not include TCS. Given the integration of TCS into our business and the joint marketing of our products, historical sales patterns and mix trends are not relevant. As a result, period-to-period comparisons of sales, margins, operating income and Adjusted EBITDA contributions between TCS and Comtech legacy products will not be meaningful and you should not rely on period-to-period comparisons as an indicator of future performance.
Critical Accounting Policies
We consider certain accounting policies to be critical due to the estimation process involved in each.
Revenue Recognition. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:
•Over time - We earnrecognize revenue fromusing the saleover-time method when there is a continuous transfer of advanced communication solutionscontrol to customers around the world. Salescustomer over the contractual period of advanced communication solutions can consist of any one orperformance. This generally occurs when we enter into a combination of items required by our customer including hardware, technology platforms and related support. A large portion of our revenue from advanced communication solutions is derived from contractslong-term contract relating to the design, development or manufacture of complex electronic equipment or technology platforms to a buyer’s specification or(or to provide services relatingrelated to the performance of such contractscontracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is recognized in accordance with FASB ASC 605-35. For these contracts, we primarily apply the percentage-of-completion accounting method and generally recognize revenue based on the relationshipextent of totalprogress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total projectedestimated costs at completion, including warranty costs. Revenues, including estimated fees or alternatively,profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits.
For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly.
The cost-to-cost method is principally used to account for contracts in our Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts within our Terrestrial and Wireless Networks segment. For service-based contracts in our Terrestrial and Wireless Networks segment, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on output measures,our customers’ actual usage of the networks and platforms which we provide.
•Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as units delivereda new contract because the pricing for these additional quantities or produced. Profits expected to be realized on such contractsservices are based on total estimated salesstandalone selling prices.
Point in time accounting is principally applied to contracts in our Satellite and Space Communications segment, which includes satellite modems, solid-state and traveling wave tube amplifiers and certain contracts for our solid-state, high-power RF amplifiers. The contracts related to these products do not meet the contract comparedrequirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to total estimated costs, including warranty costs, at completiondelivery, customers cannot direct the use of the contract.
Direct costs which include materials, laborasset, sell or exchange the equipment, etc.); and, overhead are charged to work-in-progress (includingalthough many of our contracts-in-progress) inventory or cost of sales. Indirect costs relating to long-term contracts, which include expenses such as general and administrative, are charged to expense as incurred and are not included in our work-in-process (including our contracts-in-progress) inventory or cost of sales. Total estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become evident. Long-term U.S. government cost-reimbursable type contracts are also specifically covered by FASB ASC 605-35.
We have been engaged in the production and delivery of goods and services on a continual basis under contractual arrangements for many years. Historically, we have demonstrated an ability to accurately estimate total revenues and total expenses relating to our long-term contracts. However, there exist inherent risks and uncertainties in estimating revenues, expenses and progress toward completion, particularly on larger or longer-term contracts. If we do not accurately estimate the total sales, related costs and progress towards completion on such contracts, the estimated gross margins may be significantly impacted or losses may need to be recognized in future periods. Any such resulting changes in margins or contract losses could be material to our results of operations and financial condition.
In addition, most government contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery.
In determining that our equipment has alternative use, we considered the underlying manufacturing process. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss.
When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable.
When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the right to terminaterevenue is deferred and recognized ratably over the contract at any time. Such terminations could impact the assumptions regarding total contract revenuesextended warranty period. Our contracts, from time-to-time, may also include options for additional goods and expenses utilized in recognizing profit under the percentage-of-completion method of accounting. Changes toservices. To date, these assumptions could materially impact our results of operations and financial condition. Historically, weoptions have not experiencedrepresented material terminations of our long-term contracts. We also addressrights to the customer acceptance provisions in assessing our abilityas the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to perform our contractualbe performance obligations under long-term contracts. Our inability to perform on our long-term contracts could materially impact our results of operations and financial condition. Historically,for which we have been able to perform on our long-term contracts.
We also derivemust allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our revenuesproducts for advanced communication solutionsa period of at least one year from the date of delivery.
When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us.
When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts and purchase orders where revenue is recorded on delivery of products orwith multiple performance of services. Such revenues are recognized in accordance withobligations, we allocate the authoritative guidance contained in FASB ASC 605-25 "Revenue Recognition - Multiple Deliverable Revenue Arrangements" ("FASB ASC 605-25") and, as applicable, FASB ASC 605-20 "Revenue Recognition - Services" ("FASB ASC 605-20") and Accounting Standards Update ("ASU") 2009-14 (FASB ASC Topic 985) "Certain Revenue Arrangements That Include Software Elements." Revenue recognition for multiple-element arrangements requires judgmentcontract’s transaction price to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each performance obligation using our best estimate of the elements. In summary, we recognize revenue for each separate unit of accounting when the applicable revenue recognition criteria for each element have been met. We allocate revenue to each separate unit of accounting in a multi-element arrangement based on the relative fair valuestandalone selling price of each element, using vendor-specific objective evidence ("VSOE") of their fair values, if available. VSOE is generally determineddistinct good or service in the contract. We determine standalone selling price based on the price charged when an elementat which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations.
Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the absence of VSOE of fair value,principal in the fee is allocated among each elementarrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on third-party evidence ("TPE")specific negotiations with each customer and in the case of fair value, which is determinedthe U.S. government, sometimes based on competitor pricingestimated or actual costs of providing the goods or services in accordance with applicable regulations.
The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Consolidated Balance Sheet. Under typical payment terms for similar deliverablesour contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. On large long term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition.
We recognize the incremental costs to obtain or fulfill a contract as an expense when sold separately. Whenincurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.
As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such types of commissions are unable to establish fair value using VSOE or TPE, we useincluded in total estimated sellingcosts at completion for such contracts and expensed over time through cost of sales on our Consolidated Statements of Operations.
Remaining performance obligations represent the transaction price ("ESP") to allocate value to each element. The objective of ESP is to determinefirm orders for which work has not been performed as of the price atend of a fiscal period. Remaining performance obligations, which we would transact a sale if the product or service were sold separately. We determine ESP for deliverables by considering multiple factors including, but not limitedrefer to prices we charge for similar offerings, market conditions, competitive landscape,as backlog, exclude unexercised contract options and pricing practices. For multiple element arrangements that contain only software and software-related elements, we allocate the fees to each element based on the VSOE of fair value of each element. Due to the nature of some of the agreements it may be difficult to establish VSOE of separate elements of an agreement; in these circumstances the appropriate recognition of revenue may require the use of judgment based on the particular facts and circumstances.potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts.
As discussed further in "Notes to Consolidated Financial Statements - Note (1)(c) Summary of Significant Accounting and Reporting Policies - Revenue Recognition" included in "Part II - Item 8 - Financial Statements and Supplementary Data," we are required to adopt FASB ASU No. 2014-09 in our first quarter of fiscal 2019. This ASU sets forth new revenue recognition guidance and will require us to conform our policies, procedures and disclosures to those required by the new standard.
Impairment of Goodwill and Other Intangible Assets. As of July 31, 2017,2022, total goodwill recorded on our Consolidated Balance Sheet aggregated $290.6$347.7 million (of which $231.4$173.6 million relates to our Commercial SolutionsSatellite and Space Communications segment and $59.2$174.1 million relates to our Government SolutionsTerrestrial and Wireless Networks segment). Additionally, as of July 31, 2017,2022, net intangibles recorded on our Consolidated Balance Sheet aggregated $261.9$247.3 million (of which $216.7$72.4 million relates to our Commercial SolutionsSatellite and Space Communications segment and $45.2$174.9 million relates to our Government SolutionsTerrestrial and Wireless Networks segment). Each
For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our two operatingSatellite and Space Communications and Terrestrial and Wireless Networks segments constituteseach constitute a reporting unit and we must make various assumptions in determining their estimated fair values. Reporting units are defined by how our Chief Executive Officer ("CEO") manages the business, which includes resource allocation decisions. 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other." A change to our management approach may require us to perform an interim goodwill impairment test and possibly record impairment charges in a future period.
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. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), pursuant to our adoption of FASB ASU No. 2017-04 in fiscal 2017, we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
On August 1, 2017 (the first day
As a result of our segment restructuring in the fourth quarter of fiscal 2018),2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed our annualan interim quantitative assessment using market participant assumptions to determine ifas of July 29, 2022 and estimated the fair value of each of our reporting units, withboth before and after the change, using a combination of the income and market approaches. Based on our quantitative evaluations, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least and 18.4% and 11.6%, respectively, and concluded that our goodwill exceededwas not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. Given its carrying value. proximity to our next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim quantitative assessment to conclude that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment as of August 1, 2022.
In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions.
In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, and reflectedwhich reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our August 1, 2017 total public market capitalization and assessed implied control premiums based on our common stock price of $18.47$11.62 as of August 1, 2017.the date of testing.
Based on our August 1, 2017 quantitative evaluation, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least 17.8% and 52.9%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. In order to sensitize our goodwill impairment test, we also performed a second analysis using only the income approach and concluded that neither reporting units' goodwill was impaired or at risk of failing the quantitative assessment. It is possible that, during fiscal 20182023 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, 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, or our common stock price could decline. fluctuate. Such fluctuation could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global activity.
A significant decline in our customers' 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 an interima quantitative assessment during fiscal 20182023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial SolutionsSatellite and Government SolutionsSpace Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired.
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 20182023 (the start of our fiscal 2019)2024). If our assumptions and related estimates change in the future, or if we change our reporting unit structure 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 when we perform these tests, or in other future periods. In addition to our impairment analysis of goodwill, we also review net intangible assets with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangible assets were recoverable as of July 31, 2017.2022. Any impairment charges that we may record in the future could be material to our results of operationoperations and financial condition.
Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition.
There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. In August 2016, AT&T, a distributor of a small TCS product line that we refer to as our 911 call handling software solution, informed us that they do not believe TCS met certain contractual specifications related to performance and usability and had requested a refund of certain payments made by them as well as provide them with software changes at no additional cost. TCS has also sold this software to other customers. Our Consolidated Balance Sheet as of July 31, 2017 includes accrued costs of $5.5 million related to this contingent liability, net of charges incurred to date. This amount reflects a consideration of contractual obligations as well as an estimate of future costs to resolve this matter with AT&T.
Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences are expected to reverse. Our provision for income taxes is based on domestic (including federal and state) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. The U.S. federal government is our most significant income tax jurisdiction.
Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more"more likely than notnot" that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as more"more likely than notnot" to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The development of valuation allowances for deferred tax assets and reserves for income tax positions requires consideration of timing and judgments about future taxable income, tax issues and potential outcomes, and are subjective critical estimates. Valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount "more likely than not" expected to be realized. A portion of our deferred tax assets consist of federal net operating losses and federal research and experimentation tax credit carryforwards, mostsome of which was acquired in connection with our acquisition of TCS.prior acquisitions. No valuation allowance has been established on these deferred tax assets based on our evaluation that our ability to realize such assets has met the criteria of “more"more likely than not.”" We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition.
Our U.S. federal income tax returns for fiscal 2015 and 20162019 through 2021 are subject to potential future Internal Revenue Service ("IRS") audits.audit. None of our state income tax returns prior to fiscal 2013 are subject to audit. TCS's federal income tax returns for calendar years 2013 through 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential future IRS audits. None of TCS's state income tax returns prior to calendar year 20122018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Research and Development Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, we have not capitalized any of our internally developed software costs.costs were not material.
Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and futureprojected usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition.
Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers.
We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our strong cash position and the nominal amount of interest we are earning on our cash and cash equivalents, we have, on a limited basis, approved certain customer requests.
We continue to monitor our accounts receivable credit portfolio. OurTo-date, there has been no material changes in our credit portfolio as a result of the effect of the COVID-19 pandemic on worldwide business activities.
Although our overall credit losses have historically been within our expectations of the allowances established; however,we established, we cannot guarantee that we will continue to experience the sameaccurately predict our future credit loss rates that we have inexperience, given the past.current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. ChangesFuture changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition.
Results of Operations
The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of our consolidated net sales:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2022 | | 2021 | | 2020 |
| Gross margin | | 37.0 | % | | 36.8 | % | | 36.8 | % |
| Selling, general and administrative expenses | | 23.6 | % | | 19.2 | % | | 19.0 | % |
| Research and development expenses | | 10.8 | % | | 8.4 | % | | 8.5 | % |
| CEO transition costs | | 2.8 | % | | — | % | | — | % |
| Proxy solicitation costs | | 2.3 | % | | — | % | | — | % |
| Acquisition plan expenses | | — | % | | 17.2 | % | | 3.4 | % |
| Amortization of intangibles | | 4.4 | % | | 3.6 | % | | 3.5 | % |
| Operating (loss) income | | (6.9) | % | | (11.7) | % | | 2.5 | % |
| Interest expense (income) and other | | 0.7 | % | | 1.2 | % | | 1.0 | % |
| (Loss) income before (benefit from) provision for income taxes | | (7.6) | % | | (12.9) | % | | 1.5 | % |
| Net (loss) income | | (6.8) | % | | (12.6) | % | | 1.1 | % |
| Net (loss) income attributable to common stockholders | | (8.9) | % | | (12.6) | % | | 1.1 | % |
| Adjusted EBITDA (a Non-GAAP measure) | | 8.1 | % | | 13.2 | % | | 12.6 | % |
|
| | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| Gross margin | | 39.6 | % | | 41.7 | % | | 45.2 | % |
| Selling, general and administrative expenses | | 21.1 | % | | 23.1 | % | | 20.4 | % |
| Research and development expenses | | 9.9 | % | | 10.3 | % | | 11.7 | % |
| Settlement of intellectual property litigation | | (2.2 | )% | | — | % | | — | % |
| Acquisition plan expenses | | — | % | | 5.2 | % | | — | % |
| Amortization of intangibles | | 4.1 | % | | 3.3 | % | | 2.0 | % |
| Operating income (loss) | | 6.7 | % | | (0.1 | )% | | 11.1 | % |
| Interest expense (income) and other, net | | 2.1 | % | | 1.9 | % | | — | % |
| Income (loss) before provision for income taxes | | 4.6 | % | | (2.0 | )% | | 11.1 | % |
| Net income (loss) | | 2.9 | % | | (1.9 | )% | | 7.5 | % |
| Adjusted EBITDA (a Non-GAAP measure) | | 12.8 | % | | 11.7 | % | | 16.8 | % |
For a definition and explanation of Adjusted EBITDA, see “"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal 20172022 and 20162021 - Adjusted EBITDA.”"
Fiscal 2022 Highlights and Business Outlook for Fiscal 20182023
Our financial highlights for the fiscal 2017 was a successful year. Fiscal 2017 financial results reflect the integration of the TCS business into our operations and were capped by strong fourth quarteryear ended July 31, 2022 include:
•Consolidated net sales were $486.2 million;
•Gross margins improved, year-over-year, twenty basis points to 37.0%;
•GAAP net loss attributable to common stockholders was $43.3 million, and sequentially higher Adjusted EBITDA. During fiscal 2017, we achieved annual:included $13.6 million of CEO transition costs, $11.2 million of proxy solicitation costs, $6.0 million of restructuring costs, $1.2 million of strategic emerging technology costs for next-generation satellite technology, and $1.1 million of COVID-19 related costs, as discussed below;
Net sales•GAAP EPS loss of $550.4 million;$1.63 and Non-GAAP EPS loss of $0.13;
Operating income of $37.0 million;
Net income of $15.8 million;
Cash flows from operating activities of $66.7 million; and
•Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $70.7$39.3 million;
•New bookings (also referred to as orders) of $445.5 million, resulting in an annual book-to-bill ratio of 0.92x (a measure defined as bookings divided by net sales);
•Backlog of $618.1 million as of July 31, 2022, compared to $658.9 million as of July 31, 2021 and $602.3 million as of April 30, 2022;
•Revenue visibility of approximately $1.1 billion. We measure this revenue visibility as the sum of our $618.1 million backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders; and
•Cash flows provided by operating activities of $2.0 million.
Our fiscal 2017 Adjusted EBITDA reflects $6.7 Excluding $15.9 million of benefit associated with a fee paidin aggregate payments for our CEO transition and settled proxy contest, cash flows provided by the U.S. Army to use our BFT-1 intellectual property. Effective April 1, 2017, the U.S. Army retains a limited non-exclusive right to use this intellectual property for no additional payment. Without this fee, Adjusted EBITDA in fiscal 2017operating activities would have been $64.0 million. For a definition and explanation of Adjusted EBITDA, see “$17.9 million;
Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal 20172022 and 2016 - Adjusted EBITDA.”2021."
AsIn August 2022, we announced that Ken Peterman was appointed President and CEO. Prior to such appointment, in May 2022, Mr. Peterman joined our Board of July 31, 2017,Directors as Chairman. With over forty years in the defense sector, Mr. Peterman’s significant experience in satellite technology and decades of experience with U.S. government contracting is expected to enhance our cashefforts to continually improve commercial success and cash equivalents were $41.8 millionshareholder value.
Also, we progressed on our initiative to enhance our leadership team, welcoming Don Bach as our first ever Vice President of Procurement. In light of ongoing global supply chain disruptions, part shortages and our total debt outstanding was $200.6 million (excluding deferred financing costs). Given our strong fiscal 2017 operating cash flows, we have successfully reducedextended lead times for components, Mr. Bach’s immediate focus is expected to be on optimizing the levelend-to-end management of our total indebtedness sinceconsolidated inventories, including efforts to enhance our buying power across the beginningvarious product areas. We also appointed Anirban Chakraborty as our first ever Chief Growth Officer. Mr. Chakraborty has been with Comtech for four years, most recently serving as Senior Vice President of our fiscal year by $63.7 million. SinceStrategy and Business Development within the February 23, 2016 acquisition of TCS, we have reduced our total indebtedness by $160.3 million.
We enter fiscal 2018 with solid backlogTrusted Location and a pipeline of opportunities. During fiscal 2017, we achieved a consolidated book-to-bill ratio (a measure defined as bookings divided by net sales) of 0.93 and finished the year with consolidated backlog of $446.2 million. Looking forward, we anticipate that our strong growth prospects will drive an increase in net sales as compared to fiscal 2017. In addition, despite the absence of $6.7 million of BFT-1 intellectual property license fee in fiscal 2018, we are targeting Adjusted EBITDA in a range comparable to the $70.7 million we achieved in fiscal 2017. If market conditions continue to strengthen, enabling us to achieve all of our fiscal 2018 business goals, itMessaging Solutions product area. Mr. Chakraborty is possible that Adjusted EBITDA in fiscal 2018 could exceed the $70.7 million achieved in fiscal 2017. We expect that fiscal 2018 Adjusted EBITDA, as a percentage of consolidated net sales, will be comparable to the 12.8% we achieved in fiscal 2017.
Our optimism for fiscal 2018 is driven by recent momentum on many fronts, including the following:
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• | Our Commercial Solutions segment is expected to benefit from increased fiscal 2018 sales of satellite earth station products (which include satellite modems and solid-state power amplifiers ("SSPAs")). We experienced satellite earth station revenue growth to international customers in fiscal 2017, and our international markets continue to show signs of strengthening. In addition, we expect to benefit from recent new product introductions. For instance, during the fourth quarter of fiscal 2017, we announced the general availability of our HeightsTM Dynamic Network Access Technology ("HEIGHTS"), a potentially revolutionary technology designed to deliver the highest Internet Protocol bits per Hertz in its class, as well as robust reliability. HEIGHTS has and will continue to be a cornerstone of our future research and development efforts. To-date, we have announced several important customer wins for this product line and our pipeline of opportunities is growing. As such, we anticipate that fiscal 2018 will be the break-out year for sales of our HEIGHTS products. We also expect incremental fiscal 2018 revenue contributions from our recently introduced series of compact high-power GaN SSPAs, which are ideal for transportable and mobile applications as well as tactical communications. Additionally, sales of our SSPAs used in airborne, in-flight connectivity applications are expected to remain strong.
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Sales of our satellite earth station products and technologies in our Commercial Solutions segment are also expected to benefit from increased salesfocus on growth initiatives by seeking meaningful ways to the U.S. government. deploy our cutting edge technological innovations in new market areas, as well as fostering centers of engineering excellence across Comtech.
During the fourth quarter, we continued to execute on our plans to deploy the proceeds of our $100.0 million strategic growth investment and continued to solidify our position as a leading solutions provider in our two key end-markets: Satellite and Space Communications and Terrestrial and Wireless Networks. We believe both are at the beginning of a long-term investment and upgrade cycle, and the demand environment for our products, despite the headwinds discussed below, remains strong.
Considering these trends in our end-markets, we pressed forward during the most recent quarter on our investments in capital equipment and building improvements in connection with the opening of a new 146,000 square-foot facility in Chandler, Arizona, and the establishment of a 56,000 square-foot facility in Basingstoke, United Kingdom. Although COVID-19 and supply chain issues have extended our original build-out schedules, particularly as it relates to our Chandler, Arizona facility, both manufacturing centers are expected to support production of next-generation broadband satellite technology and should be fully operational in fiscal 2017,2023.
Our business continues to face near-term challenges and continued uncertainties, as the repercussions of the military conflict between Russia and Ukraine remain significant. For Comtech, the conflict is directly impacting near-term elements of our sales pipelines. Certain customers have paused procurement and deployment of satellite and troposcatter communication systems, and instead are purchasing war-fighting equipment. The U.S. defense budget, and defense budgets worldwide, are being adjusted in real-time to reflect the priorities of war and changing European geopolitics. Anticipated funding for other expected orders, including for our satellite and space communication products, has been shifted to other programs and/or temporarily delayed as a result of changes in defense spending priorities.
For example, in May 2022, the U.S. Spaceauthorized a $40.0 billion military and Naval Warfare System Command,humanitarian aid package for Ukraine. While there are portions of this spending package that we could expect to benefit from in the future, such as financial support for Ukraine’s military and expanded U.S. military operations in Europe, we do not expect such spending for our communications related products and services to be immediate. Nonetheless, at the request of the Program Executive Office for Command, Control, Communications, Computer and Intelligence, publicly announced its intention to sole-source a five year, indefinite delivery / indefinite quantity ("IDIQ") contract to procure our SLM-5650B satellite modems and upgrade kits. There are over eight-hundred older generation modems currently utilized by multiple Navy programs and our new modems and related upgrade kits will meet critical Navy requirements. We believe no other competitor responded to the Navy’s Request for Proposal ("RFP") and we are expecting to receive a contract award in fiscal 2018, with related shipments occurring in the latter part of the second half of fiscal 2018.
We continue to invest in and upgrade our Commercial Solutions segment’s enterprise technology solutions (such as our location and messaging platforms) and safety and security technology solutions (such as our wireless and next generation 911 ("NG911") platforms). These technologies have been deployed around the U.S., are used by wireless carriers to provide Short-Message-Service ("SMS") texts to end-customers and are also used to communicate with 911 public safety answering points ("PSAPs"). We are currently pursuing a number of large multi-year, multi-million dollar NG911 and enterprise and trusted location-based technology solutions opportunities. Although the size and timing of these contract awards are difficult to predict, we are confident that fiscal 2018 will benefit from one or more NG911 awards.
We believe we are seeing benefits of our tactical shift in strategyUkrainian government, in our Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions with higher margins. Our field-proven technologies and support services are ideally suited to meet the U.S. DoD’s C4ISR needs and we are actively pursuing many opportunities. During the fourth quarter of fiscal 2017, we achieved a quarterly book-to-bill ratio of 1.26 and booked a number of important orders, including: (i) a $14.5 million contract modification from the Defense Information Systems Agency ("DISA") which exercised an option under an existing contract that enables us to continue to provide Ku satellite bandwidth and support services for the U.S. Marine Corps' ("USMC") Tactical Satellite Communications Network; (ii) an $8.6 million contract modification to provide enhanced communications infrastructure for U.S. forces in the Central Command Area of Responsibility; (iii) $6.9 million in orders for our cyber-training solutions; and (iv) $4.1 million in orders for high-power amplifiers and control components from multiple domestic original equipment manufacturers. Fiscal 2018 is expected to reflect sales and operating income contributions from these orders. In addition to these funded orders, we were named a final awardee on a ten-year, $2.5 billion IDIQ contract commonly referred to as “Complex Commercial SATCOM Solutions” (or “CS3”) from the General Services Administration, which allows U.S. federal agencies to purchase end-to-end, turnkey solutions which incorporate commercial satellite solutions. Over time, we would expect to secure new orders from the CS3 contract.
Our Government Solutions segment’s strategy to focus efforts on supporting the U.S. Army on a possible next generation Blue Force Tracking ("BFT") program appears to be gaining ground. During the third quarter of fiscal 2017,2022, we received a new $42.7 million five-year contractdonated multiple COMET™ troposcatter systems to provide the U.S. Army with continued BFT-1 sustainment support Ukraine’s urgent need for whichsecure, reliable communications. Shortly thereafter, as announced in September 2022, we have received $7.7 million of funding to-date. We were also awarded a sole-source firm-fixed price IDIQ contractfunded order to provide BFT-1 aviation transceiverssupply the Ukrainian government with additional systems. We expect related deliveries to occur in the Defense Logistics Agency ("DLA") and have received $4.2 millionfirst half of funded orders to-date. We believe thatfiscal 2023.
In late May 2022, at the U.S. Army has a requirement for a next generation system (referred to commonly as "BFT-3") and, based on our recent interactions withrequest of the U.S. Army, we are becoming increasingly optimisticconducted in-field demonstrations of our troposcatter solutions (including the COMET™) for both U.S. and NATO allied government customers. These demonstrations consisted of end-to-end data communications links, showcasing small, medium and large troposcatter terminals. While it is always difficult to predict the timing and amount of future orders, we feel confident that we will be ableComtech is well-positioned to participate in future BFT program awards.the uptick in demand, as conflict and uncertainties present new opportunities for the types of communications solutions we provide.
Our Government Solutions segment hasAs we enter fiscal 2023, business conditions have become more challenging, and the operating environment is largely unpredictable, especially now with increasing news reports of inflation, interest rate hikes and a potential global recession. There also respondedcontinues to a large multi-million dollar competitive solicitation frombe order and production delays, disruptions in component availability, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs.
As the U.S. Armybusiness environment relates to provide sustainment services to its AN/TSC-198 family of communication systems that are commonly referred to as “SNAP” (“Secret Internet Protocol Router (“SIPR”) and Non-secure Internet Protocol Router (“NIPR”) Access Point) Very Small Aperture Terminals (“VSATs”). We are the incumbent on this program. The U.S. Army is expected to announce the winner of this solicitation shortly. We believe this decision will largely be based on lowest price and believe we have appropriately and responsibly bid on this program. As such,our operations in Russia, we are optimistic thatcontinuing to shift certain commercial software development and related support activities conducted in our Russian office to locations outside of the U.S. Army will select us tocountry. While we continue to perform this important work. Sales in fiscal 2017seek and implement initiatives to lower such costs, our Business Outlook for this program were $32.4 millionFiscal 2023 reflects additional expenses associated with shifting these development resources.
In light of these business conditions and as of July 31, 2017, we had $26.0 million in our backlog related to this contract, for which we expect to perform work on during fiscal 2018.
Our Government Solutions segment is also preparing to respond to an expected large multi-year RFP for the supply of new troposcatter communications equipment to replace hundreds of the U.S. DoD’s AN/TRC-170 terminals. A draft RFP has been circulated to prospective vendors and we believe a final proposal will be issued sometime in fiscal 2018. Although an award of this program would likely not affect fiscal 2018 revenue, we would expect it to make significant contributions to revenue in subsequent years.
Based on the anticipated timing of shipments and performance related to orders currently in our backlog and the timing of expected new orders, net sales and Adjusted EBITDAresulting challenges, for our first and second quarters of fiscal 2018 are expected to be lower than the comparable operating quarters in fiscal 2017. Given the straight-line amortization expense associated with intangible assets with finite lives, we expect to report an operating loss in both the first and second quarters of fiscal 2018, with each of the third and fourth fiscal 2018 quarters achieving operating profits. Our fourth quarter of fiscal 2018 is expected to be the peak quarter for both2023, we are targeting consolidated net sales to increase between 1.0% and 3.0%, sequentially, and for our consolidated Adjusted EBITDA.EBITDA margin to approximate 8.0%.
In view of the positive signs we are seeing and broad opportunities for future growth across all of our businesses, onOn September 27, 2017,29, 2022, our Board of Directors declared a cash dividend of $0.10 per common share, payable on November 17, 201718, 2022 to stockholders of record at the close of business on October 18, 2017.19, 2022. Future common stock dividends remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.
Our Business Outlook for Fiscal 2018 depends, in large part, on the receiptapproval and certain voting rights of and performance on orders from our customers, and could be adversely impacted if business conditions deteriorate or our current or prospective customers materially postpone, reduce or even forgo purchasesholders of our products and services.Series A Convertible Preferred Stock.
Our historical results prior to February 23, 2016 do not include TCS. Given the integration of TCS into our business and the joint marketing of our products, historical sales patterns and mix trends are not relevant. As a result, period-to-period comparisons of sales, margins, operating income and Adjusted EBITDA contributions between TCS and Comtech legacy products will not be meaningful and you should not rely on period-to-period comparisons as an indicator of future performance.
Additional information related to our Business Outlook for Fiscal 20182023 and a definition and explanation of Adjusted EBITDA is included in the below section entitled “Comparison"Item 7. Management’s Discussion and Analysis of Fiscal 2017Financial Condition and 2016.”
Results of Operations - Comparison of Fiscal 20172022 and 20162021."
Comparison of Fiscal 2022 and 2021
Net Sales. Consolidated net sales were $550.4$486.2 million and $411.0$581.7 million for fiscal 20172022 and 2016,2021, respectively, representing an increasea decrease of $139.4$95.5 million, or 33.9%16.4%. As TCS was acquired on February 23, 2016, fiscal 2017 includes a full year of TCS operations as compared to fiscal 2016 which only included approximately five months. The year-over-year increaseperiod-over-period decrease in net sales was driven by incrementalprimarily reflects lower net sales of $147.1 million from TCS products lines.in our Satellite and Space Communications segment. Net sales by operating segment are discussed below.
Commercial SolutionsSatellite and Space Communications
Net sales in our Commercial SolutionsSatellite and Space Communications segment were $330.9$279.7 million for fiscal 2017,2022 as compared to $249.0$374.9 million for fiscal 2016, an increase2021, a decrease of $81.9$95.2 million, or 32.9%. The year-over-year increase in net sales reflects incremental sales of $82.3 million from TCS product lines (which include enterprise technology solutions such as our location and messaging platforms and safety and security technology solutions such as our wireless and next generation 911 ("NG911") platforms)25.4%. Our Commercial SolutionsSatellite and Space Communications segment represented 60.1%57.5% of consolidated net sales for fiscal 20172022 as compared to 60.6%64.4% for fiscal 2016.
2021. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 20172022 was 0.89. We believe1.01x. Period-to-period fluctuations in bookings are normal for this segment.
Fiscal 2022 net sales primarily reflect significantly lower sales of our global field support services, advanced VSAT products and other programs to the U.S. Army, as well as of our satellite ground station technologies, partially offset by higher sales of our satellite-based mobile communications and tracking systems and high-reliability EEE satellite-based space components. Fiscal 2021 net sales included revenue related to our performance on our 10-year, $211.0 million IDIQ contract awarded to us by a prime contractor to provide next-generation troposcatter systems in support of the U.S. Marine Corps. There were nominal corresponding sales in fiscal 2022.
In aggregate, net sales for our Satellite and Space Communications segment were anticipated to be significantly lower than the amount we achieved in fiscal 2021. As discussed in our Form 10-Q filed with the SEC on June 8, 2021, our revenues in fiscal 2022 were expected to decline due to the U.S. government’s decision to fully withdraw troops from Afghanistan and make certain program changes. In addition, as a direct result of the Russia/Ukraine military conflict, we no longer expected to receive and ship orders to Ukraine in fiscal 2022. That customer has an immediate need for wireless communication services but had redirected procurement dollars to war-fighting equipment. However, as announced in September 2022, we were awarded a funded order to supply the Ukrainian government with troposcatter systems that improving market conditions observedwe expect to deliver in recent months and the receiptfirst half of several large anticipated orders will result in a book-to-bill ratio over 1.00 in this segment for fiscal 2018.2023.
NetThe lower sales of our satellite earthground station products in fiscal 2017 were lower than fiscal 2016. Although market conditions in fiscal 2017 for our international satellite earth station customers improvedtechnologies primarily reflects the timing of receipt of, and performance on, orders related sales to these customers increased, sales and bookings from our U.S. government customersand international customers. Our results for fiscal 2022 and 2021 include nominal sales from our TDMA satellite networking technologies acquired on March 2, 2021. Our satellite ground station product line has been impacted by overall challenging business conditions, including the COVID-19 pandemic's effect on customer demand, particularly in international markets, which historically represents a large majority of end-users for this product line. Although our backlog of our satellite ground station products has increased during fiscal 2017 were significantly lower as compared2022, lead times for components are impacting the timing of shipments. We continue to fiscal 2016. We attribute this declinemonitor our inventory needs and navigate supply chain constraints which are impacting the timing of new orders, deliveries and installations. In addition, we do not expect to delays in awarding and/or funding certain programs and a lull in ordering that resulted from political and budget uncertainty. During the second half of fiscal 2017, we saw a noticeable improvement inmake any new sales to U.S. governmentRussian customers and we believe thatat this trend is continuing into fiscal 2018. In particular, we anticipate second half revenue and operating income contributions from an expected sole-source IDIQ contract award from the Navy for our SLM-5650B satellite modems and upgrade kits. We expect that fiscal 2018 net sales will also benefit from recent new product introductions such as our HEIGHTS networking platform. On the basis of opportunities in our pipeline and feedback received from current and prospective customers, we believe fiscal 2018 will be a break-out year for HEIGHTS.time.
Net sales in fiscal 2017 of both enterprise technology solutions and safety and security technology solutions were higher than fiscal 2016, primarily due to the contribution of twelve months of TCS operations as compared to only five months in fiscal 2016. Overall market conditions for these products remain favorable. We are currently bidding on a number of large opportunities and although the extent and timing of these contract awards are difficult to predict, we expect that fiscal 2018 will benefit from one or more of these opportunities. Sales of these solutions in fiscal 2018 are expected to be higher than in fiscal 2017.
Overall, we expect fiscal 2018 net sales in our Commercial Solutions segment to be higher than fiscal 2017. Bookings, sales and profitability in our Commercial SolutionsSatellite and Space Communications segment can fluctuate dramatically from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers, and changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Terrestrial and Wireless Networks
Net sales in our Terrestrial and Wireless Networks segment were $206.5 million for fiscal 2022, as compared to $206.8 million for fiscal 2021, a decrease of $0.3 million, or 0.1%, reflecting slightly higher sales of our trusted location and messaging solutions and cyber security training services, offset by slightly lower sales of our 911 call routing services. Our Terrestrial and Wireless Networks segment represented 42.5% of consolidated net sales for fiscal 2022 as compared to 35.6% for fiscal 2021. Our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 0.79x. Period-to-period fluctuations in bookings are normal for this segment.
Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Government Solutions
Net sales in our Government Solutions segment were $219.5 million for fiscal 2017 as compared to $162.0 million for fiscal 2016, an increase of $57.5 million or 35.5%. The year-over-year increase in net sales primarily reflects incremental sales of $64.8 million from TCS product lines (which include our advanced communication solutions such as field support, space components and cyber-training). Our Government Solutions segment represented 39.9% of consolidated net sales for fiscal 2017, as compared to 39.4% for fiscal 2016.
Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 2017 was approximately 1.00. We are seeing tangible benefits of our tactical shift in strategy away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions with higher margins. Although the timing of large contract awards makes it difficult to predict our book-to-bill ratio in any given period, we are targeting a book-to-bill ratio slightly over 1.00 in this segment for fiscal 2018.
Net sales of legacy Comtech products (which include over-the-horizon microwave system products, high-power broadband amplifiers and BFT-1 sustainment support services) were, in the aggregate, lower in fiscal 2017 than in fiscal 2016, primarily as a result of lower BFT-1 related sales. Net sales for fiscal 2017 and 2016 include $6.7 million and $10.0 million, respectively, of sales related to a BFT-1 intellectual property license contract which expired on March 31, 2017. Going forward, the U.S. Army does not have an obligation to pay us additional BFT-1 intellectual property license fees.
Consistent with our tactical shift in strategy in our Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions with higher margins, as well as the absence of $6.7 million of BFT-1 intellectual property license fees, fiscal 2018 net sales in our Government Solutions segment are expected to be lower than in fiscal 2017. In future years, we would expect revenue to increase from such levels. Recent contract awards that will contribute to fiscal 2018 net sales include: (i) a $23.8 million order from an international space agency; (ii) a $14.5 million contract to continue to provide Ku satellite bandwidth and support services for the USMC's Tactical Satellite Communications Network; (iii) an $8.6 million contract modification to provide enhanced communications infrastructure for U.S. forces in the Central Command Area of Responsibility; (iv) initial funding of $7.7 million for BFT-1 sustainment support and a related order of $4.2 million for BFT-1 aviation transceivers; (v) $6.9 million in orders for our cyber-training solutions; and (vi) $4.1 million in orders for high-power amplifiers and control components from multiple domestic original equipment manufacturers. In addition, our pipeline of opportunities heading into fiscal 2018 includes pending proposals on several large multi-year contracts, including a potential renewal of existing sustainment and retrofit services related to the U.S. Army’s AN/TSC-198 family of communication systems that are commonly referred to as “SNAP.” In addition to the aforementioned programs, we expect to win various new programs that will provide revenue and operating income contributions in fiscal 2018 and beyond.
Bookings, sales and profitability in our Government Solutions segment can fluctuate dramatically from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Geography and Customer Type
Sales by geography and customer type, as a percentage of related sales, for the fiscal years ended July 31, 20172022 and 20162021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Consolidated |
| U.S. government | | 45.6 | % | | 52.8 | % | | 2.4 | % | | 1.4 | % | | 27.2 | % | | 34.6 | % |
| Domestic | | 18.0 | % | | 15.3 | % | | 88.1 | % | | 89.2 | % | | 47.8 | % | | 41.5 | % |
| Total U.S. | | 63.6 | % | | 68.1 | % | | 90.5 | % | | 90.6 | % | | 75.0 | % | | 76.1 | % |
| | | | | | | | | | | | |
| International | | 36.4 | % | | 31.9 | % | | 9.5 | % | | 9.4 | % | | 25.0 | % | | 23.9 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | Commercial Solutions | | Government Solutions | | Consolidated |
| U.S. government | | 15.1 | % | | 25.0 | % | | 59.2 | % | | 65.0 | % | | 32.7 | % | | 40.8 | % |
| Domestic | | 54.4 | % | | 40.6 | % | | 15.5 | % | | 11.6 | % | | 38.9 | % | | 29.2 | % |
| Total U.S. | | 69.5 | % | | 65.6 | % | | 74.7 | % | | 76.6 | % | | 71.6 | % | | 70.0 | % |
| | | | | | | | | | | | | |
| International | | 30.5 | % | | 34.4 | % | | 25.3 | % | | 23.4 | % | | 28.4 | % | | 30.0 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Sales to U.S. government customers include sales to the U.S. DoD,Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors.
Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 11.1% and 10.7% of consolidated net sales for fiscal 2022 and 2021, respectively.
International sales for fiscal 2022 and 2021 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers.
Ascustomers) were $121.4 million and $138.9 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a resultforeign country) represented more than 10% of the TCS acquisition, we believe that domestic net sales, as a percentage of our consolidated net sales will continue to be higher than in periods prior to the TCS acquisition, due to the inclusion in consolidated net sales of safetyfor fiscal 2022 and security technology solutions (such as 911 call routing) which are primarily sold to U.S. customers.2021.
Gross Profit. Gross profit was $218.2$179.8 million and $171.2$214.0 million for fiscal 20172022 and 2016, respectively, representing an increase of $47.0 million. This increase in gross profit dollars was driven by higher consolidated net sales as discussed above.2021, respectively. Gross profit, as a percentage of consolidated net sales, decreased from 41.7% for fiscal 20162022 was 37.0% as compared to 39.6%36.8% for fiscal 2017. This decrease is attributable2021. During fiscal 2022, we recorded a $2.5 million benefit to cost of sales as we reduced a warranty accrual due to lower than expected warranty claims in our NG-911 product line. During fiscal 2021, we recorded a $2.0 million benefit to cost of sales in our Unallocated segment related to a refund of historical excise tax paid. Excluding such items, gross profit, as a percentage of consolidated net sales, for fiscal 2022 and 2021 was 36.5% and 36.4%, respectively. Gross profit during the most recent period reflects the impact of an overall favorable product mix changesand a lower provision for warranty obligations during fiscal 2022 in light of the reduced level of sales activity during the period, offset in part by lower consolidated net sales. Our gross profit in both periods also reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting primarily from the TCS acquisition, in particular,ongoing impacts of the inclusion of net sales related to TCS government solutions, which have historically had lower gross margins than Comtech’s legacy products.COVID-19 pandemic and inflationary pressures. Gross profit, as a percentage of related segment net sales, is further discussed below.
Our Commercial SolutionsSatellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for fiscal 2017 was2022 decreased in comparison to fiscal 2021. The decrease in gross profit percentage primarily reflects changes in products and services mix, as well as lower levels of factory utilization and higher thanlogistics and operational costs resulting from global supply chain constraints. Also, during fiscal 2022 and 2021, we incurred $1.1 million and $1.0 million, respectively, of incremental operating costs related to our antenna facility in the United Kingdom due to the impact of the COVID-19 pandemic. Although operations in the United Kingdom have largely resumed, we continued to experience lingering impacts from COVID-19 and the related facility shut-down in fiscal 2016. This increase was primarily driven by the inclusion of net sales related2021. We do not expect to TCS commercial solutions during fiscal 2017, which had higher gross margins than Comtech's legacy products. Gross margin, as a percentage of related net sales for Comtech’s legacy products, also increased primarily due to overall mix changes. We expect our gross profit, as a percentage of related segment net sales, for fiscal 2018, to be comparable to the percentage achievedincur similar costs in fiscal 2017.2023.
Our Government SolutionsTerrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for fiscal 20172022 was significantlycomparable to fiscal 2021. The gross profit percentage in fiscal 2022 primarily reflects changes in products and services mix, and lower than in fiscal 2016. This decrease was primarily driven by the inclusion of net sales related to TCS government solutions during fiscal 2017, which have significantly lower gross margins than Comtech's legacy products. Gross profit in this segment, for fiscal 2017 and 2016 includes $6.7 million and $10.0 million, respectively, related to a prior BFT-1 intellectual property license contract which expired on March 31, 2017. Going forward, the U.S. Army does not have an obligation to pay us additional BFT-1 intellectual property license fees. Given the absence of BFT-1 intellectual property license fees in fiscal 2018, we expect our gross profit,expected warranty claims, as a percentage of related segment net sales, to be lower than the percentage achieved in fiscal 2017. Over-time, we believe the implementation of our strategy of shifting our Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions will result in higher gross margins in this segment.discussed above.
Included in consolidated cost of sales for both fiscal 20172022 and 20162021 are provisions for excess and obsolete inventory of $2.9 million and $2.8 million, respectively.$4.4 million. As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory,"we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage assumptions.trends.
Because ourOur consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each individual segment, itand therefore is inherently difficult to forecast. Nevertheless, based on expected bookings and expected timing of our performance on orders and the absence of the BFT-1 intellectual property license fees, we currently expect our consolidated gross profit, as a percentage of consolidated net sales, for fiscal 2018 to be slightly lower than the percentage we achieved in fiscal 2017.
Selling, General and Administrative Expenses.Selling, general and administrative expenses were $116.1$114.9 million and $94.9$111.8 million for fiscal 20172022 and 2016, respectively, representing an increase of $21.2 million. The increase in spending is primarily attributable to incremental expenses associated with the increased size of our business as a result of the TCS acquisition which was partially offset by $5.5 million of favorable adjustments related to a recovery of legal expenses from a third party and adjustments related to reserves associated with the TCS acquisition that were no longer required.2021, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 21.1%23.6% and 23.1%19.2% for fiscal 20172022 and 2016,2021, respectively. This decrease
During fiscal 2022 and 2021, we incurred $6.0 million and $2.8 million, respectively, of restructuring costs to streamline our operations, including costs related to the ongoing relocation of certain of our satellite ground station production facilities to a new 146,000 square foot facility in percentage is primarily due to higher consolidated net sales during fiscal 2017, the aforementioned $5.5Chandler, Arizona. In addition, we received $3.1 million of favorable adjustments, and the benefit of cost reduction actions previously initiated.
Amortization of stock-based compensationlegal expense recorded asrecoveries from insurance in fiscal 2021. Excluding such items, selling, general and administrative expenses was $7.1for fiscal 2022 and 2021 would have been $108.9 million or 22.4% and $112.1 million or 19.3%, respectively, of consolidated net sales. The increase in fiscal 2017 as compared to $3.4 million in fiscal 2016. This increase is primarily related to the type and timing of stock-based awards. In fiscal 2017, we paid certain annual incentive compensation awards in the form of share units whereas in fiscal 2016, such annual incentives were paid in cash. The benefit of this change resulted in lower overall company-wide compensation expense of approximately $1.3 million in fiscal 2017.
Based on our current spending plans, we expect fiscal 2018 selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to be comparablelower consolidated net sales. Our selling, general and administrative expenses in the most recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities and other investments we are making to achieve our long term business goals. Such spending is expected to continue during fiscal 2017.2023.
Amortization of stock-based compensation expenses recorded as selling, general and administrative expenses was $6.3 million in fiscal 2022 as compared to $8.1 million in fiscal 2021. Such amortization for fiscal 2022 includes $0.8 million related to the retirement, in December 2021, of three, long-standing members of the Board of Directors. Amortization of stock-based compensation is not allocated to our two reportable operating segments.
Research and Development Expenses.Research and development expenses were $54.3$52.5 million and $42.2$49.1 million for fiscal 20172022 and 2016,2021, respectively, representing an increase of $12.1$3.4 million, or 28.7%6.9%. The increase in spending is primarily attributable to incremental expenses associated with the TCS product lines. As a percentage of consolidated net sales, research and development expenses were 9.9%10.8% and 10.3%8.4% for fiscal 20172022 and 2016.2021, respectively.
For fiscal 20172022 and 2016,2021, research and development expenses of $44.7$26.5 million and $33.8$28.0 million, respectively, related to our Commercial SolutionsSatellite and Space Communications segment, and $8.9$25.2 million and $8.0$20.1 million, respectively, related to our Government SolutionsTerrestrial and Wireless Networks segment. The remaining research and development expenses of $0.7$0.8 million and $0.4$1.0 million in fiscal 20172022 and 2016,2021, respectively, related to the amortization of stock-based compensation expense.
During fiscal 2022 and 2021, our Satellite and Space Communications segment incurred $1.2 million and $0.3 million, respectively, of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. As we have stated in the past, we are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future.
Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During fiscal 20172022 and 2016,2021, customers reimbursed us $27.1$9.8 million and $17.4$13.6 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.
Based on our current spending plans, we expect fiscal 2018 research and development expenses, as a percentage of consolidated net sales, to be comparable to fiscal 2017.
Amortization of Intangibles. Amortization relating to intangible assets with finite lives was $22.8$21.4 million (of which $17.7$7.3 million was for the Commercial SolutionsSatellite and Space Communications segment and $5.1$14.1 million was for the Government SolutionsTerrestrial and Wireless Networks segment) for fiscal 20172022 and $13.4$21.0 million (of which $10.6$5.7 million was for the Commercial SolutionsSatellite and Space Communications segment and $2.8$15.3 million was for the Government SolutionsTerrestrial and Wireless Networks segment) for fiscal 2016. The significant increase2021.
Proxy Solicitation Costs. During fiscal 2022, we incurred $11.2 million of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) in amortization of intangibles isour Unallocated segment as a result of our acquisitiona now-settled proxy contest initiated by a shareholder during the first quarter of TCS on February 23, 2016. As certain intangibles became fully amortized in fiscal 2017, we anticipate amortization of intangibles in fiscal 2018, in dollars, to be lower than in fiscal 2017.
Settlement of Intellectual Property Litigation.As discussed further in "Notes to Consolidated Financial Statements - Note (14)(b) Commitments and Contingencies - Legal Proceedings, Other Matters and Final Settlements" included in "Part II - Item 8 - Financial Statements and Supplementary Data," during fiscal 2017, we recorded favorable adjustments to operating income of $12.0 million, net of estimated legal fees, to reflect lower losses than originally estimated for TCS intellectual property matters which were settled during fiscal 2017.2022. There were no comparable adjustmentssimilar costs in the prior year. During our first quarter of fiscal 2016.2022, we entered into a Cooperation Agreement with such shareholder.
Acquisition Plan Expenses. Acquisition plan expenses during fiscal 2016 were $21.3 millionCEO Transition Costs. On December 31, 2021, our Board of Directors appointed Mr. Porcelain as CEO. Prior to that, Mr. Porcelain served as our President and primarily consist of transactionCOO. Transition costs related to our acquisitionformer CEO, Mr. Kornberg, were $13.6 million and all expensed in our Unallocated segment during fiscal 2022. Of such amount, $10.3 million related to Mr. Kornberg's severance payments and benefits upon termination of TCS on February 23, 2016,his employment; the remainder related to Mr. Kornberg agreeing to serve as discussed further in "Notes to Consolidated Financial Statements - Note (2) Acquisition" included in "Part II - Item 8 - Financial Statements and Supplementary Data."a Senior Technology Advisor for a minimum of two years. There were no comparablesimilar costs in the prior year.
On August 9, 2022, subsequent to year end, our Board of Directors appointed our Chairman of the Board, Mr. Peterman, as President and CEO. Transition costs related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, were $7.4 million, of which $3.8 million related to the acceleration of unamortized stock based compensation, with the remaining $3.6 million related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3.6 million is expected to be paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $1.0 million expense related to a cash sign-on bonus. CEO transition costs related to Mr. Porcelain and Mr. Peterman will be expensed in our Unallocated segment during the first quarter of fiscal 2023.
Acquisition Plan Expenses. During fiscal 2021, we incurred $100.3 million of acquisition plan expenses, of which $88.3 million related to the previously announced litigation and merger termination with Gilat, including $70.0 million paid in cash to Gilat. The remaining costs primarily related to the acquisition of TDMA satellite networking technologies and GD NG-911 acquisition-related litigation. These expenses are primarily recorded in our Unallocated segment. There were no similar costs incurred during fiscal 2017.2022.
Operating Income (Loss). Income. Operating loss for fiscal 2022 and 2021 was $33.8 million and $68.3 million, respectively. Operating income for fiscal 2017 was $37.0 million as compared to a loss of $0.6 million for fiscal 2016. Operating income(loss) by reportable segment is shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended July 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| ($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
| Operating (loss) income | | $ | (5.7) | | | $ | 24.3 | | | $ | 18.9 | | | $ | 25.2 | | | $ | (47.0) | | | $ | (117.8) | | | $ | (33.8) | | | $ | (68.3) | |
Percentage of related
net sales | | NA | | 6.5 | % | | 9.2 | % | | 12.2 | % | | NA | | NA | | NA | | NA |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| ($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
| Operating income (loss) | | $ | 33.2 |
| | $ | 23.3 |
| | $ | 9.4 |
| | $ | 23.0 |
| | $ | (5.6 | ) | | $ | (46.8 | ) | | $ | 37.0 |
| | $ | (0.6 | ) |
| Percentage of related net sales | | 10.0 | % | | 9.3 | % | | 4.3 | % | | 14.2 | % | | NA |
| | NA |
| | 6.7 | % | | NA |
|
The increase inOur GAAP operating loss of $33.8 million for fiscal 2022 reflects: (i) $13.6 million of CEO transition costs; (ii) $11.2 million of proxy solicitation costs; (iii) $6.0 million of restructuring costs; (iv) $1.2 million of strategic emerging technology costs; and (v) $1.1 million of incremental operating costs due to the lingering impact of COVID-19, as discussed above. Excluding such items, our Commercial Solutions segment’sconsolidated operating loss for fiscal 2022 would have been $0.7 million. Our GAAP operating loss of $68.3 million for fiscal 2021 reflects: (i) $100.3 million of acquisition plan expenses; (ii) $2.8 million of restructuring costs; (iii) $1.0 million of incremental operating costs due to the impact of COVID-19; and (iv) $0.3 million of strategic emerging technology costs, as discussed above. Excluding such items, our consolidated operating income for fiscal 2021 would have been $36.1 million, or 6.2% of consolidated net sales. The decrease in dollars, isoperating income from $36.1 million for fiscal 2021 to an operating loss of $0.7 million for fiscal 2022 was primarily due to an increase in this segment'slower consolidated net sales, duringas discussed above. Operating income (loss) by reportable segment is further discussed below.
The decrease in our Satellite and Space Communications segment operating income for fiscal 2017, substantially offset2022 was driven primarily by incrementallower net sales and gross profit percentage and higher restructuring costs and amortization of intangibles, associated with the TCS acquisition. partially offset by lower research and development expenses, as discussed above.
The increasedecrease in our Terrestrial and Wireless Networks segment operating income, as a percentage of related segment net sales, is primarily due to increased operating income contribution from Comtech's legacy products. We expect fiscal 2018 operating income,both in dollars and as a percentage of the related segment net sales, to increasefor fiscal 2022 was driven primarily by higher research and development expenses, as discussed above.
The decrease in unallocated expenses for fiscal 2022 as compared to fiscal 2017.
The decrease in our Government Solutions segment’s operating income, in dollars,2021 was primarily drivendue to no acquisition plan expenses incurred during the most recent fiscal year, partially offset by lowerCEO transition costs and proxy solicitation costs during fiscal 2022, as discussed above. Amortization of stock-based compensation was $7.8 million and $10.0 million, respectively, for fiscal 2022 and 2021. Stock-based compensation expense for fiscal 2022 includes $0.8 million related to the retirement of three, long-standing Board members, who retired in December 2021. Our unallocated expenses for fiscal 2021 also reflects benefits of $3.1 million for legal expense recoveries from insurance and $2.0 million related to a refund of historical excise tax paid. Excluding these items in their respective periods, unallocated expense would have been $21.4 million and $21.6 million, respectively, for fiscal 2022 and 2021.
GAAP operating income contribution from TCS's government solutions' net sales (which includes the impact of incremental amortization of intangiblesresults for fiscal 2023 will be impacted by start-up expenses and restructuring costs associated with the TCS acquisition) and lower operating income contribution fromopening of Comtech’s legacy products. The decrease in operating income, as a percentage of related segment net sales, is primarily due to the inclusion of TCS government solutions' net sales and operating results, including the impact of incremental amortization of intangibles associated with the TCS acquisition. As a result of our ongoing tactical shift in strategy in our Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions with higher margins and the absence of BFT-1 intellectual property license fees in fiscal 2018, we anticipate operating income, in dollars, to be slightly lower than fiscal 2017. Given our focus on higher margins, anticipated orders we expect to receive,new high-volume technology manufacturing centers, as well as the benefit of cost reduction actions previously taken, we expect operating income, as a percentage of related segment net sales, to be comparable to fiscal 2017.
Unallocated operating expenses for fiscal 2017 were $5.6 million. During fiscal 2017, unallocated operating expenses were offset by a number of items throughout the fiscal year, which aggregated $18.8 million. Such items include: (i) a $12.0 million favorable adjustment related to the settlement of certain TCS intellectual property matters, as discussed above; (ii) $5.5 million of favorable adjustments which related to a recovery of legal expenses from a third party and reserves associated with the TCS acquisitionCEO change that were no longer required;was announced in August 2022.
Interest Expense and (iii) a $1.3 million benefit associated with our decision (which is further described below) to pay certain fiscal 2017 incentive compensation awards in the form of share units. Unallocated operating expenses for fiscal 2016 were $46.8Other. Interest expense was $5.0 million and included $21.3 million of acquisition plan expenses, as discussed above. Excluding the $18.8 million and $21.3 million amounts, unallocated operating expenses for fiscal 2017 and 2016 would have been $24.4 million and $25.5 million, respectively.
Unallocated expenses for fiscal 2017 and 2016 include amortization of stock-based compensation of $8.5 million and $4.1 million, respectively. The increase in fiscal 2017 related to our decision to pay certain fiscal 2017 non-equity incentive awards in the form of fully vested share units, whereas in fiscal 2016 our non-equity incentive awards were settled in cash. Although this change resulted in higher amortization of stock-based compensation in fiscal 2017 as compared to fiscal 2016, the overall impact of this decision resulted in lower company-wide compensation expense of approximately $1.3$6.8 million for fiscal 2017. Our Business Outlook for Fiscal 2018 assumes the continuation of this practice. Based on the type of awards currently outstanding2022 and awards expected to be issued in future periods, total amortization of stock-based compensation is expected to be higher in fiscal 2018 than in fiscal 2017.
Our Business Outlook for Fiscal 2018 does not assume any similar unallocated operating expense offsets discussed above and will reflect the full year impact of cost reduction actions taken in fiscal 2017. Although we expect sales growth on a consolidated basis in fiscal 2018, our unallocated operating expenses in fiscal 2018 are expected to be comparable to the $24.4 million amount discussed above for fiscal 2017.
Excluding the $18.8 million of favorable adjustments described above, consolidated operating income for fiscal 2017 would have been $18.2 million, or 3.3% of consolidated net sales. Based on expected sales growth, our consolidated operating income (in dollars) in fiscal 2018 is anticipated to be higher than the $18.2 million and we are targeting to achieve operating income, as a percentage of consolidated net sales, in the range of approximately 4.0% to 5.0%. In addition, based on the continued amortization of intangible assets with finite lives and the timing of expected sales, we expect an operating loss in both the first and second quarters of fiscal 2018, with each of the third and fourth fiscal 2018 quarters achieving operating profits.
Interest Expense and Other. Interest expense was $11.6 million and $7.8 million for fiscal 2017 and 2016,2021, respectively. Interest expense for both periods primarily reflectsfiscal 2021 includes $1.2 million of incremental interest on our Secured Credit Facility, as amended. Based on the type, terms, amount of outstanding debt (including capital leases) and current interest rates, we estimate that ourexpense related to a now terminated financing commitment letter. Our effective interest rate (including amortization of deferred financing costs) will approximate 5.0% in fiscal 2018.2022 was approximately 3.4%. Our actualcurrent cash borrowing rate (which excludes the amortization of deferred financing costs) currently approximates 4.1%under our existing Credit Facility is approximately 5.1%.
Interest Income(Income) and Other. Interest income(income) and other for both fiscal 20172022 and 20162021 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.
Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During fiscal 2022, we recorded a blended annual interest rate$1.0 million non-cash benefit from the remeasurement of approximately 0.56%.the convertible preferred stock purchase option liability. See "Notes to Condensed Consolidated Financial Statements - Note (15) - Convertible Preferred Stock" for more information.
Benefit from Income Taxes.The provision for income taxes was $9.7 For fiscal 2022 and 2021, we recorded tax benefits of $4.0 million and $1.5 million, respectively. Our effective tax rate (excluding discrete tax items) for fiscal 20172022 was 28.0%, as compared to a tax benefit of $0.5 million during fiscal 2016. Ournominal effective tax rate was 37.9% for fiscal 2017, as compared2021. The increase was primarily due to 5.5%expected product and geographical mix changes in fiscal 2022.
For purposes of determining our 28.0% annual effective tax rate for fiscal 2016.
Excluding2022, CEO transition costs and proxy solicitation costs are considered significant, unusual or infrequently occurring discrete tax items for fiscal 2017,and are excluded from the computation of our effective tax rate was 35.75%. Our effective tax rate excluding discrete tax items for fiscal 2016 was 18.0%. The increase from 18.0% to 35.75% is principally attributable to the non-deductibility of certain transaction costs relating to the acquisition of TCS, which were incurred during fiscal 2016.rate.
During fiscal 2017,2022, we recorded a net discrete tax expensebenefit of $0.5$0.6 million, primarily related to the deductible portion of CEO transition costs and proxy solicitation costs. These benefits were partially offset by the establishment of a valuation allowance on certain foreign related net deferred tax assets and the settlement of certain stock-based awards during fiscal 2022. During fiscal 2021, we recorded a net discrete tax benefit of $1.6 million, primarily related to the release of valuation allowances previously established on certain foreign related deferred tax assets, the finalization of certain tax deductionsaccounts in connection with the filing of our fiscal 2020 federal, state and stateforeign income tax returns for fiscal 2016, offset, in part, by the reversal of tax contingencies no longer required due toand the settlement of thecertain stock-based awards during fiscal 2014 federal income tax audit and the expiration of applicable statutes of limitation. During fiscal 2016, we recorded a net discrete tax expense of approximately $1.0 million, primarily related to the establishment of tax contingencies for uncertain tax positions relating to the payment of certain expenses associated with the TCS acquisition, offset, in part, by the reversal of tax contingencies no longer required due to the expiration of applicable statutes of limitation; and the passage of legislation that included the permanent retroactive extension of the federal research and experimentation credit from December 31, 2014.2021.
Our U.S federal income tax returns for fiscal 2015 and 20162019 through 2021 are subject to potential future Internal Revenue Service ("IRS") audits.IRS audit. None of our state income tax returns prior to fiscal 2013 are subject to audit. TCS’s federal income tax returns for calendar years 2013 through 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential future IRS audits. None of TCS’s state income tax returns prior to calendar year 20122018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Based on our expected fiscal 2018 business outlook, and excluding the impact of any potential discrete tax items, our fiscal 2018 estimated effective tax rate is expected to approximate 34.75%.
Net Loss (Income). Attributable to Common Stockholders. During fiscal 2017,2022 and 2021, consolidated net incomeloss attributable to common stockholders was $15.8$43.3 million and $73.5 million, respectively.
Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both fiscal 2022 and 2021 are shown in the table below (numbers in the table may not foot due to rounding):
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| | Fiscal Years Ended July 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| ($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
| Net (loss) income | | $ | (3.9) | | | 24.4 | | | 18.8 | | | 24.4 | | | (48.0) | | | (122.2) | | | $ | (33.1) | | | (73.5) | |
| (Benefit from) provision for income taxes | | (1.1) | | | (0.4) | | | — | | | 0.8 | | | (2.9) | | | (1.9) | | | (4.0) | | | (1.5) | |
| Interest (income) and other | | (0.8) | | | 0.2 | | | 0.1 | | | — | | | — | | | (0.4) | | | (0.7) | | | (0.1) | |
Change in fair value of
convertible preferred stock
option liability | | — | | | — | | | — | | | — | | | (1.0) | | | — | | | (1.0) | | | — | |
| Interest expense | | 0.1 | | | 0.1 | | | — | | | — | | | 4.9 | | | 6.8 | | | 5.0 | | | 6.8 | |
| Amortization of stock-based compensation | | — | | | — | | | — | | | — | | | 7.8 | | | 10.0 | | | 7.8 | | | 10.0 | |
| Amortization of intangibles | | 7.3 | | | 5.7 | | | 14.1 | | | 15.3 | | | — | | | — | | | 21.4 | | | 21.0 | |
| Depreciation | | 4.0 | | | 3.7 | | | 6.1 | | | 5.3 | | | 0.2 | | | 0.3 | | | 10.3 | | | 9.4 | |
| Amortization of cost to fulfill assets | | 0.5 | | | — | | | — | | | — | | | — | | | — | | | 0.5 | | | — | |
| | | | | | | | | | | | | | | | |
| CEO transition costs | | — | | | — | | | — | | | — | | | 13.6 | | | — | | | 13.6 | | | — | |
| Proxy solicitation costs | | — | | | — | | | — | | | — | | | 11.2 | | | — | | | 11.2 | | | — | |
| Restructuring costs | | 5.7 | | | 2.8 | | | — | | | — | | | 0.3 | | | — | | | 6.0 | | | 2.8 | |
| Strategic emerging technology costs | | 1.2 | | | 0.3 | | | — | | | — | | | — | | | — | | | 1.2 | | | 0.3 | |
| COVID-19 related costs | | 1.1 | | | 1.0 | | | — | | | — | | | — | | | — | | | 1.1 | | | 1.0 | |
| Acquisition plan expenses | | — | | | — | | | — | | | (1.1) | | | — | | | 101.3 | | | — | | | 100.3 | |
| Adjusted EBITDA | | $ | 14.1 | | | 37.8 | | | 39.1 | | | 44.8 | | | (13.9) | | | (6.1) | | | $ | 39.3 | | | 76.5 | |
| Percentage of related net sales | | 5.0 | % | | 10.1 | % | | 18.9 | % | | 21.7 | % | | NA | | NA | | 8.1 | % | | 13.2 | % |
The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for fiscal 2022 as compared to afiscal 2021 is primarily attributable to lower consolidated net loss of $7.7 million during fiscal 2016.
sales, as discussed above.
The decrease in our Satellite and Space Communications segment's Adjusted EBITDA. EBITDA, both in dollars and as a percentage of related segment net sales, was driven primarily by lower net sales and gross profit percentage, partially offset by lower research and development expenses, as discussed above.
The decrease in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, was driven primarily by higher research and development expenses, as discussed above.
Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast.
Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for fiscal 2022 and 2021 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the table may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on full year results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP EPS for fiscal 2021 was computed using 25,885,000 weighted average diluted shares outstanding during the period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2022 |
| ($ in millions, except for per share amounts) | | Operating Loss | | Net Loss Attributable to Common Stockholders | | Net Loss per
Diluted Common Share |
| Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
| GAAP measures, as reported | | | $ | (33.8) | | | | $ | (43.3) | | | | $ | (1.63) | |
| Adjustments to reflect redemption value of convertible preferred stock | | | — | | | | 10.2 | | | | 0.39 | |
| CEO transition costs | | | 13.6 | | | | 13.0 | | | | 0.49 | |
| Proxy solicitation costs | | | 11.2 | | | | 8.7 | | | | 0.33 | |
| Restructuring costs | | | 6.0 | | | | 4.6 | | | | 0.17 | |
| Strategic emerging technology costs | | | 1.2 | | | | 0.9 | | | | 0.03 | |
| COVID-19 related costs | | | 1.1 | | | | 0.8 | | | | 0.03 | |
Change in fair value of convertible preferred stock purchase option liability | | | — | | | | (1.0) | | | | (0.04) | |
| Net discrete tax expense | | | — | | | | 2.6 | | | | 0.10 | |
| Non-GAAP measures | | | $ | (0.7) | | | | $ | (3.5) | | | | $ | (0.13) | |
| | | | | | | | | |
| | Fiscal 2021 |
| ($ in millions, except for per share amounts) | | Operating (Loss) Income | | Net (Loss) Income | | Net (Loss) Income per
Diluted Share |
| Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
| GAAP measures, as reported | | | $ | (68.3) | | | | $ | (73.5) | | | | $ | (2.86) | |
| Acquisition plan expenses | | | 100.3 | | | | 93.3 | | | | 3.60 | |
| Restructuring costs | | | 2.8 | | | | 2.1 | | | | 0.08 | |
| COVID-19 related costs | | | 1.0 | | | | 0.8 | | | | 0.03 | |
| Strategic emerging technology costs | | | 0.3 | | | | 0.3 | | | | 0.01 | |
| Interest expense | | | — | | | | 0.9 | | | | 0.04 | |
| Net discrete tax benefit | | | — | | | | (1.6) | | | | (0.06) | |
| Non-GAAP measures | | | $ | 36.1 | | | | $ | 22.4 | | | | $ | 0.86 | |
Our Adjusted EBITDA is a Non-GAAP financial measure that represents earnings (loss) before income taxes, interest (income) and other, expense,change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, estimated contract settlement costs, settlement of intellectual property litigation, and acquisition plan expenses. These items, while periodically affecting our results, may vary significantly from period-to-periodexpenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and may have a disproportionate effect in a given period, thereby affecting the comparability of our results.other. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Secured Credit Facility, as amended) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies (including TCS prior to our acquisition) and therefore may not be comparable to similarly titled measures used by other companies. Our Adjusted EBITDA is also a measure frequently requested by the Company'sour investors and analysts. We believe that investors and analysts may use our Adjusted EBITDA, along with other information contained in our SEC filings, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock.
These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP in the tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our Q1 fiscal 2023 Adjusted EBITDA (both in dollarstarget to the most directly comparable GAAP measure because items such as adjustments to the provision for income taxes, and as a percentage of related net sales) for both fiscal 2017 and 2016 are shown in the table below (numbers in the table may not foot due to rounding):
|
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| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| ($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
| Net income (loss) | | $ | 32.9 |
| | 22.8 |
| | 9.4 |
| | 23.0 |
| | (26.5 | ) | | (53.5 | ) | | $ | 15.8 |
| | (7.7 | ) |
| Income taxes | | 0.3 |
| | 0.1 |
| | — |
| | — |
| | 9.4 |
| | (0.5 | ) | | 9.7 |
| | (0.5 | ) |
| Interest (income) and other expense | | (0.1 | ) | | 0.1 |
| | — |
| | — |
| | 0.1 |
| | (0.2 | ) | | (0.1 | ) | | (0.1 | ) |
| Interest expense | | 0.2 |
| | 0.3 |
| | — |
| | — |
| | 11.4 |
| | 7.5 |
| | 11.6 |
| | 7.8 |
|
| Amortization of stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 8.5 |
| | 4.1 |
| | 8.5 |
| | 4.1 |
|
| Amortization of intangibles | | 17.7 |
| | 10.6 |
| | 5.1 |
| | 2.8 |
| | — |
| | — |
| | 22.8 |
| | 13.4 |
|
| Depreciation | | 9.9 |
| | 7.1 |
| | 2.9 |
| | 2.0 |
| | 1.5 |
| | 0.8 |
| | 14.4 |
| | 9.8 |
|
| Settlement of intellectual property litigation | | — |
| | — |
| | — |
| | — |
| | (12.0 | ) | | — |
| | (12.0 | ) | | — |
|
| Acquisition plan expenses | | — |
| | — |
| | — |
| | — |
| | — |
| | 21.3 |
| | — |
| | 21.3 |
|
| Adjusted EBITDA | | $ | 60.9 |
| | 40.9 |
| | 17.5 |
| | 27.8 |
| | (7.6 | ) | | (20.7 | ) | | $ | 70.7 |
| | 48.1 |
|
| Percentage of related net sales | | 18.4 | % | | 16.4 | % | | 8.0 | % | | 17.2 | % | | NA |
| | NA |
| | 12.8 | % | | 11.7 | % |
The increase in consolidated Adjusted EBITDA, in dollars and as a percentage of consolidated net sales, during fiscal 2017 as compared to fiscal 2016 is primarily attributable to earnings contributions associated with the TCS acquisition, period-to-period changes in sales mix and gross margin contributions and lower unallocated expenses during fiscal 2017, all ofinterest expense, which are discussed above. The increase inspecific items that impact these measures, have not yet occurred, are out of our Commercial Solutions segment's Adjusted EBITDA, in dollars and as a percentage of related segment net sales, was primarily attributable to an increase in this segment's net sales and higher gross margins, as discussed above. The decrease in our Government Solutions segment's Adjusted EBITDA, in dollars and as a percentage of related segment net sales, was primarily driven by the inclusion of net sales related to TCS government solutions, which have historically had significantly lower gross margins than Comtech’s legacy products, as discussed above.
Looking forward, we anticipate that our strong growth prospects will drive an increase in revenue as compared to fiscal 2017. In addition, despite the absence of $6.7 million of BFT-1 intellectual property license fee in fiscal 2018, we are targeting Adjusted EBITDA in a range comparablecontrol, or cannot be predicted. Accordingly, reconciliations to the $70.7 million we achieved in fiscal 2017. If market conditions continue to strengthen, enabling us to achieve all ofNon-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our fiscal 2018 business goals, we expect Adjusted EBITDA in fiscal 2018 to exceed the $70.7 million achieved in fiscal 2017. We expect that fiscal 2018 Adjusted EBITDA, as a percentage of consolidated net sales, will be comparable to fiscal 2017.financial results.
Comparison of Fiscal 20162021 and 20152020
Net Sales. Consolidated net sales were approximately $411.0$581.7 million and $307.3$616.7 million for fiscal 20162021 and 2015,2020, respectively, representing an increasea decrease of $103.7$35.0 million, or 33.7%5.7%. The year-over-year increasedecrease in net sales primarily reflects incrementallower net sales of approximately $151.4 million as a result of the TCS acquisition, partially offset by lower sales of legacy Comtech products.in our Satellite and Space Communications segment. Net sales by operating segment are further discussed below.
Commercial SolutionsSatellite and Space Communications
Net sales in our Commercial SolutionsSatellite and Space Communications segment were approximately $249.0$374.9 million for fiscal 2016,2021 as compared to $203.7$411.1 million for fiscal 2015, an increase2020, a decrease of $45.3$36.2 million or 22.2%8.8%. The period-over-period increase reflects incremental sales of approximately $73.0 million as a result of the TCS acquisition, partially offset by significantly lower sales of Comtech legacy products. Our Commercial SolutionsSatellite and Space Communications segment represented 60.6%64.4% of consolidated net sales for fiscal 20162021 as compared to 66.3%66.7% for fiscal 2015.2020. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 2021 was 0.91x. Period-to-period fluctuations in bookings are normal for this segment.
Sales of Comtech legacy productsFiscal 2021 net sales in fiscal 2016, most notably our satellite earth station products, were impacted by challenging international business conditions.
During fiscal 2016, our Commercial Solutionsthis segment benefited fromprimarily reflect lower sales of application solutions (such asglobal field support services, advanced VSAT products and other programs for the U.S. Army. Such increase was offset in part by higher sales of our locationhigh reliability Electrical, Electronic and messaging based platforms) and safety and security technology solutions (such as wireless and NG911 platforms)Electromechanical ("EEE") satellite-based space components (including incremental sales of X/Y antenna products that we now offer as a result of our January 2020 acquisition of CGC), performance on our 10-year, $211.0 million IDIQ contract awarded to us by a prime contractor to provide next-generation troposcatter systems in support of the TCS acquisition. In connection with our TCS integration plans, during fiscal 2016 we initiatedU.S. Marine Corps and a strategy to cross-share technology across each of our respective product lines. We also began jointly marketing our products to facilitate future growth. These strategies, over time, will result in historical sales patterns and mix trends becoming less relevant. As a result, period-to-period comparisonsnominal amount of sales related to our acquisition of legacy Comtech or TCS brands will not be meaningful.UHP Networks Inc. ("UHP") on March 2, 2021, which extended our product offerings to include TDMA satellite modems.
Bookings, salesTerrestrial and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period- to-period comparisons of our results may not be indicative of a trend or future performance.
Government SolutionsWireless Networks
Net sales in our Government SolutionsTerrestrial and Wireless Networks segment were $162.0$206.8 million for fiscal 20162021, as compared to $103.6$205.6 million for fiscal 2015,2020, an increase of $58.4$1.2 million, or 56.4%0.6%. The period-over-period increase in sales reflects incremental sales of approximately $78.4 million as a result of the TCS acquisition, partially offset by lower sales of Comtech legacy products. Our Government SolutionsTerrestrial and Wireless Networks segment represented 39.4%35.6% of consolidated net sales for fiscal 2016,2021 as compared to 33.7%33.3% for fiscal 2015.2020. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 2021 was 1.37x. Period-to-period fluctuations in bookings are normal for this segment.
The decrease in Comtech legacyNet sales in fiscal 2016 was driven by significantly lower comparative net sales of over-the-horizon microwave products, partially offset by2021 reflect increased sales of high-power broadband amplifiersour trusted location and BFT-1 sustainment support services. Sales of our over-the-horizon microwave system products were significantly lower when compared to the prior year, as our two large multi-year contracts to design and supply over-the-horizon microwave systems and equipment for a North African government are nearing completion. Salesmessaging solutions, offset in both comparative periods include $10.0 million of revenue related to our annual BFT-1 intellectual property license fee. During fiscal 2016, we received $20.0 million of funded orders to continue to provide BFT-1 sustainment support services to the U.S. Army through March 31, 2017. The U.S. Army will have a limited non-exclusive right to use our intellectual property after March 31, 2017 for no additional license fee.
Our Government Solutions segment benefited in fiscal 2016 from a variety of new advanced communication solutions that we now offer as a result of the TCS acquisition. These solutions include field support, space components and cyber-training. In connection with our TCS integration plans, in fiscal 2016 we initiated a strategy to cross-share technology across product lines. We also began jointly marketing our products to facilitate future growth. These strategies, over time, will result in historical sales patterns and mix trends becoming less relevant. As a result, period-to-period comparisons of sales of legacy Comtech or TCS brands will not be meaningful.
Bookings, sales and profitability in our Government Solutions segment can fluctuate dramatically from period-to-period due to many factors, including unpredictable funding, deployment and technology decisionspart by the U.S. government. As such, period- to-period comparisonsabsence of our results may not be indicative of a trend or future performance.911 wireless call routing sales to AT&T.
During fiscal 2021, we were awarded several important statewide NG-911 contracts and our strong momentum was acknowledged by Frost & Sullivan, who recognized Comtech for registering the most significant year-over-year market share increase among all NG-911 primary contract holders, growing our market share from an estimated 17.3% in 2019 to 26.2% in 2020, as calculated by Frost & Sullivan.
Geography and Customer Type
Sales by geography and customer type, as a percentage of related sales, for the fiscal years ended July 31, 20162021 and 20152020 are as follows:
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| | | Fiscal Years Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Consolidated |
| U.S. government | | 52.8 | % | | 53.7 | % | | 1.4 | % | | 1.2 | % | | 34.6 | % | | 36.2 | % |
| Domestic | | 15.3 | % | | 15.2 | % | | 89.2 | % | | 90.3 | % | | 41.5 | % | | 40.3 | % |
| Total U.S. | | 68.1 | % | | 68.9 | % | | 90.6 | % | | 91.5 | % | | 76.1 | % | | 76.5 | % |
| | | | | | | | | | | | |
| International | | 31.9 | % | | 31.1 | % | | 9.4 | % | | 8.5 | % | | 23.9 | % | | 23.5 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| | | Commercial Solutions | | Government Solutions | | Consolidated |
| U.S. government | | 25.0 | % | | 29.3 | % | | 65.0 | % | | 33.2 | % | | 40.8 | % | | 30.6 | % |
| Domestic | | 40.6 | % | | 15.9 | % | | 11.6 | % | | 7.9 | % | | 29.2 | % | | 13.2 | % |
| Total U.S. | | 65.6 | % | | 45.2 | % | | 76.6 | % | | 41.1 | % | | 70.0 | % | | 43.8 | % |
| | | | | | | | | | | | | |
| International | | 34.4 | % | | 54.8 | % | | 23.4 | % | | 58.9 | % | | 30.0 | % | | 56.2 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Sales to U.S. government customers include sales to the U.S. DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors.
Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon, which accounted for 10.7% of consolidated net sales for fiscal 2021. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales for fiscal 2020.
International sales for fiscal 2021 and 2020 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers.customers) were $138.9 million and $145.1 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for fiscal 2021 and 2020.
As a resultGross Profit. Gross profit was $214.0 million and $226.8 million for fiscal 2021 and 2020, respectively. The decrease of $12.8 million primarily reflects the TCS acquisition, we believe that international sales as a percentage of our consolidated revenue in future periods will be significantly lower than it was in the past. This expected change is driven by the inclusiondecline in consolidated net sales, of safety and security technology solutions (such as 911 call routing) which are primarily sold to U.S. customers.
Gross Profit. Gross profit was $171.2 million and $138.9 million for fiscal 2016 and 2015, respectively, representing an increase of $32.3 million. This increase in gross profit dollars was driven by higher consolidated net sales resulting from the TCS acquisition, partially offset by lower sales of Comtech legacy products.discussed above. Gross profit as a percentage of consolidated net sales decreasedwas 36.8% for both fiscal periods. Our gross profit in fiscal 2021 reflects a higher percentage of consolidated net sales generated from 45.2%our Terrestrial and Wireless Networks segment, offset by increased costs due to production delays, supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs resulting from the COVID-19 pandemic. In addition, our gross profit reflects start-up costs associated with the opening of our two new high-volume technology manufacturing centers. Our gross profit for fiscal 2015 to 41.7% for fiscal 2016. This decrease is primarily attributable to overall product mix changes resulting primarily2021 also reflects a $2.0 million benefit from the TCS acquisition,refund of historical excise tax paid, which was recorded in particular, the inclusion of sales related to TCS government solutions, which have historically had lower gross margins than Comtech's legacy products.our Unallocated segment. Gross profit, as a percentage of related segment net sales, is further discussed below.
Our Commercial SolutionsSatellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for fiscal 2016 was higher as compared2021 increased in comparison to fiscal 2015. This increase is2020 primarily driven byreflecting changes in products and services mix, as discussed above. Also, during fiscal 2021, we incurred $1.0 million of incremental operating costs for our antenna facility in the inclusionUnited Kingdom due to the impact of sales related to TCS commercial products, which had higher gross margins than Comtech's legacy products.the COVID-19 pandemic.
Our Government SolutionsTerrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for fiscal 2016, was lower as compared2021 decreased in comparison to fiscal 2015. This decrease was driven,2020 primarily reflecting changes in part, byproducts and services mix, including the inclusioncessation of sales of TCS government solutions, which had significantlyto AT&T for 911 wireless call routing services and an increase in sales related to a recently awarded statewide NG-911 deployment (which has lower gross margins than our legacy over-the-horizon microwave ("troposcatter") product line, high-power broadband amplifiers and our mobile data communications products. Additionally, during fiscal 2016, we experienced a significant drop in sales and related gross margins of our over-the-horizon microwave systems products, as a result of two large international contracts that were nearing completion. Gross profit in both periods includes $10.0 million related to our annual BFT-1 intellectual property license.911 wireless call routing services).
Included in consolidated cost of sales for both fiscal 20162021 and 20152020 are provisions for excess and obsolete inventory of $2.8 million.$4.4 million and $1.6 million, respectively. As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory,"we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage assumptions.trends.
Selling, General and Administrative Expenses.Selling, general and administrative expenses were $94.9$111.8 million and $62.7$117.1 million for fiscal 20162021 and 2015,2020, respectively, representing an increasea decrease of $32.2 million. The increase in spending is primarily attributable to incremental expenses associated with the increase in the size of our business as a result of the TCS acquisition.$5.3 million, or 4.5%. As a percentage of consolidated net sales, selling, general and administrative expenses were 23.1%19.2% and 20.4%19.0% for fiscal 20162021 and 2015,2020, respectively.
In fiscal 2021, we incurred $2.8 million of restructuring costs to streamline our operations, including $1.8 million related to the ongoing relocation of certain of our satellite ground station production facilities to a new 146,000 square foot facility in Chandler, Arizona, and $1.0 million for the consolidation of certain administrative and operating functions in our troposcatter and SATCOM solution product line. In addition, we received $3.1 million of legal expense recoveries from insurance in fiscal 2021. In fiscal 2020, we incurred estimated contract settlement costs of $0.4 million principally related to the repositioning of our trusted location and messaging solutions offerings in our Terrestrial and Wireless Networks segment. Excluding these costs in both periods, our selling, general and administrative expenses would have been $112.1 million, or 19.3% of consolidated net sales in fiscal 2021 and $116.7 million, or 18.9% of consolidated net sales in fiscal 2020. The decrease in our selling, general and administrative expenses, in dollars, is largely attributable to the benefit from our efforts to streamline business operations in our Satellite and Space Communications segment.
Amortization of stock-based compensation expenseexpenses recorded as selling, general and administrative expenses was $3.4$8.1 million in fiscal 20162021 as compared to $3.5$7.5 million in fiscal 2015. This amortization2020. Amortization of stock-based compensation is not allocated to our two reportable operating segments. This decrease is primarily related to changes in the timing of grants for certain stock-based awards.
Our selling, general and administrative expenses for fiscal 2016 reflect a benefit of $0.4 million relating to a change in the fair value of a contingent liability in connection with TCS intellectual property legal matters, which are discussed in "Notes to Consolidated Financial Statements - Note (14)(b) Legal Proceedings, Other Matters and Final Settlements" included in "Part II, Item 8. - Financial Statements and Supplementary Data" of this Form 10-K.
Research and Development Expenses.Research and development expenses were $42.2$49.1 million and $35.9$52.2 million for fiscal 20162021 and 2015,2020, respectively, representing an increasea decrease of $6.3$3.1 million, or 17.5%5.9%. The increase in spending is primarily attributable to incremental expenses associated with the TCS product lines, partially offset by lower spending as a result of cost reduction activities and the completion of several research and development projects. As a percentage of consolidated net sales, research and development expenses were 10.3%8.4% and 11.7%8.5% for fiscal 20162021 and 2015.2020, respectively.
For fiscal 20162021 and 2015,2020, research and development expenses of $33.8$28.0 million and $29.7$31.0 million, respectively, related to our Commercial SolutionsSatellite and Space Communications segment, and $8.0$20.1 million and $5.6$20.3 million, respectively, related to our Government SolutionsTerrestrial and Wireless Networks segment. The remaining research and development expenses of $0.4$1.0 million and $0.6$0.9 million in fiscal 20162021 and 2015,2020, respectively, related to the amortization of stock-based compensation expense, which is not allocatedexpense.
During fiscal 2021, our Satellite and Space Communications segment incurred $0.3 million of strategic emerging technology costs for next-generation satellite technology to advance our two reportable operating segments.solutions offerings to be used with new broadband satellite constellations.
Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During fiscal 20162021 and 2015,2020, customers reimbursed us $17.4$13.6 million and $9.2$11.9 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.
Acquisition Plan Expenses. As discussed throughout this and prior SEC filings, we had embarked on a focused acquisition plan which culminated with the closing of the acquisition of TCS on February 23, 2016. During fiscal 2016, we incurred approximately $21.3 million of expenses related to this acquisition plan. These expenses include significant amounts associated with the TCS acquisition primarily for: (i) change-in-control payments, (ii) severance, (iii) professional fees for financial and legal advisors for both Comtech and TCS. We also incurred other expenditures such as $9.6 million associated with establishing a $400.0 million Secured Credit Facility which has been capitalized and will be expensed in future periods. There were no comparable expenses in fiscal 2015.
Amortization of Intangibles. Amortization relating to intangible assets with finite lives was $13.4$21.0 million (of which $5.7 million was for the Satellite and Space Communications segment and $15.3 million was for the Terrestrial and Wireless Networks segment) for fiscal 2021 and $21.6 million (of which $5.1 million was for the Satellite and Space Communications segment and $16.5 million was for the Terrestrial and Wireless Networks segment) for fiscal 2020.
Acquisition Plan Expenses. During fiscal 2021 and 2020, we incurred acquisition plan expenses of $100.3 million and $6.2$20.8 million, forrespectively. For fiscal 20162021, $88.3 million related to the previously announced litigation and 2015, respectively.merger termination with Gilat, including $70.0 million paid in cash to Gilat. The significant increaseremaining costs in amortizationfiscal 2021 primarily related to the April 2021 settlement of intangibles is a resultlitigation associated with our 2019 acquisition of GD NG-911 as well as the March 2021 closing of our acquisition of TCS.UHP. These expenses are primarily recorded in our Unallocated segment.
Operating (Loss) Income. Operating loss for fiscal 20162021 was approximately $0.6$68.3 million as compared to operating income of $34.1$15.2 million for fiscal 2015. Excluding $21.32020. Operating income (loss) by reportable segment is shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| ($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
| Operating income (loss) | | $ | 24.3 | | | $ | 25.5 | | | $ | 25.2 | | | $ | 29.3 | | | $ | (117.8) | | | $ | (39.6) | | | $ | (68.3) | | | $ | 15.2 | |
Percentage of related
net sales | | 6.5 | % | | 6.2 | % | | 12.2 | % | | 14.3 | % | | NA | | NA | | NA | | 2.5 | % |
The decrease in our Satellite and Space Communications segment operating income, in dollars, for fiscal 2021 was driven primarily by lower net sales, $2.8 million of restructuring costs and $1.0 million of COVID-19 related costs, partially offset by a higher gross profit percentage and lower research and development expenses, as discussed above.
The decrease in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for fiscal 2021 was driven primarily by a lower gross profit percentage, partially offset by lower amortization of intangibles, as discussed above.
The increase in unallocated expenses for fiscal 2021 as compared to ourfiscal 2020 is primarily due to acquisition plan which culminated inexpenses, as discussed above. Amortization of stock-based compensation was $10.0 million and $9.3 million, respectively, for fiscal 2021 and 2020.
Excluding (i) $100.3 million of acquisition plan expenses; (ii) $2.8 million of restructuring costs; (iii) $1.0 million of incremental operating costs due to the acquisitionimpact of TCS,COVID-19; and (iv) $0.3 million of strategic emerging technology costs, consolidated operating income for fiscal 20162021 would have been $20.7$36.1 million, or 5.0%6.2% of consolidated net sales. OperatingExcluding $20.8 million of acquisition plan expenses and $0.4 million of estimated contract settlement costs, consolidated operating income for fiscal 2015,2020 would have been $36.4 million, or 5.9% of consolidated net sales. The increase, as a percentage of net sales was 11.1%. Consolidated operating income (both in dollars and a percentage of consolidated net sales)sales, was directly impacted by the TCS acquisition (including incremental amortization of intangibles) and by changes in segment operating income contributions as shown in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| ($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
| Operating income (loss) | | $ | 23.3 |
| | $ | 20.7 |
| | $ | 23.0 |
| | $ | 30.0 |
| | $ | (46.8 | ) | | $ | (16.7 | ) | | $ | (0.6 | ) | | $ | 34.1 |
|
| Percentage of related net sales | | 9.3 | % | | 10.2 | % | | 14.2 | % | | 29.0 | % | | NA |
| | NA |
| | (0.1 | )% | | 11.1 | % |
Our Commercial Solutions segment’s operating income, in dollars, reflects incremental contribution associated with TCS commercial solutions sales that were more than offset by significantlydue primarily to lower comparative net sales of Comtech's legacy products. The decrease in operating income as a percentage of our Commercial Solutions segment’s net sales is primarily due to incremental selling, general and administrative expenses and amortization of intangibles associated with the acquisition of TCS.
Our Government Solutions segment’s operating income,lower research and development expenses, offset in dollars, reflects incremental contribution associated with TCS government solution sales, partially offsetpart by significantly lower comparativeconsolidated net sales, of Comtech’s legacy products, in particular, lower sales of our over-the-horizon microwave system products. The decrease in operating income as a percentage of our Government Solutions segment’s net sales is primarily due to the inclusion of sales of TCS government solutions which had significantly lower gross margins than Comtech’s legacy government solutions products.discussed above.
Unallocated operating expenses, which are included in the above table, were $46.8Interest Expense and Other. Interest expense was $6.8 million and $16.7$6.1 million for fiscal 20162021 and 2015,2020, respectively. Fiscal 2016 unallocated expenses include $21.3Interest expense for fiscal 2021 includes $1.2 million of incremental interest expense related to a now terminated financing commitment letter. Excluding the $1.2 million, our focused acquisition plan, the large majority of which related to activities which resulted in our acquisition of TCS on February 23, 2016. Totaleffective interest rate (including amortization of stock-based compensation expense (including amounts recorded in cost of sales, selling, general and administrative expenses and research and development expenses), which is classified as unallocated operating expenses was $4.1 million for fiscal 2016 as compared to $4.4 milliondeferred financing costs) in fiscal 2015.2021 was approximately 2.8%.
Interest Expense(Income) and Other.Interest expense was $7.8 million and $0.5 million for fiscal 2016 and 2015, respectively. Interest expense during fiscal 2016 primarily reflects interest on our $400.0 million Secured Credit Facility related to the TCS acquisition.
Interest Income and Other. Interest income(income) and other for both fiscal 20162021 and 20152020 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits which are currently yielding a blended annual interest rate of approximately 0.43%.
(Benefit from) Provision for Income Taxes.During For fiscal 2016,2021, we recorded a tax benefit of approximately $0.5$1.5 million as a result of our current period operating loss. This tax benefit compared to a tax expenseprovision of $10.8$2.3 million during fiscal 2015.
Our effective tax rate of 5.5% for fiscal 2016 reflects a net discrete tax expense of approximately $1.0 million, primarily related to the establishment of tax contingencies for uncertain tax positions relating to the payment of certain expenses associated with the TCS acquisition, offset, in part, by the reversal of tax contingencies no longer required due to the expiration of applicable statutes of limitation; and the passage of legislation that included the permanent retroactive extension of the research and experimentation credit from December 31, 2014.
2020. Our effective tax rate for fiscal 20152021 (excluding discrete tax items) was nominal, as compared to 37.0% for fiscal 2020. The decrease from 37.0% is primarily due to the exclusion of 31.6% reflectsthe $70.0 million of acquisition plan expense paid to Gilat during our first quarter of fiscal 2021, as such amount was considered an unusual and infrequently occurring item. In addition, given the nature of such item, no financial statement benefit was recorded for the $70.0 million payment to Gilat.
During fiscal 2021, we recorded a net discrete tax benefit of approximately $1.0$1.6 million, primarily related toto: (i) the passagerelease of legislation that included the retroactive extensionvaluation allowances previously established on deferred tax assets of the research and experimentation credit from December 31, 2013 to December 31, 2014;one of our foreign subsidiaries; (ii) the finalization of certain tax deductionsaccounts in connection with the filing of certainour fiscal 2020 federal, state and foreign fiscal 2014 income tax returns; and (iii) the reversalsettlement of tax contingencies no longer required due to the expiration of applicable statutes of limitation. Excludingcertain stock-based awards during fiscal 2021.
During fiscal 2020, we recorded a net discrete tax items for fiscal 2016, our effective tax rate would have been 18.0%. This rate was impacted by the non-deductibilitybenefit of certain transaction costs$1.2 million, primarily related to the acquisitionfinalization of TCS. Excluding discretecertain tax items foraccounts in connection with the filing of our fiscal 2015, our effective tax rate would have been 34.5%. The TCS acquisition significantly impacted our geographical sales mix2019 federal and has a different spending profile than our legacy business.
Our federal income tax returns for fiscal 2015 and 2016 are subject to potential future Internal Revenue Service ("IRS") audits. None of our state income tax returns priorreturns. These benefits were offset, in part, by: (i) the remeasurement of certain foreign deferred taxes resulting from the passage of legislation that increased the statutory tax rate in the United Kingdom from 17.0% to 19.0%; and (ii) the settlement of certain stock-based awards during fiscal 2013 are subject2020.
Net (Loss) Income Attributable to audit. TCS’s federal income tax returns for calendar years 2013 through 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential future IRS audits. None of TCS’s state income tax returns prior to calendar year 2012 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Net Loss (Income). Common Stockholders. During fiscal 2016,2021, our consolidated net loss attributable to common stockholders was $7.7$73.5 million as compared to the consolidated net income of $23.2$7.0 million that we achieved in fiscal 2015. The net loss during fiscal 2016 is largely attributable to the acquisition plan expenses related to the TCS acquisition and the impact of all of the other aforementioned items discussed above.2020.
Adjusted EBITDA. Our Adjusted EBITDA, a Non-GAAP financial measure, represents earnings before income taxes, interest (income) and other expense, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, acquisition plan expenses or strategic alternatives analysis expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Secured Credit Facility, as amended) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies (including TCS prior to our acquisition) and, therefore, may not be comparable to similarly titled measures used by other companies. Our Adjusted EBITDA is also a measure frequently requested by the Company's investors and analysts. The Company believes that investors and analysts may use our Adjusted EBITDA, along with other information contained in our SEC filings, in assessing our performance and comparability of our results with other companies.
Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both fiscal 20162021 and 20152020 are shown in the table below (numbers in the table may not foot due to rounding):
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| | Fiscal Years Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| ($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
| Net income (loss) | | $ | 24.4 | | | 25.7 | | | 24.4 | | | 28.9 | | | (122.2) | | | (47.6) | | | $ | (73.5) | | | 7.0 | |
| (Benefit from) provision for income taxes | | (0.4) | | | — | | | 0.8 | | | 0.3 | | | (1.9) | | | 2.0 | | | (1.5) | | | 2.3 | |
| Interest (income) and other | | 0.2 | | | (0.2) | | | — | | | — | | | (0.4) | | | — | | | (0.1) | | | (0.2) | |
| Interest expense | | 0.1 | | | — | | | — | | | — | | | 6.8 | | | 6.0 | | | 6.8 | | | 6.1 | |
| Amortization of stock-based compensation | | — | | | — | | | — | | | — | | | 10.0 | | | 9.3 | | | 10.0 | | | 9.3 | |
| Amortization of intangibles | | 5.7 | | | 5.1 | | | 15.3 | | | 16.5 | | | — | | | — | | | 21.0 | | | 21.6 | |
| Depreciation | | 3.7 | | | 3.9 | | | 5.3 | | | 5.9 | | | 0.3 | | | 0.8 | | | 9.4 | | | 10.6 | |
| Estimated contract settlement costs | | — | | | 0.4 | | | — | | | — | | | — | | | — | | | — | | | 0.4 | |
| Acquisition plan expenses | | — | | | 0.8 | | | (1.1) | | | — | | | 101.3 | | | 20.0 | | | 100.3 | | | 20.8 | |
| Restructuring costs | | 2.8 | | | — | | | — | | | — | | | — | | | — | | | 2.8 | | | — | |
| COVID-19 related costs | | 1.0 | | | — | | | — | | | — | | | — | | | — | | | 1.0 | | | — | |
| Strategic emerging technology costs | | 0.3 | | | — | | | — | | | — | | | — | | | — | | | 0.3 | | | — | |
| Adjusted EBITDA | | $ | 37.8 | | | 35.7 | | | 44.8 | | | 51.7 | | | (6.1) | | | (9.6) | | | $ | 76.5 | | | 77.8 | |
| Percentage of related net sales | | 10.1 | % | | 8.7 | % | | 21.7 | % | | 25.1 | % | | NA | | NA | | 13.2 | % | | 12.6 | % |
|
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| | | Fiscal Years Ended July 31, |
| | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| ($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
| Net income (loss) | | $ | 22.8 |
| | 20.5 |
| | 23.0 |
| | 30.0 |
| | (53.5 | ) | | (27.3 | ) | | (7.7 | ) | | $ | 23.2 |
|
| Income taxes | | 0.1 |
| | (0.1 | ) | | — |
| | — |
| | (0.5 | ) | | 10.9 |
| | (0.5 | ) | | 10.8 |
|
| Interest (income) and other expense | | 0.1 |
| | 0.1 |
| | — |
| | — |
| | (0.2 | ) | | (0.5 | ) | | (0.1 | ) | | (0.4 | ) |
| Interest expense | | 0.3 |
| | 0.3 |
| | — |
| | — |
| | 7.5 |
| | 0.2 |
| | 7.8 |
| | 0.5 |
|
| Amortization of stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 4.1 |
| | 4.4 |
| | 4.1 |
| | 4.4 |
|
| Amortization of intangibles | | 10.6 |
| | 6.2 |
| | 2.8 |
| | — |
| | — |
| | — |
| | 13.4 |
| | 6.2 |
|
| Depreciation | | 7.1 |
| | 5.3 |
| | 2.0 |
| | 1.2 |
| | 0.8 |
| | — |
| | 9.8 |
| | 6.5 |
|
| Acquisition plan expenses | | — |
| | — |
| | — |
| | — |
| | 21.3 |
| | — |
| | 21.3 |
| | — |
|
| Strategic alternatives analysis | | — |
| | — |
| | — |
| | — |
| | — |
| | 0.6 |
| | — |
| | 0.6 |
|
| Adjusted EBITDA | | $ | 40.9 |
| | 32.2 |
| | 27.8 |
| | 31.2 |
| | (20.7 | ) | | (11.7 | ) | | 48.1 |
| | $ | 51.8 |
|
| Percentage of related net sales | | 16.4 | % | | 15.8 | % | | 17.2 | % | | 30.2 | % | | NA |
| | NA |
| | 11.7 | % | | 16.8 | % |
The decreaseincrease in consolidated Adjusted EBITDA, in dollars, duringas a percentage of consolidated net sales, for fiscal 20162021 as compared to fiscal 2015,2020 is primarily attributable to earnings contributions associated with the TCS acquisition being more than offset by lower earnings contributions from Comtech's legacy business. Please refer to Note (13) "Segment Information"a higher percentage of consolidated net sales in our "NotesTerrestrial and Wireless Networks segment, as well as lower consolidated selling, general and administrative expenses and research and development expenses, as discussed above.
The increase in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, was driven primarily by a higher gross profit percentage and lower research and development expenses, as discussed above.
The decrease in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to Consolidated Financial Statements"for the reconciliationa lower gross profit percentage, as discussed above.
For a definition and explanation of Adjusted EBITDA, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal 2022 and 2021 - Adjusted EBITDA."
Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income and net (loss) income per diluted common share for fiscal 2021 and 2020 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the table may not foot due to rounding). Non-GAAP net income and net income per diluted common share reflect Non-GAAP provisions for income taxes based on full year results, as adjusted for the most directly comparableNon-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP measure.effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP EPS for fiscal 2021 was computed using 25,885,000 weighted average diluted shares outstanding during the period.
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| | Fiscal 2021 |
| ($ in millions, except for per share amounts) | | Operating (Loss) Income | | Net (Loss) Income | | Net (Loss) Income per
Diluted Share |
| Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
| GAAP measures, as reported | | | $ | (68.3) | | | | $ | (73.5) | | | | $ | (2.86) | |
| Acquisition plan expenses | | | 100.3 | | | | 93.3 | | | | 3.60 | |
| Restructuring costs | | | 2.8 | | | | 2.1 | | | | 0.08 | |
| COVID-19 related costs | | | 1.0 | | | | 0.8 | | | | 0.03 | |
| Strategic emerging technology costs | | | 0.3 | | | | 0.3 | | | | 0.01 | |
| Interest expense | | | — | | | | 0.9 | | | | 0.04 | |
| Net discrete tax benefit | | | — | | | | (1.6) | | | | (0.06) | |
| Non-GAAP measures | | | $ | 36.1 | | | | $ | 22.4 | | | | $ | 0.86 | |
| | | | | | | | | |
| | Fiscal 2020 |
| ($ in millions, except for per share amounts) | | Operating Income | | Net Income | | Net Income per
Diluted Share |
| Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
| GAAP measures, as reported | | | $ | 15.2 | | | | $ | 7.0 | | | | $ | 0.28 | |
| Estimated contract settlement costs | | | 0.4 | | | | 0.3 | | | | 0.01 | |
| Acquisition plan expenses | | | 20.8 | | | | 13.1 | | | | 0.53 | |
| Net discrete tax benefit | | | — | | | | (1.2) | | | | (0.05) | |
| Non-GAAP measures | | | $ | 36.4 | | | | $ | 19.2 | | | | $ | 0.77 | |
Liquidity and Capital Resources
Our cash and cash equivalents decreased to $41.8were $21.7 million and $30.9 million at July 31, 2017 from $66.8 million at July 31, 2016, a decrease of $25.0 million. The decrease in2022 and 2021, respectively. For fiscal 2022, our cash and cash equivalents during fiscal 2017 was driven byflows reflect the following:
•Net cash provided by operating activities was $66.7$2.0 million for fiscal 20172022 as compared to $15.0net cash used in operating activities of $40.6 million for fiscal 2016.2021. During fiscal 2022, we paid $15.9 million in aggregate payments related to our CEO transition and settled proxy contest. Excluding such payments, net cash provided by operating activities would have been $17.9 million for fiscal 2022. During fiscal 2021, in connection with an agreement to terminate our acquisition of Gilat, we made a $70.0 million payment to Gilat. Excluding such payment, net cash provided by operating activities would have been $29.4 million for fiscal 2021. The period-over-period increasedecrease in cash flow from operating activities is attributable to(excluding the $15.9 million and $70.0 million payments) reflects overall changes in net working capital requirements, principally the timing of shipments, billings and payments and the inclusion of full fiscal-year operating results from the TCS business in fiscal 2017. Net cash provided by operating activities in fiscal 2016 reflects significant acquisition plan expenses associated with our TCS acquisition.payments.
•Net cash used in investing activities for fiscal 20172022 and 2021 was $8.2$19.6 million and $15.5 million, respectively. Net cash used during fiscal 2022 primarily reflects capital expenditures to build-out cloud-based computer networks to support our recent NG-911 contract wins and capital investments and building improvements in connection with the opening of our new high-volume technology manufacturing centers. Net cash used in both periods also relates to expenditures for property, plant and equipment upgrades and enhancements.
•Net cash provided by financing activities was $8.4 million and $39.1 million for fiscal 2022 and 2021, respectively. During fiscal 2022, we received an aggregate of $100.0 million in proceeds related to the issuance of a new series of Convertible Preferred Stock to certain investors. During fiscal 2022, we also made net payments under our Credit Facility of $71.0 million as compared to $286.2net borrowings under our Credit Facility of $51.5 million forduring fiscal 2016. The period-over-period decrease in net cash used in investing activities is2021, primarily due to the $70.0 million payment of $280.5 million relatedwe made to the acquisition of TCS in February 2016, net of cash acquired.
Net cash used in financing activities was $83.5 million for fiscal 2017 as compared to net cash provided of $187.1 million for fiscal 2016.Gilat. During fiscal 2017, we made $26.5 million of net payments under our Revolving Loan Facility2022 and $33.6 million of principal repayments related to our Term Loan Facility. During fiscal 2016, $83.9 million of net proceeds were received from borrowings under our Revolving Loan Facility, $250.0 million of proceeds were received from borrowings under our Term Loan Facility and $95.0 million of net proceeds were received from a public offering of our common stock which occurred in June 2016. These proceeds were partially offset by a payment of $134.1 million for debt assumed in connection with the acquisition of TCS and $77.4 million of principal repayments related to our Term Loan Facility. During fiscal 2017 and 2016,2021, we paid $3.6$11.0 million and $1.8 million, respectively, of principal repayments related to our capital lease obligations and $1.1 million and $9.5 million, respectively, of financing costs associated with the Secured Credit Facility, as amended. During fiscal 2017 and 2016, we also paid $18.9 million and $19.4$10.3 million, respectively, in cash dividends to our common stockholders. We also made $6.1 million and $2.8 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during fiscal 2022 and 2021, respectively.
The Credit Facility is discussed below and in "Notes to Consolidated Financial Statements - Note (7) - Credit Facility" included in "Part II - Item 8. - Financial Statements and Supplementary Data" included in this Form 10-K.
The Convertible Preferred Stock is discussed below and in "Notes to Consolidated Financial Statements - Note (15) - Convertible Preferred Stock" included in "Part II - Item 8. - Financial Statements and Supplementary Data" included in this Form 10-K.
Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same timeand maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest our cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits, and U.S. Treasury securities. Many of our money market mutual funds invest in direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.
The Secured Credit Facility isIn addition to making capital investments for our new high-volume manufacturing centers, we have been making significant capital expenditures and building out cloud-based computer networks to support our previously announced NG-911 contract wins for the states of Pennsylvania, South Carolina and Arizona. We expect capital investments for these and other initiatives to continue in fiscal 2023.
As discussed below and in "Notes to Consolidated Financial Statements - Note (8) Secured Credit Facility" (2) - Acquisitions - UHP Networks Inc." included in "Part II - Item 8. - Financial Statements and Supplementary Data.Data"
Asincluded in this Form 10-K, we completed our acquisition of July 31, 2017, our material short-term cash requirements primarily consist of: (i) fiscal 2018 mandatory principal repaymentsUHP on March 2, 2021, substantially all of $15.5 million associatedwhich was paid for with the Term Loan Facility and related interest payments of approximately $4.8 million, (ii) estimated interest payments for fiscal 2018 for our Revolving Loan Facility, (iii) capital lease obligations and operating lease commitments, (iv) our ongoing working capital needs, including income tax payments, and (v) accrued quarterly dividends.
In June 2016, we sold 7.1 million shares of our common stock instock.
On July 13, 2022, we filed a public offering at a price of $14.00 per share, resulting in proceeds to us of $95.0$200.0 million net of underwriting discounts and commissions. As of July 31, 2017 and September 27, 2017, an aggregate registered amount of $75.0 million under our existing Shelf Registration Statement filedshelf registration statement with the SEC remains available for the sale of various types of securities, including debt.
As This new shelf registration statement was declared effective by the SEC as of July 31, 201725, 2022 and replaces the prior unused $400.0 million shelf registration statement that expired in December 2021.
On September 27, 2017, we were29, 2020, our Board of Directors authorized to repurchase up to an additional $8.7 million of our common stock, pursuant to our currenta new $100.0 million stock repurchase program, which replaced our prior program. OurThe new $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, and may be made pursuant to SEC Rule 10b5-1 trading plans.or by other means in accordance with federal securities laws. There were no repurchases of our common stock during fiscal 20172022 and 2016.2021.
On October 6, 2016,As discussed further in "Notes to Consolidated Financial Statements - Note (16) -"Stockholders' Equity" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K, on June 9, 2022, our Board of Directors declared a cash dividend of $0.30$0.10 per common share, which was paid on November 22, 2016. August 19, 2022.
On December 7, 2016, March 8, 2017 and June 7, 2017,September 29, 2022, our Board of Directors declared a dividend of $0.10 per common share, which were paid on February 17, 2017, May 19, 2017 and August 18, 2017, respectively. On September 27, 2017, our Board of Directors declared acash dividend of $0.10 per common share, payable on November 17, 201718, 2022 to stockholders of record at the close of business on October 18, 2017. The Board of Directors is currently targeting fiscal 2018 quarterly dividend payments of $0.10 per19, 2022. Future common share. Futurestock dividends remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.approval and certain voting rights of holders of our Series A Convertible Preferred Stock.
Our material long-term cash requirements primarily consist of: (i) mandatory interestare for working capital, CEO transition costs expected to be paid in October 2022, capital expenditures, income tax payments, and principal repayments pursuant to our Secured Credit Facility, as amended; (ii)debt service, facilities lease payments, relating to our capital lease obligations and operating lease commitments; and (iii) cash payments of approximately $2.2 milliondividends related to our 2009 Radyne-related restructuring plan, including accreted interest as discussed in "Notes to Consolidated Financial Statements - Note (7) Radyne Acquisition-Related Restructuring Plan"included in "Part II - Item 8. - Financial Statementscommon stock and Supplementary Data."
In August 2016, AT&T, a distributor of a small TCS product line that we refer to as our 911 call handling software solution, informed us that they do not believe TCS met certain contractual specificationsdividends related to performance and usability and had requested a refund of certain payments made by them. We have entered into settlement negotiations with AT&T and expect to issue refunds of $5.5 million over the course of thirty-six months once the settlement is finalized. Our Consolidated Balance Sheet as of July 31, 2017 includes accrued costs of $5.5 million related to this contingent liability.our Convertible Preferred Stock, which are payable in kind or in cash at our election.
We continue to receive (and approve on a limited basis) requests from our customers for higher credit limits and longer payment terms. We also continue to monitor our accounts receivable credit portfolio and have not had material negative customer credit experiences historically.
We have historically met both our short-term and long-term cash requirements with funds provided by a combination of cash and cash equivalent balances, cash generated from operating activities and cash generated from equity and debt financing transactions. In our first quarter of fiscal 2022, we secured a $100.0 million strategic growth investment to enhance our financial flexibility and strengthen our ability to capitalize on large contract awards and growing customer demand by making crucial investments in our satellite and space communications and terrestrial and wireless network solutions. Based on our anticipated level of future sales and operating income,current revenue visibility, we believe that our existing cash and cash equivalent balances, our cash generated from operating activities and amounts potentially available under the Revolving Loan Facility under our Secured Credit Facility as amended, will be sufficient to meet both our currently anticipated short-termcash requirements in the next twelve months and long-term operatingbeyond.
Our material cash requirements.
requirements could increase beyond our current expectations due to factors such as general economic conditions, a change in government spending priorities, or larger than usual customer orders. In addition, we may choose to raise additional funds through equity and debt financing transactions to provide additional flexibility or to pursue acquisitions. Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, should our short-term or long-term cash requirements increase beyond our current expectations, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.
Secured Credit Facility
On February 23, 2016, in connection with our acquisition of TCS, we entered into a $400.0 million secured credit facility (the "Secured Credit Facility") with a syndicate of lenders. The Secured Credit Facility, as amended June 6, 2017 (the “June 2017 Amendment”), comprises a senior secured term loan A facility of $250.0 million (the “Term Loan Facility”) and a secured revolving loan facility of up to $150.0 million, including a $25.0 million letter of credit sublimit (the “Revolving Loan Facility”), and, together, with the Term Loan Facility, matures on February 23, 2021. The proceeds of these borrowings were primarily used to finance our acquisition of TCS, including the repayment of certain existing indebtedness of TCS. The Term Loan Facility requires mandatory quarterly repayments. During the fiscal year ended July 31, 2017, we repaid $33.6 million principal amount of borrowings under the Term Loan Facility, including $22.5 million paid in connection with the June 2017 Amendment to reduce the balloon or final payment of the Term Loan Facility,As discussed further below. Under the Revolving Loan Facility, we had outstanding balances ranging from $31.9 million to $84.9 million during the fiscal year ended July 31, 2017. During the fiscal year ended July 31, 2016, the Company repaid $97.4 million of principal amount under the Secured Credit Facility, primarily using the net proceeds received from a public offering of our common stock in June 2016, as discussed further above and in "Notes to Consolidated Financial Statements - Note (17) "Stockholders’ Equity."
The Revolving Loan Facility is primarily used for working capital and other general corporate purposes of the Company and its subsidiaries, including the issuance of letters of credit. Borrowings under the Secured(7) - Credit Facility pursuant to terms defined" included in the Secured"Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by reference), on October 31, 2018, we entered into a First Amended and Restated Credit Facility, shall be either (i) Alternate Base Rate ("ABR"Agreement (the "Credit Facility") borrowings, which bear interest from the applicable borrowing date atwith a rate per annum equal to (x) the greatestsyndicate of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% per annum and (c) the Adjusted LIBO Rate on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%), plus (y) the Applicable Rate, or (ii) Eurodollar borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO Rate for such interest period (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%) plus (y) the Applicable Rate. The Applicable Rate is determined based on a pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. The Secured Credit Facility contains customary representations, warranties and affirmative covenants and customary negative covenants, subject to negotiated exceptions, on (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Secured Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business.lenders.
The June 2017 Amendment is expected to result in increased operating and acquisition flexibility and simplify the calculations of our financial covenants. The June 2017 Amendment resulted in, among other things, that the:
| |
(i) | Consolidated EBITDA definition more closely aligns with our Adjusted EBITDA metric by eliminating favorable adjustments to operating income related to settlements of TCS intellectual property matters; |
| |
(ii) | Leverage Ratio is calculated on a “gross” basis using the quotient of Total Indebtedness (excluding unamortized deferred financing costs) divided by our TTM Consolidated EBITDA. The prior Leverage Ratio was calculated on a “net” basis but did not include a reduction for any cash or cash equivalents above $50.0 million; |
| |
(iii) | Fixed Charge Coverage Ratio includes a deduction for all cash dividends, regardless of the amount of our cash and cash equivalents and the related allowable Quarterly Dividend Amount, as defined, will now align with our current quarterly dividend target of $0.10 per common share; |
| |
(iv) | Balloon or final payment of the Term Loan Facility, which is not due until February 23, 2021, was reduced by $22.5 million through increased borrowings from the Revolving Loan Facility, which does not expire until February 23, 2021; and |
| |
(v) | Leverage Ratios will be adjusted, in certain conditions, to provide for additional flexibility for us to make acquisitions. |
In connection with the June 2017 Amendment, there were no changes to: (i) the committed borrowing capacity; (ii) the maturity date; or (iii) interest rates payable (except that the interest rate pricing grid will now be based on the new Leverage Ratio). Also, the June 2017 Amendment did not result in an extinguishment for accounting purposes (as such term is defined in ASC 470 “Debt”); instead, the June 2017 Amendment was accounted for as a debt modification. As a result, deferred financing costs (including incremental fees for the June 2017 Amendment) will continue to be amortized over the remaining maturity term of the Secured Credit Facility.
As of July 31, 2017,2022, the amount outstanding under our Credit Facility was $130.0 million, which is reflected in the non-current portion of long-term debt on our Consolidated Balance Sheet. At July 31, 2022, we had $0.6 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During fiscal 2022, we had outstanding balances under the Credit Facility ranging from $100.0 million to $212.0 million.
As of July 31, 2022, our Secured Leverage Ratio was 2.84x TTM Consolidated3.50x trailing twelve months ("TTM") Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM ConsolidatedAdjusted EBITDA. In fiscal 2018, the maximum allowable Leverage Ratio will decrease each quarter until reaching 3.00x TTM Consolidated EBITDA in the fourth quarter of fiscal 2018, with no further reductions thereafter. Our Fixed ChargeInterest Expense Coverage Ratio as of July 31, 20172022 was 1.95x8.81x TTM Adjusted EBITDA compared to the minimum required Fixed ChargeMinimum Interest Expense Coverage Ratio of 1.25x3.25x TTM Adjusted EBITDA. Although we expect our Secured Leverage Ratio to remain elevated during the first quarter of fiscal 2023, as we make payments to various vendors associated with the build-out of our high-volume technology manufacturing facilities, to support our working capital needs for our existing contracts and will not change for the remaining term of the Secured Credit Facility, as amended. Givento make required CEO transition related payments, given our overall expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Secured Credit Facility as amended, for the foreseeable future.
Convertible Preferred Stock
As discussed further in "Notes to Consolidated Financial Statements - Note (15) - Convertible Preferred Stock" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by reference), on October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the Secured Credit Facility, as amended, are guaranteed by certain“Investors”), relating to the issuance and sale of our domestic subsidiaries (the "Subsidiary Guarantors"). As collateral security for amounts outstanding under our Secured Credit Facility, as amended, and the guarantees thereof, we and our Subsidiary Guarantors have grantedup to an administrative agent, for the benefit125,000 shares of a new series of the lenders, a lien on, and first priority security interest in, substantially allCompany's Series A Convertible Preferred Stock, par value $0.10 per share (the "Convertible Preferred Stock"), for an aggregate purchase price of our tangible and intangible assets.
Capitalizedup to $125.0 million, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms used but not defined herein have the meanings set forth for such terms in the Secured Credit Facility, dated as of February 23, 2016, and the First Amendment of the Secured Credit Facility, dated asSubscription Agreement, the Investors purchased an aggregate of June 6, 2017, both100,000 shares of which have been documented and filed with the SEC.Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100.0 million.
Off-Balance Sheet Arrangements
As of July 31, 2017, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Commitments
In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of July 31, 2017,2022, will materially adversely affect our liquidity.
At July 31, 2017,2022, cash payments due under long-termcontractual obligations (including estimated interest expense on our Secured Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows:
| | | | | | | | | | | | | | |
| ($ in thousands) | | Total | | Due Within 1 Year |
| Credit Facility - principal payments | | $ | 130,000 | | | — | |
| Credit Facility - interest payments | | 7,914 | | | 6,341 | |
| Operating and financing lease obligations | | 62,596 | | | 9,953 | |
| Dividends payable | | 2,746 | | | 2,746 | |
| Contractual cash obligations | | $ | 203,256 | | | $ | 19,040 | |
|
| | | | | | | | | | | | | | | | |
| | | Obligations Due by Fiscal Years or Maturity Date (in thousands) |
| | | Total | | 2018 | | 2019
and
2020 | | 2021
and
2022 | | After
2022 |
| Secured Credit Facility - principal payments | | $ | 196,485 |
| | 15,494 |
| | 35,415 |
| | 145,576 |
| | — |
|
| Secured Credit Facility - interest payments | | 23,284 |
| | 7,331 |
| | 12,798 |
| | 3,155 |
| | — |
|
| Operating lease commitments | | 45,622 |
| | 12,374 |
| | 15,856 |
| | 9,538 |
| | 7,854 |
|
| Capital lease obligations | | 4,304 |
| | 2,494 |
| | 1,810 |
| | — |
| | — |
|
| Net contractual cash obligations | | $ | 269,695 |
| | 37,693 |
| | 65,879 |
| | 158,269 |
| | 7,854 |
|
As discussed further inSee "Notes to Consolidated Financial Statements - Note (8) Secured Credit Facility-"Leases" included in "Part II — Item 8. - Financial Statements and Supplementary Data," on June 6, 2017, we entered into the June 2017 Amendment to our Secured Credit Facility. In connection with this amendment, the balloon or final payment of the Term Loan Facility, which is not due until February 23, 2021, was reduced by $22.5 million through increased borrowings from the Revolving Loan Facility which is not required to be repaid in full until February 23, 2021.
As discussed further in "Notes to Consolidated Financial Statements - Note (17) Stockholders’ Equity" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K, for additional information on September 27, 2017, our Boardlease commitments.
As discussed further in "Notes to Consolidated Financial Statements - Note (15) - Convertible Preferred Stock" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K, the holders of Directors declared a dividend of $0.10 per common share, payable on November 17, 2017the Convertible Preferred Stock have the option to stockholders of record atredeem such shares for cash commencing in October 2026. As the close of business on October 18, 2017. Future dividends remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.
At July 31, 2017, we have approximately $3.9 million of standby letters of credit outstanding under our Secured Credit Facility, as amended, related to our guarantees of future performance on certain customer contracts. Such amountsConvertible Preferred Stock are not includedmandatorily redeemable for cash, the redemption value of such shares are not presented in the above table.table above.
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims in the Comtech legacy business and the unique facts and circumstances involved in each particular agreement.
As discussed further in "Notes toConsolidated Financial Statements - Note (14)(12) - Commitments and Contingencies," TCSincluded in "Part II - Item 8.- Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by reference), we are subject to a party to onenumber of indemnification matterdemands and we are incurring ongoing legal expenses in connection with this matter.these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we have agreed to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.
We have change in control agreements, severance agreements and indemnification agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or an involuntarya termination of employment without cause.the employee.
Our consolidated balance sheetAs further discussed in "Notes to Consolidated Financial Statements – Note (9) - "Income Taxes " included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by reference), our Consolidated Balance Sheet at July 31, 20172022 includes total liabilities of $8.7$10.0 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities.
Recent Accounting Pronouncements
We are required to prepare our consolidated financial statements in accordance with the Financial Accounting Standards Board ("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 the FASB, which are known as Accounting Standards Updates ("ASUs").
As further discussed in "Notes to Consolidated Financial Statements – Note (1)(n) - Adoption of Accounting Standards and Updates" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Form 10-K, during fiscal 2017,2022, we adopted:
•FASB ASU No. 2014-12,2019-12, which requires that a performance target which affects vestingsimplifies various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and that could be achieved after the requisite service period be treated as a performance condition.also clarifies and amends existing guidance to improve consistent application. Our adoption of this ASU on August 1, 2021 did not have a material impact on our consolidated financial statements or disclosures.
•FASB ASU No. 2020-01, which clarifies the interactions between Topics 321, 323 and 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. Our adoption of this ASU on August 1, 2021 did not impact our consolidated financial statements or disclosures.
•FASB ASU No. 2014-15, which provides guidance about management's responsibility to evaluate whether there is a substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Our adoption of this ASU did not impact our consolidated financial statements or disclosures.
FASB ASU No. 2015-11,2020-06, which simplifies the guidance onaccounting for convertible instruments by removing certain separation models (including the subsequent measurement of inventory other than inventory measured usingcash conversion model and the last-in, first out or the retail inventory method. This ASU requires in-scope inventorybeneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are not required to be subsequentlyaccounted for as derivatives under Topic 815 or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at the lower ofits amortized cost, and net realizable value, the latter of which is definedconvertible preferred stock will be accounted for as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposala single equity instrument measured at its historical cost as long as no other features require bifurcation and transportation.recognition as derivatives. On August 1, 2021, we early adopted this ASU. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
•FASB ASU No. 2016-06,2021-08, which clarifies the requirements for assessing whether contingent call (put) options,requires that can accelerate the payment of principal on debt instruments, are clearlyan acquirer recognize, and closely related to their debt hosts. An entity performing the assessment under the amendmentsmeasure contract assets and contract liabilities acquired in this ASU is required to assess the embedded call (put) options solelya business combination in accordance with Topic 606, as if it had originated the Derivatives Implementation Group’s four-step decision sequence.contracts. Prior to this ASU, an acquirer generally recognized contract assets and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. On August 1, 2021, we early adopted this ASU. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2016-07, which eliminates the requirement to retroactively adopt the equity method of accounting for an investment as a result of an increase in the level of ownership interest or degree of influence. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2016-17, which amends the consolidation guidance on how a reporting entity (that is the single decision maker of a Variable Interest Entity (“VIE”)) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2016-18, which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2017-04, which simplifies the measurement of goodwill impairment by eliminating Step Two from the goodwill impairment test. Instead, impairment will be measured using the excess amount that a reporting unit's carrying value exceeds its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
In addition, the following FASB ASUs have been issued and incorporated into the FASB ASC and have not yet been adopted by us as of July 31, 2017:
FASB ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)," issued in May 2014, which replaces numerous requirements in U.S. GAAP, including industry specific requirements, and provides a single revenue recognition model for contracts with customers. The core principle of the new standard is that a company should record revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, FASB ASU No. 2015-14 "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" was issued to defer the effective date of FASB ASU No. 2014-09 by one year. As a result, FASB ASU No. 2014-09 is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), including interim reporting periods within those fiscal years and can be adopted either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted only as of fiscal years beginning after December 15, 2016 (our fiscal year beginning on August 1, 2017), including interim reporting periods within those fiscal years. In March 2016, April 2016, May 2016 and February 2017, FASB ASU Nos. 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)," 2016-10 "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," 2016-12 "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" and 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets" were issued, respectively, to clarify certain implementation matters related to the new revenue standard. The effective dates for these ASUs coincide with the effective date of FASB ASU 2014-09. Because of the broad scope of this new standard, it could impact our net sales and operating income across our two operating segments as well as related business processes and IT systems. We have formed a project team to perform a detailed evaluation of the operational impact of this new ASU, which transition approach to use and the overall impact of these ASUs on our consolidated financial statements and disclosures. This evaluation is ongoing and is expected to be completed shortly before our first quarter of fiscal 2019.
FASB ASU No. 2016-01, issued January 2016, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments, such as: amending the initial and subsequent measurement requirements for certain equity investments; eliminating the disclosure requirements related to the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet; requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset or liability on the balance sheet or the accompanying notes to the financial statements. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), including interim periods within those fiscal years and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for the provisions related to equity securities without readily determinable fair values which are to be adopted prospectively. Under certain circumstances, early adoption is permitted. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2016-02, issued in February 2016, which requires lessees to recognize the following for all leases (with the exception of short-term leases): (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, initially measured at the present value of the lease payments; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. This ASU is effective for fiscal years beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019), including interim periods within those fiscal years and should be applied with a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2016-09, issued in March 2016, which amends several aspects of the accounting for and reporting of share-based payment transactions, including: the recognition of excess tax benefits and shortfalls in the income statement; the classification of excess tax benefits as an operating activity in the statement of cash flows; the timing of recognizing forfeitures; permitting the withholding of statutory taxes up to the maximum rate in the applicable jurisdictions; and the classification of cash paid by an employer, when withholding shares for tax withholdings, as a financing activity. The amendments related to this ASU are effective for fiscal years beginning after December 15, 2016 (our fiscal year beginning on August 1, 2017), and interim periods within those fiscal years and should be applied either retrospectively or prospectively, as applicable. Our adoption of this ASU, on August 1, 2017, did not have a material impact on our consolidated financial statements and the changes in presentation required by this ASU will be reflected commencing in fiscal 2018. See "Notes to Consolidated Financial Statements – Note (11) Stock-Based Compensation" included in "Part II - Item 8. - Financial Statements and Supplementary Data" for further information regarding our adoption of this ASU.
FASB ASU No. 2016-13, issued in June 2016, which requires the measurement of expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions and reasonable and supportable forecasts. This ASU is effective for fiscal years beginning after December 15, 2019 (our fiscal year beginning on August 1, 2020), including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Except for a prospective transition approach required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, an entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, on a modified-retrospective approach). We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2016-15, issued in August 2016, which amends the guidance on the following cash flow related issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon and similar type debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims (including those related to certain life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and cash receipts or payments with more than one class of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), and interim periods within those fiscal years and shall be applied using the retrospective transition method to each period presented. Early adoption is permitted; however, all of the amendments must be adopted in the same period. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2016-16, issued in October 2016, which eliminates a prior exception and now requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory (for example, intellectual property and property, plant and equipment) when the transfer occurs. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), and interim periods within those fiscal years and shall be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2017-09, issued in May 2017, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018) and early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. This ASU should be applied prospectively to an award modified on or after the adoption date of this ASU. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2017-11, issued in July 2017, which provides guidance on the accounting for certain financial instruments with embedded features that result in the strike price of the instrument or embedded conversion option being reduced on the basis of the pricing of future equity offerings (commonly referred to as "down round" features). This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019) and early adoption is permitted, including adoption in an interim period. This ASU should be applied retrospectively in accordance with the provisions of the ASU. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from borrowings under our Secured Credit Facility, as amended.Facility. Based on the amount of outstanding debt under our Secured Credit Facility, as amended, a hypothetical change in interest rates by 10% would change interest expense by $0.8approximately $0.6 million over a one-year period. Although we do not currently use interest rate derivative instruments to manage exposure to interest rate changes, we may choose to do so in the future in connection with our Secured Credit Facility, as amended.Facility.
Our earnings and cash flows are also subject to fluctuations due to changes in interest rates on our investment of available cash balances. As of July 31, 2017,2022, we had cash and cash equivalents of $41.8$21.7 million, which consisted of cash and highly-liquid money market deposit accounts. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of July 31, 2017,2022, a hypothetical change in interest rates of 10% would have a nominal impact on interest income over a one-year period. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Registered Public Accounting Firm, Consolidated Financial Statements, Notes to Consolidated Financial Statements and Related Financial Schedule are listed in the Index to Consolidated Financial Statements and Schedule annexed hereto.hereto and are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including our President, Chief Executive Officer and Chairman and Chief Financial Officer. Based on that evaluation, our President, Chief Executive Officer and Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of July 31, 2017.2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control – Integrated Framework (2013). Based on our assessment, we determined that, as of July 31, 2017,2022, our internal control over financial reporting was effective based on those criteria.
Deloitte and Touche LLP, our independent registered public accounting firm, has performed an audit of our internal control over financial reporting as of July 31, 20172022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO. This audit is required to be performed in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our independent auditors were given unrestricted access to all financial records and related data. Deloitte’s audit reports appear on pages F-2 and F-3 of this annual report.
Changes In Internal Control Over Financial Reporting
We acquired TeleCommunication Systems, Inc. ("TCS") on February 23, 2016 and have integrated TCS into our existing internal controls over financial reporting. Except for any changes and related enhancements in internal controls related to TCS, thereThere have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our fiscal quarter ended July 31, 2017,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information concerning directors and officers is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders (the "Proxy Statement") which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding securities authorized for issuance under equity compensation plans and certain information regarding security ownership of certain beneficial owners and management is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accountant fees and services is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) The Registrant’s financial statements together with a separate index are annexed hereto.
(2) The Financial Statement Schedule listed in a separate index is annexed hereto.
(3) Exhibits required by Item 601 of Regulation S-K are listed below.
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(a) | | (1) The Registrant’s financial statements together with a separate index are annexed hereto. |
| | (2) The Financial Statement Schedule listed in a separate index is annexed hereto. |
| | (3) Exhibits required by Item 601 of Regulation S-K are listed below. |
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Exhibit Number | | Description of Exhibit | | Incorporated By Reference to Exhibit |
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| | Exhibit 3(a)(i) to the Registrant’s 2006 Form 10-K
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| | | | Exhibit 3.1 to the Registrant's Form 8-K, filed December 30, 2021 |
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Exhibit 3(a)(ii) to the Registrant’s 2017 Form 10-K |
| | | | Exhibit 3.1 to the Registrant's Form 8-K filed October 22, 2021 |
| | | | Exhibit 3.1 to the Registrant's 8-K, filed November 12, 2021 |
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| | Exhibit 10.1 to the Registrant’s Form 10-Q,8-K, filed December 7, 2016
March 4, 2020 |
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| | Exhibit 10.7 to the Registrant’s Form 8-K, filed June 7, 2017
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| | | | Exhibit 10(s) to the Registrant's 2011 Form 10-K
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| | | | Exhibit 10.2 to the Registrant's Form 8-K, filed January 5, 2022 |
| | | | Exhibit 10.1 to the Registrant's Form 10-Q, filed March 10, 2022 |
| | | | Appendix B to the Registrant’s Proxy Statement, filed November 3, 2000
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| | | | AppendixExhibit A to the Registrant’s Proxy Statement, filed November 21, 2016
16, 2018 |
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| | Exhibit 10(f)(7) to the Registrant’s 2005 Form 10-K
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| | Exhibit 10(f)(8)10(d)(3) to the Registrant’s 2006Registrant's Form 2020 Form 10-K |
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| | Exhibit 10(s) to the Registrant’s 2012 Form 10-K |
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| | Exhibit 10(z) to the Registrant's 2013 Form 10-K |
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| | Exhibit 10(aa) to the Registrant's 2013 Form 10-K |
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| | Exhibit 10(ab)10(f)(2) to the Registrant's 20142019 Form 10-K
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| | Exhibit 10.8 to the Registrant's Form 8-K, filed June 7, 2017 |
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| | Exhibit 10(y) to the Registrant’s 2016 Form 10-K
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Exhibit
Number
| | Description of Exhibit
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Reference to Exhibit
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| | Exhibit 10(ab) to the Registrant’s 2016 Form 10-K |
| | | | Exhibit 10(g)(3) to the Registrant's 2019 Form 10-K |
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Exhibit Number | | Description of Exhibit | | Incorporated By Reference to Exhibit |
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| | Exhibit 10(h)(1) to the Registrant’s 2017 Form 10-K |
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| | Exhibit 10(z) to the Registrant’s 2016 Form 10-K
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| | Exhibit 10(w) to the Registrant's 2013 Form 10-K |
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| | Exhibit 10.2 to the Registrant's Form 10-Q, filed June 7, 2012 |
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| | Exhibit 10(aa) to the Registrant’s 2016 Form 10-K
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| | Exhibit 10(x) to the Registrant's 2013 Form 10-K |
| | | | Exhibit 10.1 to the Registrant's Form 10-Q, filed June 3, 2020 |
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| | Exhibit 10.1 to the Registrant's Form 10-Q, filed June 7, 2012 |
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| | Exhibit 10(v) to the Registrant's 2013 Form 10-K |
| | | | Exhibit 10.2 to the Registrant's Form 10-Q, filed December 9, 2013
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| | Exhibit 10(j)(2) to the Registrant's 2018 Form 10-K |
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| | Exhibit 10.1 to Registrant’s Form 8-K, filed on March 8, 2007
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| | | | Exhibit 10.2 to the Registrant’s Form 8-K, filed June 7, 2017
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| | Exhibit 10.3 to the Registrant’s Form 8-K, filed June 7, 2017 |
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Exhibit
Number
| | Description of Exhibit | | Incorporated By Reference to Exhibit |
| | | | Exhibit 10.4 to the Registrant’s Form 8-K, filed June 7, 2017
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| | Exhibit 10.5 to the Registrant’s Form 8-K, filed June 7, 2017
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Exhibit
| | Description of Exhibit
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Reference to Exhibit
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| | Exhibit 10.6 to the Registrant’s Form 8-K, filed June 7, 2017
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| | | | Exhibit 10.1 to the Registrant's Form 10-Q, filed December 4, 2019 |
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| | Exhibit 2.1 to the Registrant’s Form 8-K, filed November 23, 2015
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| | Exhibit 10.1 to the Registrant’s Form 8-K, filed February 29, 2016
November 5, 2018 |
| | | | Exhibit 10.1 to the Registrant's Form 8-K filed October 22, 2021 |
| | | | Exhibit 99.2 to the Registrant's Form 8-K filed October 22, 2021 |
| | | | Exhibit 3.1 to the Registrant's Form 8-K, filed November 12, 2021 |
| | Cooperation Agreement dated December 16, 2021, by and among Comtech Telecommunications Corp., the lenders party theretoOuterbridge Partners, LP, Outerbridge Capital Management, LLC, Outerbridge Partners GP, LLC, Outerbridge Bartleby Fund, LP, Outerbridge Bartleby GP, LLC, and Citibank N.A., as administrative agent and issuing bankRory Wallace
| | Exhibit 10.1 to the Registrant's Form 8-K, filed December 21, 2021 |
| | | | Exhibit 10.1 to the Registrant's Form 8-K, filed January 5, 2022 |
| | | | Exhibit 10.2 to the Registrant's Form 10-Q, filed March 10, 2022 |
| | | | Exhibit 10.1 to the Registrant's Form 8-K, filed August 10, 2022 |
| | | | Exhibit 10.1 to the Registrant’s Form 8-K, filed June 7, 2017September 13, 2022 |
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| | Exhibit 10(ac)10.2 to the Registrant’s 2016 Form 10-K8-K, filed September 13, 2022 |
| | | | Exhibit 10.3 to the Registrant’s Form 8-K, filed September 13, 2022 |
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Exhibit Number | | Description of Exhibit | | Incorporated By Reference to Exhibit |
| | | | Exhibit 10.4 to the Registrant’s Form 8-K, filed September 13, 2022 |
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| 101.INS | | XBRL Instance Document
The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2022, formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statements | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document
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| 101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) | | |
* Management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| COMTECH TELECOMMUNICATIONS CORP. |
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September 27, 201729, 2022 | By: /s/Fred KornbergKen Peterman |
| (Date) | Fred Kornberg,Ken Peterman, Chairman of the Board
President and Chief Executive Officer and President
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | Title |
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| September 29, 2022 | /s/Ken Peterman | Chairman of the Board |
| (Date) | Ken Peterman | President and Chief Executive Officer |
| | (Principal Executive Officer) |
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| September 29, 2022 | /s/Michael A. Bondi | Chief Financial Officer |
| (Date) | Michael A. Bondi | (Principal Financial and Accounting Officer) |
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| September 29, 2022 | Signature/s/Wendi Carpenter | TitleDirector |
| (Date) | Wendi Carpenter | |
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September 27, 201729, 2022 | /s/Judy Chambers | Director |
| (Date) | Judy Chambers | |
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| September 29, 2022 | /s/Fred Kornberg | Chairman of the BoardDirector |
| (Date) | Fred Kornberg | Chief Executive Officer and President |
| | (Principal Executive Officer) |
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September 27, 201729, 2022 | /s/Michael D. PorcelainLisa Lesavoy | Senior Vice President andDirector |
| (Date) | Michael D. PorcelainLisa Lesavoy | Chief Financial Officer
(Principal Financial and Accounting Officer)
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September 27, 201729, 2022 | /s/Edwin KantorMark Quinlan | Director |
| (Date) | Edwin KantorMark Quinlan | |
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September 27, 201729, 2022 | /s/Ira S. Kaplan | Director |
(Date) | Ira S. Kaplan | |
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September 27, 2017 | /s/Robert G. Paul | Director |
(Date) | Robert G. Paul | |
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September 27, 2017 | /s/Dr. Yacov A. Shamash | Director |
| (Date) | Dr. Yacov A. Shamash | |
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September 27, 201729, 2022 | /s/Lawrence J. Waldman | Director |
| (Date) | Lawrence J. Waldman | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
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| Additional Financial Information Pursuant to the Requirements of Form 10-K: | |
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| Schedules not listed above have been omitted because they are either not applicable or the required information has been provided elsewhere in the consolidated financial statements or notes thereto. | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors and Stockholders of
Comtech Telecommunications Corp.
Melville, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries (the "Company") as of July 31, 20172022 and 2016, and2021, the related consolidated statements of operations, convertible preferred stock and stockholders’ equity, and cash flows, for each of the three years in the period ended July 31, 2017. Our audits also included2022, and the financial statementrelated notes and the schedule listed in the Index at Item 15. 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of July 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 29, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
InCritical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion such consolidated financial statements present fairly, in all material respects,on the financial position of the Company as of July 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, present fairly,and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Net Sales – Over Time Accounting Using the Cost-to-Cost Measure for Specific Identified Material Contracts — Refer to Note 1 to the financial statements.
Critical Audit Matter Description
The Company’s determination of revenue recognition for specific identified material contracts accounted for over time involves estimating the total costs needed to complete the specific identified contracts and updating those estimates throughout the life of those specific identified contracts. This requires management to make significant estimates related to forecasts of future costs for the identified specific contracts. Changes in allthese estimates for the identified specific contracts could have a significant impact on the Company’s results of operations.
Given the significant judgment and estimates used in management’s projections, auditing the Company’s estimates at completion and estimates to completion involved especially subjective judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s determination of revenue recognition for specific identified material respects,contracts accounted for over time included the information set forth therein.following, among others:
•We have also audited, in accordance withtested the standardsdesign, implementation, and operating effectiveness of the Public Company Accounting Oversight Board (United States),controls over the Company’s internal control over financial reporting asdevelopment of July 31, 2017,the initial contract cost to complete estimate and monitoring of estimates at completion and estimates to completion.
•For each specific identified material contract selected, we performed the following:
◦Evaluated whether the contract was properly included in management’s calculation of overtime revenue based on the criteria establishedterms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation.
◦Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers.
◦Tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated.
◦Evaluated the estimates of total cost and profit for the performance obligation by:
▪Performing a retrospective review by comparing the estimated margins at contract inception to the actual margins as of year-end in Internal Control-Integrated Framework (2013) issued byorder to assess management’s ability to accurately estimate costs.
▪Inquiring and corroborating the Committeeestimates to complete and the estimates at completion with the Project Manager (i.e., someone outside of Sponsoring OrganizationsFinance/Accounting) to understand significant variances in costs and completeness of the Treadway Commissionestimates at completion and our report dated September 27, 2017 expressedestimates to completion.
▪Testing the estimates to complete through a combination of tests of details, in which we selected individual costs within the estimate to complete and obtained supporting documentation, and where we developed an unqualified opinion onexpectation of the estimate to complete and compared it to the recorded balance.
◦Tested the accuracy and completeness of costs incurred during the current fiscal year. This testing included agreeing labor costs to employee timesheets and agreeing the labor rate to either rates agreed upon with the customer in the contract or rates from the Company’s internal controlpayroll records.
◦Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation.
Goodwill — Refer to Note 13 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used the income approach, also known as the discounted cash flow ("DCF") method, to determine the present value of cash flows to estimate fair value. The future cash flows for the Company’s reporting units were projected based on their estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The Satellite and Space and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 18.4% and 11.6%, respectively.
We identified goodwill for the reporting units as a critical audit matter because of the significant judgments made by management to estimate the fair values of these reporting units and the differences between their fair value and carrying value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenue and operating margins.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discount rate and forecasts of future revenue and operating margins used by management to estimate the fair values of the reporting units included the following, among others:
•We tested the effectiveness of controls over financial reporting.management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting units, such as controls related to management’s selection of the discount rate and forecasts of future revenue and operating margins.
•We evaluated management’s ability to accurately forecast future revenues and operating margins by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s revenue forecasts and forecasts of operating margins by comparing the forecasts to:
◦Historical revenues and operating margins.
◦Internal communications to management and the Board of Directors.
◦Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:
◦Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.
◦Developing a range of independent estimates and comparing those to the discount rate selected by management.
/s/ DELOITTE & TOUCHE LLP
Jericho, New York
September 27, 201729, 2022
We have served as the Company’s auditor since 2015.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors and Stockholders of
Comtech Telecommunications Corp.
Melville, New York
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Comtech Telecommunications Corp. and subsidiaries (the "Company") as of July 31, 2017,2022, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended July 31, 2022, of the Company and our report dated September 29, 2022, expressed an unqualified opinion on those financial statements and financial statement schedule.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended July 31, 2017 of the Company and our report dated September 27, 2017 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
Jericho, New York
September 27, 2017
29, 2022
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of July 31, 20172022 and 20162021 | | | Assets | | 2017 | | 2016 | Assets | | 2022 | | 2021 |
| Current assets: | | | | | Current assets: | | | | |
| Cash and cash equivalents | | $ | 41,844,000 |
| | 66,805,000 |
| Cash and cash equivalents | | $ | 21,654,000 | | | 30,861,000 | |
| Accounts receivable, net | | 124,962,000 |
| | 150,967,000 |
| Accounts receivable, net | | 123,711,000 | | | 158,110,000 | |
| Inventories, net | | 60,603,000 |
| | 71,354,000 |
| Inventories, net | | 96,317,000 | | | 80,358,000 | |
| Prepaid expenses and other current assets | | 13,635,000 |
| | 14,513,000 |
| Prepaid expenses and other current assets | | 21,649,000 | | | 18,167,000 | |
| Total current assets | | 241,044,000 |
| | 303,639,000 |
| Total current assets | | 263,331,000 | | | 287,496,000 | |
| | | | | | |
| Property, plant and equipment, net | | 32,847,000 |
| | 38,667,000 |
| Property, plant and equipment, net | | 50,363,000 | | | 35,286,000 | |
| Operating lease right-of-use assets, net | | Operating lease right-of-use assets, net | | 49,767,000 | | | 44,486,000 | |
| Goodwill | | 290,633,000 |
| | 287,618,000 |
| Goodwill | | 347,692,000 | | | 347,698,000 | |
| Intangibles with finite lives, net | | 261,871,000 |
| | 284,694,000 |
| Intangibles with finite lives, net | | 247,303,000 | | | 268,699,000 | |
| Deferred financing costs, net | | 3,065,000 |
| | 3,309,000 |
| Deferred financing costs, net | | 1,014,000 | | | 1,824,000 | |
| Other assets, net | | 2,603,000 |
| | 3,269,000 |
| Other assets, net | | 14,827,000 | | | 7,622,000 | |
| Total assets | | $ | 832,063,000 |
| | 921,196,000 |
| Total assets | | $ | 974,297,000 | | | 993,111,000 | |
| Liabilities and Stockholders’ Equity | | |
| | |
| |
| Liabilities, Convertible Preferred Stock and Stockholders’ Equity | | Liabilities, Convertible Preferred Stock and Stockholders’ Equity | | | | |
| Current liabilities: | | |
| | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 29,402,000 |
| | 33,462,000 |
| Accounts payable | | $ | 44,591,000 | | | 36,193,000 | |
| Accrued expenses and other current liabilities | | 68,610,000 |
| | 98,034,000 |
| Accrued expenses and other current liabilities | | 72,662,000 | | | 89,601,000 | |
| Operating lease liabilities, current | | Operating lease liabilities, current | | 8,685,000 | | | 8,841,000 | |
| Dividends payable | | 2,343,000 |
| | 7,005,000 |
| Dividends payable | | 2,746,000 | | | 2,601,000 | |
| Customer advances and deposits | | 25,771,000 |
| | 29,665,000 |
| |
| Current portion of long-term debt | | 15,494,000 |
| | 11,067,000 |
| |
| Current portion of capital lease obligations | | 2,309,000 |
| | 3,592,000 |
| |
| Contract liabilities | | Contract liabilities | | 64,601,000 | | | 66,130,000 | |
| Interest payable | | 282,000 |
| | 1,321,000 |
| Interest payable | | 172,000 | | | 195,000 | |
| Total current liabilities | | 144,211,000 |
| | 184,146,000 |
| Total current liabilities | | 193,457,000 | | | 203,561,000 | |
| | | | | | |
| Non-current portion of long-term debt, net | | 176,228,000 |
| | 239,969,000 |
| Non-current portion of long-term debt, net | | 130,000,000 | | | 201,000,000 | |
| Non-current portion of capital lease obligations | | 1,771,000 |
| | 4,021,000 |
| |
| Operating lease liabilities, non-current | | Operating lease liabilities, non-current | | 44,423,000 | | | 39,569,000 | |
| Income taxes payable | | 2,515,000 |
| | 2,992,000 |
| Income taxes payable | | 3,007,000 | | | 2,717,000 | |
| Deferred tax liability, net | | 17,306,000 |
| | 9,798,000 |
| Deferred tax liability, net | | 15,355,000 | | | 21,230,000 | |
| Customer advances and deposits, non-current | | 7,227,000 |
| | 5,764,000 |
| |
| Long-term contract liabilities | | Long-term contract liabilities | | 9,975,000 | | | 9,808,000 | |
| Other liabilities | | 2,655,000 |
| | 4,105,000 |
| Other liabilities | | 6,291,000 | | | 14,507,000 | |
| Total liabilities | | 351,913,000 |
| | 450,795,000 |
| Total liabilities | | 402,508,000 | | | 492,392,000 | |
| Commitments and contingencies (See Note 14) | |
|
| |
|
| |
| Commitments and contingencies (See Note 12) | | Commitments and contingencies (See Note 12) | |
| Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at July 31, 2022 (includes accrued dividends of $566,000) | | Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at July 31, 2022 (includes accrued dividends of $566,000) | | 105,204,000 | | | — | |
| Stockholders’ equity: | | |
| | |
| 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 38,619,467 shares and 38,367,997 shares at July 31, 2017 and 2016, respectively | | 3,862,000 |
| | 3,837,000 |
| |
| Preferred stock, par value $0.10 per share; authorized and unissued 1,875,000 shares | | Preferred stock, par value $0.10 per share; authorized and unissued 1,875,000 shares | | — | | | — | |
| Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 42,672,827 shares and 41,281,812 shares at July 31, 2022 and 2021, respectively | | Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 42,672,827 shares and 41,281,812 shares at July 31, 2022 and 2021, respectively | | 4,267,000 | | | 4,128,000 | |
| Additional paid-in capital | | 533,001,000 |
| | 524,797,000 |
| Additional paid-in capital | | 625,484,000 | | | 605,439,000 | |
| Retained earnings | | 385,136,000 |
| | 383,616,000 |
| Retained earnings | | 278,683,000 | | | 333,001,000 | |
| | | 921,999,000 |
| | 912,250,000 |
| | | 908,434,000 | | | 942,568,000 | |
| Less: | | |
| | |
| Less: | | | | |
| Treasury stock, at cost (15,033,317 shares at July 31, 2017 and 2016) | | (441,849,000 | ) | | (441,849,000 | ) | |
| Treasury stock, at cost (15,033,317 shares at July 31, 2022 and 2021) | | Treasury stock, at cost (15,033,317 shares at July 31, 2022 and 2021) | | (441,849,000) | | | (441,849,000) | |
| Total stockholders’ equity | | 480,150,000 |
| | 470,401,000 |
| Total stockholders’ equity | | 466,585,000 | | | 500,719,000 | |
| Total liabilities and stockholders’ equity | | $ | 832,063,000 |
| | 921,196,000 |
| |
| Total liabilities, convertible preferred stock and stockholders’ equity | | Total liabilities, convertible preferred stock and stockholders’ equity | | $ | 974,297,000 | | | 993,111,000 | |
See accompanying notes to consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended July 31, 2017, 20162022, 2021 and 20152020
| | | | | 2017 | | 2016 | | 2015 | | | 2022 | | 2021 | | 2020 |
| Net sales | | $ | 550,368,000 |
| | 411,004,000 |
| | 307,289,000 |
| Net sales | | $ | 486,239,000 | | | 581,695,000 | | | 616,715,000 | |
| Cost of sales | | 332,183,000 |
| | 239,767,000 |
| | 168,405,000 |
| Cost of sales | | 306,403,000 | | | 367,737,000 | | | 389,882,000 | |
| Gross profit | | 218,185,000 |
| | 171,237,000 |
| | 138,884,000 |
| Gross profit | | 179,836,000 | | | 213,958,000 | | | 226,833,000 | |
| | | | | | | | | | | | | |
| Expenses: | | |
| | |
| | |
| Expenses: | | | | | | |
| Selling, general and administrative | | 116,080,000 |
| | 94,932,000 |
| | 62,680,000 |
| Selling, general and administrative | | 114,858,000 | | | 111,796,000 | | | 117,130,000 | |
| Research and development | | 54,260,000 |
| | 42,190,000 |
| | 35,916,000 |
| Research and development | | 52,532,000 | | | 49,148,000 | | | 52,180,000 | |
| Amortization of intangibles | | 22,823,000 |
| | 13,415,000 |
| | 6,211,000 |
| Amortization of intangibles | | 21,396,000 | | | 21,020,000 | | | 21,595,000 | |
| Settlement of intellectual property litigation | | (12,020,000 | ) | | — |
| | — |
| |
| CEO transition costs | | CEO transition costs | | 13,554,000 | | | — | | | — | |
| Proxy solicitation costs | | Proxy solicitation costs | | 11,248,000 | | | — | | | — | |
| Acquisition plan expenses | | — |
| | 21,276,000 |
| | — |
| Acquisition plan expenses | | — | | | 100,292,000 | | | 20,754,000 | |
| | | 181,143,000 |
| | 171,813,000 |
| | 104,807,000 |
| | | 213,588,000 | | | 282,256,000 | | | 211,659,000 | |
| | | | | | | | | | | | | |
| Operating income (loss) | | 37,042,000 |
| | (576,000 | ) | | 34,077,000 |
| |
| Operating (loss) income | | Operating (loss) income | | (33,752,000) | | | (68,298,000) | | | 15,174,000 | |
| | | | | | | | |
| Other expenses (income): | | |
| | |
| | |
| Other expenses (income): | | | | | | |
| Interest expense and other | | 11,629,000 |
| | 7,750,000 |
| | 479,000 |
| |
| Interest income and other | | (68,000 | ) | | (134,000 | ) | | (405,000 | ) | |
| Interest expense | | Interest expense | | 5,031,000 | | | 6,821,000 | | | 6,054,000 | |
| Interest (income) and other | | Interest (income) and other | | (703,000) | | | (139,000) | | | (190,000) | |
Change in fair value of convertible preferred
stock purchase option liability | | Change in fair value of convertible preferred
stock purchase option liability | | (1,005,000) | | | — | | | — | |
| | | | | | | | | | | | | |
| Income (loss) before provision for (benefit from) income taxes | | 25,481,000 |
| | (8,192,000 | ) | | 34,003,000 |
| |
| Provision for (benefit from) income taxes | | 9,654,000 |
| | (454,000 | ) | | 10,758,000 |
| |
| (Loss) income before (benefit from) provision for income taxes | | (Loss) income before (benefit from) provision for income taxes | | (37,075,000) | | | (74,980,000) | | | 9,310,000 | |
| (Benefit from) provision for income taxes | | (Benefit from) provision for income taxes | | (4,023,000) | | | (1,500,000) | | | 2,290,000 | |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 15,827,000 |
| | (7,738,000 | ) | | 23,245,000 |
| |
| Net income (loss) per share: | | |
| | |
| | |
| |
| Net (loss) income | | Net (loss) income | | $ | (33,052,000) | | | (73,480,000) | | | 7,020,000 | |
| Adjustments to reflect redemption value of convertible
preferred stock: | | Adjustments to reflect redemption value of convertible
preferred stock: | |
| Convertible preferred stock issuance costs | | Convertible preferred stock issuance costs | | (4,007,000) | | | — | | | — | |
Establishment of initial convertible
preferred stock purchase option liability | | Establishment of initial convertible
preferred stock purchase option liability | | (1,005,000) | | | — | | | — | |
| Dividend on convertible preferred stock | | Dividend on convertible preferred stock | | (5,204,000) | | | — | | | — | |
Net (loss) income attributable to common
stockholders | | Net (loss) income attributable to common
stockholders | | $ | (43,268,000) | | | (73,480,000) | | | 7,020,000 | |
| | Net (loss) income per share: | | Net (loss) income per share: | | | | | | |
| Basic | | $ | 0.68 |
| | (0.46 | ) | | 1.43 |
| Basic | | $ | (1.63) | | | (2.86) | | | 0.28 | |
| Diluted | | $ | 0.67 |
| | (0.46 | ) | | 1.42 |
| Diluted | | $ | (1.63) | | | (2.86) | | | 0.28 | |
| | | | | | | | | | | | | |
| Weighted average number of common shares outstanding – basic | | 23,433,000 |
| | 16,972,000 |
| | 16,203,000 |
| Weighted average number of common shares outstanding – basic | | 26,506,000 | | | 25,685,000 | | | 24,798,000 | |
| | | | | | | | | | | | | |
| Weighted average number of common and common equivalent shares outstanding – diluted | | 23,489,000 |
| | 16,972,000 |
| | 16,418,000 |
| Weighted average number of common and common equivalent shares outstanding – diluted | | 26,506,000 | | | 25,685,000 | | | 24,899,000 | |
| | | | | | | | |
| Dividends declared per issued and outstanding common share as of the applicable dividend record date | | $ | 0.60 |
| | 1.20 |
| | 1.20 |
| |
|
See accompanying notes to consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity
Fiscal Years Ended July 31, 2017, 20162022, 2021 and 20152020
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Stockholders' Equity |
| | | Shares | | Amount | | | | Shares | | Amount | |
| 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 | | — |
| | — |
| | 4,387,000 |
| | — |
| | — |
| | — |
| | 4,387,000 |
|
| Proceeds from exercise of options | | 50,000 |
| | 5,000 |
| | 1,434,000 |
| | — |
| | — |
| | — |
| | 1,439,000 |
|
| Proceeds from issuance of employee stock purchase plan shares | | 34,310 |
| | 3,000 |
| | 914,000 |
| | — |
| | — |
| | — |
| | 917,000 |
|
| Common stock issued for net settlement of stock-based awards | | 64,622 |
| | 7,000 |
| | (480,000 | ) | | — |
| | — |
| | — |
| | (473,000 | ) |
| Cash dividends declared | | — |
| | — |
| | — |
| | (19,406,000 | ) | | — |
| | — |
| | (19,406,000 | ) |
| Accrual of dividend equivalents | | — |
| | — |
| | — |
| | (224,000 | ) | | — |
| | — |
| | (224,000 | ) |
| Net income tax shortfall from settlement of stock-based awards | | — |
| | — |
| | (341,000 | ) | | — |
| | — |
| | — |
| | (341,000 | ) |
| Reversal of deferred tax assets 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 | | — |
| | — |
| | (13,000 | ) | | — |
| | — |
| | — |
| | (13,000 | ) |
| Repurchases of common stock | | — |
| | — |
| | — |
| | — |
| | 175,735 |
| | (4,989,000 | ) | | (4,989,000 | ) |
| Net income | | — |
| | — |
| | — |
| | 23,245,000 |
| | — |
| | — |
| | 23,245,000 |
|
| Balance as of July 31, 2015 | | 31,165,401 |
| | 3,117,000 |
| | 427,083,000 |
| | 413,058,000 |
| | 15,033,317 |
| | (441,849,000 | ) | | 401,409,000 |
|
| Common stock issued from equity offering, net of issuance costs | | 7,145,000 |
| | 715,000 |
| | 93,355,000 |
| | — |
| | — |
| | — |
| | 94,070,000 |
|
| Equity-classified stock award compensation | | — |
| | — |
| | 4,076,000 |
| | — |
| | — |
| | — |
| | 4,076,000 |
|
| Proceeds from issuance of employee stock purchase plan shares | | 45,319 |
| | 4,000 |
| | 672,000 |
| | — |
| | — |
| | — |
| | 676,000 |
|
| Common stock issued for net settlement of stock-based awards | | 12,277 |
| | 1,000 |
| | (106,000 | ) | | — |
| | — |
| | — |
| | (105,000 | ) |
| Cash dividends declared | | — |
| | — |
| | — |
| | (21,549,000 | ) | | — |
| | — |
| | (21,549,000 | ) |
| Accrual of dividend equivalents | | — |
| | — |
| | — |
| | (155,000 | ) | | — |
| | — |
| | (155,000 | ) |
| Net income tax shortfall from settlement of stock-based awards | | — |
| | — |
| | (27,000 | ) | | — |
| | — |
| | — |
| | (27,000 | ) |
| Reversal of deferred tax assets associated with expired and unexercised stock-based awards | | — |
| | — |
| | (256,000 | ) | | — |
| | — |
| | — |
| | (256,000 | ) |
| Net loss | | — |
| | — |
| | — |
| | (7,738,000 | ) | | — |
| | — |
| | (7,738,000 | ) |
| Balance as of July 31, 2016 | | 38,367,997 |
| | 3,837,000 |
| | 524,797,000 |
| | 383,616,000 |
| | 15,033,317 |
| | (441,849,000 | ) | | 470,401,000 |
|
| Equity-classified stock award compensation | | — |
| | — |
| | 8,467,000 |
| | — |
| | — |
| | — |
| | 8,467,000 |
|
| Proceeds from issuance of employee stock purchase plan shares | | 64,367 |
| | 7,000 |
| | 687,000 |
| | — |
| | — |
| | — |
| | 694,000 |
|
| Issuance of restricted stock, net | | 144,988 |
| | 14,000 |
| | (14,000 | ) | | — |
| | — |
| | — |
| | — |
|
| Common stock issued for net settlement of stock-based awards | | 42,115 |
| | 4,000 |
| | (266,000 | ) | | — |
| | — |
| | — |
| | (262,000 | ) |
| Cash dividends declared | | — |
| | — |
| | — |
| | (14,034,000 | ) | | — |
| | — |
| | (14,034,000 | ) |
| Accrual of dividend equivalents | | — |
| | — |
| | — |
| | (273,000 | ) | | — |
| | — |
| | (273,000 | ) |
| Net income tax shortfall from settlement of stock-based awards | | — |
| | — |
| | (248,000 | ) | | — |
| | — |
| | — |
| | (248,000 | ) |
| Reversal of deferred tax assets associated with expired and unexercised stock-based awards | | — |
| | — |
| | (422,000 | ) | | — |
| | — |
| | — |
| | (422,000 | ) |
| Net income | | — |
| | — |
| | — |
| | 15,827,000 |
| | — |
| | — |
| | 15,827,000 |
|
| Balance as of July 31, 2017 | | 38,619,467 |
| | $ | 3,862,000 |
| | $ | 533,001,000 |
| | $ | 385,136,000 |
| | 15,033,317 |
| | $ | (441,849,000 | ) | | $ | 480,150,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A Convertible Preferred Stock | | Common Stock | | Additional
Paid-in Capital | | Retained Earnings | | Treasury Stock | | Stockholders'
Equity | | |
| | Shares | | Amount | | Shares | | Amount | | | | Shares | | Amount | | |
| Balance as of July 31, 2019 | | — | | | $ | — | | | 39,276,161 | | | $ | 3,928,000 | | | $ | 552,670,000 | | | $ | 420,333,000 | | | 15,033,317 | | | $ | (441,849,000) | | | $ | 535,082,000 | | | |
| Equity-classified stock award compensation | | — | | | — | | | — | | | — | | | 9,275,000 | | | — | | | — | | | — | | | 9,275,000 | | | |
| Proceeds from exercises of stock options | | — | | | — | | | 16,700 | | | 2,000 | | | 466,000 | | | — | | | — | | | — | | | 468,000 | | | |
| Proceeds from issuance of employee stock purchase plan shares | | — | | | — | | | 52,958 | | | 5,000 | | | 850,000 | | | — | | | — | | | — | | | 855,000 | | | |
| Issuance of restricted stock | | — | | | — | | | 3,319 | | | — | | | — | | | — | | | — | | | — | | | — | | | |
| Net settlement of stock-based awards | | — | | | — | | | 251,797 | | | 25,000 | | | (4,913,000) | | | — | | | — | | | — | | | (4,888,000) | | | |
| Common stock issued for acquisition of CGC Technology Limited ("CGC") | | — | | | — | | | 323,504 | | | 32,000 | | | 11,543,000 | | | — | | | — | | | — | | | 11,575,000 | | | |
| Cash dividends declared ($0.40 per share) | | — | | | — | | | — | | | — | | | — | | | (9,794,000) | | | — | | | — | | | (9,794,000) | | | |
| Accrual of dividend equivalents, net of reversal ($0.40 per share) | | — | | | — | | | — | | | — | | | — | | | (294,000) | | | — | | | — | | | (294,000) | | | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 7,020,000 | | | — | | | — | | | 7,020,000 | | | |
| Balance as of July 31, 2020 | | — | | | — | | | 39,924,439 | | | 3,992,000 | | | 569,891,000 | | | 417,265,000 | | | 15,033,317 | | | (441,849,000) | | | 549,299,000 | | | |
| Equity-classified stock award compensation | | — | | | — | | | — | | | — | | | 9,983,000 | | | — | | | — | | | — | | | 9,983,000 | | | |
| | | | | | | | | | | | | | | | | | | | |
| Proceeds from issuance of employee stock purchase plan shares | | — | | | — | | | 54,762 | | | 5,000 | | | 804,000 | | | — | | | — | | | — | | | 809,000 | | | |
| Issuance of restricted stock, net of forfeiture | | — | | | — | | | 35,495 | | | 4,000 | | | (4,000) | | | — | | | — | | | — | | | — | | | |
| Net settlement of stock-based awards | | — | | | — | | | 240,549 | | | 24,000 | | | (4,024,000) | | | — | | | — | | | — | | | (4,000,000) | | | |
| Common stock issued for acquisition of UHP Networks Inc. ("UHP") | | — | | | — | | | 1,026,567 | | | 103,000 | | | 28,789,000 | | | — | | | — | | | — | | | 28,892,000 | | | |
| Cash dividends declared ($0.40 per share) | | — | | | — | | | — | | | — | | | — | | | (10,189,000) | | | — | | | — | | | (10,189,000) | | | |
| Accrual of dividend equivalents, net of reversal ($0.40 per share) | | — | | | — | | | — | | | — | | | — | | | (380,000) | | | — | | | — | | | (380,000) | | | |
| Adoption of current expected credit loss standard | | — | | | — | | | — | | | — | | | — | | | (215,000) | | | — | | | — | | | (215,000) | | | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | (73,480,000) | | | — | | | — | | | (73,480,000) | | | |
| Balance as of July 31, 2021 | | — | | | — | | | 41,281,812 | | | 4,128,000 | | | 605,439,000 | | | 333,001,000 | | | 15,033,317 | | | (441,849,000) | | | 500,719,000 | | | |
| Equity-classified stock award compensation | | — | | | — | | | — | | | — | | | 7,767,000 | | | — | | | — | | | — | | | 7,767,000 | | | |
| CEO transition costs related to equity-classified stock-based awards (See Note 11) | | — | | | — | | | — | | | — | | | 7,388,000 | | | — | | | — | | | — | | | 7,388,000 | | | |
| Proceeds from issuance of employee stock purchase plan shares | | — | | | — | | | 49,138 | | | 5,000 | | | 725,000 | | | — | | | — | | | — | | | 730,000 | | | |
| Issuance of restricted stock, net of forfeiture | | — | | | — | | | 132,854 | | | 13,000 | | | (13,000) | | | — | | | — | | | — | | | — | | | |
| Net settlement of stock-based awards | | — | | | — | | | 247,721 | | | 25,000 | | | (4,640,000) | | | — | | | — | | | — | | | (4,615,000) | | | |
| Common stock issued for settlement of UHP earn-out liability | | — | | | — | | | 961,302 | | | 96,000 | | | 8,818,000 | | | — | | | — | | | — | | | 8,914,000 | | | |
| Issuance of convertible preferred stock | | 100,000 | | | 100,000,000 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | |
| Convertible preferred stock issuance costs | | — | | | (4,007,000) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | |
| Establishment of initial convertible preferred stock purchase option liability | | — | | | (1,005,000) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | |
| Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) | | — | | | 10,216,000 | | | — | | | — | | | — | | | (10,216,000) | | | — | | | — | | | (10,216,000) | | | |
| Cash dividends declared ($0.40 per share) | | — | | | — | | | — | | | — | | | — | | | (10,661,000) | | | — | | | — | | | (10,661,000) | | | |
| Accrual of dividend equivalents, net of reversal ($0.40 per share) | | — | | | — | | | — | | | — | | | — | | | (389,000) | | | — | | | — | | | (389,000) | | | |
| | | | | | | | | | | | | | | | | | | | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | (33,052,000) | | | — | | | — | | | (33,052,000) | | | |
| Balance as of July 31, 2022 | | 100,000 | | | $ | 105,204,000 | | | 42,672,827 | | | $ | 4,267,000 | | | $ | 625,484,000 | | | $ | 278,683,000 | | | 15,033,317 | | | $ | (441,849,000) | | | $ | 466,585,000 | | | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended July 31, 2022, 2021 and 2020
| | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | | |
| Net (loss) income | | $ | (33,052,000) | | | (73,480,000) | | | 7,020,000 | |
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | | | | | | |
| Depreciation and amortization of property, plant and equipment | | 10,314,000 | | | 9,379,000 | | | 10,561,000 | |
| Amortization of intangible assets with finite lives | | 21,396,000 | | | 21,020,000 | | | 21,595,000 | |
| Amortization of stock-based compensation | | 7,767,000 | | | 9,983,000 | | | 9,275,000 | |
| | | | | | |
| CEO transition costs related to equity-classified stock-based awards | | 7,388,000 | | | — | | | — | |
| Amortization of deferred financing costs | | 811,000 | | | 736,000 | | | 737,000 | |
| Change in fair value of convertible preferred stock purchase option liability | | (1,005,000) | | | — | | | — | |
| | | | | | |
| Changes in other liabilities | | (4,132,000) | | | (6,633,000) | | | (4,133,000) | |
| Loss on disposal of property, plant and equipment | | (310,000) | | | 215,000 | | | — | |
| Provision for (benefit from) allowance for doubtful accounts | | 838,000 | | | (18,000) | | | (431,000) | |
| Provision for excess and obsolete inventory | | 4,447,000 | | | 4,364,000 | | | 1,647,000 | |
| Deferred income tax (benefit) expense | | (5,856,000) | | | (3,263,000) | | | 860,000 | |
| Other | | 469,000 | | | (225,000) | | | 444,000 | |
| Changes in assets and liabilities, net of effects of business acquisitions: | | | | | | |
| Accounts receivable | | 33,567,000 | | | (31,223,000) | | | 20,929,000 | |
| Inventories | | (20,406,000) | | | (2,338,000) | | | (9,132,000) | |
| Prepaid expenses and other current assets | | (3,190,000) | | | (265,000) | | | (2,261,000) | |
| Other assets | | (6,656,000) | | | (4,215,000) | | | (719,000) | |
| Accounts payable | | 6,833,000 | | | 11,016,000 | | | (2,206,000) | |
| Accrued expenses and other current liabilities | | (11,081,000) | | | (7,886,000) | | | 4,292,000 | |
| Contract liabilities | | (1,362,000) | | | 25,444,000 | | | (6,312,000) | |
| Other liabilities, non-current | | (3,690,000) | | | 3,583,000 | | | 2,422,000 | |
| Interest payable | | (22,000) | | | 32,000 | | | (397,000) | |
| Income taxes payable | | (1,071,000) | | | 3,136,000 | | | (1,427,000) | |
| Net cash provided by (used in) operating activities | | 1,997,000 | | | (40,638,000) | | | 52,764,000 | |
| Cash flows from investing activities: | | | | | | |
| Net cash acquired from acquisition of UHP | | — | | | 1,304,000 | | | — | |
| Payment for acquisition of CGC, net of cash acquired | | — | | | (750,000) | | | (11,165,000) | |
| Payments for acquisition of NG-911 businesses | | — | | | — | | | (1,794,000) | |
| | | | | | |
| Purchases of property, plant and equipment | | (19,619,000) | | | (16,037,000) | | | (7,225,000) | |
| Net cash used in investing activities | | (19,619,000) | | | (15,483,000) | | | (20,184,000) | |
| Cash flows from financing activities: | | | | | | |
| Proceeds from issuance of convertible preferred stock | | 100,000,000 | | | — | | | — | |
| Net (payments) borrowings of long-term debt under Credit Facility | | (71,000,000) | | | 51,500,000 | | | (15,500,000) | |
| Remittance of employees' statutory tax withholding for stock awards | | (6,109,000) | | | (2,803,000) | | | (5,276,000) | |
| Cash dividends paid | | (11,048,000) | | | (10,334,000) | | | (10,020,000) | |
| Payment of convertible preferred stock issuance costs | | (4,007,000) | | | — | | | — | |
| Repayment of principal amounts under finance lease and other obligations | | (15,000) | | | (38,000) | | | (805,000) | |
| Payment of deferred financing costs | | (140,000) | | | (30,000) | | | — | |
| Proceeds from issuance of employee stock purchase plan shares | | 734,000 | | | 809,000 | | | 855,000 | |
| Proceeds from exercises of stock options | | — | | | — | | | 468,000 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash provided by (used in) financing activities | | 8,415,000 | | | 39,104,000 | | | (30,278,000) | |
| | | | | | (Continued) |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years Ended July 31, 2017, 2016 and 2015 |
| | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | |
| Cash flows from operating activities: | | | | | | | |
| Net income (loss) | | $ | 15,827,000 |
| | (7,738,000 | ) | | 23,245,000 |
| |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| | |
| | |
| |
| Depreciation and amortization of property, plant and equipment | | 14,354,000 |
| | 9,830,000 |
| | 6,525,000 |
| |
| Amortization of intangible assets with finite lives | | 22,823,000 |
| | 13,415,000 |
| | 6,211,000 |
| |
| Amortization of stock-based compensation | | 8,506,000 |
| | 4,117,000 |
| | 4,363,000 |
| |
| Amortization of deferred financing costs | | 1,977,000 |
| | 795,000 |
| | 65,000 |
| |
| Settlement of intellectual property litigation | | (12,020,000 | ) | | — |
| | — |
| |
| Change in fair value of contingent liability | | — |
| | (359,000 | ) | | — |
| |
| (Gain) loss on disposal of property, plant and equipment | | (126,000 | ) | | (21,000 | ) | | 3,000 |
| |
| Provision for allowance for doubtful accounts | | 497,000 |
| | 907,000 |
| | 764,000 |
| |
| Provision for excess and obsolete inventory | | 2,900,000 |
| | 2,780,000 |
| | 2,813,000 |
| |
| Excess income tax benefit from stock-based award exercises | | (82,000 | ) | | (28,000 | ) | | (148,000 | ) | |
| Deferred income tax expense (benefit) | | 9,056,000 |
| | (3,241,000 | ) | | (2,365,000 | ) | |
| Changes in assets and liabilities, net of effects of business acquisition: | | |
| | |
| | |
| |
| Accounts receivable | | 25,508,000 |
| | 5,806,000 |
| | (15,132,000 | ) | |
| Inventories | | 7,812,000 |
| | 8,280,000 |
| | (3,446,000 | ) | |
| Prepaid expenses and other current assets | | (956,000 | ) | | 2,112,000 |
| | 543,000 |
| |
| Other assets | | 666,000 |
| | (86,000 | ) | | (39,000 | ) | |
| Accounts payable | | (4,472,000 | ) | | (1,255,000 | ) | | (3,194,000 | ) | |
| Accrued expenses and other current liabilities | | (22,058,000 | ) | | (13,465,000 | ) | | (815,000 | ) | |
| Customer advances and deposits | | (2,431,000 | ) | | (6,397,000 | ) | | 1,631,000 |
| |
| Other liabilities, non-current | | (1,442,000 | ) | | (882,000 | ) | | (931,000 | ) | |
| Interest payable | | (1,039,000 | ) | | 1,292,000 |
| | (29,000 | ) | |
| Income taxes payable | | 1,355,000 |
| | (892,000 | ) | | 1,662,000 |
| |
| Net cash provided by operating activities | | 66,655,000 |
| | 14,970,000 |
| | 21,726,000 |
| |
| Cash flows from investing activities: | | |
| | |
| | |
| |
| Purchases of property, plant and equipment | | (8,150,000 | ) | | (5,667,000 | ) | | (3,362,000 | ) | |
| Payments for business acquisition, net of cash acquired | | — |
| | (280,535,000 | ) | | — |
| |
| Net cash used in investing activities | | (8,150,000 | ) | | (286,202,000 | ) | | (3,362,000 | ) | |
| Cash flows from financing activities: | | |
| | |
| | |
| |
| Repayment of long-term debt under Term Loan Facility | | (33,567,000 | ) | | (77,353,000 | ) | | — |
| |
| Net (payments) borrowings under Revolving Loan Facility | | (26,500,000 | ) | | 83,904,000 |
| | — |
| |
| Cash dividends paid | | (18,872,000 | ) | | (19,406,000 | ) | | (19,426,000 | ) | |
| Repayment of principal amounts under capital lease obligations | | (3,592,000 | ) | | (1,753,000 | ) | | — |
| |
| Payment of deferred financing costs | | (1,085,000 | ) | | (9,464,000 | ) | | — |
| |
| Payment of issuance costs related to equity offering | | (626,000 | ) | | (476,000 | ) | | — |
| |
| Proceeds from issuance of employee stock purchase plan shares | | 694,000 |
| | 676,000 |
| | 917,000 |
| |
| Excess income tax benefit from stock-based award exercises | | 82,000 |
| | 28,000 |
| | 148,000 |
| |
| Borrowings of long-term debt under Term Loan Facility | | — |
| | 250,000,000 |
| | — |
| |
| Proceeds received from equity offering | | — |
| | 95,029,000 |
| | — |
| |
| Required payments for debt assumed for business acquisition | | — |
| | (134,101,000 | ) | | — |
| |
| Proceeds from exercises of stock options | | — |
| | — |
| | 1,439,000 |
| |
| Repurchases of common stock | | — |
| | — |
| | (4,989,000 | ) | |
| Net cash (used in) provided by financing activities | | (83,466,000 | ) | | 187,084,000 |
| | (21,911,000 | ) | |
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Fiscal Years Ended July 31, 2022, 2021 and 2020
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Net (decrease) increase in cash and cash equivalents | | $ | (9,207,000) | | | (17,017,000) | | | 2,302,000 | |
| Cash and cash equivalents at beginning of year | | 30,861,000 | | | 47,878,000 | | | 45,576,000 | |
| Cash and cash equivalents at end of year | | $ | 21,654,000 | | | 30,861,000 | | | 47,878,000 | |
| | | | | | |
| Supplemental cash flow disclosure | | | | | | |
| Cash paid (received) during the year for: | | | | | | |
| Interest | | $ | 4,094,000 | | | 5,987,000 | | | 5,549,000 | |
| Income taxes, net | | $ | 2,913,000 | | | (1,373,000) | | | 2,875,000 | |
| | | | | | |
| Non-cash investing and financing activities: | | | | | | |
| | | | | | |
| | | | | | |
| Accrued remittance of employees' statutory tax withholdings for fully-vested share units | | $ | 1,102,000 | | | 2,596,000 | | | 1,399,000 | |
| | | | | | |
| Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents) | | $ | 3,135,000 | | | 2,981,000 | | | 2,762,000 | |
| | | | | | |
| Adjustment to reflect redemption value of convertible preferred stock | | 10,216,000 | | | — | | | — | |
| | | | | | |
| Establishment of initial convertible preferred stock purchase option liability | | $ | 1,005,000 | | | — | | | — | |
| | | | | | |
| Accrued additions to property, plant and equipment | | $ | 5,586,000 | | | 2,466,000 | | | 1,408,000 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Common stock issued for acquisitions | | $ | 9,000,000 | | | 28,892,000 | | | 11,575,000 | |
| | | | | | |
| Fair value of UHP acquisition contingent earn-out consideration | | $ | — | | | 8,500,000 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| Accruals related to acquisitions | | $ | — | | | — | | | 1,157,000 | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Fiscal Years Ended July 31, 2017, 2016 and 2015
|
| | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | |
| | | | | | | (Continued) |
| |
| Net decrease in cash and cash equivalents | | $ | (24,961,000 | ) | | (84,148,000 | ) | | (3,547,000 | ) | |
| | | | | | | | |
| Cash and cash equivalents at beginning of year | | 66,805,000 |
| | 150,953,000 |
| | 154,500,000 |
| |
| | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 41,844,000 |
| | 66,805,000 |
| | 150,953,000 |
| |
| | | | | | | | |
| Supplemental cash flow disclosure | | | | | | | |
| Cash paid (received) during the year for: | | | | | | | |
| Interest | | $ | 10,424,000 |
| | 5,307,000 |
| | 117,000 |
| |
| Income taxes, net | | $ | (758,000 | ) | | 3,678,000 |
| | 11,441,000 |
| |
| | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | |
| Capital lease obligations incurred (excluding the effect of business acquisition) | | $ | 68,000 |
| | 373,000 |
| | — |
| |
| | | | | | | | |
| Accrued fixed asset additions | | $ | 1,221,000 |
| | 346,000 |
| | — |
| |
| | | | | | | | |
| Cash dividends declared but unpaid (including accrual of dividend equivalents) | | $ | 2,616,000 |
| | 7,462,000 |
| | 5,164,000 |
| |
| | | | | | | | |
| Issuance of restricted stock | | $ | 14,000 |
| | — |
| | — |
| |
| | | | | | | | |
| Accrued issuance costs related to equity offering | | $ | — |
| | 636,000 |
| | — |
| |
| | | | | | | | |
| Accrued deferred financing costs | | $ | — |
| | 155,000 |
| | — |
| |
See accompanying notes to consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting and Reporting Policies
| |
(a) | Principles of Consolidation |
(a)Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our"), all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation.
(b)Nature of Business
We design, develop, produce and market innovative products, systems and services for advanced communications solutions. We conduct our business through two reportable operating segments: Commercial SolutionsSatellite and Government Solutions.Space Communications and Terrestrial and Wireless Networks.
Our business is highly competitive and characterized by rapid technological change. Our growth and financial position depends on our ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipmentsecure wireless communications technology users, among other things. Many of our competitors are substantially larger, and have significantly greater financial, marketing and operating resources and broader product lines than us.our own. A significant technological or sales breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on our business. In addition, certain of our customers have technological capabilities in our product areas and could choose to replace our products with their own.
International sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States ("U.S.") and foreign regulations that may apply to the export of our products, as well as the generally greater difficulties of doing business abroad. We attempt to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S. dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in our favor.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(c)Revenue is generally recognized when the earnings process is complete, upon shipment or customer acceptance.Recognition
In accordance with FASB ASC 606 - Revenue from contractsContracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:
•Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex electronic equipment or technology platforms to a buyer’s specification or(or to provide services relatingrelated to the performance of such contractscontracts). Continuous transfer of control is generallytypically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized in accordance with the Financial Accounting Standards Board’s ("FASB") Accounting Standards Codification ("ASC") 605-35 "Revenue Recognition - Construction-Type and Production-Type Contracts" ("FASB ASC 605-35"). We primarily apply the percentage-of-completion method andover time is generally recognize revenue based on the relationshipextent of totalprogress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total projectedestimated costs at completion, including warranty costs. Revenues, including estimated fees or alternatively,profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits.
For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly.
The cost-to-cost method is principally used to account for contracts in our Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our Terrestrial and Wireless Networks segment. For service-based contracts in our Terrestrial and Wireless Networks segment, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on output measures,our customers’ actual usage of the networks and platforms which we provide.
•Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as units delivereda new contract because the pricing for these additional quantities or produced. Profits expected to be realized on such contractsservices are based on total estimated sales for the contract compared to total estimated costs, including warranty costs, at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses become evident. Long-term, U.S. government, cost-reimbursable type contracts are also specifically covered by FASB ASC 605-35.standalone selling prices.
We have historically demonstrated an ability to estimate contract revenues and expenses in applying the percentage-of-completion method of accounting. However, there exist inherent risks and uncertainties in estimating future revenues and expenses, particularly on larger or longer-term contracts. Changes to such estimates could have a material effect on our consolidated financial condition and results of operations.
Revenues recognized in excess of amounts billable under long-term contracts accounted for under the percentage-of-completion method are recorded as unbilled receivables in the accompanying consolidated balance sheets. Unbilled receivables are billable upon various events, including the attainment of performance milestones, delivery of hardware, submission of progress bills based on time and materials, finalization of indirect rates or completion of the contract. We do not recognize revenue, or record unbilled receivables, until we receive fully funded orders.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In fiscal 2017, 75.2%Point in time accounting is principally applied to contracts in our Satellite and 24.8%Space Communications segment, which includes satellite modems, solid-state and traveling wave tube amplifiers and to certain contracts for our solid-state, high-power RF amplifiers. The contracts related to these products do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our consolidated U.S. government net sales were derived from firm fixed-pricemanufacturing process; customers do not simultaneously receive and cost-reimbursable type contracts, respectively. Under firm fixed-price contracts, we perform for an agreed-upon priceor consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, we can derive benefits from cost savings, but bear the riskalthough many of cost overruns. Our cost-reimbursable type contracts typically provide for reimbursement of allowable costs incurred plus a negotiated fee. Cost-plus-incentive-fee orders typically provide for sharing with the U.S. government savings accrued from orders performed for less than the target costs and costs incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost), and for the supplier to carry the entire burden of costs exceeding the negotiated ceiling price.
Most governmentour contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery.
In determining that our equipment has alternative use, we considered the underlying manufacturing process. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss.
When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable.
When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the right to terminaterevenue is deferred and recognized ratably over the contract at any time. Historically, weextended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not experiencedrepresented material contract terminationsrights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery.
When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or write-offsother provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of unbilled receivables.cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us.
When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We addressdetermine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer acceptance provisionsand in assessing our ability to perform our contractual obligations under long-term contracts. Historically, we have been able to performthe case of the U.S. government, sometimes based on our long-term contracts.
Revenues from contracts that contain multiple elements that are not accounted for underestimated or actual costs of providing the percentage-of-completion method are accounted forgoods or services in accordance with FASB ASC 605-25 "Revenue Recognition — Multiple Element Arrangements"applicable regulations. Sales by geography and customer type, as amendeda percentage of consolidated net sales, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2022 | | 2021 | | 2020 |
| United States | | | | | | |
| U.S. government | | 27.2 | % | | 34.6 | % | | 36.2 | % |
| Domestic | | 47.8 | % | | 41.5 | % | | 40.3 | % |
| Total United States | | 75.0 | % | | 76.1 | % | | 76.5 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| International | | 25.0 | % | | 23.9 | % | | 23.5 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which were 11.1% and 10.7% of consolidated net sales for fiscal 2022 and 2021, respectively. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during fiscal 2020. International sales for fiscal 2022, 2021 and 2020 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $121,392,000, $138,943,000 and $145,107,000, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for fiscal 2022, 2021 and 2020.
The following tables summarize our disaggregation of revenue consistent with information reviewed by FASB Accounting Standards Updateour Chief Operating Decision Maker ("ASU"CODM") No. 2009-13 "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangementsfor the fiscal years ended July 31, 2022, 2021 and 2020. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business. See Note (11) - a Consensus"Segment Information" for more information related to our segments.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2022 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total |
| Geographical region and customer type | | | | | | |
| U.S. government | | $ | 127,536,000 | | | 5,061,000 | | | $ | 132,597,000 | |
| Domestic | | 50,274,000 | | | 181,976,000 | | | 232,250,000 | |
| Total United States | | 177,810,000 | | | 187,037,000 | | | 364,847,000 | |
| | | | | | |
| International | | 101,868,000 | | | 19,524,000 | | | 121,392,000 | |
| Total | | $ | 279,678,000 | | | 206,561,000 | | | $ | 486,239,000 | |
| Contract type | | | | | | |
| Firm fixed-price | | $ | 249,497,000 | | | 206,561,000 | | | $ | 456,058,000 | |
| Cost reimbursable | | 30,181,000 | | | — | | | 30,181,000 | |
| Total | | $ | 279,678,000 | | | 206,561,000 | | | $ | 486,239,000 | |
| Transfer of control | | | | | | |
| Point in time | | $ | 186,052,000 | | | 2,633,000 | | | $ | 188,685,000 | |
| Over time | | 93,626,000 | | | 203,928,000 | | | 297,554,000 | |
| Total | | $ | 279,678,000 | | | 206,561,000 | | | $ | 486,239,000 | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2021 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total |
| Geographical region and customer type | | | | | | |
| U.S. government | | $ | 198,157,000 | | | 2,924,000 | | | $ | 201,081,000 | |
| Domestic | | 57,246,000 | | | 184,425,000 | | | 241,671,000 | |
| Total United States | | 255,403,000 | | | 187,349,000 | | | 442,752,000 | |
| | | | | | |
| International | | 119,448,000 | | | 19,495,000 | | | 138,943,000 | |
| Total | | $ | 374,851,000 | | | 206,844,000 | | | $ | 581,695,000 | |
| Contract type | | | | | | |
| Firm fixed-price | | $ | 292,044,000 | | | 206,844,000 | | | $ | 498,888,000 | |
| Cost reimbursable | | 82,807,000 | | | — | | | 82,807,000 | |
| Total | | $ | 374,851,000 | | | 206,844,000 | | | $ | 581,695,000 | |
| Transfer of control | | | | | | |
| Point in time | | $ | 234,690,000 | | | 1,704,000 | | | $ | 236,394,000 | |
| Over time | | 140,161,000 | | | 205,140,000 | | | 345,301,000 | |
| Total | | $ | 374,851,000 | | | 206,844,000 | | | $ | 581,695,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2020 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total |
| Geographical region and customer type | | | | | | |
| U.S. government | | $ | 220,824,000 | | | 2,539,000 | | | $ | 223,363,000 | |
| Domestic | | 62,607,000 | | | 185,638,000 | | | 248,245,000 | |
| Total United States | | 283,431,000 | | | 188,177,000 | | | 471,608,000 | |
| | | | | | |
| International | | 127,642,000 | | | 17,465,000 | | | 145,107,000 | |
| Total | | $ | 411,073,000 | | | 205,642,000 | | | $ | 616,715,000 | |
| Contract type | | | | | | |
| Firm fixed-price | | $ | 322,450,000 | | | 205,642,000 | | | $ | 528,092,000 | |
| Cost reimbursable | | 88,623,000 | | | — | | | 88,623,000 | |
| Total | | $ | 411,073,000 | | | 205,642,000 | | | $ | 616,715,000 | |
| Transfer of control | | | | | | |
| Point in time | | $ | 274,614,000 | | | 4,352,000 | | | $ | 278,966,000 | |
| Over time | | 136,459,000 | | | 201,290,000 | | | 337,749,000 | |
| Total | | $ | 411,073,000 | | | 205,642,000 | | | $ | 616,715,000 | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The timing of the FASB Emerging Issues Task Force," which, among other things, requires revenue to be allocated to each element based on the relative selling price method.
Adoption of New Revenue Standard
On August 1, 2018 (our first quarter of fiscal 2019), we are required to adopt FASB ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)," which replaces numerous requirements in U.S. GAAP, including industry specific requirements, and provides a single revenue recognition, modelbillings and collections results in receivables, unbilled receivables and contract liabilities on our Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the fiscal years ended July 31, 2022, 2021 and 2020, respectively. On large long-term contracts, and for contracts with customers. The core principleinternational customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the new standardcontract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the contract liability balance at July 31, 2021 and July 31, 2020, $51,762,000 and $34,545,000 was recognized as revenue during fiscal years 2022 and 2021, respectively.
We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is thatone year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.
As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a company should record revenuecontract with a customer and are expensed as incurred in selling, general and administrative expenses on our Consolidated Statements of Operations. As for commissions payable to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In March 2016, April 2016, May 2016 and February 2017, FASB ASU Nos. 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)," 2016-10 "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," 2016-12 "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" and 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets" were issued, respectively, to clarify certain implementation mattersour third-party sales representatives related to large long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Consolidated Statements of Operations.
Remaining performance obligations represent the new revenue standard. The effective datestransaction price of firm orders for these ASUs coincide with the effective date of FASB ASU 2014-09. FASB ASU No. 2014-09 can be adopted either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustmentwhich work has not been performed as of the dateend of adoption.
Becausea fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of July 31, 2022, the aggregate amount of the broad scopetransaction price allocated to remaining performance obligations was $618,138,000 (which represents the amount of this new standard, it could impact our net sales and operating income across our two operating segments as well as related business processes and IT systems. We have formed a project team to perform a detailed evaluation of the operational impact of this new ASU, which transition approach to use and the overall impact of these ASUs on our consolidated financial statements and disclosures. This evaluation is ongoing and is expected tobacklog). We estimate that a substantial portion of our remaining performance obligations at July 31, 2022 will be completed shortly before our first quarter ofand recognized as revenue during the next twenty-four month period, with the rest thereafter. During fiscal 2019.2022, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.
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(d) | Cash and Cash Equivalents |
(d)Cash and Cash Equivalents
Our cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and have insignificant risk of change in value as a result of changes in interest rates. Our cash and cash equivalents, as of July 31, 20172022 and 2016,2021, amounted to $41,844,000$21,654,000 and $66,805,000,$30,861,000, respectively, and primarily consist of bank deposits and money market deposit accounts insured by the Federal Deposit Insurance Corporation. Cash equivalents are carried at cost, which approximates fair value.
(e)Inventories
Our inventories are stated at the lower of cost and net realizable value, the latter of which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Our inventories are reduced to their estimated net realizable value by a charge to cost of sales in the period such excess costs are determined. Our inventories are principally recorded using either average or standard costing methods.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Work-in-process (including our contracts-in-progress) and finished goods inventory reflect all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of sales as the related revenue is recognized. Indirect costs relating to long-term contracts, which include expenses such as general and administrative, are charged to expense as incurred and are not included in our cost of sales or work-in-process (including our contracts-in-progress) and finished goods inventory.
(f)Long-Lived Assets
Our machinery and equipment, which are recorded at cost, are depreciated or amortized over their estimated useful lives (three(three to eight years) under the straight-line method. Capitalized values of properties and leasehold improvements under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less.
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with FASB ASC 350 "Intangibles - Goodwill and Other" goodwill is not amortized. We periodically, at least on an annual basis in the first quarter of each fiscal year, review goodwill, considering factors such as projected cash flows and revenue and earnings multiples, to determine whether the carrying value of the goodwill is impaired. If we fail the quantitative assessment of goodwill is deemedimpairment ("quantitative assessment"), we would be required to be impaired,recognize an impairment loss equal to the difference betweenamount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the carryingtotal amount reflected in the consolidated financial statements and the estimated fair value is recognized as an expense in the period in which the impairment occurs.of goodwill allocated to that reporting unit. We define our reporting units to be the same as our operating segments.
We performed our annual goodwill impairment assessment for fiscal 20182023 on August 1, 20172022 (the startfirst day of our first quarter of fiscal 2018)2023). See Note (15) (13) - "Goodwill" for more information. Unless there are future indicators that the fair value of a reporting unit is more likely than not less than its carrying value, such as a significant adverse change in our future financial performance, our next impairment assessment for goodwill will be performed and completed in the first quarter of fiscal 2019.2024. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.
We assess the recoverability of the carrying value of our other long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount.
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(g) | Research and Development Costs |
We charge research and development costs to operations as incurred, except in those cases in which such costs are reimbursable under customer funded contracts. In fiscal 2017, 2016 and 2015, we were reimbursed by customers for such activities in the amount of $27,050,000, $17,432,000 and $9,229,000, respectively. These amounts are not reflected in the reported research and development expenses in each of the respective periods, but are included in net sales with the related costs included in cost of sales in each of the respective periods.(g)Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
We determine the uncertain tax positions taken or expected to be taken in income tax returns in accordance with the provisions of FASB ASC 740-10-25 "Income Taxes," which prescribes a two-step evaluation process for tax positions. The first step is recognition based on a determination of whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure a tax position that meets the more-likely-than-not threshold. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Our policy is to recognize potential interest and penalties related to uncertain tax positions in income tax expense.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(h)Earnings Per Share
Our basic earnings per share ("EPS") is computed based on the weighted average number of common 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, settlement of escrow and earn-out arrangements related to our acquisition of UHP and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 "Earnings Per Share," equity-classified stock-based awards that are subject to performanceshares whose issuance is contingent upon the satisfaction of certain conditions are not consideredincluded in our diluted EPS calculations untilbased on the respective performance conditions have been satisfied.number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. When calculating our diluted earnings per share, we consider (i) the amount an employee must pay upon assumed exercise of stock-based awards; (ii)awards and the amount of stock-based compensation cost attributed to future services and not yet recognized; and (iii) the amount of excess tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of in-the-money stock-based awards. This excess tax benefit is the amount resulting from a tax deduction for compensation in excess of compensation expense recognized for financial reporting purposes.recognized.
Our basic and diluted EPS calculations for fiscal 2017 and 2016 include the impact of common shares issued from a public offering in June 2016. There were no purchasesrepurchases of our common stock during the fiscal years ended July 31, 20172022, 2021 and 2016. Weighted-average basic and diluted shares outstanding for the fiscal year ended July 31, 2015 reflect a reduction of 64,000 shares as a result of the repurchase of our common shares during the period.2020. See Note (17) (16) - "Stockholders’ Equity" for more information.
Weighted average stock options, RSUs and restricted stock outstanding of 1,986,000, 2,350,0001,656,000, 1,440,000 and 570,0001,348,000 shares for fiscal 2017, 20162022, 2021 and 2015,2020, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.
Our EPS calculations exclude 228,000, 147,000293,000, 232,000 and 119,000201,000 weighted average performance shares outstanding for fiscal 2017, 20162022, 2021 and 2015,2020, respectively, as the performance conditions have not yet been satisfied. However, the compensation expense related to these awards is included in net income (loss) (the numerator)numerator for EPS calculations for each respective period.period is reduced by the compensation expense related to these awards.
Weighted average common shares of 591,000 and 82,000 related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation for fiscal 2022 and 2021, respectively, because their effect would have been anti-dilutive.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Weighted average common shares of 3,342,000 underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, were not included in our diluted EPS calculation for fiscal 2022 because their effect would have been anti-dilutive. As a result, the numerator for our basic and diluted EPS calculation for fiscal 2022 is the respective net loss attributable to common stockholders.
The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Numerator: | | | | | | |
| Net (loss) income | | $ | (33,052,000) | | | (73,480,000) | | | 7,020,000 | |
| Convertible preferred stock issuance costs | | (4,007,000) | | | — | | | — | |
Establishment of initial convertible preferred
stock purchase option liability | | (1,005,000) | | | — | | | — | |
| Dividend on convertible preferred stock | | (5,204,000) | | | — | | | — | |
Net (loss) income attributable to common
stockholders | | $ | (43,268,000) | | | (73,480,000) | | | 7,020,000 | |
| | | | | | |
| Denominator: | | | | | | |
| Denominator for basic calculation | | 26,506,000 | | | 25,685,000 | | | 24,798,000 | |
| Effect of dilutive securities: | | | | | | |
| Stock-based awards | | — | | | — | | | 101,000 | |
| | | | | | |
| Denominator for diluted calculation | | 26,506,000 | | | 25,685,000 | | | 24,899,000 | |
As discussed further in Note (15) - "Convertible Preferred Stock," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260. As a result, our EPS calculations for fiscal 2022 were based on the two-class method. Given the net loss attributable to common stockholders for fiscal 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.
(i)Fair Value Measurements and Financial Instruments
|
| | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | | |
| Net income (loss) for basic calculation | | $ | 15,827,000 |
| | (7,738,000 | ) | | 23,245,000 |
|
| Numerator for diluted calculation | | $ | 15,827,000 |
| | (7,738,000 | ) | | 23,245,000 |
|
| | | | | | | |
| Denominator: | | |
| | |
| | |
|
| Denominator for basic calculation | | 23,433,000 |
| | 16,972,000 |
| | 16,203,000 |
|
| Effect of dilutive securities: | | |
| | |
| | |
|
| Stock-based awards | | 56,000 |
| | — |
| | 215,000 |
|
| Denominator for diluted calculation | | 23,489,000 |
| | 16,972,000 |
| | 16,418,000 |
|
| |
(j) | Fair Value Measurements and Financial Instruments |
Using the fair value hierarchy described in FASB ASC 820 “"Fair Value Measurements and Disclosures”Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable and accrued expenses and the current portion of our Secured Credit Facility)expenses) approximate their fair values due to their short-term maturities.
The fair value of the non-current portion of our Secured Credit Facility as of Julythat we entered into on October 31, 20172018 approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. We believe the fair value of our non-current portion of capital lease obligations, which currently has a blended interest rate of 5.60%, would not be materially different than its carrying value as of July 31, 2017.
As of July 31, 20172022 and 2016,2021, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.
(j)Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reported period. We make significant estimates in many areas of our accounting, including but not limited to the following: long-term contracts, stock-based compensation, intangible assets and liabilities including goodwill, provision for excess and obsolete inventory, allowance for doubtful accounts, warranty obligations and income taxes. Actual results may differ from those estimates.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(k)Comprehensive Income
In accordance with FASB ASC 220 "Comprehensive Income"Income," we report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive income (loss) was the same as our net income (loss) in fiscal 2017, 20162022, 2021 and 2015.2020.
(l)Reclassifications
Certain reclassifications have been made to previously reported consolidated financial statements to conform to the fiscal 20172022 presentation.
| |
(n) | Adoption of Accounting Standards and Updates
|
(m)Adoption of Accounting Standards and Updates
We are required to prepare our consolidated financial statements in accordance with the FASB ASCFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting StandardStandards Updates ("ASUs"). During fiscal 2017,2022, we adopted:
•FASB ASU No. 2014-12,2019-12, which requires that a performance target which affects vestingsimplifies various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and that could be achieved after the requisite service period be treated as a performance condition.also clarifies and amends existing guidance to improve consistent application. Our adoption of this ASU on August 1, 2021 did not have a material impact on our consolidated financial statements or disclosures.
•FASB ASU No. 2020-01, which clarifies the interactions between Topics 321, 323 and 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. Our adoption of this ASU on August 1, 2021 did not impact our consolidated financial statements or disclosures.
•FASB ASU No. 2014-15, which provides guidance about management's responsibility to evaluate whether there is a substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Our adoption of this ASU did not impact our consolidated financial statements or disclosures.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
FASB ASU No. 2015-11,2020-06, which simplifies the guidance onaccounting for convertible instruments by removing certain separation models (including the subsequent measurement of inventory other than inventory measured usingcash conversion model and the last-in, first out or the retail inventory method. This ASU requires in-scope inventorybeneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are not required to be subsequentlyaccounted for as derivatives under Topic 815 or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at the lower ofits amortized cost, and net realizable value, the latter of which is definedconvertible preferred stock will be accounted for as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposala single equity instrument measured at its historical cost as long as no other features require bifurcation and transportation.recognition as derivatives. On August 1, 2021, we early adopted this ASU. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
•FASB ASU No. 2016-06,2021-08, which clarifies the requirements for assessing whether contingent call (put) options,requires that can accelerate the payment of principal on debt instruments, are clearlyan acquirer recognize and closely related to their debt hosts. An entity performing the assessment under the amendmentsmeasure contract assets and contract liabilities acquired in this ASU is required to assess the embedded call (put) options solelya business combination in accordance with Topic 606, as if it had originated the Derivatives Implementation Group’s four-step decision sequence.contracts. Prior to this ASU, an acquirer generally recognized contract assets and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. On August 1, 2021, we early adopted this ASU. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2016-07, which eliminates the requirement to retroactively adopt the equity method of accounting for an investment as a result of an increase in the level of ownership interest or degree of influence. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2016-17, which amends the consolidation guidance on how a reporting entity (that is the single decision maker of a Variable Interest Entity (“VIE”)) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2016-18, which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
FASB ASU No. 2017-04, which simplifies the measurement of goodwill impairment by eliminating Step Two from the goodwill impairment test. Instead, impairment will be measured using the excess amount that a reporting unit's carrying value exceeds its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Our early adoption of this ASU did not have any impact on our consolidated financial statements or disclosures.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions
(2) AcquisitionUHP Networks Inc.
On February 23, 2016,March 2, 2021, we completed theour acquisition of TeleCommunication Systems,UHP Networks Inc. ("TCS"UHP"), pursuant to the Agreement and Plan of Merger, dated as of November 22, 2015 (the “Merger Agreement”), among Comtech, TCS and Typhoon Acquisition Corp., a Maryland corporation and a direct, wholly owned subsidiary of Comtech (“Merger Sub”).
TCS is a leading provider of commercialinnovative and disruptive satellite ground station technology solutions, such as public safety systemspursuant to a stock purchase agreement initially entered into in November 2019 and enterprise application technologieslast amended on March 1, 2021. With end-markets for high-speed satellite-based networks anticipated to significantly grow, our acquisition allows us to enhance our Satellite and government solutions such as command and control (also known as Command, Control,Space Communications Computers, Intelligence, Surveillance and Reconnaissance (“C4ISR”segment's offerings with time division multiple access ("TDMA") applications). The TCS acquisition resulted in Comtech entering complementary markets and expanding our domestic and international commercial offerings. TCS is now a wholly-owned subsidiary of Comtech.satellite modems.
The acquisition has an aggregatehad a final purchase price for accounting purposes of $340,432,000 (also referred$37,470,000, which represents the sum of $23,979,000 paid at closing, $4,991,000 paid on August 1, 2021 and $8,500,000 related to as the transaction equity value) and an enterprise value of $423,629,000. Theacquisition date estimated fair value of consideration transferred in connection with the TCS acquisition was $280,535,000 in cash, which is net of $59,897,000 of cash acquired. Wea $9,000,000 contingent earn-out payment.
At closing, we funded the acquisition (including transaction$23,979,000 and merger related expenditures)$4,991,000 payments with 1,026,567 shares of our common stock, based on a volume weighted average stock price of approximately $28.14 per share, plus $87,000 in cash. As of July 31, 2022, 132,005 of the 1,026,567 shares of our common stock issued at closing were held in escrow to satisfy potential indemnification obligations of the seller.
In addition, the specified sales milestones were met and repaid $134,101,000the full $9,000,000 earn-out payment was settled on July 12, 2022 with 961,302 newly issued shares of debtour common stock, based on a volume weighted average stock price of approximately $9.36 per share. Upon payment, twenty-percent, or 192,260 of the 961,302 newly issued shares were placed into escrow and are anticipated to be released to the seller equally on March 2, 2023 and 2024. The terms of the stock purchase agreement provide an ability for us to substitute cash in lieu of the common stock that was initially placed into escrow.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table summarizes the final fair value of assets acquired and liabilities assumed in connection with the acquisition by redeploying a significant amount of our combined cash and cash equivalents, with the remaining funds coming from a $400,000,000 Secured Credit Facility (the "Secured Credit Facility"), which is discussed further in Note (8) "Secured Credit Facility."UHP acquisition:
| | | | | | | | | | | |
| Purchase
Price Allocation | | |
| Initial upfront payment | $ | 23,979,000 | | | |
| Hold back amount | 4,991,000 | | | |
| Contingent earn-out consideration | 8,500,000 | | | |
| Purchase price at fair value | $ | 37,470,000 | | | |
| Allocation of aggregate purchase price: | | | |
| Cash and cash equivalents | $ | 1,391,000 | | | |
| Current assets | 1,367,000 | | | |
| Property, plant and equipment | 10,000 | | | |
| Deferred tax assets | 310,000 | | | |
| Contract liabilities | (648,000) | | | |
| Accrued warranty obligations | (750,000) | | | |
| Other current liabilities | (1,175,000) | | | |
| Non-current liabilities | (160,000) | | | |
| Net tangible assets at fair value | $ | 345,000 | | | |
| Identifiable intangibles, deferred taxes and goodwill: | | | Estimated Useful Lives |
| Technology | $ | 15,300,000 | | | 15 years |
| Customer relationships | 15,500,000 | | | 15 years |
| Trade name | 800,000 | | | 20 years |
| Deferred tax liabilities | (8,374,000) | | | |
| Goodwill | 13,899,000 | | | Indefinite |
| Allocation of aggregate purchase price | $ | 37,470,000 | | | |
We have incurred transaction and merger related expenditures which include significant amounts primarily for: (i) change-in-control payments, (ii) severance, (iii) costs associated with establishing our Secured Credit Facility, and (iv) professional fees for financial and legal advisors for both Comtech and TCS. There were no such transaction and merger related expenses during fiscal 2017. For the fiscal year ended July 31, 2016, acquisition plan expenses were $21,276,000 and primarily related to the TCS acquisition. Additional transaction and merger related expenditures were either accounted for by TCS prior to being acquired by Comtech or were capitalized by us (such as deferred financing costs) or recorded as a reduction to additional paid-in capital (such as issuance costs related to our June 2016 equity offering) on our Consolidated Balance Sheet.
Our consolidated financial results include net sales from TCS operations of $298,476,000 and $151,365,000, respectively, for the fiscal years ended July 31, 2017 and 2016.
We have accounted for the TCS acquisition under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations."Combinations" ("ASC 805"). Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. The final purchase price was allocated to the assets acquired and liabilities assumed, based on their fair value at February 23, 2016,as of March 2, 2021 pursuant to the business combination accounting rules. Acquisition-related transactionOur consolidated statements of operations for the fiscal years ended July 31, 2022 and 2021 include a nominal amount of revenue contribution from the acquisition. Pro forma financial information is not disclosed, as the acquisition is not material.
Acquisition Plan Expenses
During fiscal 2021 and 2020, we incurred acquisition plan expenses of $100,292,000 and $20,754,000, respectively. Of the amount recorded in fiscal 2021, $88,343,000 related to the previously announced litigation and merger termination with Gilat Satellite Networks, Ltd. ("Gilat"), including $70,000,000 paid in cash to Gilat. The remaining costs are not includedprimarily related to the April 2021 settlement of litigation associated with the 2019 acquisition of GD NG-911 as componentswell as our acquisition of consideration transferred but are expensedUHP, which closed in the period incurred.March 2021. Additionally, during fiscal 2021, we recorded $1,178,000 of incremental interest expense related to a now terminated financing commitment letter.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table summarizes the final estimated fair values of the assets acquired and liabilities assumed in connection with the TCS acquisition:
|
| | | | |
| | Purchase Price Allocation | |
| Shares of TCS common stock purchased | $ | 318,605,000 |
| |
| Stock-based awards settled | 21,827,000 |
| |
| Aggregate purchase price at fair value | $ | 340,432,000 |
| |
| Allocation of aggregate purchase price: | | |
| Cash and cash equivalents | $ | 59,897,000 |
| |
| Current assets | 115,913,000 |
| |
| Deferred tax assets, net, non-current | 85,490,000 |
| |
| Property, plant and equipment | 25,689,000 |
| |
| Other assets, non-current | 2,641,000 |
| |
| Current liabilities (excluding interest accrued on debt) | (123,956,000 | ) | |
| Debt (including interest accrued) | (134,101,000 | ) | |
| Capital lease obligations | (8,993,000 | ) | |
| Other liabilities | (9,156,000 | ) | |
| Net tangible assets at fair value | $ | 13,424,000 |
| |
| Identifiable intangible assets, deferred taxes and goodwill: | | Estimated Useful Lives |
| Customer relationships and backlog | $ | 223,100,000 |
| 21 years |
| Trade names | 20,000,000 |
| 10 to 20 years |
| Technology | 35,000,000 |
| 5 to 15 years |
| Deferred tax liabilities | (104,371,000 | ) | |
| Goodwill | 153,279,000 |
| Indefinite |
| Allocation of aggregate purchase price | $ | 340,432,000 |
| |
The purchase price allocation shown in the above table includes the final estimated fair value of contingent liabilities associated with TCS's intellectual property matters and the warranty obligations for TCS's 911 call handling software, which are discussed in more detail in Note (14)(b) "Commitments and Contingencies - Legal Proceedings, Other Matters and Final Settlements" and Note (6) "Accrued Expenses and Other Current Liabilities," respectively. These estimated fair values reflect market participant assumptions, as required by FASB ASC 805 "Business Combinations" and do not reflect our settlement position or amounts we actually have paid or may pay in the future.
The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives. The fair value of technologies and trade names was based on the discounted capitalization of royalty expense saved because we now own the assets. The estimated fair value of customer relationships and backlog was primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. Among the factors contributing to the recognition of goodwill, as a component of the purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Government Solutions and Commercial Solutions segments based on specific identification and, while generally not deductible for income tax purposes, certain goodwill related to previous business combinations by TCS will be deductible for income tax purposes.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The unaudited pro forma financial information in the table below for the fiscal year ended July 31, 2016 is presented as if Comtech's acquisition of TCS had occurred on August 1, 2014, and combines Comtech’s historical statement of operations for the fiscal year ended July 31, 2016 (which includes TCS's results of operations since the acquisition date of February 23, 2016) with TCS's historical statement of operations for the trailing five months ended December 31, 2015 and TCS's historical statement of operations for the stub period beginning January 1, 2016 and ended February 23, 2016. TCS's historical statement of operations for the trailing five months ended December 31, 2015 was derived by taking TCS's historical results of operations for the calendar year ended December 31, 2015 and deducting TCS's historical results of operations for the seven months ended July 31, 2015.
The unaudited pro forma financial information in the table below for the fiscal year ended July 31, 2015 is presented as if Comtech's acquisition of TCS had occurred on August 1, 2014, and combines Comtech's historical statement of operations for the fiscal year ended July 31, 2015 with TCS's historical statement of operations for the trailing twelve months ended July 31, 2015. TCS's historical statement of operations for the trailing twelve months ended July 31, 2015 was derived by taking TCS's historical results of operations for the calendar year ended December 31, 2014, deducting TCS's historical results of operations for the seven months ended July 31, 2014 and adding TCS's historical results of operations for the seven months ended July 31, 2015.
|
| | | | | | | |
| | (Unaudited) |
| | For the Fiscal Years Ended July 31, |
| | 2016 | | 2015 |
| Net sales | $ | 611,241,000 |
| | $ | 664,315,000 |
|
| Net loss | (30,750,000 | ) | | (13,299,000 | ) |
| Basic net loss per share | (1.81 | ) | | (0.82 | ) |
| Diluted net loss per share | (1.81 | ) | | (0.82 | ) |
The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and cash paid had taken place as of August 1, 2014. The pro forma financial information includes adjustments for:
The elimination of historical sales between Comtech and TCS of $8,601,000 and $293,000 for the fiscal years ended July 31, 2016 and 2015, respectively.
The reduction to capitalized software amortization of $2,566,000 and $3,529,000 for the fiscal years ended July 31, 2016 and 2015, respectively, related to the difference between the historical value and the estimated fair value of TCS's capitalized software.
The elimination of acquisition plan expenses of $36,212,000 for the fiscal year ended July 31, 2016 and additions of $35,890,000 for the fiscal year ended July 31, 2015, due to the assumption that all of the acquisition plan expenses were incurred on August 1, 2014.
The incremental amortization expense of $7,113,000 and $15,662,000 for the fiscal years ended July 31, 2016 and 2015, respectively, associated with the increase in acquired other intangible assets.
The increase in interest expense of $2,339,000 and $7,915,000 for the fiscal years ended July 31, 2016 and July 31, 2015, respectively, due to the assumed August 1, 2014 repayment of TCS's legacy debt and related new borrowings under our Secured Credit Facility which was utilized to partially fund the TCS acquisition.
The reduction to interest income of $577,000 and $705,000 for the fiscal years ended July 31, 2016 and 2015, respectively, due to the assumed cash payments relating to the TCS acquisition.
The related increase or decrease to the provision for income taxes, based on Comtech’s effective tax rate for the respective periods.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Accounts Receivable
Accounts receivable consistconsists of the following at July 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
| Receivables from commercial and international customers | | $ | 59,922,000 | | | 86,890,000 | |
| Unbilled receivables from commercial and international customers | | 39,826,000 | | | 36,131,000 | |
| Receivables from the U.S. government and its agencies | | 24,776,000 | | | 33,381,000 | |
| Unbilled receivables from the U.S. government and its agencies | | 1,524,000 | | | 3,356,000 | |
| Total accounts receivable | | 126,048,000 | | | 159,758,000 | |
| Less allowance for doubtful accounts | | 2,337,000 | | | 1,648,000 | |
| Accounts receivable, net | | $ | 123,711,000 | | | 158,110,000 | |
|
| | | | | | | |
| | | 2017 | | 2016 |
| Billed receivables from commercial and international customers | | $ | 71,404,000 |
| | 90,185,000 |
|
| Unbilled receivables from commercial and international customers | | 24,668,000 |
| | 19,333,000 |
|
| Billed receivables from the U.S. government and its agencies | | 18,497,000 |
| | 21,465,000 |
|
| Unbilled receivables on U.S government and its agencies | | 11,693,000 |
| | 21,013,000 |
|
| Total accounts receivable | | 126,262,000 |
| | 151,996,000 |
|
| Less allowance for doubtful accounts | | 1,300,000 |
| | 1,029,000 |
|
| Accounts receivable, net | | $ | 124,962,000 |
| | 150,967,000 |
|
Unbilled receivables as of July 31, 2022 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet billedearned the right to bill the customer for work performed. We had $118,000 of retainage included inperformed to-date. Under ASC 606, unbilled receivables at both July 31, 2017 and 2016, and managementconstitute contract assets. Management estimates that substantially alla substantial portion of the unbilled receivablesamounts not yet billed at July 31, 20172022 will be billed and collected within one year. Of the unbilled receivables from commercial and international customers at July 31, 2017 and 2016, approximately $2,995,000 and $6,070,000, respectively, relates to a large over-the-horizon microwave system contract with our large U.S. prime contractor customer (all of which related to our North African country end-customer).
As of July 31, 20172022, 20.9% and 2016,13.4% of total accounts receivable related to U.S. government (and its agencies) and Verizon, respectively.
As of July 31, 2021, 23.0%, 12.7% and 12.1% of total accounts receivable related to the U.S. government (and its agencies) represented 23.9%, AT&T, Inc. and 27.9%, respectively, of total accounts receivable. There were no other customers which accounted for greater than 10.0% of total accounts receivable at both July 31, 2017 or 2016.Verizon, respectively.
As of July 31, 2016, 10.5% of our total accounts receivable related to our North African country end customers.
(4) Inventories
(4) Inventories
Inventories consist of the following at July 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
| Raw materials and components | | $ | 78,478,000 | | | 62,249,000 | |
| Work-in-process and finished goods | | 40,960,000 | | | 38,338,000 | |
| Total inventories | | 119,438,000 | | | 100,587,000 | |
| Less reserve for excess and obsolete inventories | | 23,121,000 | | | 20,229,000 | |
| Inventories, net | | $ | 96,317,000 | | | 80,358,000 | |
|
| | | | | | | |
| | | 2017 | | 2016 |
| Raw materials and components | | $ | 50,569,000 |
| | 54,723,000 |
|
| Work-in-process and finished goods | | 26,053,000 |
| | 32,829,000 |
|
| Total inventories | | 76,622,000 |
| | 87,552,000 |
|
| Less reserve for excess and obsolete inventories | | 16,019,000 |
| | 16,198,000 |
|
| Inventories, net | | $ | 60,603,000 |
| | 71,354,000 |
|
AtAs of July 31, 20172022 and 2016,2021, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $2,148,000$4,100,000 and $2,896,000, respectively.
At July 31, 2017$7,028,000, respectively, and 2016, $1,718,000 and $1,428,000, respectively,the amount of the inventory balance above related to contracts from third partythird-party commercial customers who outsource their manufacturing to us.us was $1,866,000 and $1,509,000, respectively.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following at July 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
| Machinery and equipment | | $ | 186,935,000 | | | 170,600,000 | |
| Leasehold improvements | | 14,260,000 | | | 15,726,000 | |
| | | 201,195,000 | | | 186,326,000 | |
| Less accumulated depreciation and amortization | | 150,832,000 | | | 151,040,000 | |
| Property, plant and equipment, net | | $ | 50,363,000 | | | 35,286,000 | |
|
| | | | | | | |
| | | 2017 | | 2016 |
| Machinery and equipment | | $ | 146,459,000 |
| | 137,595,000 |
|
| Leasehold improvements | | 13,624,000 |
| | 13,784,000 |
|
| | | 160,083,000 |
| | 151,379,000 |
|
| Less accumulated depreciation and amortization | | 127,236,000 |
| | 112,712,000 |
|
| Property, plant and equipment, net | | $ | 32,847,000 |
| | 38,667,000 |
|
Depreciation and amortization expense on property, plant and equipment amounted to $14,354,000, $9,830,000$10,303,000, $9,343,000 and $6,525,000$10,386,000 for the fiscal years ended July 31, 2017, 20162022, 2021 and 2015,2020, respectively.
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at July 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
| Accrued wages and benefits | | $ | 25,675,000 | | | 26,367,000 | |
| Accrued warranty obligations | | 9,420,000 | | | 17,600,000 | |
| Accrued contract costs | | 15,921,000 | | | 12,750,000 | |
| Accrued acquisition-related costs | | — | | | 9,222,000 | |
| Accrued commissions and royalties | | 5,697,000 | | | 5,342,000 | |
| Accrued legal costs | | 2,514,000 | | | 2,854,000 | |
| Other | | 13,435,000 | | | 15,466,000 | |
| Accrued expenses and other current liabilities | | $ | 72,662,000 | | | 89,601,000 | |
|
| | | | | | | |
| | | 2017 | | 2016 |
| Accrued wages and benefits | | $ | 19,622,000 |
| | 23,394,000 |
|
| Accrued legal costs | | 8,402,000 |
| | 32,469,000 |
|
| Accrued warranty obligations | | 17,617,000 |
| | 15,362,000 |
|
| Accrued acquisition-related costs | | — |
| | 2,119,000 |
|
| Accrued contract costs | | 8,644,000 |
| | 8,348,000 |
|
| Accrued commissions and royalties | | 3,600,000 |
| | 3,473,000 |
|
| Other | | 10,725,000 |
| | 12,869,000 |
|
| Accrued expenses and other current liabilities | | $ | 68,610,000 |
| | 98,034,000 |
|
Accrued legal costs as of July 31, 2017 and 2016 include $4,120,000 and $28,112,000, respectively, related to estimated costs associated with certain TCS intellectual property matters. Included in the accrued legal costs as of July 31, 2017 are amounts payable for one TCS intellectual property matter settlement that has been finalized and an estimate of legal expenses and potential settlement costs related to one unresolved matter. The accrued potential settlement costs do not reflect the final amounts we may actually pay. Ongoing legal costs associated with defending the remaining legacy TCS intellectual property matter and its ultimate resolution could vary and have a material adverse effect on our future consolidated results of operations, financial position or cash flows. TCS intellectual property matters are discussed in more detail in Note (14)(b) "Commitments and Contingencies - Legal Proceedings, Other Matters and Final Settlements."
Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for invoices not yet received from vendors or reflected in accounts payable.
Accrued acquisition-related costs for fiscal 2021 include $8,705,000 of contingent earn-out consideration related to our acquisition of UHP, which was paid in the fourth quarter of fiscal 2022. See Note (2) - “Acquisitions - UHP Networks Inc.” for further discussion.
Accrued warranty obligations as of July 31, 2022 relate to estimated liabilities for assurance type warranty coverage that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at least one year from the date of delivery. We record a liability for estimated warranty expense based on historical claims, product failure rates, consideration of contractual obligations, future costs to resolve software issues 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.
AccruedChanges in our accrued warranty obligations include $9,909,000 of warranty obligations for a TCS 911 call handling software solution that was licensed to customers prior to our acquisition of TCS. This amount reflects a consideration of contractual obligationsduring the fiscal years ended July 31, 2022 and 2021 were as well as an estimate of future costs to resolve software issues.follows:
| | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
| Balance at beginning of year | | $ | 17,600,000 | | | 15,200,000 | |
| (Benefit from) provision for warranty obligations | | (1,255,000) | | | 4,360,000 | |
| Adjustments for changes in estimates | | (2,500,000) | | | — | |
| Charges incurred | | (4,425,000) | | | (2,710,000) | |
| Additions (in connection with acquisitions) | | — | | | 750,000 | |
| | | | |
| Balance at end of year | | $ | 9,420,000 | | | 17,600,000 | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ChangesDuring the second quarter of fiscal 2022, we recorded a $2,500,000 benefit to cost of sales in our productTerrestrial and Wireless Networks segment due to lower than expected warranty liability during the fiscal years ended July 31, 2017 and 2016 were as follows:claims associated with previously acquired NG-911 technologies.
(7) Credit Facility
|
| | | | | | | |
| | | 2017 | | 2016 |
| Balance at beginning of year | | $ | 15,362,000 |
| | 8,638,000 |
|
| Provision for warranty obligations | | 5,394,000 |
| | 4,264,000 |
|
| Adjustment to TCS pre-acquisition contingent liability | | 4,200,000 |
| | 7,419,000 |
|
| Charges incurred | | (7,339,000 | ) | | (4,959,000 | ) |
| Balance at end of year | | $ | 17,617,000 |
| | 15,362,000 |
|
(7) 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 On October 31, 2018,. We estimated sublease income based on (i) the terms of a fully executed sublease agreement that expired on 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 for the remaining lease 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 July 31, 2017, the amount of the acquisition-related restructuring reserve is as follows:
|
| | | |
| | Cumulative Activity Through
July 31, 2017 |
| Present value of estimated facility exit costs at August 1, 2008 | $ | 2,100,000 |
|
| Cash payments made | (10,588,000 | ) |
| Cash payments received | 8,600,000 |
|
| Accreted interest recorded | 1,829,000 |
|
| Liability as of July 31, 2017 | 1,941,000 |
|
| Amount recorded as accrued expenses and other current liabilities in the Consolidated Balance Sheet | 1,535,000 |
|
| Amount recorded as other liabilities in the Consolidated Balance Sheet | $ | 406,000 |
|
As of July 31, 2016, the present value of the estimated facility exit costs was $3,327,000. During the fiscal year ended July 31, 2017, we made cash payments of $1,575,000. Interest accreted for the fiscal years ended July 31, 2017, 2016 and 2015 was $189,000, $278,000 and $279,000, respectively, and is included in interest expense for each respective fiscal period.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Future cash payments associated with our restructuring plan are summarized below:
|
| | | |
| | As of |
| | July 31, 2017 |
| Future lease payments to be made | $ | 1,941,000 |
|
| Interest expense to be accreted in future periods | 212,000 |
|
| Total remaining payments | $ | 2,153,000 |
|
TCS
In connection with our February 23, 2016 acquisition of TCS, we continue to implement a tactical shift in strategy in our Government Solutions segment and have initiated certain cost reduction actions. To date, we have incurred an immaterial amount of severance and retention costs related to our shift in strategy.
(8) Secured Credit Facility
On February 23, 2016, in connection with our acquisition of TCS, we entered into a $400,000,000 secured credit facilityFirst Amended and Restated Credit Agreement (the "Secured Credit"Credit Facility") with a syndicate of lenders.
The Secured Credit Facility as amended June 6, 2017 (the “June 2017 Amendment”), comprisesprovides a senior secured term loan A facility of $250,000,000 (the "Term Loan Facility") and a secured revolving loan facility of up to $150,000,000, including$550,000,000 consisting of: (i) a $25,000,000revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $300,000,000; (ii) an accordion feature allowing us to borrow up to an additional $250,000,000; (iii) a $35,000,000 letter of credit sublimit; and (iv) a swingline loan credit sublimit (the "Revolving Loan Facility") and, together, with the Term Loanof $25,000,000.
The Credit Facility matures on February 23, 2021. The proceedsOctober 31, 2023 (the "Revolving Maturity Date"). If we issue new unsecured debt in excess of these borrowings were primarily used to finance our acquisition of TCS, including$5,000,000 with a maturity date that is less than 91 days from October 31, 2023, the repayment of certain existing indebtedness of TCS. The Term Loan Facility requires mandatory quarterly repayments. DuringRevolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the fiscal year ended July 31, 2017, we repaid $33,567,000 principal amount of borrowings under the Term Loan Facility, including a payment of $22,500,000 paid in connection with the June 2017 amendment to reduce the balloon or final paymentmaturity date of the Term Loan Facility, discussed further below. Under the Revolving Loan Facility, we had outstanding balances ranging from $31,904,000 to $84,904,000 during the fiscal year ended July 31, 2017. During the fiscal year ended July 31, 2016, the Company repaid $97,352,000 of principal amount under the Secured Credit Facility, primarily using the net proceeds received from a public offering of our common stock in June 2016, as discussed further in Note (17) "Stockholders’ Equity."new unsecured debt.
As of July 31, 2017 and 2016 amounts2022, the amount outstanding under our Secured Credit Facility, net, were as follows:
|
| | | | | | |
| | 2017 | | 2016 |
| Term Loan Facility | $ | 139,080,000 |
| | 172,647,000 |
|
| Less unamortized deferred financing costs related to Term Loan Facility | 4,763,000 |
| | 5,515,000 |
|
| Term Loan Facility, net | 134,317,000 |
| | 167,132,000 |
|
| Revolving Loan Facility | 57,405,000 |
| | 83,904,000 |
|
| Amount outstanding under Secured Credit Facility, net | 191,722,000 |
| | 251,036,000 |
|
| Less current portion of long-term debt | 15,494,000 |
| | 11,067,000 |
|
| Non-current portion of long-term debt | $ | 176,228,000 |
| | 239,969,000 |
|
Interest expense, including amortization of deferred financing costs, recorded during fiscal 2017 and 2016 related to the Secured Credit Facility was $11,106,000 and $6,933,000, respectively and reflects a blended interest rate$130,000,000 which is reflected in the non-current portion of approximately 4.90% and 5.00% in fiscal 2017 and 2016, respectively. Interest expense, recorded during fiscal 2015 was $198,000 and related tolong-term debt on our $100,000,000 committed revolving credit facility that expired on October 31, 2014.
Consolidated Balance Sheet. At July 31, 2017,2022, we had $3,850,000$558,000 of standby letters of credit outstanding under our Secured Credit Facility related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the fiscal year ended July 31, 2022, we had outstanding balances under the Credit Facility ranging from $100,000,000 to $212,000,000.
As of July 31, 2022, total net deferred financing costs related to the Credit Facility were $1,014,000 and are being amortized over the term of our Credit Facility through October 31, 2023.
Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the fiscal years ended July 31, 2022, 2021 and 2020 was $4,933,000, $5,628,000 and $5,905,000, respectively. Our blended interest rate approximated 3.41%, 2.84% and 3.87%, respectively, for fiscal 2022, 2021 and 2020.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Revolving Loan Facility is primarily used for working capital and other general corporate purposes of the Company and its subsidiaries, including the issuance of letters of credit. Borrowings under the Secured Credit Facility, pursuant to terms defined in the Secured Credit Facility shall be eithereither: (i) Alternate Base Rate ("ABR") borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatest of (a) the Prime Rate (as defined) in effect on such day, (b) the Federal Funds Effective Rate (as defined) in effect on such day plus 0.50%1/2 of 1.00% per annum and (c) the Adjusted LIBO Rate (as defined) on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum, (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%), plus (y) the Applicable Rate (as defined), or (ii) Eurodollar borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO Rate for such interest period (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%) plus (y) the Applicable Rate. TheDetermination of the Applicable Rate is determined based on a pricing grid that is dependent upon our leverage ratioSecured Leverage Ratio (as defined) as of the end of each fiscal quarter. quarter for which consolidated financial statements have been most recently delivered.
The Secured Credit Facility contains customary representations, warranties and affirmative covenants andcovenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, onincluding but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Secured Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The June 2017 Amendment is expected to result in increased operating and acquisition flexibility and simplify the calculations of our financial covenants. The June 2017 Amendment resulted in,Credit Facility provides for, among other things, that the:things: (i) no scheduled payments of principal until maturity; (ii) a maximum Secured Leverage Ratio of 3.75x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and a Maximum Total Leverage Ratio of 4.50x TTM Adjusted EBITDA, each with no step downs; and (iii) a Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA.
| |
(i) | Consolidated EBITDA definition more closely aligns with our Adjusted EBITDA metric by eliminating favorable adjustments to operating income related to settlements of TCS intellectual property matters; |
| |
(ii) | Leverage Ratio is calculated on a “gross” basis using the quotient of Total Indebtedness (excluding unamortized deferred financing costs) divided by our TTM Consolidated EBITDA. The prior Leverage Ratio was calculated on a “net” basis but did not include a reduction for any cash or cash equivalents above $50,000,000; |
| |
(iii) | Fixed Charge Coverage Ratio includes a deduction for all cash dividends, regardless of the amount of our cash and cash equivalents and the related allowable Quarterly Dividend Amount, as defined, will now align with our current quarterly dividend target of $0.10 per common share; |
| |
(iv) | Balloon or final payment of the Term Loan Facility, which is not due until February 23, 2021, was reduced by $22,500,000 through increased borrowings from the Revolving Loan Facility, which does not expire until February 23, 2021; and |
| |
(v) | Leverage Ratios will be adjusted, in certain conditions, to provide for additional flexibility for us to make acquisitions. |
In connection with the June 2017 Amendment, there were no changes to: (i) the committed borrowing capacity; (ii) the maturity date; or (iii) interest rates payable (except that the interest rate pricing grid will now be based on the new Leverage Ratio). Also, the June 2017 Amendment did not result in an extinguishment for accounting purposes (as such term is defined in ASC 470 “Debt”); instead, the June 2017 Amendment was accounted for as a debt modification. As a result, deferred financing costs (including incremental fees for the June 2017 Amendment) will continue to be amortized over the remaining maturity term of the Secured Credit Facility.
As of July 31, 2017,2022, our Secured Leverage Ratio was 2.84x3.50x TTM ConsolidatedAdjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM ConsolidatedAdjusted EBITDA. In fiscal 2018, the maximum allowable Leverage Ratio will decrease each quarter until reaching 3.00x TTM Consolidated EBITDA in the fourth quarter of fiscal 2018, with no further reductions thereafter. Our Fixed ChargeInterest Expense Coverage Ratio as of July 31, 20172022 was 1.95x8.81x TTM Adjusted EBITDA compared to the minimum required Fixed ChargeMinimum Interest Expense Coverage Ratio of 1.25x3.25x TTM Adjusted EBITDA. Although we expect our Secured Leverage Ratio to remain elevated during the first quarter of fiscal 2023, as we make payments to various vendors associated with the build-out of our high-volume technology manufacturing facilities, to support our working capital needs for our existing contracts and will not change for the remaining term of the Secured Credit Facility, as amended. Givento make required CEO transition related payments, given our overall expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Secured Credit Facility as amended, for the foreseeable future.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The obligations under the Secured Credit Facility as amended, are guaranteed by certain of our domestic and foreign subsidiaries (the "Subsidiary Guarantors""Guarantors"). As collateral security for amounts outstanding under our Securedthe Credit Facility as amended, and the guarantees thereof, we and our Subsidiarythe Guarantors have granted to anthe administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets.
On December 6, 2018, we entered into an amendment to the Credit Facility to provide for a mechanism to replace the LIBO Rate for Eurodollar borrowings with an alternative benchmark interest rate, should the LIBO Rate generally become unavailable in the future on an other-than-temporary basis. On January 14, 2021, we entered into a further amendment of the Credit Facility to update the LIBO Rate replacement mechanism language and other definitional items. On July 30, 2021, we entered into an amendment to incorporate certain foreign subsidiaries as loan parties and Guarantors into the Credit Facility and added certain definitional items.
Capitalized terms used but not defined herein have the meanings set forth for such terms in the Secured Credit Facility dated as of February 23, 2016, and the First Amendment of the SecuredPrior Credit Facility, dated as of June 6, 2017, both of which have been documented and filed with the SEC.
(9) Capital Lease Obligations(8) Leases
Our leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 - "Leases" ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain equipment under capitalthat we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term.
Some of our leases include payments that are based on the majorityConsumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of whichthe ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions).
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
For all classes of leased assets, we assumed in connection withelected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies).
Certain of our acquisitionfacility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of TCS.the lease. As of July 31, 20172022, none of our leases contained a residual value guarantee and 2016covenants included in our lease agreements are customary for the net book valuetypes of facilities and equipment being leased.
The components of lease expense are as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal years ended July 31, |
| 2022 | | 2021 | | 2020 |
| Finance lease expense: | | | | | |
| Amortization of ROU assets | $ | 13,000 | | | 36,000 | | | 175,000 | |
| Interest on lease liabilities | 1,000 | | | 3,000 | | | 4,000 | |
| Operating lease expense | 11,658,000 | | | 12,152,000 | | | 10,728,000 | |
| Short-term lease expense | 402,000 | | | 819,000 | | | 3,045,000 | |
| Variable lease expense | 4,619,000 | | | 4,523,000 | | | 4,033,000 | |
| Sublease income | (67,000) | | | (67,000) | | | (22,000) | |
| Total lease expense | $ | 16,626,000 | | | 17,466,000 | | | 17,963,000 | |
Additional information related to leases is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal years ended July 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Cash paid for amounts included in the measurement of lease
liabilities: | | | | | |
| Operating leases - Operating cash outflows | $ | 11,864,000 | | | 10,868,000 | | | 11,437,000 | |
| Finance leases - Operating cash outflows | 1,000 | | | 3,000 | | | 4,000 | |
| Finance leases - Financing cash outflows | 15,000 | | | 38,000 | | | 322,000 | |
ROU assets obtained in the exchange for lease liabilities
(non-cash): | | | | | |
| Operating leases | $ | 15,233,000 | | | 24,987,000 | | | 3,561,000 | |
| | | | | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table is a reconciliation of future cash flows relating to operating and financing lease liabilities presented on our Consolidated Balance Sheet as of July 31, 2022:
| | | | | | | | | | | | | | | | | |
| Operating | | Finance | | Total |
| Fiscal 2023 | $ | 9,953,000 | | | $ | 6,000 | | | $ | 9,959,000 | |
| Fiscal 2024 | 8,798,000 | | | — | | | 8,798,000 | |
| Fiscal 2025 | 8,155,000 | | | — | | | 8,155,000 | |
| Fiscal 2026 | 6,757,000 | | | — | | | 6,757,000 | |
| Fiscal 2027 | 4,715,000 | | | — | | | 4,715,000 | |
| Thereafter | 24,218,000 | | | — | | | 24,218,000 | |
| Total future undiscounted cash flows | 62,596,000 | | | 6,000 | | | 62,602,000 | |
| Less: Present value discount | 9,488,000 | | | 1,000 | | | 9,489,000 | |
| Lease liabilities | $ | 53,108,000 | | | $ | 5,000 | | | $ | 53,113,000 | |
| | | | | |
| Weighted-average remaining lease terms (in years) | 8.77 | | 0.57 | | |
| Weighted-average discount rate | 3.43 | % | | 6.59 | % | | |
In fiscal 2022, we modified our existing lease for a facility in Seattle, Washington, increasing the lease term through October 2033. Accordingly, amounts related to the modified lease are reflected as an operating lease right-of-use asset or related operating lease liability in our Consolidated Balance Sheet as of July 31, 2022.
We lease our Melville, New York production facility from a partnership controlled by our former CEO. Lease payments made during the fiscal year ended July 31, 2022 and 2021 were $675,000 and $660,000, respectively. The current lease provides for our use of the leased assets which collateralizepremises as they exist through December 2031. The annual rent of the capital lease obligations was $5,419,000facility for calendar year 2023 is $685,000 and $8,698,000, respectively, and consisted primarilyis subject to customary adjustments. We have a right of machinery and equipment. first refusal in the event of a sale of the facility.
As of July 31, 2017, our capital lease obligations reflect a blended interest rate of approximately 5.60%. Our capital leases generally contain provisions whereby2022, we can purchase the equipment at the end of the lease for a one dollar buyout. Depreciation of leased assets is included in depreciation expense.do not have any material rental commitments that have not commenced.
Future minimum payments under capital lease obligations consisted of the following at July 31, 2017:
|
| | | |
| Fiscal 2018 | $ | 2,494,000 |
|
| Fiscal 2019 | 1,492,000 |
|
| Fiscal 2020 | 318,000 |
|
| Fiscal 2021 and beyond | — |
|
| Total minimum lease payments | 4,304,000 |
|
| Less: amounts representing interest | 224,000 |
|
| Present value of net minimum lease payments | 4,080,000 |
|
| Current portion of capital lease obligations | 2,309,000 |
|
| Non-current portion of capital lease obligations | $ | 1,771,000 |
|
(10) (9) Income Taxes
Income (loss)(Loss) income before (benefit from) provision for (benefit from) income taxes consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2022 | | 2021 | | 2020 |
| U.S. | | $ | (31,772,000) | | | (73,153,000) | | | 7,226,000 | |
| Foreign | | (5,303,000) | | | (1,827,000) | | | 2,084,000 | |
| | | $ | (37,075,000) | | | (74,980,000) | | | 9,310,000 | |
|
| | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| U.S. | | $ | 23,732,000 |
| | (7,666,000 | ) | | 33,425,000 |
|
| Foreign | | 1,749,000 |
| | (526,000 | ) | | 578,000 |
|
| | | $ | 25,481,000 |
| | (8,192,000 | ) | | 34,003,000 |
|
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The (benefit from) provision for (benefit from) income taxes included in the accompanying Consolidated Statements of Operations consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2022 | | 2021 | | 2020 |
| Federal – current | | $ | 287,000 | | | 608,000 | | | 1,053,000 | |
| Federal – deferred | | (4,888,000) | | | (877,000) | | | 721,000 | |
| | | | | | |
| State and local – current | | 348,000 | | | 466,000 | | | 1,137,000 | |
| State and local – deferred | | (442,000) | | | (598,000) | | | (1,312,000) | |
| | | | | | |
| Foreign – current | | 1,197,000 | | | 688,000 | | | 298,000 | |
| Foreign – deferred | | (525,000) | | | (1,787,000) | | | 393,000 | |
| (Benefit from) provision for income taxes | | $ | (4,023,000) | | | (1,500,000) | | | 2,290,000 | |
|
| | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| Federal – current | | $ | (441,000 | ) | | 2,297,000 |
| | 12,367,000 |
|
| Federal – deferred | | 8,399,000 |
| | (2,930,000 | ) | | (2,342,000 | ) |
| | | | | | | |
| State and local – current | | 608,000 |
| | 408,000 |
| | 931,000 |
|
| State and local – deferred | | 659,000 |
| | (310,000 | ) | | (25,000 | ) |
| | | | | | | |
| Foreign – current | | 413,000 |
| | 81,000 |
| | (173,000 | ) |
| Foreign – deferred | | 16,000 |
| | — |
| | — |
|
| Provision for (benefit from) income taxes | | $ | 9,654,000 |
| | (454,000 | ) | | 10,758,000 |
|
The (benefit from) provision for (benefit from) income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a result of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| Computed “expected” tax expense | | $ | 8,919,000 |
| | 35.0 | % | | (2,867,000 | ) | | 35.0 | % | | 11,901,000 |
| | 35.0 | % |
| Increase (reduction) in income taxes resulting from: | | |
| | |
| | |
| | |
| | |
| | |
|
| State and local income taxes, net of Federal benefit | | 1,257,000 |
| | 4.9 |
| | 23,000 |
| | (0.3 | ) | | 720,000 |
| | 2.1 |
|
| Nondeductible stock-based compensation | | 78,000 |
| | 0.3 |
| | 68,000 |
| | (0.8 | ) | | 86,000 |
| | 0.2 |
|
| Domestic production activities deduction | | (269,000 | ) | | (1.1 | ) | | (198,000 | ) | | 2.4 |
| | (1,030,000 | ) | | (3.0 | ) |
| Research and experimentation credits | | (919,000 | ) | | (3.6 | ) | | (1,106,000 | ) | | 13.5 |
| | (793,000 | ) | | (2.3 | ) |
| Acquisition-related tax contingencies | | — |
| | — |
| | 1,962,000 |
| | (24.0 | ) | | — |
| | — |
|
| Nondeductible transaction costs | | — |
| | — |
| | 1,279,000 |
| | (15.6 | ) | | — |
| | — |
|
| Foreign income taxes | | (151,000 | ) | | (0.6 | ) | | 289,000 |
| | (3.5 | ) | | (372,000 | ) | | (1.1 | ) |
| Other | | 739,000 |
| | 3.0 |
| | 96,000 |
| | (1.2 | ) | | 246,000 |
| | 0.7 |
|
| Provision for (benefit from) income taxes | | $ | 9,654,000 |
| | 37.9 | % | | (454,000 | ) | | 5.5 | % | | 10,758,000 |
| | 31.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2022 | | 2021 | | 2020 |
| | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| Computed "expected" tax expense (benefit) | | $ | (7,786,000) | | | 21.0 | % | | (15,746,000) | | | 21.0 | % | | 1,955,000 | | | 21.0 | % |
| Increase (reduction) in income taxes resulting from: | | | | | | | | | | | | |
| State and local income taxes, net of federal benefit | | 227,000 | | | (0.6) | | | (1,371,000) | | | 1.8 | | | (278,000) | | | (3.0) | |
| Stock-based compensation | | 1,049,000 | | | (2.8) | | | (20,000) | | | — | | | 308,000 | | | 3.3 | |
| Research and experimentation credits | | (1,484,000) | | | 4.0 | | | (1,018,000) | | | 1.4 | | | (1,210,000) | | | (13.0) | |
| Foreign-derived intangible income deduction | | — | | | — | | | 164,000 | | | (0.2) | | | (162,000) | | | (1.7) | |
| Revaluation of convertible preferred stock option liability | | (211,000) | | | 0.6 | | | — | | | — | | | — | | | — | |
| Nondeductible transaction costs | | — | | | — | | | 402,000 | | | (0.5) | | | 301,000 | | | 3.2 | |
| Nondeductible executive compensation | | 2,801,000 | | | (7.6) | | | 628,000 | | | (0.8) | | | 595,000 | | | 6.4 | |
| Fines and penalties | | (1,000) | | | — | | | — | | | — | | | 189,000 | | | 2.0 | |
| Audit settlements | | 18,000 | | | — | | | 6,000 | | | — | | | 1,000 | | | — | |
| Change in the beginning of the year valuation allowance for deferred tax assets | | — | | | — | | | (805,000) | | | 1.1 | | | — | | | — | |
| Change in valuation allowance | | 2,009,000 | | | (5.4) | | | 15,582,000 | | | (20.8) | | | — | | | — | |
Remeasurement of
deferred taxes | | (396,000) | | | 1.1 | | | (224,000) | | | 0.3 | | | (135,000) | | | (1.5) | |
| Foreign income taxes | | (478,000) | | | 1.3 | | | 676,000 | | | (0.9) | | | 453,000 | | | 4.9 | |
| Other, net | | 229,000 | | | (0.7) | | | 226,000 | | | (0.4) | | | 273,000 | | | 3.0 | |
| (Benefit from) provision for income taxes | | $ | (4,023,000) | | | 10.9 | % | | (1,500,000) | | | 2.0 | % | | 2,290,000 | | | 24.6 | % |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 20172022 and 20162021 are presented below:
| | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
| Deferred tax assets: | | | | |
| Inventory and warranty reserves | | $ | 5,970,000 | | | 6,774,000 | |
| Compensation and commissions | | 4,376,000 | | | 4,338,000 | |
| Federal, state and foreign research and experimentation credits | | 19,476,000 | | | 19,324,000 | |
| Stock-based compensation | | 3,950,000 | | | 4,979,000 | |
| Foreign scientific research and experimental development expenditures | | 1,890,000 | | | 1,496,000 | |
| Federal, state and foreign net operating losses | | 14,481,000 | | | 5,413,000 | |
| Federal and state capital losses | | 15,582,000 | | | 15,582,000 | |
| Lease liabilities | | 12,595,000 | | | 10,980,000 | |
| Other | | 5,919,000 | | | 4,550,000 | |
| Less: valuation allowance | | (31,227,000) | | | (28,384,000) | |
| Total deferred tax assets | | 53,012,000 | | | 45,052,000 | |
| Deferred tax liabilities: | | | | |
| Plant and equipment | | (3,489,000) | | | (1,146,000) | |
| Lease right-of-use assets | | (11,801,000) | | | (10,085,000) | |
| Intangibles | | (52,681,000) | | | (54,635,000) | |
| Total deferred tax liabilities | | (67,971,000) | | | (65,866,000) | |
| Net deferred tax liabilities | | $ | (14,959,000) | | | (20,814,000) | |
|
| | | | | | | |
| | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Inventory and warranty reserves | | $ | 7,854,000 |
| | 8,383,000 |
|
| Compensation and commissions | | 3,807,000 |
| | 5,842,000 |
|
| Federal, state and foreign research and experimentation credits | | 16,286,000 |
| | 16,364,000 |
|
| Stock-based compensation | | 7,767,000 |
| | 5,743,000 |
|
| Acquisition-related contingent liabilities | | 4,687,000 |
| | 12,929,000 |
|
| Federal and state NOLs | | 19,880,000 |
| | 25,760,000 |
|
| Other | | 11,416,000 |
| | 10,885,000 |
|
| Less valuation allowance | | (8,633,000 | ) | | (9,624,000 | ) |
| Total deferred tax assets | | 63,064,000 |
| | 76,282,000 |
|
Deferred tax liabilities: | | |
| | |
|
| Plant and equipment | | (1,309,000 | ) | | (1,882,000 | ) |
| Intangibles | | (79,061,000 | ) | | (84,198,000 | ) |
| Total deferred tax liabilities | | (80,370,000 | ) | | (86,080,000 | ) |
| Net deferred tax (liabilities) assets | | $ | (17,306,000 | ) | | (9,798,000 | ) |
At July 31, 2022, our net deferred tax liability of $14,959,000 includes $396,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets. At July 31, 2021, our net deferred tax liability of $20,814,000 includes $416,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets.
We provide for income taxes under the provisions of FASB ASC 740 "Income Taxes." FASB ASC 740which requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of them will not be realized. If management determines that it is more likely than not that some or all of its deferred tax assets will not be realized, a valuation allowance will be recorded against such deferred tax assets.
At July 31, 2017,2022, we had approximately $48,986,000 of U.S. Federal net operating loss carryforwards reflected in deferred tax assets. Of the total loss carryforwards, approximately $46,933,000, which were generated by TCS in calendar 2013 and the tax period from January 1, 2016 to February 23, 2016, are usable at a rate of approximately $23,910,000 per year and will begin to expire in 2033. Approximately $1,589,000 is the remaining net operating loss carryforwards acquired in an acquisition by TCS in 2001, which are usable at the rate of $1,401,000 per year and will expire in 2021 if unused at that time. The remaining U.S. Federal net operating loss carryforwards generated in fiscal year 2016 of approximately $464,000 will expire in 2036.
At July 31, 2017, we had Federal alternative minimum tax credit carryforwards of approximately $2,652,000, which are available to offset future regular Federal taxes. We have Federalfederal research and experimentation credits of approximately $9,769,000$10,571,000 that will begin to expire in 2019.2030. The timing and manner in which we may utilize net operating loss carryforwards and tax credits in future tax years will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 382 and 383 of the Internal Revenue Code.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
We have a federal net operating loss carryforward of $3,822,000, with an indefinite carryforward period. We have state net operating loss carryforwards available of approximately $2,735,000$4,685,000, which expire through 2036,2042, utilization of which will be limited in a manner similar toby the Federal net operating loss carryforwards.amounts and timing of future taxable income and by the application of the ownership change rules under Section 382 of the Internal Revenue Code. We believe that it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of approximately $1,553,000$3,393,000 on the deferred tax assets relating to these state net operating loss carryforwards. We have state research and experimentation creditscredit carryforwards of approximately $5,540,000 expiring$8,534,000, which expire through 2036.2042. We believe that it is more likely than not that the benefit from certain state research and experimentation credits will not be realized. In recognition of this risk, we have provided a valuation allowance of approximately $5,472,000$7,828,000 on the deferred tax assets relating to these state credits. In addition, we have provided a valuation allowance of $1,724,000 on certain other state deferred tax assets. We have federal and state capital loss carryforwards of $15,582,000, which begin to expire in 2026. We believe that it is more likely than not that the benefit from these capital losses will not be realized. In recognition of this risk, we have provided a valuation allowance of $15,582,000 on the deferred tax assets relating to these capital losses.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At July 31, 2017 and 2016, our2022, we had foreign deferred tax assets relating to net operating loss carryforwards of $5,973,000, which will begin to expire in 2029. We believe that it is more likely than not that certain net operating loss carryforwards may not be realized. In recognition of this risk, we have provided a valuation allowance of $2,700,000 on the deferred tax assets relating to these net operating loss carryforwards. We have foreign deferred tax assets relating to research and experimentation credits have been offset by a valuation allowance as they may not be utilizedof $371,000, which will begin to expire in a future period.2025. Our foreign earnings and profits are insignificant and, as such, we have not recorded any deferred tax liability on unremitted foreign earnings.
We must generate approximately $169,100,000$228,700,000 of taxable income in the future to fully utilize our net deferred tax assets as of July 31, 2017.2022. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. In addition, at July 31, 2017, we had a hypothetical additional paid-in capital ("APIC") pool related to stock-based compensation of $16,267,000. On August 1, 2017, we adopted FASB ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as income tax expense or benefit in the income statement in the reporting period in which they occur. The adoption of this ASU is discussed in more detail in Note (11) "Stock-Based Compensation."
At July 31, 20172022 and 2016,2021, total unrecognized tax benefits were $8,681,000$10,008,000 and $9,171,000,$9,172,000, respectively, including interest of $95,000$330,000 and $63,000,$163,000, respectively. At July 31, 2017, $2,515,0002022 and 2021, $3,007,000 and $2,717,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable inon our Consolidated Balance Sheet.Sheets. The remaining unrecognized tax benefits of $6,166,000$7,001,000 and $6,455,000 at July 31, 2022 and 2021, respectively, were presented as an offset to the associated non-current deferred tax assets inon our Consolidated Balance Sheet. At July 31, 2016, $2,992,000 of our unrecognized tax benefits were recorded as non-current income taxes payable in our Consolidated Balance Sheet. The remaining unrecognized benefit of $6,179,000 was presented as an offset to the associated non-current deferred tax assets in our Consolidated Balance Sheet.Sheets. Of the total unrecognized tax benefits, $7,727,000$9,034,000 and $8,261,000$8,408,000 at July 31, 20172022 and 2016,2021, respectively, net of the reversal of the Federalfederal benefit recognized as a deferred tax asset relating to state reserves, would positivelyfavorably 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 consolidated financial statements. We do not expectbelieve it is reasonably possible that there will be any significant changes to our totalthe gross unrecognized tax benefits withincould decrease by as much as $1,400,000 in the next twelve months.12 months due to the expiration of a statute of limitations related to federal, state and foreign tax positions.
Our policy is to recognize potential interest and penalties relating to uncertain tax positions in income tax expense. The following table summarizes the activity related to our unrecognized tax benefits for fiscal years 2017, 20162022, 2021 and 20152020 (excluding interest):
| | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | 2020 |
| Balance at beginning of period | | $ | 9,009,000 | | | 8,270,000 | | | 7,203,000 | |
| Increase related to current period | | 598,000 | | | 528,000 | | | 684,000 | |
| Increase related to prior periods | | 153,000 | | | 338,000 | | | 464,000 | |
| Expiration of statute of limitations | | (83,000) | | | (48,000) | | | (73,000) | |
| Decrease related to prior periods | | (2,000) | | | (79,000) | | | (8,000) | |
| Balance at end of period | | $ | 9,675,000 | | | 9,009,000 | | | 8,270,000 | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
|
| | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Balance at beginning of period | | $ | 9,108,000 |
| | 2,728,000 |
| | 2,703,000 |
|
| Increase related to current period | | 587,000 |
| | 2,487,000 |
| | 410,000 |
|
| Increase related to prior periods | | 86,000 |
| | 4,490,000 |
| | 144,000 |
|
| Expiration of statute of limitations | | (404,000 | ) | | (580,000 | ) | | (468,000 | ) |
| Decrease related to prior periods | | (791,000 | ) | | (17,000 | ) | | (61,000 | ) |
| Balance at end of period | | $ | 8,586,000 |
| | 9,108,000 |
| | 2,728,000 |
|
Our U.S. federal income tax returns for fiscal 2015 and 20162019 through 2021 are subject to potential future Internal Revenue Service ("IRS") audits.audit. None of our state income tax returns prior to fiscal 2013 are subject to audit. TCS’s federal income tax returns for calendar years 2013 through 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential future IRS audits. None of TCS’s state income tax returns prior to calendar year 20122018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) (10) 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 and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (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
As of July 31, 2022, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 9,462,500.10,962,500. 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 employee purchases under the ESPP with the issuance of new shares of our common stock.
As of July 31, 2017,2022, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 7,895,9479,446,088 shares (net of 3,724,2975,419,028 expired and canceled awards), of which an aggregate of 5,209,8757,851,858 have been exercised or converted into common stock.settled.
As of July 31, 2017,2022, the following stock-based awards, by award type, were outstanding:
|
| | | | |
| July 31, 20172022 |
| Stock options | 1,855,875483,480 |
|
| Performance shares | 252,089333,987 |
|
RSUs, and restricted stock and share units | 292,260776,763 |
|
Share unitsTotal | 285,8481,594,230 |
|
Total | 2,686,072 |
|
Our ESPP provides for the issuance of up to 800,0001,050,000 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 July 31, 2017,2022, we have cumulatively issued 698,739943,909 shares of our common stock to participating employees in connection with our ESPP.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Stock-based compensation for awards issued is reflected in the following line items in our Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2022 | | 2021 | | 2020 |
| Cost of sales | | $ | 692,000 | | | 929,000 | | | 823,000 | |
| Selling, general and administrative expenses | | 6,312,000 | | | 8,091,000 | | | 7,527,000 | |
| Research and development expenses | | 763,000 | | | 963,000 | | | 925,000 | |
| Stock-based compensation expense | | 7,767,000 | | | 9,983,000 | | | 9,275,000 | |
CEO transition costs related to equity-classified stock-based
awards | | 7,388,000 | | | — | | | — | |
| Total stock-based compensation expense before income tax benefit | | 15,155,000 | | | 9,983,000 | | | 9,275,000 | |
| Estimated income tax benefit | | (2,260,000) | | | (2,164,000) | | | (2,042,000) | |
| Net stock-based compensation expense | | $ | 12,895,000 | | | 7,819,000 | | | 7,233,000 | |
|
| | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| Cost of sales | | $ | 760,000 |
| | 296,000 |
| | 245,000 |
|
| Selling, general and administrative expenses | | 7,071,000 |
| | 3,407,000 |
| | 3,507,000 |
|
| Research and development expenses | | 675,000 |
| | 414,000 |
| | 611,000 |
|
| Stock-based compensation expense before income tax benefit | | 8,506,000 |
| | 4,117,000 |
| | 4,363,000 |
|
| Estimated income tax benefit | | (3,065,000 | ) | | (1,434,000 | ) | | (1,523,000 | ) |
| Net stock-based compensation expense | | $ | 5,441,000 |
| | 2,683,000 |
| | 2,840,000 |
|
Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At July 31, 2017,2022, unrecognized stock-based compensation of $6,569,000,$8,538,000, net of estimated forfeitures of $759,000,$790,000, is expected to be recognized over a weighted average period of 2.73.0 years. Total stock-based compensation capitalized and included in ending inventory at both July 31, 20172022 and 20162021 was $12,000 and $51,000, respectively.$48,000. There are no liability-classified stock-based awards outstanding as of July 31, 20172022 or 2016.2021.
F- 27Selling, general and administrative expenses included in the table above, for fiscal 2022, includes $827,000 of amortization of stock-based compensation related to three, long-standing members of our Board of Directors who retired in December 2021.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Stock-based compensation expense, by award type, is summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Stock options | | $ | 519,000 | | | 370,000 | | | 442,000 | |
| Performance shares | | 1,136,000 | | | 1,345,000 | | | 1,491,000 | |
| RSUs, restricted stock and share units | | 5,912,000 | | | 8,060,000 | | | 7,120,000 | |
| ESPP | | 200,000 | | | 208,000 | | | 222,000 | |
| Stock based compensation expense | | 7,767,000 | | | 9,983,000 | | | 9,275,000 | |
CEO transition costs related to equity-classified stock-based
awards | | 7,388,000 | | | — | | | — | |
| Total stock-based compensation expense before income tax benefit | | 15,155,000 | | | 9,983,000 | | | 9,275,000 | |
| Estimated income tax benefit | | (2,260,000) | | | (2,164,000) | | | (2,042,000) | |
| Net stock-based compensation expense | | $ | 12,895,000 | | | 7,819,000 | | | 7,233,000 | |
|
| | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| Stock options | | $ | 1,400,000 |
| | 2,353,000 |
| | 2,842,000 |
|
| Performance shares | | 1,607,000 |
| | 1,374,000 |
| | 890,000 |
|
| ESPP | | 162,000 |
| | 163,000 |
| | 206,000 |
|
| RSUs and restricted stock | | 829,000 |
| | 227,000 |
| | 397,000 |
|
| Share units | | 4,508,000 |
| | — |
| | 28,000 |
|
| Stock-based compensation expense before income tax benefit | | 8,506,000 |
| | 4,117,000 |
| | 4,363,000 |
|
| Estimated income tax benefit | | (3,065,000 | ) | | (1,434,000 | ) | | (1,523,000 | ) |
| Net stock-based compensation expense | | $ | 5,441,000 |
| | 2,683,000 |
| | 2,840,000 |
|
ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants 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. Such deferred tax asset was recorded net as part of our non-current deferred tax liability inon our Consolidated Balance Sheet as of July 31, 20172022 and 2016.2021. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting.
The following table reconciles the actual income tax benefit recognized for tax deductions relating to the settlement of stock-based awards to the excess income tax benefit reported as a cash flow from financing activities in our Consolidated Statements of Cash Flows:
|
| | | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| Actual income tax benefit recorded for the tax deductions relating to the settlement of stock-based awards | | $ | 372,000 |
| | 196,000 |
| | 1,108,000 |
|
| 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 | | 290,000 |
| | 168,000 |
| | 960,000 |
|
| Excess income tax benefit from settled equity-classified stock-based awards recorded as an increase to additional paid-in capital and reported as a cash inflow from financing activities in our Consolidated Statements of Cash Flows | | $ | 82,000 |
| | 28,000 |
| | 148,000 |
|
During fiscal 2017, 2016 and 2015, we recorded $670,000, $283,000 and $354,000, respectively, of a reduction to additional paid-in capital and accumulated hypothetical tax benefits, which represent net income tax shortfalls recognized from the settlement of stock-based awards and the reversal of unrealized deferred tax assets associated with certain vested equity-classified stock-based awards that expired during each of the respective periods.
F - 33
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Stock Options
The following table summarizes the Plan's activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Awards
(in Shares) | | Weighted Average
Exercise Price | | Weighted Average
Remaining Contractual
Term (Years) | | Aggregate
Intrinsic Value |
| Outstanding at July 31, 2019 | | 1,555,555 | | | $ | 28.72 | | | | | |
| Granted | | 327,100 | | | 17.88 | | | | | |
| Expired/canceled | | (174,840) | | | 29.06 | | | | | |
| Exercised | | (285,790) | | | 28.82 | | | | | |
| Outstanding at July 31, 2020 | | 1,422,025 | | | 26.17 | | | | | |
| Expired/canceled | | (348,590) | | | 27.44 | | | | | |
| Outstanding at July 31, 2021 | | 1,073,435 | | | 25.76 | | | | | |
| Expired/canceled | | (588,735) | | | 26.86 | | | | | |
| Exercised | | (1,220) | | | 17.88 | | | | | |
| Outstanding at July 31, 2022 | | 483,480 | | | $ | 24.43 | | | 4.39 | | $ | — | |
| | | | | | | | |
| Exercisable at July 31, 2022 | | 395,460 | | | $ | 25.88 | | | 3.63 | | $ | — | |
| | | | | | | | |
| Vested and expected to vest at July 31, 2022 | | 476,692 | | | $ | 24.52 | | | 4.34 | | $ | — | |
| | | | | | | | |
|
| | | | | | | | | | | | | |
| | | 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 | | 416,525 |
| | 33.78 |
| | | | |
| Expired/canceled | | (46,400 | ) | | 30.20 |
| | | | |
| Exercised | | (383,338 | ) | | 27.61 |
| | | | |
| Outstanding at July 31, 2015 | | 2,119,683 |
| | 29.33 |
| | | | |
| Granted | | 552,806 |
| | 27.15 |
| | | | |
| Expired/canceled | | (396,610 | ) | | 28.99 |
| | | | |
| Exercised | | (19,200 | ) | | 27.24 |
| | | | |
| Outstanding at July 31, 2016 | | 2,256,679 |
| | 28.87 |
| | | | |
| Expired/canceled | | (400,804 | ) | | 30.15 |
| | | | |
| Outstanding at July 31, 2017 | | 1,855,875 |
| | $ | 28.60 |
| | 5.56 | | $ | — |
|
| | | | | | | | | |
| Exercisable at July 31, 2017 | | 1,261,529 |
| | $ | 28.55 |
| | 4.84 | | $ | — |
|
| | | | | | | | | |
| Vested and expected to vest at July 31, 2017 | | 1,799,732 |
| | $ | 28.58 |
| | 5.51 | | $ | — |
|
Stock options outstanding as of July 31, 20172022 have exercise prices ranging from $20.90$17.88 - $33.94. There were no stock options granted or exercised during the fiscal year ended July 31, 2017. The total intrinsic value relating to stock options exercised during the fiscal years ended July 31, 2016 and 2015 was $32,000 and $2,279,000, respectively. Stock options granted during the fiscal years ended July 31, 2016 and 2015 had exercise prices equal to$33.94, representing the fair market value of our common stock on the date of grant, a contractual term of five or ten years and a vesting period of three or five years. The total intrinsic value relating to stock options exercised during the fiscal years ended July 31 2022 and 2020 was $7,000 and $1,869,000, respectively. There were no stock options exercised during the fiscal year ended July 31, 2021.
During fiscal 20162022 and 2015,2020, at the election of certain holders of vested stock options, 19,2001,220 and 333,338269,090, respectively, of stock options respectively, were net settled upon exercise. As a result, 706220 and 49,086 net27,994 shares of our common stock were issued after reductionduring the fiscal years ended July 31, 2022 and 2020, respectively, net of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements,requirements.
There were no stock options granted during the fiscal years ended July 31, 2016 and 2015, respectively.
2022 or 2021. The estimated per-share weighted average grant-date fair value of stock options granted during fiscal 2016 and 20152020 was $5.50 and $6.12, respectively,$5.52, which was determined using the Black-Scholes option pricing model, and included the following weighted average assumptions:assumptions as follows: (i) expected dividend yield of 2.24%, (ii) expected volatility of 40.03%, (iii) risk-free interest rate of 0.54%, and (iv) expected life of 6.5 years.
|
| | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | | 2016 | | 2015 |
| Expected dividend yield | | | 4.46 | % | | 3.55 | % |
| Expected volatility | | | 34.44 | % | | 28.19 | % |
| Risk-free interest rate | | | 1.52 | % | | 1.61 | % |
| Expected life (years) | | | 5.15 |
| | 5.44 |
|
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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. We estimate expected volatility by considering the historical volatility of our stock and the implied volatility of publicly-traded call options on our stock. 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.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 2019 | | 954,676 | | | $ | 22.40 | | | |
| Granted | | 560,361 | | | 19.93 | | | |
| Settled | | (431,581) | | | 22.02 | | | |
| Canceled/Forfeited | | (83,882) | | | 22.84 | | | |
| Outstanding at July 31, 2020 | | 999,574 | | | 21.15 | | | |
| Granted | | 644,272 | | | 19.06 | | | |
| Settled | | (455,564) | | | 17.09 | | | |
| Canceled/Forfeited | | (119,912) | | | 18.42 | | | |
| Outstanding at July 31, 2021 | | 1,068,370 | | | 21.93 | | | |
| Granted | | 797,771 | | | 18.77 | | | |
| Settled | | (641,747) | | | 22.83 | | | |
| Canceled/Forfeited | | (113,644) | | | 22.78 | | | |
| Outstanding at July 31, 2022 | | 1,110,750 | | | $ | 19.05 | | | $ | 12,907,000 | |
| | | | | | | |
| Vested at July 31, 2022 | | 505,187 | | | $ | 15.36 | | | $ | 5,870,000 | |
| | | | | | | |
| Vested and expected to vest at July 31, 2022 | | 1,077,958 | | | $ | 18.93 | | | $ | 12,526,000 | |
|
| | | | | | | | | | | |
| | | Awards (in Shares) | | Weighted Average Grant Date Fair Value | | Aggregate Intrinsic Value |
| Outstanding at July 31, 2014 | | 180,097 |
| | $ | 26.20 |
| | |
| Granted | | 66,294 |
| | 33.96 |
| | |
| Converted to common stock | | (18,422 | ) | | 27.79 |
| | |
| Forfeited | | (3,804 | ) | | 32.47 |
| | |
| Outstanding at July 31, 2015 | | 224,165 |
| | 28.26 |
| | |
| Granted | | 71,605 |
| | 27.45 |
| | |
| Converted to common stock | | (16,439 | ) | | 26.35 |
| | |
| Forfeited | | (62,118 | ) | | 27.62 |
| | |
| Outstanding at July 31, 2016 | | 217,213 |
| | 28.32 |
| | |
| Granted | | 705,241 |
| | 14.31 |
| | |
| Converted to common stock | | (61,462 | ) | | 26.63 |
| | |
| Forfeited | | (30,795 | ) | | 17.13 |
| | |
| Outstanding at July 31, 2017 | | 830,197 |
| | $ | 16.95 |
| | $ | 14,943,546 |
|
| | | | | | | |
| Vested at July 31, 2017 | | 531,885 |
| | $ | 18.51 |
| | $ | 9,573,930 |
|
| | | | | | | |
| Vested and expected to vest at July 31, 2017 | | 802,715 |
| | $ | 16.96 |
| | $ | 14,448,867 |
|
The total intrinsic value relating to fully-vested awards converted into our common stocksettled during the fiscal years ended July 31, 2017, 20162022, 2021 and 20152020 was $1,039,000, $660,000$12,560,000, $9,878,000 and $654,000$9,635,000, respectively.
Performance shares granted to employees prior to fiscal 2014 generally vest over a 5.3 year period, beginning on the date of grant once pre-established performance goals were attained, and are convertible into shares of our common stock 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 July 31, 2017,2022, 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.
RSUs and restricted stock granted to non-employee directors prior to August 12, 2022 have a vesting period of threefive 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 and restricted stock granted to non-employee directors after August 12, 2022 have a vesting period of one year. Also, restricted stock granted to our former non-executive Chairman of the Board of Directors, pursuant to his Senior Technology Advisor consulting agreement, vests 1/12 on the date of grant and in eleven equal monthly installments thereafter.
RSUs granted to employees prior to August 12, 2022 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. RSUs granted to employees after August 12, 2022 have a vesting period of three years.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Share units aregranted prior to July 31, 2017 were 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. Cumulatively throughShare units granted on or after July 31, 2017 744 share unitswere granted have been convertedto certain employees in lieu of non-equity incentive compensation and are convertible into shares of our common stock. stock on the one-year anniversary of the respective grant date.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On July 31, 2017, 278,08928, 2022, 286,000 fully vested share units were granted to certain employees in lieu of fiscal 20172022 non-equity incentive compensation. InAlso, on July 31, 2022, 221,052 fully vested share units (previously granted in lieu of fiscal 2016, our2021 non-equity incentivesincentive compensation) were settled in cash. These share units will be convertible intoby delivery of 131,782 shares of our common stock on the one-year anniversaryafter reduction of the grant date.share units retained to satisfy employees’ statutory tax withholding requirements. Cumulatively, through July 31, 2022, 1,184,851 share units granted have been settled.
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 and an applicable estimated discount for post vestingany post-vesting transfer restrictions. RSUs and performance shares granted in fiscal 2012 are not entitled to dividend equivalents. RSUs, performance shares and restricted stock granted since fiscal 2013 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.occurs. Share units granted since fiscal 2014 are entitled to dividend equivalents while the underlying shares are unissued.
Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of conversionsettlement of the underlying shares into our common stock.award. During fiscal 2017, 20162022, 2021 and 2015,2020, we accrued $273,000, $155,000$389,000, $380,000 and $224,000,$294,000, respectively, of dividend equivalents (net of forfeitures) and paid out $176,000, $23,000$531,000, $279,000 and $15,000,$288,000, respectively. Such amountsAccrued dividend equivalents were recorded as a reduction to retained earnings. As of July 31, 20172022 and 2016,2021, accrued dividend equivalents were $554,000$742,000 and $457,000,$884,000, respectively.
Cash payments to remit employees' minimum statutory tax withholding requirements relatedWith respect to the netactual settlement of stock-based awards for income tax reporting, during the fiscal yearsyear ended July 31, 2017, 20162022, we recorded an income tax expense of $924,000, during the fiscal year ended July 31, 2021, we recorded an income tax benefit of $142,000 and 2015 were $262,000, $105,000 and $473,000, respectively, which is reported as a cash outflow from operating activities induring the accrued expenses and other current liabilities line item in our Consolidated Statementsfiscal year ended July 31, 2020, we recorded an income tax expense of Cash Flows for each respective period.$224,000.
Subsequent Events
In the first quarter of fiscal 2018,2023, our Board of Directors authorized the issuance of 305,734 stock-based awards of which 99,620 were performance shares and 206,114 were restricted stock units. Totalwith a total unrecognized compensation expense, related to such awards, net of estimated forfeitures, and assuming achievement of the pre-established performance goals at a target level, approximated $5,328,000.approximately $7,500,000.
Also on August 1, 2017, we adopted FASB ASU 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which amended several aspects of the accounting and reporting of share-based payment transactions, including:
Excess tax benefits and shortfalls - ASU 2016-09 requires that all tax effects related to share-based awards to be recognized in the statement of operations. ASU 2016-09 also removes the prior requirement to delay recognition of excess tax benefits until it reduces current taxes payable; instead, we are now required to recognize excess tax benefits as discrete items in the interim period in which they occur, subject to normal valuation allowance considerations. As ASU 2016-09 eliminates the concept of accumulated hypothetical tax benefits, excess tax benefits and shortfalls will no longer be recognized in stockholders’ equity. As a result, ASU 2016-09 is expected to result in future volatility of our income tax expense (as the future tax effects of share-based awards will be dependent on the price of our common stock at the time of settlement). Due to the adoption of ASU 2016-09, on a prospective basis, excess income tax benefits from the settlement of share-based awards will be presented in our Consolidated Statement of Cash Flows as a cash inflow from operating activities. Such amounts for fiscal 2017, 2016 and 2015 were $82,000, $28,000 and $148,000, respectively, and were reported as a cash outflow from operating activities and cash inflow from financing activities.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Diluted earnings per share - When calculating our diluted earnings per share prior to the adoption of ASU 2016-09, in addition to considering the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized, the assumed proceeds also included the amount of excess tax benefits, if any, that would have been credited to additional paid-in capital assuming exercise of in-the-money stock-based awards. Effective with our adoption of ASU 2016-09 in the first quarter of fiscal 2018, excess tax benefits are to be excluded from the calculation on a prospective basis. As a result, the denominator for our diluted calculations could increase in the future as compared to prior calculations.
Forfeitures - As permitted by ASU 2016-09, we elected to continue to estimate forfeitures of share-based awards.
Statutory Tax Withholding Requirements - When net settling share-based awards as a means to meet tax withholding requirements, ASU 2016-09 now allows entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction, without resulting in liability classification of the award. To qualify, we must have at least some withholding obligation. This aspect of adopting ASU 2016-09 did not have any material impact on us. However, with respect to cash payments that we make to taxing authorities on behalf of employees for such shares withheld, on a retrospective basis in future financial statements that include a statement of cash flows, we are required to present such payments as a cash outflow from financing activities. Payments for share-based award tax withholding requirements for fiscal 2017, 2016 and 2015 were $262,000, $105,000 and $473,000, respectively, and were previously presented as a cash outflow from operating activities.
(12) Customer and Geographic Information
Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:
|
| | | | | | | | | |
| | | Fiscal Years Ended July 31, |
| | | 2017 | | 2016 | | 2015 |
| United States | | | | | | |
| U.S. government | | 32.7 | % | | 40.8 | % | | 30.6 | % |
| Domestic | | 38.9 | % | | 29.2 | % | | 13.2 | % |
| Total United States | | 71.6 | % | | 70.0 | % | | 43.8 | % |
| | | | | | | |
| International | | | | | | |
| North African country | | 1.8 | % | | 3.6 | % | | 13.8 | % |
| Other international | | 26.6 | % | | 26.4 | % | | 42.4 | % |
| Total International | | 28.4 | % | | 30.0 | % | | 56.2 | % |
Sales to U.S. government customers include the Department of Defense ("DoD") and intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to U.S. state and local governments.
International sales for fiscal 2017, 2016 and 2015 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $156,483,000, $123,474,000 and $172,651,000, respectively.
For fiscal 2017 and 2016, except for the U.S. government, no other customer or individual country (including sales to U.S. domestic companies for inclusion in products that will be sold to a foreign country) represented more than 10% of consolidated net sales. Sales to a U.S. prime contractor customer represented approximately 13.5% of consolidated net sales for the fiscal years ended July 31, 2015. Almost all of these sales related to our North African country end-customer.
(13) (11) Segment Information
Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment"Segment Reporting" is based on the way that the chief operating decision-maker ("CODM")CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive OfficerOfficer.
In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and President.services and our CODM began managing our business in two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” As a result, the segment information for the prior fiscal years has been recast to conform to the current year presentation.
Our CommercialSatellite and Space Communications is organized into four product areas: Satellite Modem and Amplifier Technologies, Troposcatter and SATCOM Solutions, segment serves commercial customersSpace Components and smaller government customers, such as stateAntennas, and local governments, that require advanced communications technologies to meet their needs.High-Power Amplifiers and Switches. This segment also serves certain large government customers (includingoffers customers: Satellite ground station technologies, services and system integration that facilitate the U.S. government) when they have requirements for off-the-shelf commercial equipment. Commercial solutions products includetransmission of voice, video and data over GEO, MEO and LEO satellite earth station communications equipment such as modemsconstellations, including solid-state and traveling wave tube power amplifiers, public safety technologiesmodems, VSAT platforms and frequency converters; Satellite communications and tracking antenna systems, including thosehigh precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; Over-the-horizon microwave equipment that are utilized in next generation 911 systemscan transmit digitized voice, video, and enterprise technologies such as trusted locationdata over distances up to 200 miles using the troposphere and text-messaging platforms.diffraction, including the Comtech COMET™; Solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and Procurement and supply chain management of high reliability EEE parts for satellite, launch vehicle and manned space applications.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Terrestrial and Wireless Networks is organized into four product areas: Next Generation 911 & Call Delivery, Solacom Call Handling Solutions, Trusted Location and Messaging Solutions, and Cyber Security Training & Services. This segment offers customers: SMS Text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points; Next Generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of Next Generation 911 services; Call handling applications for Public Safety Answering Points; Wireless emergency alerts solutions for network operators; Software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services, and Cybersecurity training, skills labs, and competency assessments for both technical and non-technical applications.
Our Government Solutions segment serves large U.S. and foreign government end-users that require mission critical technologies and systems. Government solutions products include command and control technologies (such as remote sensing tracking systems, rugged solid state drives, land mobile products, and quick deploy satellite systems), troposcatter technologies systems (such as digital troposcatter multiplexers, digital over-the-horizon modems, troposcatter systems, and frequency converter systems), and RF power and switching technologies products (such as solid-state high-power narrow and broadband amplifiers, enhanced position location reporting system ("EPLRS") amplifier assemblies, identification friend or foe amplifiers, and amplifiers used in the counteraction of improvised explosive devices).
Our CODM primarily uses a metric that we refer to as Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA")EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric doesfor the Satellite and Space Communications and Terrestrial and Wireless Networks segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest (income) and other, expense,change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, orrestructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Satellite and Space Communications and Terrestrial and Wireless Networks segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Secured Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies (including TCS prior to our acquisition) and, therefore, may not be comparable to similarly titled measures used by other companies.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income (loss) to Adjusted EBITDA is presented in the tables below: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended July 31, 2022 |
| | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Total |
| Net sales | | $ | 279,678,000 | | | 206,561,000 | | | — | | | $ | 486,239,000 | |
| Operating (loss) income | | $ | (5,671,000) | | | 18,925,000 | | | (47,006,000) | | | $ | (33,752,000) | |
| | | | | | | | |
| Net (loss) income | | $ | (3,852,000) | | | 18,796,000 | | | (47,996,000) | | | $ | (33,052,000) | |
| (Benefit from) provision for income taxes | | (1,120,000) | | | 19,000 | | | (2,922,000) | | | (4,023,000) | |
| Interest (income) and other | | (797,000) | | | 110,000 | | | (16,000) | | | (703,000) | |
Change in fair value of convertible
preferred stock purchase option liability | | — | | | — | | | (1,005,000) | | | (1,005,000) | |
| | | | | | | | |
| Interest expense | | 98,000 | | | — | | | 4,933,000 | | | 5,031,000 | |
Amortization of stock-based
compensation | | — | | | — | | | 7,767,000 | | | 7,767,000 | |
| Amortization of intangibles | | 7,312,000 | | | 14,084,000 | | | — | | | 21,396,000 | |
| Depreciation | | 4,049,000 | | | 6,069,000 | | | 196,000 | | | 10,314,000 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Amortization of cost to fulfill assets | | 469,000 | | | — | | | — | | | 469,000 | |
| CEO transition costs | | — | | | — | | | 13,554,000 | | | 13,554,000 | |
| Proxy solicitation costs | | — | | | — | | | 11,248,000 | | | 11,248,000 | |
| Restructuring costs | | 5,666,000 | | | — | | | 299,000 | | | 5,965,000 | |
| COVID-19 related costs | | 1,105,000 | | | — | | | — | | | 1,105,000 | |
| Strategic emerging technology costs | | 1,197,000 | | | — | | | — | | | 1,197,000 | |
| Adjusted EBITDA | | $ | 14,127,000 | | | 39,078,000 | | | (13,942,000) | | | $ | 39,263,000 | |
| | | | | | | | |
| Purchases of property, plant and equipment | | $ | 8,915,000�� | | | 10,704,000 | | | — | | | $ | 19,619,000 | |
| | | | | | | | |
| Total assets at July 31, 2022 | | $ | 487,235,000 | | | 461,443,000 | | | 25,619,000 | | | $ | 974,297,000 | |
|
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended July 31, 2017 |
| | | Commercial Solutions | | Government Solutions | | Unallocated | | Total |
| Net sales | | $ | 330,867,000 |
| | 219,501,000 |
| | — |
| | $ | 550,368,000 |
|
| Operating income (loss) | | $ | 33,234,000 |
| | 9,393,000 |
| | (5,585,000 | ) | | $ | 37,042,000 |
|
| | | | | | | | | |
| Net income (loss) | | $ | 32,871,000 |
| | 9,421,000 |
| | (26,465,000 | ) | | $ | 15,827,000 |
|
| Provision for income taxes | | 258,000 |
| | — |
|
| 9,396,000 |
| | 9,654,000 |
|
| Interest (income) and other expense | | (108,000 | ) | | (34,000 | ) |
| 74,000 |
| | (68,000 | ) |
| Interest expense | | 213,000 |
| | 6,000 |
|
| 11,410,000 |
| | 11,629,000 |
|
| Amortization of stock-based compensation | | — |
| | — |
|
| 8,506,000 |
| | 8,506,000 |
|
| Amortization of intangibles | | 17,698,000 |
| | 5,125,000 |
|
| — |
| | 22,823,000 |
|
| Depreciation | | 9,938,000 |
| | 2,938,000 |
|
| 1,478,000 |
| | 14,354,000 |
|
| Settlement of intellectual property litigation | | — |
| | — |
| | (12,020,000 | ) | | (12,020,000 | ) |
| Adjusted EBITDA | | $ | 60,870,000 |
| | 17,456,000 |
| | (7,621,000 | ) | | $ | 70,705,000 |
|
| | | | | | | | | |
| Purchases of property, plant and equipment | | $ | 7,007,000 |
| | 1,046,000 |
| | 97,000 |
| | $ | 8,150,000 |
|
| Total assets at July 31, 2017 | | $ | 606,436,000 |
| | 185,234,000 |
| | 40,393,000 |
| | $ | 832,063,000 |
|
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended July 31, 2021 |
| | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Total |
| Net sales | | $ | 374,850,000 | | | 206,845,000 | | | — | | | $ | 581,695,000 | |
| Operating income (loss) | | $ | 24,281,000 | | | 25,185,000 | | | (117,764,000) | | | $ | (68,298,000) | |
| | | | | | | | |
| Net income (loss) | | $ | 24,357,000 | | | 24,396,000 | | | (122,233,000) | | | $ | (73,480,000) | |
| (Benefit from) provision for income taxes | | (377,000) | | | 795,000 | | | (1,918,000) | | | (1,500,000) | |
| Interest (income) and other | | 235,000 | | | (6,000) | | | (368,000) | | | (139,000) | |
| Interest expense | | 66,000 | | | — | | | 6,755,000 | | | 6,821,000 | |
Amortization of stock-based
compensation | | — | | | — | | | 9,983,000 | | | 9,983,000 | |
| Amortization of intangibles | | 5,695,000 | | | 15,325,000 | | | — | | | 21,020,000 | |
| Depreciation | | 3,721,000 | | | 5,316,000 | | | 342,000 | | | 9,379,000 | |
| | | | | | | | |
| Acquisition plan expenses | | — | | | (1,052,000) | | | 101,344,000 | | | 100,292,000 | |
| Restructuring costs | | 2,782,000 | | | — | | | — | | | 2,782,000 | |
| COVID-19 related costs | | 1,046,000 | | | — | | | — | | | 1,046,000 | |
| Strategic emerging technology costs | | 315,000 | | | — | | | — | | | 315,000 | |
| Adjusted EBITDA | | $ | 37,840,000 | | | 44,774,000 | | | (6,095,000) | | | $ | 76,519,000 | |
| | | | | | | | |
| Purchases of property, plant and equipment | | $ | 8,456,000 | | | 7,498,000 | | | 83,000 | | | $ | 16,037,000 | |
Long-lived assets acquired in connection
with acquisitions | | $ | 47,958,000 | | | — | | | — | | | $ | 47,958,000 | |
| Total assets at July 31, 2021 | | $ | 507,981,000 | | | 462,877,000 | | | 22,253,000 | | | $ | 993,111,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended July 31, 2020 |
| | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Total |
| Net sales | | $ | 411,073,000 | | | 205,642,000 | | | — | | | $ | 616,715,000 | |
| Operating income (loss) | | $ | 25,492,000 | | | 29,316,000 | | | (39,634,000) | | | $ | 15,174,000 | |
| | | | | | | | |
| Net income (loss) | | $ | 25,714,000 | | | 28,932,000 | | | (47,626,000) | | | $ | 7,020,000 | |
| (Benefit from) provision for income taxes | | (29,000) | | | 339,000 | | | 1,980,000 | | | 2,290,000 | |
| Interest (income) and other | | (218,000) | | | 18,000 | | | 10,000 | | | (190,000) | |
| | | | | | | | |
| Interest expense | | 25,000 | | | 27,000 | | | 6,002,000 | | | 6,054,000 | |
Amortization of stock-based
compensation | | — | | | — | | | 9,275,000 | | | 9,275,000 | |
| Amortization of intangibles | | 5,133,000 | | | 16,462,000 | | | — | | | 21,595,000 | |
| Depreciation | | 3,854,000 | | | 5,939,000 | | | 768,000 | | | 10,561,000 | |
| Estimated contract settlement costs | | 476,000 | | | (32,000) | | | — | | | 444,000 | |
| | | | | | | | |
| Acquisition plan expenses | | 751,000 | | | — | | | 20,003,000 | | | 20,754,000 | |
| | | | | | | | |
| Adjusted EBITDA | | $ | 35,706,000 | | | 51,685,000 | | | (9,588,000) | | | $ | 77,803,000 | |
| | | | | | | | |
| Purchases of property, plant and equipment | | $ | 3,801,000 | | | 3,097,000 | | | 327,000 | | | $ | 7,225,000 | |
Long-lived assets acquired in connection
with acquisitions | | $ | 32,391,000 | | | 6,060,000 | | | — | | | $ | 38,451,000 | |
| Total assets at July 31, 2020 | | $ | 412,704,000 | | | 467,312,000 | | | 49,631,000 | | | $ | 929,647,000 | |
|
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended July 31, 2016 |
| | | Commercial Solutions | | Government Solutions | | Unallocated | | Total |
| Net sales | | $ | 248,955,000 |
| | 162,049,000 |
| | — |
| | $ | 411,004,000 |
|
| Operating income (loss) | | $ | 23,255,000 |
| | 23,006,000 |
| | (46,837,000 | ) | | $ | (576,000 | ) |
| | | | | | | | | |
| Net income (loss) | | $ | 22,785,000 |
| | 23,018,000 |
| | (53,541,000 | ) | | $ | (7,738,000 | ) |
| Provision for (benefit from) income taxes | | 72,000 |
| | — |
| | (526,000 | ) | | (454,000 | ) |
| Interest (income) and other expense | | 109,000 |
| | (11,000 | ) | | (232,000 | ) | | (134,000 | ) |
| Interest expense | | 289,000 |
| | (1,000 | ) | | 7,462,000 |
| | 7,750,000 |
|
| Amortization of stock-based compensation | | — |
| | — |
| | 4,117,000 |
| | 4,117,000 |
|
| Amortization of intangibles | | 10,592,000 |
| | 2,823,000 |
| | — |
| | 13,415,000 |
|
| Depreciation | | 7,073,000 |
| | 2,006,000 |
| | 751,000 |
| | 9,830,000 |
|
| Acquisition plan expenses | | — |
| | — |
| | 21,276,000 |
| | 21,276,000 |
|
| Adjusted EBITDA | | $ | 40,920,000 |
| | 27,835,000 |
| | (20,693,000 | ) | | $ | 48,062,000 |
|
| | | | | | | | | |
| Purchases of property, plant and equipment | | $ | 4,614,000 |
| | 978,000 |
| | 75,000 |
| | $ | 5,667,000 |
|
| Long-lived assets acquired in connection with the TCS acquisition | | $ | 367,865,000 |
| | 82,860,000 |
| | 4,359,000 |
| | $ | 455,084,000 |
|
| Total assets at July 31, 2016 | | $ | 631,936,000 |
| | 226,865,000 |
| | 62,395,000 |
| | $ | 921,196,000 |
|
|
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended July 31, 2015 |
| | | Commercial Solutions | | Government Solutions | | Unallocated | | Total |
| Net sales | | $ | 203,674,000 |
| | 103,615,000 |
| | — |
| | $ | 307,289,000 |
|
| Operating income (loss) | | $ | 20,733,000 |
| | 30,004,000 |
| | (16,660,000 | ) | | $ | 34,077,000 |
|
| | | | | | | | | |
| Net income (loss) | | $ | 20,502,000 |
| | 30,033,000 |
| | (27,290,000 | ) | | $ | 23,245,000 |
|
| (Benefit from) provision for income taxes | | (142,000 | ) | | — |
| | 10,900,000 |
| | 10,758,000 |
|
| Interest (income) and other expense | | 92,000 |
| | (30,000 | ) | | (467,000 | ) | | (405,000 | ) |
| Interest expense | | 281,000 |
| | — |
| | 198,000 |
| | 479,000 |
|
| Amortization of stock-based compensation | | — |
| | — |
| | 4,363,000 |
| | 4,363,000 |
|
| Amortization of intangibles | | 6,211,000 |
| | — |
| | — |
| | 6,211,000 |
|
| Depreciation | | 5,250,000 |
| | 1,242,000 |
| | 33,000 |
| | 6,525,000 |
|
| Strategic alternatives analysis expenses and other | | — |
| | — |
| | 585,000 |
| | 585,000 |
|
| Adjusted EBITDA | | $ | 32,194,000 |
| | 31,245,000 |
| | (11,678,000 | ) | | $ | 51,761,000 |
|
| | | | | | | | | |
| Purchases of property, plant and equipment | | $ | 2,233,000 |
| | 1,063,000 |
| | 66,000 |
| | $ | 3,362,000 |
|
| Total assets at July 31, 2015 | | $ | 233,965,000 |
| | 95,314,000 |
| | 144,598,000 |
| | $ | 473,877,000 |
|
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. During fiscal 2021 and 2020, we recorded $100,292,000 and $20,754,000 of acquisition plan expenses, respectively, most of which were recorded primarily in our unallocated expenses. See Note (2) -"Acquisitions" for further information. During fiscal 2022, we incurred $11,248,000 of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) as a result of a now settled proxy contest initiated by a shareholder during the first quarter of fiscal 2022. Also, during fiscal 2022, we expensed $13,554,000 of transition costs related to our former CEO, Fred Kornberg.
During fiscal 2022 and 2021, our Satellite and Space Communications segment recorded $5,666,000 and $2,782,000, respectively, of restructuring costs incurred to streamline our operations, including costs related to the ongoing relocation of certain of our satellite ground station production facilities to a new 146,000 square foot facility in Chandler, Arizona, as well as to consolidate certain administrative and operating functions in our troposcatter and SATCOM solutions product line. In addition, during fiscal 2017, unallocated expenses2022 and 2021, this segment also reflect the favorable adjustments torecorded $1,105,000 and $1,046,000 of incremental operating income related to the settlement of certain legacy TCS intellectual property matters. During fiscal 2016, unallocated expenses include acquisition plan expenses, most of which related to the February 23, 2016 acquisition of TCS. Unallocated expenses for fiscal 2015 include expensescosts related to our strategic alternatives analysis, which we concludedantenna facility located in December 2014.the United Kingdom due to the impact of the COVID-19 pandemic. There were no such charges recorded in fiscal 2020.
Interest expense in fiscal 2017 and 2016 includes $11,106,000 and $6,933,000, respectively, relatedthe tables above primarily relates to our Secured Credit Facility, and includes the amortization of deferred financing costs. See Note (8)(7) - "Secured Credit Facility" for further discussion of such debt. Interestdiscussion. In addition, interest expense for fiscal 20152021 includes $1,178,000 of incremental interest onexpense related to a committed $100,000,000 secured revolving credit facility that expired on October 31, 2014 and amortization of deferrednow terminated financing costs.commitment letter, as discussed in more detail in Note (2) - "Acquisitions."
Intersegment sales in fiscal 2017, 20162022, 2021 and 2015 by2020 between the Commercial SolutionsSatellite and Space Communications segment toand the Government SolutionsTerrestrial and Wireless Networks segment were $12,492,000, $6,266,000nominal. All intersegment sales are eliminated in consolidation and $6,165,000, respectively. There were nominal sales byare excluded from the Government Solutions segment to the Commercial Solutions segment for these fiscal periods.tables above.
Unallocated assets at July 31, 20172022 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. Substantially allThe large majority of our long-lived assets are located in the U.S.
(12) Commitments and all intersegment sales are eliminatedContingencies
(a) Legal Proceedings and Other Matters
Settled Litigation Related to the Convertible Preferred Stock Issuance
In October 2021, Anthony Franchi (the “Plaintiff”) brought a putative class action in consolidationthe Court of Chancery of the State of Delaware against the Company's current directors, the Company, White Hat Capital Partners LP (“White Hat”) and are excludedMagnetar Capital LLC (“Magnetar”), which was fully resolved by the parties and the case dismissed by court order on May 3, 2022. The ultimate resolution of this matters did not result in a material adverse effect on our consolidated results of operations and financial condition.
Other Matters
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the tables above.
(14) Commitments and Contingencies
(a) Operating Leases
At July 31, 2017, future minimum lease payments, net of subleases, under non-cancelable operating lease agreements are as follows:
|
| | | |
| Fiscal Year: | |
| 2018 | $ | 12,374,000 |
|
| 2019 | 9,114,000 |
|
| 2020 | 6,742,000 |
|
| 2021 | 5,316,000 |
|
| 2022 | 4,222,000 |
|
| Thereafter | 7,854,000 |
|
| Total | $ | 45,622,000 |
|
Lease expense charged to operations was $13,270,000, $9,100,000 and $5,363,000 in fiscal 2017, 2016 and 2015, respectively.
We lease our Melville, New York production facility from a partnership controlled by our President, CEO and Chairman. Lease payments made in fiscal 2017 were $617,000. The current lease provides for ourcustomer’s use of the premisesour products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that 911 calls were improperly routed during an emergency. We evaluate such claims as and when they exist through December 2021arise. We do not always agree with an option for an additional 10 years. The annual rent of the facility for calendar year 2018 is $635,000 and is subjectcustomers that they are entitled to customary adjustments. We have a right of first refusal in the event of a sale of the facility.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) Legal Proceedings, Other Matters and Final Settlements
Legacy TCS Intellectual Property Matter - Vehicle IP
In December 2009, Vehicle IP, LLC ("Vehicle IP") filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware (the "District Court"), seeking monetary damages, fees and expenses and other relief from, among others, our customer Verizon Wireless ("Verizon"), based on the VZ Navigator product, and TCS is defending Verizon against Vehicle IP. In 2013, the District Court granted the defendants’ motion for summary judgment on the basis that the products in question did not infringe plaintiff’s patent. Plaintiff appealed that decisionindemnification and in 2014, the U.S. Court of Appeals for the Federal Circuit reversed the District Court's claim construction, overturned the District Court's grant of summary judgment of noninfringement, and remanded the case for further proceedings. Fact discovery and expert discovery has closed. Substantive settlement conversations have occurred but, to date, the parties have been unable to reach a settlement. As discussed in Note (6) “Accrued Expenses and Other Current Liabilities,"such cases reject their claims. Despite maintaining that we have accrued certain legal and settlement costs related to the Vehicle IP matter. The accrued settlement costs related to this matter do not reflect the final amountsproperly carried out our duties, we actually may pay, if any.
On May 30, 2017,seek coverage under our various insurance policies; however, we received positive news that the District Court issued a supplemental claim construction order in our favor. As a result, the plaintiff agreed to file a joint status report to the District Court that requested that the District Court cancel the trial date (which was scheduled for July 2017). On July 28, 2017, the parties entered into a stipulation that the defendants’ accused products do not infringe Vehicle IP’s patent under the District Court’s current revised construction of the disputed patent claim term and requested that the District Court therefore enter a judgment of noninfringement. On August 18, 2017, the court entered such a judgment of noninfringment. As expected, following the judgment, Vehicle IP filed a notice of appeal on August 29, 2017.
Vehicle IP's opening brief on appeal of the District Court's claim construction is currently due October 31, 2017. An appellate ruling may take a year or so tocannot be issued. If the District Court's current claim construction is ultimately upheld at the appellate level, it is possiblesure that we maywill be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not havedisclaim coverage as to gosuch claims. Accordingly, pending or future claims asserted against us by a party that we agree to trial or pay any monetary damages.
Ongoingindemnify could result in legal expenses associated with defending this mattercosts and its ultimate resolutiondamages that could vary and have a material adverse effect on our consolidated results of operations and financial position or cash flows in future periods.condition.
Other Matters
In October 2014, we disclosed
F - 40
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) that we learned during a self-assessment of our export transactions that a shipment of modems sent to a Canadian customer by Comtech EF Data Corp. was incorporated into a communication system, the ultimate end user of which was the Sudan Civil Aviation Authority. The sales value of this equipment was approximately $288,000. OFAC regulations prohibit U.S. persons from doing business directly or indirectly with Sudan. In late 2015, OFAC issued an administrative subpoena seeking further information about the disclosed transaction. We have responded to the subpoena, including alerting OFAC to Comtech’s repair of three modems for a customer in Lebanon who may have rerouted the modems from Lebanon to Sudan without the required U.S. licensing authorization. We are not able to predict when OFAC will complete its review, nor whether it will take any action against us, which could include civil and criminal penalties. If OFAC determines that we have violated U.S. trade sanctions, we may suffer reputational harm. Even though we take precautions to avoid engaging in transactions that may violate U.S. trade sanctions, those measures may not be effective in every instance.Consolidated Financial Statements, Continued
There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Final Settlements of Certain TCS Intellectual Property Matters and Mississippi Lawsuit
During the fiscal year ended July 31, 2017, we entered into final settlements of certain legacy TCS intellectual property matters and a separate lawsuit filed in Mississippi. The settlement of these matters and their impact on our consolidated financial statements are described below:
TracBeam - On January 30, 2017, we entered into a final settlement of a legacy TCS patent infringement litigation matter which resulted in a lower loss than originally estimated. The final settlement resolved litigation in the U.S. District Court for the Eastern District of Texas (“Eastern District Court”) in which TracBeam, LLC ("TracBeam") asserted a patent infringement claim and sought damages, fees and expenses and other relief from, among others, TCS’s customers T-Mobile US, Inc. and T-Mobile USA, Inc. (together, "T-Mobile"), based on the defendants’ E911 service and locator products. TCS was defending T-Mobile against TracBeam.The final settlement required that we make two cash payments in fiscal 2017. On a GAAP basis, the final settlement resulted in a favorable $9,979,000 contribution, net of estimated legal fees, to operating income for fiscal 2017. In addition to the final settlement, during fiscal 2017, TCS settled its claims against a prior owner of the TCS assets that were the subject of the TracBeam infringement claim and we received cash settlement proceeds that were recorded as a reduction of selling, general and administrative expenses in fiscal 2017. As a result, our total net cash outflow related to the final resolution of the entire TracBeam matter was immaterial.
CallWave - In 2012, CallWave Communication LLC ("CallWave") brought a patent infringement lawsuit in the U.S. District Court for the District of Delaware seeking damages, fees and expenses and other relief from, among others, Verizon Wireless and certain of its affiliates (collectively, "Verizon"), based on Verizon's VZ Family Locator and VZ Navigator products, and TCS had previously agreed to indemnify Verizon subject to certain conditions. During fiscal 2017, a final settlement was entered into between TCS and CallWave and, on a GAAP basis, the resolution of this matter resulted in a favorable $2,041,000 contribution, net of estimated legal fees, to operating income for fiscal 2017. Cash payments related to this final settlement are immaterial and principally occurred during fiscal 2017.
Mississippi Lawsuit - A family in Mississippi sued Verizon Wireless in June 2016 and TCS in July 2016 in the U.S. District Court for the Southern District of Mississippi, for damages resulting from allegations that their 911 calls were improperly routed during an emergency. Both TCS and Verizon denied the allegations. During fiscal 2017, a final settlement was reached on terms that had no impact on our consolidated financial statements and the case was dismissed.
(c) (b) Employment Change of Control and Indemnification Agreements
We haveAs of July 31, 2022, we had an employment agreement with Michael Porcelain, our CEOPresident and President.CEO. The employment agreement generally providesprovided for an annual salary and bonus award. On August 10, 2022, we announced the mutually agreed separation between the Company and Mr. Porcelain as President and CEO and member of the Board of Directors. The Company entered into a separation agreement with Mr. Porcelain.
On August 9, 2022, subsequent to year end, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and CEO, and the Company entered an employment agreement with Mr. Peterman generally providing for an annual salary, bonus award, sign-on bonus, equity incentive awards and, under certain termination of employment, severance payment.
Transition costs related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, were approximately $7.4 million, of which $3.8 million related to the acceleration of unamortized stock based compensation, with the remaining $3.6 million related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3.6 million is expected to be paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $1.0 million expense related to a cash sign-on bonus. CEO transition costs related to Mr. Porcelain and Mr. Peterman will be expensed in our Unallocated segment during the first quarter of fiscal 2023.
We have also entered into change of control agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company.Company or termination of the employee.
(15) (13) Goodwill
The following table represents the amount of goodwill by reportable operating segment, including the changes in the net carrying value of goodwill for the fiscal years endedas of July 31, 2017 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total |
| Balance as of July 31, 2021 | | $ | 173,608,000 | | | 174,090,000 | | | $ | 347,698,000 | |
| UHP acquisition | | (6,000) | | | — | | | (6,000) | |
| Balance as of July 31, 2022 | | $ | 173,602,000 | | | 174,090,000 | | | $ | 347,692,000 | |
| | | | | | |
|
| | | | | | | | | | | |
| | | Commercial Solutions | | Government Solutions | | Total |
| Balance as of July 31, 2016 | | $ | 229,273,000 |
| | 58,345,000 |
| | $ | 287,618,000 |
|
| Additions resulting from TCS acquisition | | 2,167,000 |
| | 848,000 |
| | 3,015,000 |
|
| Balance as of July 31, 2017 | | $ | 231,440,000 |
| | 59,193,000 |
| | $ | 290,633,000 |
|
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
See Note (2) "Acquisition" for further discussion of the TCS acquisition. The additions to goodwill resulting from the TCS acquisition in fiscal 2017 were primarily related to the finalization of: (i) the estimated fair value of TCS's 911 call handling software warranty obligations; (ii) TCS's income tax returns for the pre-acquisition period which began January 1, 2016 and ended February 23, 2016 and calendar year 2015; (iii) revisions to the estimated fair value of certain fixed assets; and (iv) the related adjustments to deferred income taxes. These measurement period adjustments were recorded to reflect final determinations of estimated fair values of the assets acquired and the liabilities assumed in connection with the TCS acquisition based on facts and circumstances that existed as of the acquisition date.
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. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), pursuant to our adoption of FASB ASU No. 2017-04 in fiscal 2017, we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
On August 1, 2017 (the first dayAs discussed further in Note 11 - "Segment Information", as a result of our segment restructuring in the fourth quarter of fiscal 2018),2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed an interim quantitative assessment as of July 29, 2022 and estimated the fair value of each of our annualreporting units, both before and after the change, using a combination of the income and market approaches.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
We performed our quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions.
In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, and reflectedwhich reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our August 1, 2017 total public market capitalization and assessed implied control premiums based on our common stock price of $18.47$11.62 as of August 1, 2017.the date of testing.
BasedUltimately, based on our quantitative evaluation,evaluations, we determined that our Commercial SolutionsSatellite and Government SolutionsSpace Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 17.8%18.4% and 52.9%11.6%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. However, in orderAlso, given its proximity to sensitizeour next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim quantitative assessment to conclude that our goodwill impairment test, we performed a second analysis using only the income approachwas not impaired and concluded that neither of our two reporting units' goodwillunits was impaired or at risk of failing the quantitative assessment. assessment as of August 1, 2022. Additionally, the carrying value of goodwill of $347,692,000 was reallocated to our new reporting units based on their respective estimated relative fair value.
It is possible that, during fiscal 20182023 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, 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, or our common stock price could decline. fluctuate. Such fluctuation could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global activity.
A significant decline in our customers' 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 an interima quantitative assessment during fiscal 20182023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, , our Commercial SolutionsSatellite and Government SolutionsSpace Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 20182023 (the start of our fiscal 2019)2024). If our assumptions and related estimates change in the future, or if we change our reporting unit structure 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 when we perform these tests, or in other future periods. In addition to our impairment analysis of goodwill, we also review net intangible assets with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangible assets were recoverable as of July 31, 2017. Any impairment charges that we may record in the future could be material to our results of operationoperations and financial condition.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Intangible Assets
Intangible assets with finite lives as of July 31, 20172022 and 20162021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | July 31, 2022 |
| | | Weighted Average
Amortization Period | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Customer relationships | | 20.2 | | $ | 302,058,000 | | | 107,500,000 | | | $ | 194,558,000 | |
| Technologies | | 14.8 | | 114,949,000 | | | 75,798,000 | | | 39,151,000 | |
| Trademarks and other | | 16.7 | | 32,926,000 | | | 19,332,000 | | | 13,594,000 | |
| Total | | | | $ | 449,933,000 | | | 202,630,000 | | | $ | 247,303,000 | |
|
| | | | | | | | | | | | | |
| | | July 31, 2017 |
| | | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Customer relationships | | 20.3 | | $ | 249,831,000 |
| | 41,923,000 |
| | $ | 207,908,000 |
|
| Technologies | | 12.3 | | 82,370,000 |
| | 48,623,000 |
| | 33,747,000 |
|
| Trademarks and other | | 16.4 | | 28,894,000 |
| | 8,678,000 |
| | 20,216,000 |
|
| Total | | | | $ | 361,095,000 |
| | 99,224,000 |
| | $ | 261,871,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | July 31, 2021 |
| | | Weighted Average
Amortization Period | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Customer relationships | | 20.2 | | $ | 302,058,000 | | | 93,215,000 | | | $ | 208,843,000 | |
| Technologies | | 14.8 | | 114,949,000 | | | 70,924,000 | | | 44,025,000 | |
| Trademarks and other | | 16.7 | | 32,926,000 | | | 17,095,000 | | | 15,831,000 | |
| Total | | | | $ | 449,933,000 | | | 181,234,000 | | | $ | 268,699,000 | |
|
| | | | | | | | | | | | | |
| | | July 31, 2016 |
| | | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Customer relationships | | 20.3 | | $ | 249,831,000 |
| | 28,497,000 |
| | $ | 221,334,000 |
|
| Technologies | | 12.3 | | 82,370,000 |
| | 42,860,000 |
| | 39,510,000 |
|
| Trademarks and other | | 16.3 | | 28,894,000 |
| | 5,044,000 |
| | 23,850,000 |
|
| Total | | | | $ | 361,095,000 |
| | 76,401,000 |
| | $ | 284,694,000 |
|
The weighted average amortization period in the above table excludes fully amortized intangible assets.
Amortization expense for the years ended July 31, 2017, 2016 and 2015 was $22,823,000, $13,415,000 and $6,211,000, respectively.
Intangible assets at July 31, 2017 and 2016, and the associated amortization expense for the fiscal years ended July 31, 20172022, 2021 and 2016, include the impact of the TCS acquisition which closed on February 23, 20162020 was $21,396,000, $21,020,000 and which is further discussed in Note (2) "Acquisition."$21,595,000, respectively.
The estimated amortization expense consists of the following for the fiscal years ending July 31:
| | | | | |
| 2023 | $ | 21,556,000 | |
| 2024 | 21,154,000 | |
| 2025 | 21,039,000 | |
| 2026 | 19,888,000 | |
| 2027 | 18,534,000 | |
We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of July 31, 2022. However, if business conditions deteriorate, we may be required to record impairment losses, and or increase the amortization of intangibles in the future. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.
(15) Convertible Preferred Stock
|
| | | |
| 2018 | $ | 21,075,000 |
|
| 2019 | 17,155,000 |
|
| 2020 | 17,155,000 |
|
| 2021 | 16,196,000 |
|
| 2022 | 14,955,000 |
|
On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $125,000,000, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100,000,000. The Investors have a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $25,000,000. This purchase option is commonly referred to as a “Green Shoe” and together with the Initial Issuance, is collectively referred to as the “Issuance.”
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The adjusted conversion price for the shares issued in the Initial Issuance is $23.97, and the adjusted conversion price for the Green Shoe is $31.21, subject to certain adjustments set forth in the Certificate of Designations filed with the Secretary of the Stare of Delaware.
The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5% per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of our $0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations.
As of September 29, 2022, the Convertible Preferred Stock is convertible into shares of common stock at the option of the holders. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days.
Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $25,000,000 of shares of common stock), dispositions of businesses or assets, the incurrence of certain indebtedness and certain amendments or extensions of our existing Credit Facility.
Holders will have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the liquidation preference or (b) in connection with a conversion of Convertible Preferred Stock, pursuant to which the number of shares of common stock issuable upon such conversion would exceed 19.99% of the issued and outstanding shares of common stock as of October 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference.
We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 meets the definition of a freestanding financial instrument that should be accounted for as a liability. As such, we established an initial convertible preferred stock purchase option liability of $1,005,000 and reduced the proceeds from the Initial Issuance by such amount. The liability will be remeasured to its estimated fair value each reporting period until such instrument is exercised or expires. Changes in its estimated fair value are recognized as a non-cash charge or benefit and presented on the consolidated statement of operations. The estimated fair value of the convertible preferred stock purchase option liability was nominal as of July 31, 2022. During fiscal 2022, we recorded a benefit $1,005,000 for the remeasurement of the convertible preferred stock purchase option liability.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In accordance with ASC 480, "Distinguishing Liabilities from Equity," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement: Classification and Measurement of Redeemable Securities, we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option. Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $100,000,000. We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $105,204,000, which includes $4,638,000 of dividends paid in kind and $566,000 of accumulated and unpaid dividends. As such, an adjustment of $10,216,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during fiscal 2022.
(17)
(16) Stockholders’ Equity
Sale of Common Stock
In June 2016, the Company sold 7,145,000 sharesOn March 3, 2021, in connection with our acquisition of its common stock inUHP, we filed a public offering at a price of $14.00 per share, resulting in proceeds to the Company of $95,029,000, net of underwriting discounts and commissions. As of July 31, 2017 and September 27, 2017, an aggregate registered amount of $74,970,000 under the Company's existing Shelf Registration Statement filedshelf registration statement with the SEC remains available for the sale by the selling stockholder of UHP of up to 1,381,567 shares of our common stock. The shelf registration statement was declared effective by the SEC as of March 15, 2021. On July 13, 2022, we filed a shelf registration statement with the SEC for the sale of 606,302 additional shares of our common stock by the selling stockholder of UHP. The shelf registration statement was declared effective by the SEC as of July 25, 2022. To-date, we have issued all 1,987,869 shares pursuant to these shelf registration statements to satisfy payment and escrow arrangements under the terms of the stock purchase agreement. See Note (2) - "Acquisitions - UHP Networks Inc." for further information.
On July 13, 2022, we filed a $200,000,000 shelf registration statement with the SEC for the sale of various types of securities, including debt. DuringThe shelf registration was declared effective by the fiscal year ended July 31, 2016, the Company recorded $1,112,000 of total issuance costs related to this common stock offering, $959,000 of which was a reduction to the additional paid-in capital included in the Consolidated Balance SheetSEC as of July 31, 2016.25, 2022. To-date, we have not issued any securities pursuant to our $200,000,000 shelf registration statement.
Common Stock Repurchase Program
AsOn September 29, 2020, our Board of July 31, 2017 and September 27, 2017, we wereDirectors authorized to repurchase up to an additional $8,664,000 of our common stock, pursuant to our currenta new $100,000,000 stock repurchase program, which replaced our prior program. OurThe new $100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, and may be made pursuant to SEC Rule 10b5-1 trading plans.or by other means in accordance with federal securities laws. There were no repurchases made during the fiscal years ended July 31, 20172022 or 2016.2021.
Dividends on Common Stock
Since September 2010, we have paid quarterly cash dividends pursuant to an annual targeted dividend amount that was established by our Board of Directors. On October 6, 2016, our Board of Directors declared a dividend of $0.30 per common share, which was paid on November 22, 2016. On4, 2021, December 7, 2016,9, 2021, March 8, 201710, 2022 and June 7, 2017,9, 2022, our Board of Directors declared a dividend of $0.10 per common share, which were paid on November 12, 2021, February 17, 2017,18, 2022, May 19, 201720, 2022 and August 18, 2017,19, 2022, respectively.
On September 27, 2017,29, 2022, our Board of Directors declared a cash dividend of $0.10 per common share, payable on November 17, 201718, 2022 to stockholders of record at the close of business on October 18, 2017.
19, 2022. Future common stock dividends remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.approval and certain voting rights of holders of our Series A Convertible Preferred Stock.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(18) Unaudited Quarterly Financial Data
The following is a summary of unaudited quarterly operating results. Our historical results prior to February 23, 2016 do not include TCS; as such, you should not rely on period-to-period comparisons as an indicator of future performance as these comparisons may not be meaningful.
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal 2017 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | | |
| Net sales | | $ | 135,786,000 |
| | 139,028,000 |
| | 127,792,000 |
| | 147,762,000 |
| | $ | 550,368,000 |
| | |
| Gross profit | | 52,108,000 |
| | 53,204,000 |
| | 52,461,000 |
| | 60,412,000 |
| | 218,185,000 |
| | |
| Net (loss) income | | (2,489,000 | ) | | 6,585,000 |
| | 4,417,000 |
| | 7,314,000 |
| | 15,827,000 |
| | |
| Diluted (loss) income per share | | (0.11 | ) | | 0.28 |
| | 0.19 |
| | 0.31 |
| | 0.67 |
| | |
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal 2016 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | | |
| Net sales | | $ | 64,117,000 |
| | 70,323,000 |
| | 124,187,000 |
| | 152,377,000 |
| | $ | 411,004,000 |
| | |
| Gross profit | | 28,202,000 |
| | 29,438,000 |
| | 51,391,000 |
| | 62,206,000 |
| | 171,237,000 |
| | |
| Net income (loss) | | 1,439,000 |
| | 2,476,000 |
| | (14,355,000 | ) | | 2,702,000 |
| | (7,738,000 | ) | | |
| Diluted income (loss) per share | | 0.09 |
| | 0.15 |
| | (0.89 | ) | | 0.14 |
| | (0.46 | ) | | * |
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal 2015 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | | |
| Net sales | | $ | 76,391,000 |
| | 81,802,000 |
| | 71,633,000 |
| | 77,463,000 |
| | $ | 307,289,000 |
| | |
| Gross profit | | 35,325,000 |
| | 37,875,000 |
| | 32,308,000 |
| | 33,376,000 |
| | 138,884,000 |
| | |
| Net income | | 5,225,000 |
| | 7,585,000 |
| | 4,960,000 |
| | 5,475,000 |
| | 23,245,000 |
| | |
| Diluted income per share | | 0.32 |
| | 0.46 |
| | 0.30 |
| | 0.34 |
| | 1.42 |
| | |
* The per share information is computed independently for each quarter and the full year based on the respective weighted average number of common shares outstanding. Therefore, income per share information for the full fiscal year may not equal the total of the quarters within the year.
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Fiscal Years Ended July 31, 2017, 20162022, 2021 and 20152020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C Additions | | | | Column D | | | | Column E |
| Description | | Balance at
beginning of
period | | Charged to
cost and
expenses | | | | Charged to
other accounts
- describe | | | | Transfers
(deductions)
- describe | | | | Balance at
end of
period |
| Allowance for doubtful accounts receivable: | | | | | | | | | | | | | | | | |
| Year ended July 31, | | | | | | | | | | | | | | | | |
| 2022 | | $ | 1,648,000 | | | 838,000 | | | (A) | | — | | | | | (149,000) | | | (B) | | $ | 2,337,000 | |
| 2021 | | 1,769,000 | | | (18,000) | | | (A) | | 215,000 | | | (C) | | (318,000) | | | (B) | | 1,648,000 | |
| 2020 | | 1,867,000 | | | 45,000 | | | (A) | | — | | | | | (143,000) | | | (B) | | 1,769,000 | |
| | | | | | | | | | | | | | | | |
| Inventory reserves: | | | | | | | | | | | | | | | | |
| Year ended July 31, | | | | | | | | | | | | | | | | |
| 2022 | | $ | 20,229,000 | | | 4,447,000 | | | (D) | | — | | | | | (1,555,000) | | | (E) | | $ | 23,121,000 | |
| 2021 | | 19,076,000 | | | 4,364,000 | | | (D) | | — | | | | | (3,211,000) | | | (E) | | 20,229,000 | |
| 2020 | | 19,696,000 | | | 1,647,000 | | | (D) | | — | | | | | (2,267,000) | | | (E) | | 19,076,000 | |
| | | | | | | | | | | | | | | | |
| Valuation allowance for deferred tax assets: | | | | | | | | | | | | | | | | |
| Year ended July 31, | | | | | | | | | | | | | | | | |
| 2022 | | $ | 28,384,000 | | | 2,947,000 | | | (F) | | — | | | | | (104,000) | | | (F) | | $ | 31,227,000 | |
| 2021 | | 11,471,000 | | | 17,750,000 | | | (F) | | — | | | | | (837,000) | | | (F) | | 28,384,000 | |
| 2020 | | 12,568,000 | | | 750,000 | | | (F) | | — | | | | | (1,847,000) | | | (F) | | 11,471,000 | |
(A)Provision for doubtful accounts.
(B)Write-off of uncollectible receivables.
(C)Increase due to our August 1, 2020 adoption of FASB ASU No. 2016-13, on a modified-retrospective basis, which requires companies to utilize an impairment model (current expected credit loss ("CECL”)) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to trade receivables and contract assets.
(D)Provision for excess and obsolete inventory.
(E)Write-off of inventory.
(F)Change in valuation allowance. See Note (9) - "Income Taxes" for further discussion.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C Additions | | | | Column D | | | | Column E |
| Description | | Balance at beginning of period | | Charged to cost and expenses | | | | Charged to other accounts - describe | | | | Transfers (deductions) - describe | | | | Balance at end of period |
| Allowance for doubtful accounts receivable: | | | | | | | | | | | | | | | | |
| Year ended July 31, | | | | | | | | | | | | | | | | |
| 2017 | | $ | 1,029,000 |
| | 497,000 |
| | (A) | | — |
| | | | (226,000 | ) | | (B) | | $ | 1,300,000 |
|
| 2016 | | 1,206,000 |
| | 907,000 |
| | (A) | | — |
| | | | (1,084,000 | ) | | (B) | | 1,029,000 |
|
| 2015 | | 627,000 |
| | 764,000 |
| | (A) | | — |
| | | | (185,000 | ) | | (B) | | 1,206,000 |
|
| | | | | | | | | | | | | | | | | |
| Inventory reserves: | | |
| | |
| | | | |
| | | | |
| | | | |
|
| Year ended July 31, | | |
| | |
| | | | |
| | | | |
| | | | |
|
| 2017 | | $ | 16,198,000 |
| | 2,900,000 |
| | (C) | | — |
| | | | (3,079,000 | ) | | (D) | | $ | 16,019,000 |
|
| 2016 | | 16,904,000 |
| | 2,780,000 |
| | (C) | | — |
| | | | (3,486,000 | ) | | (D) | | 16,198,000 |
|
| 2015 | | 16,309,000 |
| | 2,813,000 |
| | (C) | | — |
| | | | (2,218,000 | ) | | (D) | | 16,904,000 |
|
| | | | | | | | | | | | | | | | | |
| Valuation allowance for deferred tax assets: | | |
| | |
| | | | |
| | | | |
| | | | |
|
| Year ended July 31, | | |
| | |
| | | | |
| | | | |
| | | | |
|
| 2017 | | $ | 9,624,000 |
| | 324,000 |
| | (E) | | 121,000 |
| | (F) | | (1,436,000 | ) | | (F) | | $ | 8,633,000 |
|
| 2016 | | 4,442,000 |
| | 524,000 |
| | (E) | | 4,658,000 |
| | (F) | | — |
| | | | 9,624,000 |
|
| 2015 | | 2,958,000 |
| | 1,484,000 |
| | (E) | | — |
| | | | — |
| | | | 4,442,000 |
|
| |
(A) | Provision for doubtful accounts. |
| |
(B) | Write-off of uncollectible receivables. |
| |
(C) | Provision for excess and obsolete inventory. |
| |
(D) | Write-off of inventory. |
| |
(E) | Change in valuation allowance. |
| |
(F) | Acquisition related valuation allowance charged to (deducted) from goodwill. |
