10-Q 1 cmtl0430201810q.htm CURRENT REPORT Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2018
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:    0-7928
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(Exact name of registrant as specified in its charter)
Delaware
 
11-2139466
(State or other jurisdiction of incorporation /organization)
 
(I.R.S. Employer Identification Number)
 
 
 
68 South Service Road, Suite 230,
Melville, NY
 
 
11747
(Address of principal executive offices)
 
(Zip Code)

(631) 962-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Emerging growth company
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Non-accelerated filer
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Smaller reporting company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. blankboxa20.jpg

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 1, 2018, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 23,641,984 shares.



COMTECH TELECOMMUNICATIONS CORP.
INDEX
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 6.
 
 
 
 
 
 



1


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
April 30, 2018
 
July 31, 2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
44,173,000

 
41,844,000

Accounts receivable, net
 
127,267,000

 
124,962,000

Inventories, net
 
76,554,000

 
60,603,000

Prepaid expenses and other current assets
 
13,912,000

 
13,635,000

Total current assets
 
261,906,000

 
241,044,000

Property, plant and equipment, net
 
30,240,000

 
32,847,000

Goodwill
 
290,633,000

 
290,633,000

Intangibles with finite lives, net
 
246,065,000

 
261,871,000

Deferred financing costs, net
 
2,420,000

 
3,065,000

Other assets, net
 
2,808,000

 
2,603,000

Total assets
 
$
834,072,000

 
832,063,000

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
30,125,000

 
29,402,000

Accrued expenses and other current liabilities
 
66,258,000

 
68,610,000

Dividends payable
 
2,354,000

 
2,343,000

Customer advances and other
 
33,485,000

 
25,771,000

Current portion of long-term debt
 
17,211,000

 
15,494,000

Current portion of capital lease and other obligations
 
2,540,000

 
2,309,000

Interest payable
 
532,000

 
282,000

Total current liabilities
 
152,505,000

 
144,211,000

Non-current portion of long-term debt, net
 
161,856,000

 
176,228,000

Non-current portion of capital lease and other obligations
 
993,000

 
1,771,000

Income taxes payable
 
2,592,000

 
2,515,000

Deferred tax liability, net
 
6,069,000

 
17,306,000

Customer advances and other, non-current
 
7,761,000

 
7,227,000

Other liabilities
 
4,512,000

 
2,655,000

Total liabilities
 
336,288,000

 
351,913,000

Commitments and contingencies (See Note 18)
 


 


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 38,675,301 shares and 38,619,467 shares at April 30, 2018 and July 31, 2017, respectively
 
3,868,000

 
3,862,000

Additional paid-in capital
 
535,620,000

 
533,001,000

Retained earnings
 
400,145,000

 
385,136,000

 
 
939,633,000

 
921,999,000

Less:
 
 

 
 

Treasury stock, at cost (15,033,317 shares at April 30, 2018 and July 31, 2017)
 
(441,849,000
)
 
(441,849,000
)
Total stockholders’ equity
 
497,784,000

 
480,150,000

Total liabilities and stockholders’ equity
 
$
834,072,000

 
832,063,000


See accompanying notes to condensed consolidated financial statements.

2



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
 
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
147,854,000

 
127,792,000

 
403,154,000

 
402,606,000

Cost of sales
 
85,418,000

 
75,331,000

 
242,201,000

 
244,833,000

Gross profit
 
62,436,000

 
52,461,000

 
160,953,000

 
157,773,000

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Selling, general and administrative
 
30,410,000

 
25,923,000

 
86,100,000

 
89,596,000

Research and development
 
12,778,000

 
12,961,000

 
39,963,000

 
40,371,000

Amortization of intangibles
 
5,269,000

 
5,468,000

 
15,806,000

 
17,555,000

Settlement of intellectual property litigation
 

 
(2,041,000
)
 

 
(12,020,000
)
 
 
48,457,000

 
42,311,000

 
141,869,000

 
135,502,000

 
 
 
 
 
 
 
 
 
Operating income
 
13,979,000

 
10,150,000

 
19,084,000

 
22,271,000

 
 
 
 
 
 
 
 
 
Other expenses (income):
 
 

 
 

 
 

 
 

Interest expense
 
2,500,000

 
2,761,000

 
7,607,000

 
8,938,000

Interest (income) and other
 
198,000

 
88,000

 
189,000

 
12,000

 
 
 
 
 
 
 
 
 
Income before provision for (benefit from) income taxes
 
11,281,000

 
7,301,000

 
11,288,000

 
13,321,000

Provision for (benefit from) income taxes
 
3,071,000

 
2,884,000

 
(11,023,000
)
 
4,808,000

 
 
 
 
 
 
 
 
 
Net income
 
$
8,210,000

 
4,417,000

 
22,311,000

 
8,513,000

Net income per share (See Note 4):
 
 

 
 

 
 

 
 

Basic
 
$
0.34

 
0.19

 
0.94

 
0.36

Diluted
 
$
0.34

 
0.19

 
0.93

 
0.36

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
 
23,834,000

 
23,449,000

 
23,819,000

 
23,420,000

 
 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding – diluted
 
24,052,000

 
23,503,000

 
23,999,000

 
23,449,000

 
 
 
 
 
 
 
 
 
Dividends declared per issued and outstanding common share as of the applicable dividend record date
 
$
0.10

 
0.10

 
0.30

 
0.50

 
See accompanying notes to condensed consolidated financial statements.

3



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED APRIL 30, 2018 AND 2017
(Unaudited)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Stockholders'
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
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
 

 

 
2,980,000

 

 

 

 
2,980,000

Proceeds from issuance of employee stock purchase plan shares
 
49,694

 
5,000

 
509,000

 

 

 

 
514,000

Issuance of restricted stock
 
144,988

 
14,000

 
(14,000
)
 

 

 

 

Net settlement of stock-based awards
 
40,354

 
4,000

 
(248,000
)
 

 

 

 
(244,000
)
Cash dividends declared, net
 

 

 

 
(11,691,000
)
 

 

 
(11,691,000
)
Accrual of dividend equivalents, net of reversal
 

 

 

 
(228,000
)
 

 

 
(228,000
)
Net income tax shortfall from settlement of stock-based awards
 

 

 
(240,000
)
 

 

 

 
(240,000
)
Reversal of deferred tax assets associated with expired and unexercised stock-based awards
 

 

 
(350,000
)
 

 

 

 
(350,000
)
Net income
 

 

 

 
8,513,000

 

 

 
8,513,000

Balance as of April 30, 2017
 
38,603,033

 
$
3,860,000

 
$
527,434,000

 
$
380,210,000

 
15,033,317

 
$
(441,849,000
)
 
$
469,655,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Equity-classified stock award compensation
 

 

 
2,931,000

 

 

 

 
2,931,000

Proceeds from exercises of stock options
 
4,900

 

 
130,000

 

 

 

 
130,000

Proceeds from issuance of employee stock purchase plan shares
 
35,830

 
4,000

 
615,000

 

 

 

 
619,000

Forfeiture of restricted stock
 
(10,254
)
 
(1,000
)
 
1,000

 

 

 

 

Net settlement of stock-based awards
 
25,358

 
3,000

 
(1,058,000
)
 

 

 

 
(1,055,000
)
Cash dividends declared
 

 

 

 
(7,055,000
)
 

 

 
(7,055,000
)
Accrual of dividend equivalents, net of reversal
 

 

 

 
(247,000
)
 

 

 
(247,000
)
Net income
 

 

 

 
22,311,000

 

 

 
22,311,000

Balance as of April 30, 2018
 
38,675,301

 
$
3,868,000

 
$
535,620,000

 
$
400,145,000

 
15,033,317

 
$
(441,849,000
)
 
$
497,784,000


See accompanying notes to condensed consolidated financial statements.

4



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended April 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
22,311,000

 
8,513,000

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization of property, plant and equipment
 
9,833,000

 
10,849,000

Amortization of intangible assets with finite lives
 
15,806,000

 
17,555,000

Amortization of stock-based compensation
 
2,931,000

 
2,980,000

Amortization of deferred financing costs
 
1,646,000

 
1,450,000

Settlement of intellectual property litigation
 

 
(12,020,000
)
Loss (gain) on disposal of property, plant and equipment
 
77,000

 
(147,000
)
Provision for allowance for doubtful accounts
 
412,000

 
454,000

Provision for excess and obsolete inventory
 
3,659,000

 
1,758,000

Excess income tax benefit from stock-based awards
 

 
(78,000
)
Deferred income tax (benefit) expense
 
(11,237,000
)
 
6,606,000

Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
(3,786,000
)
 
30,065,000

Inventories
 
(19,610,000
)
 
2,259,000

Prepaid expenses and other current assets
 
722,000

 
(1,532,000
)
Other assets
 
(205,000
)
 
230,000

Accounts payable
 
310,000

 
(6,088,000
)
Accrued expenses and other current liabilities
 
48,000

 
(16,588,000
)
Customer advances and other
 
8,248,000

 
3,961,000

Other liabilities, non-current
 
(670,000
)
 
(1,042,000
)
Interest payable
 
250,000

 
(1,226,000
)
Income taxes payable
 
(129,000
)
 
(4,038,000
)
Net cash provided by operating activities
 
30,616,000

 
43,921,000

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(5,299,000
)
 
(6,223,000
)
Net cash used in investing activities
 
(5,299,000
)
 
(6,223,000
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Repayment of long-term debt under Term Loan Facility
 
(14,657,000
)
 
(7,747,000
)
Cash dividends paid
 
(7,173,000
)
 
(16,518,000
)
Repayment of principal amounts under capital lease and other obligations
 
(1,853,000
)
 
(2,739,000
)
Remittance of employees' statutory tax withholdings for stock awards
 
(1,055,000
)
 
(244,000
)
Net borrowings (repayments) under Revolving Loan Facility
 
1,001,000

 
(18,300,000
)
Proceeds from issuance of employee stock purchase plan shares
 
619,000

 
514,000

Proceeds from exercises of stock options
 
130,000

 

Payment of issuance costs related to equity offering
 

 
(626,000
)
Payment of deferred financing costs
 

 
(104,000
)
Excess income tax benefit from stock-based awards
 

 
78,000

Net cash used in financing activities
 
(22,988,000
)
 
(45,686,000
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
2,329,000

 
(7,988,000
)
Cash and cash equivalents at beginning of period
 
41,844,000

 
66,805,000

Cash and cash equivalents at end of period
 
$
44,173,000

 
58,817,000

See accompanying notes to condensed consolidated financial statements. (Continued)

5



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

 
 
Nine months ended April 30,
 
 
2018
 
2017
Supplemental cash flow disclosures:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
5,348,000

 
8,584,000

Income taxes, net
 
$
345,000

 
2,240,000

 
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
Cash dividends declared but unpaid (including dividend equivalents)
 
$
2,601,000

 
2,570,000

Accrued additions to property, plant and equipment
 
$
1,491,000

 
824,000

Capital lease and other obligations incurred
 
$
1,306,000

 

(Forfeiture) issuance of restricted stock
 
$
(1,000
)
 
14,000


See accompanying notes to condensed consolidated financial statements.


6


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(1)    General

The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, 2018 and 2017 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reported period. Actual results may differ from those estimates.

Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2017 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

As disclosed in more detail in Note (14) - "Segment Information," we manage our business in two reportable segments: Commercial Solutions and Government Solutions.

Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the current fiscal period presentation.

(2)    Adoption of Accounting Standards and Updates

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standard 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 Standards Updates ("ASUs"). During the nine months ended April 30, 2018, we adopted:

FASB ASU 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which amends several aspects of the accounting for and reporting of share-based payment transactions. Our adoption of this ASU, on August 1, 2017, did not have a material impact on our condensed consolidated financial statements. See Note (12) - "Stock-Based Compensation" for further information regarding our adoption of this ASU.

FASB ASU No. 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 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. Our adoption of this ASU on February 1, 2018 did not have any impact on our condensed consolidated financial statements.

FASB ASU No. 2017-09 "Compensation - Stock Compensation (Topic 718)" ("ASU 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. An entity would not be required to account for changes to the terms or conditions of a share-based payment award as a modification if there were no changes to the award’s fair value, vesting conditions and classification. Our adoption of this ASU on February 1, 2018 did not have any impact on our condensed consolidated financial statements.


7


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


(3)    Fair Value Measurements and Financial Instruments

Using the fair value hierarchy described in FASB ASC 820 "Fair Value Measurements and Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices.

We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable, accrued expenses and the current portions of our Secured Credit Facility and favorable AT&T warranty settlement) 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 April 30, 2018 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 and other obligations, which currently has a blended interest rate of 6.0%, would not be materially different than its carrying value as of April 30, 2018.

The fair value of the non-current portion of our favorable AT&T warranty settlement would not be materially different than its carrying value as of as of April 30, 2018, given our belief that the present value of such liability reflects market participants' assumptions for a similar junior, unsecured debt instrument. See Note (7) - "Accrued Expenses and Other Current Liabilities" for further discussion of the favorable AT&T warranty settlement.

As of April 30, 2018 and July 31, 2017, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(4)    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, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 "Earnings Per Share," equity-classified stock-based awards that are subject to performance conditions are not considered in our diluted EPS calculations until the respective performance conditions have been satisfied. When calculating our diluted earnings per share, we consider 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. On August 1, 2017, we adopted ASU 2016-09, which amends several aspects of the accounting for and reporting of share-based payment transactions. As a result of our adoption of ASU 2016-09, the amount of excess tax benefits assuming exercise of in-the-money stock-based awards is no longer included in the calculation of diluted earnings per share on a prospective basis and the denominator for our diluted calculations could increase in the future as compared to prior calculations. See Note (12) - "Stock-Based Compensation" for more information on the impact of adopting ASU 2016-09.

There were no purchases of our common stock during the nine months ended April 30, 2018 or 2017. See Note (17) - "Stockholders’ Equity" for more information.

Weighted average stock options, RSUs and restricted stock outstanding of 1,505,000 and 1,912,000 for the three months ended April 30, 2018 and 2017, respectively, and 1,804,000 and 2,227,000 for the nine months ended April 30, 2018 and 2017, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 260,000 and 227,000 weighted average performance shares outstanding for the three months ended April 30, 2018 and 2017, respectively, and 257,000 and 233,000 weighted average performance shares outstanding for the nine months ended April 30, 2018 and 2017, respectively, as the performance conditions have not yet been satisfied. However, the compensation expense related to these awards is included in net income (the numerator) for EPS calculations for each respective period.

8


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)



The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income for basic calculation
 
$
8,210,000

 
4,417,000

 
22,311,000

 
8,513,000

Numerator for diluted calculation
 
$
8,210,000

 
4,417,000

 
22,311,000

 
8,513,000

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Denominator for basic calculation
 
23,834,000

 
23,449,000

 
23,819,000

 
23,420,000

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock-based awards
 
218,000

 
54,000

 
180,000

 
29,000

Denominator for diluted calculation
 
24,052,000

 
23,503,000

 
23,999,000

 
23,449,000

    
(5)    Accounts Receivable

Accounts receivable consist of the following at:
 
 
April 30, 2018
 
July 31, 2017
Billed receivables from commercial and international customers
 
$
72,889,000

 
71,404,000

Unbilled receivables from commercial and international customers
 
18,184,000

 
24,668,000

Billed receivables from the U.S. government and its agencies
 
22,020,000

 
18,497,000

Unbilled receivables from the U.S. government and its agencies
 
15,780,000

 
11,693,000

Total accounts receivable
 
128,873,000

 
126,262,000

Less allowance for doubtful accounts
 
1,606,000

 
1,300,000

Accounts receivable, net
 
$
127,267,000

 
124,962,000


Unbilled receivables relate to contracts-in-progress for which revenue has been recognized but we have not yet billed the customer for work performed. We had $130,000 and $118,000 of retainage included in unbilled receivables at April 30, 2018 and July 31, 2017, respectively, and management estimates that substantially all of the unbilled receivables at April 30, 2018 will be billed and collected within one year. Of the unbilled receivables from commercial and international customers at April 30, 2018 and July 31, 2017, approximately $1,049,000 and $2,995,000, 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 April 30, 2018, the U.S. government (and its agencies) and Verizon Communications Inc. (through various divisions and, collectively, "Verizon") represented 29.3% and 14.5%, respectively, of total accounts receivable. As of July 31, 2017, except for the U.S. government (and its agencies), which represented 23.9% of total accounts receivable, there were no other customers which accounted for greater than 10.0% of total accounts receivable.

(6)    Inventories

Inventories consist of the following at:
 
 
April 30, 2018
 
July 31, 2017
Raw materials and components
 
$
55,128,000

 
50,569,000

Work-in-process and finished goods
 
37,149,000

 
26,053,000

Total inventories
 
92,277,000

 
76,622,000

Less reserve for excess and obsolete inventories
 
15,723,000

 
16,019,000

Inventories, net
 
$
76,554,000

 
60,603,000


9


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)



As of April 30, 2018 and July 31, 2017, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $1,008,000 and $2,148,000, respectively.

As of April 30, 2018 and July 31, 2017, $1,722,000 and $1,718,000, respectively, of the inventory balance above related to contracts from third party commercial customers who outsource their manufacturing to us.

(7)    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following at:
 
 
April 30, 2018
 
July 31, 2017
Accrued wages and benefits
 
$
23,720,000

 
19,622,000

Accrued warranty obligations
 
12,499,000

 
17,617,000

Accrued contract costs
 
8,705,000

 
8,644,000

Accrued legal costs
 
7,882,000

 
8,402,000

Accrued commissions and royalties
 
3,549,000

 
3,600,000

Other
 
9,903,000

 
10,725,000

Accrued expenses and other current liabilities
 
$
66,258,000

 
68,610,000


Accrued legal costs as of April 30, 2018 and July 31, 2017 include $3,377,000 and $4,120,000, respectively, related to estimated costs associated with certain TeleCommunication Systems, Inc. ("TCS") intellectual property matters. The accrued potential settlement costs do not reflect the final amounts we may actually pay. Ongoing legal costs associated with defending legacy TCS intellectual property matters and the 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 (18) - "Legal Proceedings and Other Matters."

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 warranty obligations relate to estimated liabilities for 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, a 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.

Changes in our current accrued warranty obligations during the nine months ended April 30, 2018 and 2017 were as follows:
 
 
Nine months ended April 30,
 
 
2018
 
2017
Balance at beginning of period
 
$
17,617,000

 
15,362,000

Provision for warranty obligations
 
4,292,000

 
4,147,000

Charges incurred
 
(6,311,000
)
 
(5,486,000
)
Warranty settlement and reclass (see below)
 
(3,099,000
)
 

Adjustments to TCS pre-acquisition contingent liability
 

 
4,200,000

Balance at end of period
 
$
12,499,000

 
18,223,000



10


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Our current accrued warranty obligations at April 30, 2018 and July 31, 2017 include $4,946,000 and $9,909,000, respectively, of warranty obligations for a small product line that we refer to as the TCS 911 call handling software solution. This solution was licensed to customers prior to our acquisition of TCS. During the nine months ended April 30, 2018, we entered into a full and final warranty settlement with AT&T, the largest customer/distributor of this product line, pursuant to which we issued thirty-six credits to AT&T of $153,000 which AT&T can apply on a monthly basis to purchases of solutions from us, beginning October 2017 through September 2020. As of April 30, 2018, the total present value of these monthly credits is $3,992,000, of which $1,553,000 is included in our current accrued warranty obligations and $2,439,000 is reflected in other liabilities (non-current) on our Condensed Consolidated Balance Sheet. In connection with this favorable settlement, during the nine months ended April 30, 2018, we recorded a benefit to cost of sales of $660,000.

(8)    Acquisition-Related Restructuring Plans

Radyne

In connection with our August 1, 2008 acquisition of Radyne, we adopted a restructuring plan for which we recorded $2,713,000 of estimated restructuring costs. Of this amount, $613,000 related to severance for Radyne employees which was paid in fiscal 2009. The remaining estimated amounts relate to facility exit costs and were determined as follows:
 
At August 1, 2008
Total non-cancelable lease obligations
$
12,741,000

Less: Estimated sublease income
8,600,000

Total net estimated facility exit costs
4,141,000

Less: Interest expense to be accreted
2,041,000

Present value of estimated facility exit costs
$
2,100,000


Our total non-cancelable lease obligations were based on the actual lease term which runs from November 1, 2008 through October 31, 2018. We estimated sublease income based on (i) the terms of a fully executed sublease agreement 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 April 30, 2018, the amount of the acquisition-related restructuring reserve is as follows:
 
Cumulative
Activity Through
April 30, 2018
Present value of estimated facility exit costs at August 1, 2008
$
2,100,000

Cash payments made
(11,802,000
)
Cash payments received
8,600,000

Accreted interest recorded
1,905,000

Liability recorded as of period end as accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet
$
803,000

 
As of July 31, 2017, the present value of the estimated facility exit costs was $1,941,000. During the nine months ended April 30, 2018, we made cash payments of $1,214,000. Interest accreted for the three and nine months ended April 30, 2018 and 2017 was $19,000 and $76,000, respectively, and $44,000 and $151,000, respectively, and is included in interest expense for each respective fiscal period.


11


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Future cash payments associated with our restructuring plan are summarized below:
 
As of April 30, 2018
Future lease payments to be made
$
803,000

Interest expense to be accreted in future periods
136,000

Total remaining payments
$
939,000


TCS and Cost Reduction Activities

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. We continue to evaluate and implement cost reduction initiatives to reduce unnecessary spending, reduce the size and cost of our facilities and improve productivity. To date, we have incurred an immaterial amount of severance and retention costs related to our shift in strategy.

(9)    Secured Credit Facility

On February 23, 2016, in connection with our acquisition of TCS, we entered into a $400,000,000 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 $250,000,000 (the "Term Loan Facility") and a secured revolving loan facility of up to $150,000,000, including a $25,000,000 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 nine months ended April 30, 2018 and 2017, we repaid $14,657,000 and $7,747,000, respectively, principal amount of borrowings under the Term Loan Facility. Under the Revolving Loan Facility, we had outstanding balances ranging from $41,904,000 to $66,804,000 during the nine months ended April 30, 2018.

As of April 30, 2018 and July 31, 2017, amounts outstanding under our Secured Credit Facility, net, were as follows:
 
 
April 30, 2018

 
July 31, 2017

Term Loan Facility
 
$
124,423,000

 
139,080,000

Less unamortized deferred financing costs related to Term Loan Facility
 
3,760,000

 
4,763,000

Term Loan Facility, net
 
120,663,000

 
134,317,000

Revolving Loan Facility
 
58,404,000

 
57,405,000

Amount outstanding under Secured Credit Facility, net
 
179,067,000

 
191,722,000

Less current portion of long-term debt
 
17,211,000

 
15,494,000

Non-current portion of long-term debt
 
$
161,856,000

 
176,228,000


Interest expense, including amortization of deferred financing costs, recorded during the three and nine months ended April 30, 2018 and 2017 related to the Secured Credit Facility was $2,351,000 and $7,166,000, respectively, and $2,641,000 and $8,524,000, respectively, and reflects a blended interest rate of approximately 5.49% and 4.83% for the three months ended April 30, 2018 and 2017, respectively, and 5.29% and 4.80% for the nine months ended April 30, 2018 and 2017, respectively.

At April 30, 2018, we had $3,268,000 of standby letters of credit outstanding under our Secured Credit Facility, as amended, related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit.


12


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


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 either (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 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.

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 trailing twelve month ("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 April 30, 2018, our Leverage Ratio was 2.43x TTM Consolidated EBITDA compared to the maximum allowable Leverage Ratio of 3.10x TTM Consolidated EBITDA. During the fourth quarter of fiscal 2018, the maximum allowable Leverage Ratio will decrease to 3.00x TTM Consolidated EBITDA, with no further reductions thereafter. Our Fixed Charge Coverage Ratio as of April 30, 2018 was 2.36x compared to the minimum required Fixed Charge Coverage Ratio of 1.25x. The Fixed Charge Coverage Ratio 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.


13


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


The obligations under the Secured Credit Facility, as amended, are guaranteed by certain 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 granted to an 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.

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 Secured Credit Facility, dated as of June 6, 2017, both of which have been documented and filed with the SEC.

(10)    Capital Lease and Other Obligations

We lease certain equipment under capital leases. As of April 30, 2018 and July 31, 2017, the net book value of the leased assets which collateralize the capital lease and other obligations was $3,294,000 and $5,419,000, respectively, and consisted primarily of machinery and equipment. Depreciation of leased assets is included in depreciation expense.

As of April 30, 2018, our capital lease and other obligations reflect a blended interest rate of approximately 6.0%. Our capital leases generally contain provisions whereby we can purchase the equipment at the end of the lease for a one dollar buyout.
 
Future minimum payments under capital lease and other obligations consisted of the following at April 30, 2018:
Remainder of fiscal 2018
$
997,000

Fiscal 2019
1,955,000

Fiscal 2020
780,000

Fiscal 2021 and beyond

Total minimum lease payments
3,732,000

Less: amounts representing interest
199,000

Present value of net minimum lease payments
3,533,000

Current portion of capital lease and other obligations
2,540,000

Non-current portion of capital lease and other obligations
$
993,000


(11)    Income Taxes

On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Reform"), was enacted in the U.S. Tax Reform significantly lowered the amount of our current and future income tax expense primarily due to the reduction in the U.S. statutory income tax rate from 35.0% to 21.0%. This provision went into effect on January 1, 2018 and required us to remeasure our deferred tax assets and liabilities. In fiscal 2019 and beyond, Tax Reform will result in the loss of our ability to take the domestic production activities deduction, which has been repealed, and is also likely to result in lower tax deductions for certain executive compensation expenses.

For fiscal 2018, we will be subject to a 35.0% statutory income tax rate with respect to the period August 1, 2017 through December 31, 2017 and a 21.0% statutory income tax rate with respect to the period January 1, 2018 through July 31, 2018, or a blended statutory income tax rate for fiscal 2018 of approximately 27.0%. As such, our effective tax rate for accounting purposes in fiscal 2018, excluding discrete items, is now expected to approximate 27.0%. We expect to fully benefit from the lower statutory income tax rate in fiscal 2019 and thereafter.

During the nine months ended April 30, 2018, we recorded an estimated net discrete tax benefit of $14,071,000 which, as a result of Tax Reform, primarily related to the remeasurement of deferred tax liabilities associated with non-deductible amortization related to intangible assets. The remeasurement was recorded pursuant to ASC 740 "Income Taxes" and SEC Staff Accounting Bulletin ("SAB") 118, using estimates based on reasonable and supportable assumptions and available information as of the reporting date. As such, we expect to finalize this net discrete tax benefit during the remainder of fiscal 2018. In addition, it is possible that the Internal Revenue Service ("IRS") will issue clarifying or interpretive guidance related to Tax Reform, which may ultimately result in a change to our estimated income tax.
 

14


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


At April 30, 2018 and July 31, 2017, total unrecognized tax benefits were $9,263,000 and $8,681,000, respectively, including interest of $181,000 and $95,000, respectively. At April 30, 2018 and July 31, 2017, $2,592,000 and $2,515,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable in our Condensed Consolidated Balance Sheets. The remaining unrecognized tax benefits of $6,671,000 and $6,166,000 at April 30, 2018 and July 31, 2017, respectively, were presented as an offset to the associated non-current deferred tax assets in our Condensed Consolidated Balance Sheets. Of the total unrecognized tax benefits, $8,517,000 and $7,727,000, at April 30, 2018 and July 31, 2017, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, excluding interest, would favorably 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 condensed consolidated financial statements. Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense.

Since November 2017, our federal income tax return for fiscal 2016 has been under audit by the IRS. The audit is ongoing and we are unaware of any proposed adjustments by the IRS. Our federal income tax return for fiscal 2015 is also subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2013 are subject to audit. TCS’s federal income tax returns for tax years 2014 and 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential IRS audit. None of TCS’s state income tax returns prior to calendar year 2013 are subject to audit. The results of the IRS tax audit for fiscal 2016, future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

(12)    Stock Based Compensation

Overview

We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended, (the "Plan") and our 2001 Employee Stock Purchase Plan (the "ESPP"), and recognize related stock-based compensation in our condensed 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.

On August 1, 2017, we adopted ASU 2016-09, which amended several aspects of the accounting for and reporting of our share-based payment transactions, including:

Excess tax benefits and shortfalls - ASU 2016-09 requires that all tax effects related to our share-based awards be recognized in the Condensed Consolidated 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 eliminated the concept of accumulated hypothetical tax benefits, excess tax benefits and shortfalls are no longer 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). Additionally, on a prospective basis, excess income tax benefits from the settlement of share-based awards are presented as a cash inflow from operating activities in our Condensed Consolidated Statement of Cash Flows.

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, when calculating our diluted earnings per share, 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, 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.


15


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Forfeitures - As permitted by ASU 2016-09, we elected to continue to estimate forfeitures of share-based awards.

Statutory Tax Withholding Requirements - ASU 2016-09 now allows us, when net settling share-based awards, 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, we are required to present such payments as a cash outflow from financing activities in our Condensed Consolidated Statements of Cash Flows (as opposed to operating activities).

As of April 30, 2018, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 10,362,500. 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 April 30, 2018, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 8,082,846 shares (net of 3,847,804 expired and canceled awards), of which an aggregate of 5,379,719 have been exercised or settled.

As of April 30, 2018, the following stock-based awards, by award type, were outstanding:
Stock options
1,734,775

Performance shares
278,860

RSUs and restricted stock
421,886

Share units
267,606

Total
2,703,127


Our ESPP provides for the issuance of up to 800,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85% of fair market value at the date of issuance. Through April 30, 2018, we have cumulatively issued 734,569 shares of our common stock to participating employees in connection with our ESPP.

Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations:
 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Cost of sales
 
$
55,000

 
56,000

 
146,000

 
162,000

Selling, general and administrative expenses
 
976,000

 
862,000

 
2,584,000

 
2,591,000

Research and development expenses
 
73,000

 
73,000

 
201,000

 
227,000

Stock-based compensation expense before income tax benefit
 
1,104,000

 
991,000

 
2,931,000

 
2,980,000

Estimated income tax benefit
 
(240,000
)
 
(349,000
)
 
(734,000
)
 
(1,051,000
)
Net stock-based compensation expense
 
$
864,000

 
642,000

 
2,197,000

 
1,929,000


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 April 30, 2018, unrecognized stock-based compensation of $8,088,000, net of estimated forfeitures of $801,000, is expected to be recognized over a weighted average period of 2.9 years. Total stock-based compensation capitalized and included in ending inventory at both April 30, 2018 and July 31, 2017 was $12,000. There are no liability-classified stock-based awards outstanding as of April 30, 2018 or July 31, 2017.


16


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Stock-based compensation expense (benefit), by award type, is summarized as follows:
 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Stock options
 
$
309,000

 
368,000

 
845,000

 
1,000,000

Performance shares
 
363,000

 
361,000

 
846,000

 
1,227,000

RSUs and restricted stock
 
376,000

 
221,000

 
1,150,000

 
633,000

ESPP
 
56,000

 
41,000

 
152,000

 
120,000

Share units
 

 

 
(62,000
)
 

Stock-based compensation expense before income tax benefit
 
1,104,000

 
991,000

 
2,931,000

 
2,980,000

Estimated income tax benefit
 
(240,000
)
 
(349,000
)
 
(734,000
)
 
(1,051,000
)
Net stock-based compensation expense
 
$
864,000

 
642,000

 
2,197,000

 
1,929,000


ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants in the ESPP.

During the nine months ended April 30, 2018, we recorded a $62,000 net benefit which primarily represents the recoupment of certain share units.

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 in our Condensed Consolidated Balance Sheet as of April 30, 2018 and July 31, 2017. 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.

Stock Options
The following table summarizes the Plan's activity during the nine months ended April 30, 2018:
 
 
Awards
(in Shares)
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Contractual
Term (Years)
 
Aggregate
Intrinsic Value
Outstanding at July 31, 2017
 
1,855,875

 
$
28.60

 
 
 
 
Expired/canceled
 
(41,040
)
 
28.97

 
 
 
 
Outstanding at October 31, 2017
 
1,814,835

 
28.59

 
 
 
 
Expired/canceled
 
(9,350
)
 
29.02

 
 
 
 
Outstanding at January 31, 2018
 
1,805,485

 
28.59

 
 
 
 
Expired/canceled
 
(2,400
)
 
28.11

 
 
 
 
Exercised
 
(68,310
)
 
27.40

 
 
 
 
Outstanding at April 30, 2018
 
1,734,775

 
$
28.64

 
4.80
 
$
4,095,000

 
 
 
 
 
 
 
 
 
Exercisable at April 30, 2018
 
1,303,808

 
$
28.64

 
4.29
 
$
2,973,000

 
 
 
 
 
 
 
 
 
Vested and expected to vest at April 30, 2018
 
1,693,769

 
$
28.61

 
4.76
 
$
4,014,000


Stock options outstanding as of April 30, 2018 have exercise prices ranging from $20.90 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 three and nine months ended April 30, 2018 was $225,000. There were no stock options exercised during the nine months ended April 30, 2017. There were no stock options granted during the nine months ended April 30, 2018 and 2017.


17


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


During the three and nine months ended April 30, 2018, at the election of certain holders of vested stock options, 63,410 stock options were net settled upon exercise. As a result, 4,937 net shares of our common stock were issued after reduction of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements.

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, 2017
 
830,197

 
$
16.95

 
 
Granted
 
307,194

 
18.25

 
 
Settled
 
(100,321
)
 
20.67

 
 
Forfeited
 
(61,520
)
 
18.88

 
 
Outstanding at October 31, 2017
 
975,550

 
16.86

 
 
Settled
 
(526
)
 
11.40

 
 
Forfeited
 
(4,311
)
 
15.26

 
 
Outstanding at January 31, 2018
 
970,713

 
16.86

 
 
Granted
 
3,212

 
28.37

 
 
Settled
 
(687
)
 
11.04

 
 
Forfeited
 
(4,886
)
 
15.36

 
 
Outstanding at April 30, 2018
 
968,352

 
$
16.91

 
$
29,622,000

 
 
 
 
 
 
 
Vested at April 30, 2018
 
309,853

 
$
17.55

 
$
9,478,000

 
 
 
 
 
 
 
Vested and expected to vest at April 30, 2018
 
933,270

 
$
16.94

 
$
28,549,000


The total intrinsic value relating to fully-vested awards settled during the three months ended April 30, 2018 was $17,000. There were no fully-vested awards converted into our common stock during the three months ended April 30, 2017. The total intrinsic value relating to fully-vested awards settled during the nine months ended April 30, 2018 and 2017 was $1,964,000 and $633,000, 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 April 30, 2018, 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 have a vesting period of three years and are convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. RSUs granted to employees have a vesting period of five years and are convertible into shares of our common stock, generally at the time of vesting, on a one-for-one basis for no cash consideration.

Share units granted 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. Share units granted on or after July 31, 2017 were granted to certain employees in lieu of fiscal 2017 non-equity incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the grant date. Cumulatively through April 30, 2018, 14,777 share units granted have been settled.


18


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


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 vesting restrictions. 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. 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 settlement of the underlying shares into our common stock. During the nine months ended April 30, 2018, we accrued $247,000 of dividend equivalents and paid out $129,000. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of April 30, 2018 and July 31, 2017, accrued dividend equivalents were $672,000 and $554,000, respectively.

We recorded $96,000 of income tax expense in our Condensed Consolidated Statements of Operations for the nine months ended April 30, 2018, which represents net income tax shortfalls from the settlement of stock-based awards and the reversal of deferred tax assets associated with expired and unexercised stock-based awards. During the nine months ended April 30, 2017, net income tax shortfalls from similar items totaled $590,000 and, pursuant to prior GAAP, were recorded as a reduction to additional paid-in capital.

(13)    Customer and Geographic Information

Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:

 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
U.S. government
 
37.4
%
 
32.0
%
 
34.0
%
 
33.1
%
Domestic
 
38.0
%
 
41.3
%
 
41.2
%
 
37.9
%
Total United States
 
75.4
%
 
73.3
%
 
75.2
%
 
71.0
%
 
 
 
 
 
 
 
 
 
International
 
24.6
%
 
26.7
%
 
24.8
%
 
29.0
%
Total
 
100.0
%
 
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 which represented 9.8% and 10.6% of consolidated net sales for the three and nine months ended April 30, 2018, respectively. Sales to Verizon were less than 10.0% of consolidated net sales for the three and nine months ended April 30, 2017.

International sales for the three months ended April 30, 2018 and 2017 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $36,316,000 and $34,131,000, respectively. International sales for the nine months ended April 30, 2018 and 2017 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $100,030,000 and $116,588,000, 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% of consolidated net sales for the three and nine months ended April 30, 2018 and 2017.


19


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


(14)    Segment Information

Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the chief operating decision-maker ("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 Officer and President.

Our Commercial Solutions segment serves commercial customers and smaller government customers, such as state and local governments, that require advanced communications technologies to meet their needs. This segment also serves certain large government customers (including the U.S. government) when they have requirements for off-the-shelf commercial equipment. Commercial solutions products include satellite earth station communications equipment such as modems and traveling wave tube amplifiers, public safety technologies including those that are utilized in next generation 911 systems and enterprise technologies such as trusted location and text-messaging platforms.

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 mobile satellite transceivers used on the Blue Force Tracking-1 and Blue Force Tracking-2 programs), 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") to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Commercial Solutions and Government Solutions segments do not consider any allocation of indirect expenses, including the following: 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 or strategic alternatives analysis expenses and other expenses that relate to our Unallocated segment. 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 Commercial Solutions and Government Solutions 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, as amended) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies.


20


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income to Adjusted EBITDA is presented in the tables below:

 
 
Three months ended April 30, 2018
 
 
Commercial Solutions
 
Government Solutions
 
Unallocated
 
Total
Net sales
 
$
89,936,000

 
57,918,000

 

 
$
147,854,000

Operating income (loss)
 
$
13,282,000

 
6,048,000

 
(5,351,000
)
 
$
13,979,000

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
12,938,000

 
5,975,000

 
(10,703,000
)
 
$
8,210,000

     Provision for income taxes
 
210,000

 

 
2,861,000

 
3,071,000

     Interest (income) and other expense
 
110,000

 
73,000

 
15,000

 
198,000

     Interest expense
 
24,000

 

 
2,476,000

 
2,500,000

     Amortization of stock-based compensation
 

 

 
1,104,000

 
1,104,000

     Amortization of intangibles
 
4,425,000

 
844,000

 

 
5,269,000

     Depreciation
 
2,329,000

 
573,000

 
268,000

 
3,170,000

Adjusted EBITDA
 
$
20,036,000

 
7,465,000

 
(3,979,000
)
 
$
23,522,000

 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
 
$
2,140,000

 
217,000

 
106,000

 
$
2,463,000

Total assets at April 30, 2018
 
$
615,643,000

 
177,495,000

 
40,934,000

 
$
834,072,000



 
 
Three months ended April 30, 2017
 
 
Commercial Solutions
 
Government Solutions
 
Unallocated
 
Total
Net sales
 
$
79,409,000

 
48,383,000

 

 
$
127,792,000

Operating income
 
$
8,633,000

 
1,313,000

 
204,000

 
$
10,150,000

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
8,506,000

 
1,314,000

 
(5,403,000
)
 
$
4,417,000

     Provision for income taxes
 
27,000

 

 
2,857,000

 
2,884,000

     Interest (income) and other expense
 
51,000

 

 
37,000

 
88,000

     Interest expense
 
49,000

 
(1,000
)
 
2,713,000

 
2,761,000

     Amortization of stock-based compensation
 

 

 
991,000

 
991,000

     Amortization of intangibles
 
4,425,000

 
1,043,000

 

 
5,468,000

     Depreciation
 
2,425,000

 
752,000

 
355,000

 
3,532,000

     Settlement of intellectual property litigation
 

 

 
(2,041,000
)
 
(2,041,000
)
Adjusted EBITDA
 
$
15,483,000

 
3,108,000

 
(491,000
)
 
$
18,100,000

 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
 
$
1,893,000

 
179,000

 
4,000

 
$
2,076,000

Total assets at April 30, 2017
 
$
619,215,000

 
184,764,000

 
59,779,000

 
$
863,758,000





21


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


 
 
Nine months ended April 30, 2018
 
 
Commercial Solutions
 
Government Solutions
 
Unallocated
 
Total
Net sales
 
$
251,874,000

 
151,280,000

 

 
$
403,154,000

Operating income (loss)
 
$
26,996,000

 
5,108,000

 
(13,020,000
)
 
$
19,084,000

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
26,598,000

 
5,020,000

 
(9,307,000
)
 
$
22,311,000

     Provision for (benefit from) income taxes
 
209,000

 

 
(11,232,000
)
 
(11,023,000
)
     Interest (income) and other expense
 
100,000

 
85,000

 
4,000

 
189,000

     Interest expense
 
89,000

 
3,000

 
7,515,000

 
7,607,000

     Amortization of stock-based compensation
 

 

 
2,931,000

 
2,931,000

     Amortization of intangibles
 
13,274,000

 
2,532,000

 

 
15,806,000

     Depreciation
 
7,229,000

 
1,777,000

 
827,000

 
9,833,000

Adjusted EBITDA
 
$
47,499,000

 
9,417,000

 
(9,262,000
)
 
$
47,654,000

 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
 
$
4,517,000

 
499,000

 
283,000

 
$
5,299,000

Total assets at April 30, 2018
 
$
615,643,000

 
177,495,000

 
40,934,000

 
$
834,072,000


 
Nine months ended April 30, 2017
 
 
Commercial Solutions
 
Government Solutions
 
Unallocated
 
Total
Net sales
 
$
237,690,000

 
164,916,000

 

 
$
402,606,000

Operating income (loss)
 
$
17,595,000

 
6,151,000

 
(1,475,000
)
 
$
22,271,000

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
17,249,000

 
6,179,000

 
(14,915,000
)
 
$
8,513,000

     Provision for income taxes
 
185,000

 

 
4,623,000

 
4,808,000

     Interest (income) and other expense
 
(11,000
)
 
(26,000
)
 
49,000

 
12,000

     Interest expense
 
172,000

 
(2,000
)
 
8,768,000

 
8,938,000

     Amortization of stock-based compensation
 

 

 
2,980,000

 
2,980,000

     Amortization of intangibles
 
13,274,000

 
4,281,000

 

 
17,555,000

     Depreciation
 
7,441,000

 
2,255,000

 
1,153,000

 
10,849,000

     Settlement of intellectual property litigation
 

 

 
(12,020,000
)
 
(12,020,000
)
Adjusted EBITDA
 
$
38,310,000

 
12,687,000

 
(9,362,000
)
 
$
41,635,000

 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
 
$
5,540,000

 
602,000

 
81,000

 
$
6,223,000

Total assets at April 30, 2017
 
$
619,215,000

 
184,764,000

 
59,779,000

 
$
863,758,000


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. In addition, during fiscal 2017, unallocated expenses also reflect the favorable adjustments to operating income related to the settlement of certain legacy TCS intellectual property matters.

Interest expense for the three and nine months ended April 30, 2018 and 2017 includes $2,351,000 and $7,166,000, respectively, and $2,641,000 and $8,524,000, respectively, related to our Secured Credit Facility, as amended, and includes the amortization of deferred financing costs. See Note (9) - "Secured Credit Facility" for further discussion of such debt.


22


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Intersegment sales for the three months ended April 30, 2018 and 2017 by the Commercial Solutions segment to the Government Solutions segment were $2,664,000 and $2,812,000, respectively. Intersegment sales for the nine months ended April 30, 2018 and 2017 by the Commercial Solutions segment to the Government Solutions segment were $7,613,000 and $9,297,000, respectively. There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these periods. All intersegment sales are eliminated in consolidation and are excluded from the tables above.

Unallocated assets at April 30, 2018 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. Substantially all of our long-lived assets are located in the U.S.

(15)    Goodwill

The following table represents goodwill by reportable operating segment as of April 30, 2018 and July 31, 2017:
 
 
Commercial Solutions
 
Government Solutions
 
Total
Goodwill
 
$
231,440,000

 
$
59,193,000

 
$
290,633,000

 
 
 
 
 
 
 

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 of our fiscal 2018), we performed our annual 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 reflected our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. 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 as of August 1, 2017.


23


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


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. However, in order to sensitize our goodwill impairment test, we 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 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 a 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 and Government Solutions reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired. Any impairment charges that we may record in the future could be material to our results of operation and financial condition.

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.

(16)    Intangible Assets

Intangible assets with finite lives are as follows:
 
 
As of April 30, 2018