UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
(Mark One)
 | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 30, 2016
 | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 0-7928
(Exact name of registrant as specified in its charter)
Delaware | 11-2139466 | |
(State or other jurisdiction of incorporation /organization) | (I.R.S. Employer Identification Number) | |
68 South Service Road, Suite 230, Melville, NY | 11747 | |
(Address of principal executive offices) | (Zip Code) | |
(631) 962-7000 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | Accelerated filer | |
Non-accelerated filer | | Smaller reporting company | |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes NoAPPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 3, 2016, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 16,171,079 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, 2016 | July 31, 2015 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 69,112,000 | 150,953,000 | ||||
Accounts receivable, net | 134,054,000 | 69,255,000 | |||||
Inventories, net | 75,324,000 | 62,068,000 | |||||
Prepaid expenses and other current assets | 19,753,000 | 7,396,000 | |||||
Deferred tax asset, net (See Note 12) | — | 11,084,000 | |||||
Total current assets | 298,243,000 | 300,756,000 | |||||
Property, plant and equipment, net | 39,588,000 | 15,370,000 | |||||
Goodwill | 264,503,000 | 137,354,000 | |||||
Intangibles with finite lives, net | 293,561,000 | 20,009,000 | |||||
Deferred financing costs, net | 3,739,000 | — | |||||
Other assets, net | 3,694,000 | 388,000 | |||||
Total assets | $ | 903,328,000 | 473,877,000 | ||||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 24,086,000 | 15,708,000 | ||||
Accrued expenses and other current liabilities | 75,137,000 | 29,470,000 | |||||
Dividends payable | 4,851,000 | 4,839,000 | |||||
Customer advances and deposits | 29,779,000 | 14,320,000 | |||||
Current portion of long-term debt | 14,062,000 | — | |||||
Current portion of capital lease obligations | 3,770,000 | — | |||||
Interest payable | 111,000 | — | |||||
Total current liabilities | 151,796,000 | 64,337,000 | |||||
Non-current portion of long-term debt, net | 328,486,000 | — | |||||
Non-current portion of capital lease obligations | 4,880,000 | — | |||||
Income taxes payable | 3,262,000 | 1,573,000 | |||||
Deferred tax liability, net (See Note 12) | 24,193,000 | 2,925,000 | |||||
Customer advances and deposits, non-current | 6,137,000 | — | |||||
Other liabilities | 4,776,000 | 3,633,000 | |||||
Total liabilities | 523,530,000 | 72,468,000 | |||||
Commitments and contingencies (See Note 19) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 | — | — | |||||
Common stock, par value $.10 per share; authorized 100,000,000 shares; issued 31,204,396 shares and 31,165,401 shares at April 30, 2016 and July 31, 2015, respectively | 3,121,000 | 3,117,000 | |||||
Additional paid-in capital | 430,549,000 | 427,083,000 | |||||
Retained earnings | 387,977,000 | 413,058,000 | |||||
821,647,000 | 843,258,000 | ||||||
Less: | |||||||
Treasury stock, at cost (15,033,317 shares at April 30, 2016 and July 31, 2015) | (441,849,000 | ) | (441,849,000 | ) | |||
Total stockholders’ equity | 379,798,000 | 401,409,000 | |||||
Total liabilities and stockholders’ equity | $ | 903,328,000 | 473,877,000 | ||||
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, | ||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||
Net sales | $ | 124,187,000 | 71,633,000 | 258,627,000 | 229,826,000 | ||||||||
Cost of sales | 72,796,000 | 39,325,000 | 149,596,000 | 124,318,000 | |||||||||
Gross profit | 51,391,000 | 32,308,000 | 109,031,000 | 105,508,000 | |||||||||
Expenses: | |||||||||||||
Selling, general and administrative | 30,439,000 | 15,005,000 | 60,818,000 | 46,557,000 | |||||||||
Research and development | 12,613,000 | 8,582,000 | 28,216,000 | 28,267,000 | |||||||||
Acquisition plan expenses | 16,960,000 | — | 20,689,000 | — | |||||||||
Amortization of intangibles | 4,776,000 | 1,561,000 | 7,348,000 | 4,682,000 | |||||||||
64,788,000 | 25,148,000 | 117,071,000 | 79,506,000 | ||||||||||
Operating (loss) income | (13,397,000 | ) | 7,160,000 | (8,040,000 | ) | 26,002,000 | |||||||
Other expenses (income): | |||||||||||||
Interest expense and other | 3,473,000 | 72,000 | 3,621,000 | 406,000 | |||||||||
Interest income and other | (5,000 | ) | (107,000 | ) | (227,000 | ) | (281,000 | ) | |||||
(Loss) income before (benefit from) provision for income taxes | (16,865,000 | ) | 7,195,000 | (11,434,000 | ) | 25,877,000 | |||||||
(Benefit from) provision for income taxes | (2,510,000 | ) | 2,235,000 | (994,000 | ) | 8,107,000 | |||||||
Net (loss) income | $ | (14,355,000 | ) | 4,960,000 | (10,440,000 | ) | 17,770,000 | ||||||
Net (loss) income per share (See Note 5): | |||||||||||||
Basic | $ | (0.89 | ) | 0.31 | (0.65 | ) | 1.10 | ||||||
Diluted | $ | (0.89 | ) | 0.30 | (0.65 | ) | 1.08 | ||||||
Weighted average number of common shares outstanding – basic | 16,195,000 | 16,202,000 | 16,184,000 | 16,220,000 | |||||||||
Weighted average number of common and common equivalent shares outstanding – diluted | 16,195,000 | 16,382,000 | 16,184,000 | 16,468,000 | |||||||||
Dividends declared per issued and outstanding common share as of the applicable dividend record date | $ | 0.30 | 0.30 | 0.90 | 0.90 | ||||||||
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, 2016 AND 2015
(Unaudited)
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 | — | — | 3,642,000 | — | — | — | 3,642,000 | |||||||||||||||||||
Proceeds from exercise of options | 49,200 | 5,000 | 1,412,000 | — | — | — | 1,417,000 | |||||||||||||||||||
Proceeds from issuance of employee stock purchase plan shares | 25,768 | 2,000 | 705,000 | — | — | — | 707,000 | |||||||||||||||||||
Common stock issued for net settlement of stock-based awards | 60,120 | 6,000 | (426,000 | ) | — | — | — | (420,000 | ) | |||||||||||||||||
Cash dividends declared | — | — | — | (14,567,000 | ) | — | — | (14,567,000 | ) | |||||||||||||||||
Accrual of dividend equivalents | — | — | — | (169,000 | ) | — | — | (169,000 | ) | |||||||||||||||||
Net income tax shortfall from settlement of stock-based awards | — | — | (248,000 | ) | — | — | — | (248,000 | ) | |||||||||||||||||
Reversal of deferred tax asset associated with debt converted to shares of common stock | — | — | (58,000 | ) | — | — | — | (58,000 | ) | |||||||||||||||||
Reversal of deferred tax assets associated with expired and unexercised stock-based awards | — | — | (12,000 | ) | — | — | — | (12,000 | ) | |||||||||||||||||
Repurchases of common stock | — | — | — | — | 175,735 | (4,989,000 | ) | (4,989,000 | ) | |||||||||||||||||
Net income | — | — | — | 17,770,000 | — | — | 17,770,000 | |||||||||||||||||||
Balance as of April 30, 2015 | 31,151,557 | $ | 3,115,000 | $ | 426,255,000 | $ | 412,477,000 | 15,033,317 | $ | (441,849,000 | ) | $ | 399,998,000 | |||||||||||||
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 | |||||||||||||
Equity-classified stock award compensation | — | — | 3,125,000 | — | — | — | 3,125,000 | |||||||||||||||||||
Proceeds from issuance of employee stock purchase plan shares | 29,070 | 3,000 | 496,000 | — | — | — | 499,000 | |||||||||||||||||||
Common stock issued for net settlement of stock-based awards | 9,925 | 1,000 | (75,000 | ) | — | — | — | (74,000 | ) | |||||||||||||||||
Cash dividends declared | — | — | — | (14,544,000 | ) | — | — | (14,544,000 | ) | |||||||||||||||||
Accrual of dividend equivalents, net of reversal | — | — | — | (97,000 | ) | — | — | (97,000 | ) | |||||||||||||||||
Net income tax shortfall from settlement of stock-based awards | — | — | (25,000 | ) | — | — | — | (25,000 | ) | |||||||||||||||||
Reversal of deferred tax assets associated with expired and unexercised stock-based awards | — | — | (55,000 | ) | — | — | — | (55,000 | ) | |||||||||||||||||
Net loss | — | — | — | (10,440,000 | ) | — | — | (10,440,000 | ) | |||||||||||||||||
Balance as of April 30, 2016 | 31,204,396 | $ | 3,121,000 | $ | 430,549,000 | $ | 387,977,000 | 15,033,317 | $ | (441,849,000 | ) | $ | 379,798,000 | |||||||||||||
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, | |||||||
2016 | 2015 | ||||||
Cash flows from operating activities: | |||||||
Net (loss) income | $ | (10,440,000 | ) | 17,770,000 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||
Depreciation and amortization of property, plant and equipment | 6,078,000 | 4,896,000 | |||||
Amortization of intangible assets with finite lives | 7,348,000 | 4,682,000 | |||||
Amortization of stock-based compensation | 3,166,000 | 3,642,000 | |||||
Amortization of deferred financing costs | 292,000 | 65,000 | |||||
(Gain) loss on disposal of property, plant and equipment | (15,000 | ) | 3,000 | ||||
Provision for allowance for doubtful accounts | 670,000 | 315,000 | |||||
Provision for excess and obsolete inventory | 2,022,000 | 1,962,000 | |||||
Excess income tax benefit from stock-based award exercises | (23,000 | ) | (140,000 | ) | |||
Deferred income tax benefit | (516,000 | ) | (1,103,000 | ) | |||
Changes in assets and liabilities, net of effects of business acquisition: | |||||||
Accounts receivable | 23,057,000 | (13,049,000 | ) | ||||
Inventories | 5,068,000 | (8,729,000 | ) | ||||
Prepaid expenses and other current assets | 1,877,000 | (225,000 | ) | ||||
Other assets | (306,000 | ) | (40,000 | ) | |||
Accounts payable | (9,846,000 | ) | (3,882,000 | ) | |||
Accrued expenses and other current liabilities | (4,013,000 | ) | (3,152,000 | ) | |||
Customer advances and deposits | (5,910,000 | ) | 5,063,000 | ||||
Other liabilities, non-current | (882,000 | ) | (608,000 | ) | |||
Interest payable | 82,000 | (29,000 | ) | ||||
Income taxes payable | (5,436,000 | ) | 242,000 | ||||
Net cash provided by operating activities | 12,273,000 | 7,683,000 | |||||
Cash flows from investing activities: | |||||||
Payments for business acquisition, net of cash acquired | (280,535,000 | ) | — | ||||
Purchases of property, plant and equipment | (3,063,000 | ) | (2,833,000 | ) | |||
Net cash used in investing activities | (283,598,000 | ) | (2,833,000 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings of debt | 351,905,000 | — | |||||
Required payments for debt assumed for business acquisition | (134,101,000 | ) | — | ||||
Cash dividends paid | (14,540,000 | ) | (14,581,000 | ) | |||
Payment of deferred financing costs | (10,123,000 | ) | — | ||||
Repayment of long-term debt including capital lease obligations | (3,842,000 | ) | — | ||||
Payment of shelf registration costs | (337,000 | ) | — | ||||
Repurchases of common stock | — | (4,989,000 | ) | ||||
Proceeds from exercises of stock options | — | 1,417,000 | |||||
Proceeds from issuance of employee stock purchase plan shares | 499,000 | 707,000 | |||||
Excess income tax benefit from stock-based award exercises | 23,000 | 140,000 | |||||
Net cash provided by (used in) financing activities | 189,484,000 | (17,306,000 | ) | ||||
Net decrease in cash and cash equivalents | (81,841,000 | ) | (12,456,000 | ) | |||
Cash and cash equivalents at beginning of period | 150,953,000 | 154,500,000 | |||||
Cash and cash equivalents at end of period | $ | 69,112,000 | 142,044,000 | ||||
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, | |||||||
2016 | 2015 | ||||||
Supplemental cash flow disclosures: | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 2,976,000 | 117,000 | ||||
Income taxes | $ | 4,766,000 | 8,970,000 | ||||
Non-cash investing and financing activities: | |||||||
Accrued fixed asset additions | $ | 125,000 | — | ||||
Cash dividends declared but unpaid (including accrual of dividend equivalents) | $ | 5,265,000 | 5,115,000 | ||||
Accrued deferred financing costs | $ | 139,000 | — | ||||
Accrued shelf registration costs | $ | 20,000 | — | ||||
See accompanying notes to condensed consolidated financial statements.
6
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and subsidiaries (“Comtech,” “we,” “us,” or “our”) as of and for the three and nine months ended April 30, 2016 and for the three and nine months ended April 30, 2015 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, 2015 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.
Certain prior year amounts have been reclassified to conform to current year presentation.
(2) Acquisition
In connection with our focused acquisition plan, on February 23, 2016, we completed the acquisition of TeleCommunication Systems, Inc. ("TCS"), 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 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 resulted in Comtech entering complementary markets and expanding our domestic and international commercial offerings. TCS is now a wholly-owned subsidiary of Comtech.
The acquisition has a preliminary aggregate purchase price for accounting purposes of approximately $340,432,000 (also referred to as the transaction equity value) and an enterprise value of approximately $423,629,000. The fair value of consideration transferred in connection with the TCS acquisition was approximately $280,535,000 in cash, which is net of $59,897,000 of cash acquired. We have funded and expect to fully fund the acquisition (including approximately $48,000,000 of transaction and merger related expenditures) and have repaid $134,101,000 of debt assumed in connection with the acquisition by redeploying a significant amount of our combined cash and cash equivalents, with the remaining funds coming from, as discussed further in Note (10) - "Secured Credit Facility," a $400,000,000 Secured Credit Facility (the "Secured Credit Facility.")
We have incurred and expect to incur transaction and merger related expenditures totaling $48,000,000, which includes significant amounts 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. For the three and nine months ended April 30, 2016, acquisition plan expenses were approximately $16,960,000 and $20,689,000, respectively, and primarily related to the TCS acquisition. We expect to record an additional expense of approximately $3,900,000 during the fourth quarter of fiscal 2016. The remaining transaction and merger related expenditures have been accounted for by TCS prior to its acquisition by Comtech or have been capitalized (such as deferred financing costs) on our Condensed Consolidated Balance Sheet as of April 30, 2016.
Our consolidated financial results for the three and nine months ended April 30, 2016 include approximately $65,957,000 of net sales from TCS operations. Given the immediate integration of TCS into our business, it is not practicable to determine the earnings contributions of TCS during the three and nine months ended April 30, 2016.
7
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
We are accounting for the TCS acquisition under the acquisition method of accounting in accordance with FASB ASC 805, “Business Combinations." The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value at February 23, 2016, pursuant to the business combination accounting rules. Acquisition-related transaction costs are not included as components of consideration transferred but are expensed in the period incurred. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in connection with the TCS acquisition, based on the current best estimates of management:
February 23, 2016 | |||||
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 | |||
Preliminary allocation of aggregate purchase price: | |||||
Cash and cash equivalents | $ | 59,897,000 | |||
Current assets, excluding cash acquired | 115,797,000 | ||||
Deferred tax assets, net, non-current | 72,700,000 | ||||
Property, plant and equipment | 26,720,000 | ||||
Other assets, non-current | 2,641,000 | ||||
Current liabilities (excluding interest accrued on debt) | (87,700,000 | ) | |||
Debt (including interest accrued) | (134,101,000 | ) | |||
Capital lease obligations | (8,993,000 | ) | |||
Other liabilities | (9,156,000 | ) | |||
Net tangible assets at preliminary fair value | $ | 37,805,000 | |||
Identifiable intangible assets, deferred taxes and goodwill: | Estimated Useful Lives | ||||
Customer relationships and backlog | $ | 225,900,000 | 21 to 22 years | ||
Trade names | 20,000,000 | 10 to 20 years | |||
Technology | 35,000,000 | 5 to 15 years | |||
Deferred tax liabilities related to intangible assets acquired | (105,422,000 | ) | |||
Goodwill | 127,149,000 | Indefinite | |||
Preliminary allocation of aggregate purchase price | $ | 340,432,000 | |||
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 preliminary 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.
The allocation of the preliminary aggregate purchase price for TCS was based upon a preliminary valuation and estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date). The primary areas of the purchase price allocation for TCS not yet finalized include income taxes, pre-acquisition contingencies for TCS’s intellectual property matters that existed as of the acquisition date (see “Notes to Condensed Consolidated Financial Statements - Note (19) “Legal Matters and Proceedings”) and residual goodwill.
8
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The unaudited pro forma financial information in the table below, for the three months ended April 30, 2016, combines the historical results of Comtech for the three months ended April 30, 2016 and, due to the differences in the companies’ reporting periods, the historical results of TCS for the three months ended March 31, 2016, as if the acquisition had occurred on August 1, 2014. The unaudited pro forma financial information in the table below, for the nine months ended April 30, 2016, combines the historical results of Comtech for the nine months ended April 30, 2016 and, due to the differences in the companies’ reporting periods, the historical results of TCS for the nine months ended March 31, 2016, as if the acquisition had occurred on August 1, 2014.
The unaudited pro forma financial information in the table below, for the three months ended April 30, 2015, combines the historical results of Comtech for the three months ended April 30, 2015 and, due to the differences in the companies’ reporting periods, the historical results of TCS for the three months ended March 31, 2015, as if the acquisition had occurred on August 1, 2014. The unaudited pro forma financial information in the table below, for the nine months ended April 30, 2015, combines the historical results of Comtech for the nine months ended April 30, 2015 and, due to the differences in the companies’ reporting periods, the historical results of TCS for the nine months ended March 31, 2015, as if the acquisition had occurred on August 1, 2014.
Three months ended April 30, | Nine months ended April 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net sales | $ | 130,238,000 | $ | 153,500,000 | $ | 453,475,000 | $ | 499,934,000 | |||||||
Net (loss) income | (21,395,000 | ) | 1,739,000 | (27,694,000 | ) | (16,065,000 | ) | ||||||||
Basic net (loss) income per share | (1.32 | ) | 0.11 | (1.71 | ) | (0.99 | ) | ||||||||
Diluted net (loss) income per share | (1.32 | ) | 0.11 | (1.71 | ) | (0.99 | ) | ||||||||
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 $1,569,000 for the three months ended April 30, 2016 and $7,331,000 and $285,000 for the nine months ended April 30, 2016 and 2015, respectively. There were no sales between Comtech and TCS for the three months ended April 30, 2015. |
• | The reduction to capitalized software amortization of $937,000 and $890,000 for the three months ended April 30, 2016 and 2015, respectively, and $3,062,000 and $2,539,000 for the nine months ended April 30, 2016 and 2015, respectively, related to the difference between the historical value and the preliminary estimated fair value of TCS's capitalized software. |
• | The elimination of acquisition plan expenses of $22,464,000 and $25,507,000 for the three and nine months ended April 30, 2016, respectively, and addition of $35,660,000 for the nine months ended April 30, 2015, due to the assumption that all of the acquisition plan expenses were incurred on August 1, 2014. There were no acquisition plan expenses for the three months ended April 30, 2015. |
• | The incremental amortization expense of $1,581,000 and $3,891,000 for the three months ended April 30, 2016 and 2015, respectively, and $7,935,000 and $11,628,000 for the nine months ended April 30, 2016 and 2015, respectively, associated with the increase in acquired other intangible assets. |
• | The reduction in interest expense of $1,836,000 for the three months ended April 30, 2016 and increase in interest expense of $2,165,000 for the three months ended April 30, 2015 and increase in interest expense of $1,731,000 and $6,221,000 for the nine months ended April 30, 2016 and 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 $124,000 and $158,000 for the three months ended April 30, 2016 and 2015, respectively, and $585,000 and $509,000 for the nine months ended April 30, 2016 and 2015, respectively, due to the assumed cash payments relating to the TCS acquisition. |
9
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
• | The related increase or decrease to the provision for income taxes, based on Comtech’s effective tax rate for the respective periods. |
(3) Adoption of Accounting Standards and Updates
We are required to prepare our condensed 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 commonly referred to as “GAAP.” The ASC is subject to updates by the FASB, which are known as Accounting Standards Updates (“ASUs”). During the nine months ended April 30, 2016, we adopted:
• | FASB ASU No. 2014-08 which changed the definition of discontinued operations and related disclosure requirements. Only those disposed components (or components held-for-sale) representing a strategic shift that have (or will have) a major effect on operations and financial results will be reported as discontinued operations. Continuing involvement will no longer prevent a disposal group from being presented as discontinued operations. Our adoption of this ASU did not have any impact on our consolidated financial statements and or disclosures. |
• | FASB ASU No. 2014-16 which requires an entity that issues or invests in hybrid financial instruments, issued in the form of a share, to determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of relevant facts and circumstances and including the embedded derivative feature that is being evaluated for separate accounting from the host contract. Our adoption of this ASU did not have any impact on our consolidated financial statements and or disclosures. |
• | FASB ASU No. 2015-01 which eliminates the concept of extraordinary items from GAAP and expands the presentation and disclosure guidance for items that are unusual in nature or occur infrequently. Our adoption of this ASU did not have any impact on our consolidated financial statements and or disclosures. |
• | FASB ASU No. 2015-02 which amends current consolidation guidance affecting the evaluation of whether certain legal entities should be consolidated. Our adoption of this ASU did not have any impact on our consolidated financial statements and or disclosures. |
• | FASB ASU No. 2015-03 which requires that debt issuance costs (which we refer to as deferred financing costs) be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Also, ASU No. 2015-15 was issued in August 2015 and indicates that Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs associated with a line of credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings. As discussed further in Note (10) - "Secured Credit Facility," we adopted this ASU during the nine months ended April 30, 2016 and presented on our Condensed Consolidated Balance Sheet as of April 30, 2016 $3,739,000 and $6,231,000 of net deferred financing costs as a non-current asset in the case of our Revolving Loan Facility and a direct deduction from the carrying amount of the non-current portion of the long-term debt related to our Term Loan Facility. |
• | FASB ASU No. 2015-05 which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Our adoption of this ASU did not have any material impact on our consolidated financial statements. |
• | FASB ASU No. 2015-07 which removes the requirements to categorize within the fair value hierarchy, and make certain disclosures related to, investments for which fair value is measured using the net asset value per share practical expedient. Our adoption of this ASU did not have any impact on our consolidated financial statements and or disclosures. |
10
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
• | FASB ASU No. 2015-16 which requires an acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU eliminates the requirement to retrospectively account for the adjustments to provisional amounts in a business combination. As permitted, we adopted this ASU as of February 1, 2016, and will apply this ASU prospectively to our accounting for the TCS acquisition which was completed on February 23, 2016. Our adoption of this ASU did not have any immediate impact on our consolidated financial statements, including disclosures. |
• | FASB ASU No. 2015-17 which requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. As discussed further in Note (12) - "Income Taxes," we adopted this ASU prospectively on August 1, 2015 and reclassified our net deferred tax assets and liabilities to the net non-current deferred tax asset in our Condensed Consolidated Balance Sheet beginning as of October 31, 2015. No prior periods were retrospectively adjusted. |
(4) Fair Value Measurements and Financial Instruments
As of April 30, 2016 and July 31, 2015, we had approximately $2,132,000 and $3,130,000, respectively, consisting primarily of money market mutual funds which are classified as cash and cash equivalents in our Condensed Consolidated Balance Sheets. These money market mutual funds are recorded at their fair value. FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, using the fair value hierarchy described in FASB ASC 820, we valued our money market mutual funds using Level 1 inputs that were based on quoted market prices.
The carrying amounts of our other current financial assets and our current financial liabilities, including receivables, accounts payable, accrued expenses and the current portion of our capital lease obligations and our Secured Credit Facility, approximate their fair values due to their short-term maturities.
The fair value of outstanding liabilities pursuant to our long-term Secured Credit Facility as of April 30, 2016 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 the fiscal quarter for which financial statements have most recently been delivered. We believe the fair value of our non-current portion of capital lease obligations, which currently has stated blended interest rates of 5.7%, would not be materially different than its $4,880,000 carrying value as of April 30, 2016.
As of April 30, 2016 and July 31, 2015, 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.
11
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(5) 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 (i) the amount an employee must pay upon assumed exercise of stock-based awards; (ii) the amount of stock-based compensation cost attributed to future services and not yet recognized; and (iii) the amount of excess tax benefits, if any, that would be credited to additional paid-in capital assuming 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.
There were no repurchases of our common stock during the three and nine months ended April 30, 2016. Weighted average basic and diluted shares outstanding for the three and nine months ended April 30, 2015 reflects a reduction of approximately 83,000 and 27,000 shares as a result of the repurchase of our common shares during the respective periods. See Note (18) - "Stockholders' Equity" for more information on our stock repurchase program.
Weighted average stock options and RSUs outstanding to purchase 2,362,000 and 685,000 shares for the three months ended April 30, 2016 and 2015, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive. Weighted average stock options and RSUs outstanding to purchase 2,365,000 and 477,000 shares for the nine months ended April 30, 2016 and 2015, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.
Our EPS calculations exclude 149,000 and 124,000 weighted average RSUs with performance measures (which we refer to as performance shares) outstanding for the three months ended April 30, 2016 and 2015, respectively, and 144,000 and 118,000 weighted average performance shares outstanding for the nine months ended April 30, 2016 and 2015, respectively, as the respective performance conditions have not yet been satisfied. However, the compensation expense related to these awards is included in net (loss) income (the numerator) for EPS calculations for each respective period.
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, | ||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||
Numerator: | |||||||||||||
Net (loss) income for basic calculation | $ | (14,355,000 | ) | 4,960,000 | (10,440,000 | ) | 17,770,000 | ||||||
Numerator for diluted calculation | $ | (14,355,000 | ) | 4,960,000 | (10,440,000 | ) | 17,770,000 | ||||||
Denominator: | |||||||||||||
Denominator for basic calculation | 16,195,000 | 16,202,000 | 16,184,000 | 16,220,000 | |||||||||
Effect of dilutive securities: | |||||||||||||
Stock-based awards | — | 180,000 | — | 248,000 | |||||||||
Denominator for diluted calculation | 16,195,000 | 16,382,000 | 16,184,000 | 16,468,000 | |||||||||
12
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(6) Accounts Receivable
Accounts receivable consist of the following at:
April 30, 2016 | July 31, 2015 | ||||||
Billed receivables from commercial and international customers | $ | 60,670,000 | 39,062,000 | ||||
Billed receivables from the U.S. government and its agencies | 29,086,000 | 8,375,000 | |||||
Unbilled receivables from commercial and international customers | 24,164,000 | 21,898,000 | |||||
Unbilled receivables on U.S. government contracts-in-progress | 21,964,000 | 1,126,000 | |||||
Total accounts receivable | 135,884,000 | 70,461,000 | |||||
Less allowance for doubtful accounts | 1,830,000 | 1,206,000 | |||||
Accounts receivable, net | $ | 134,054,000 | 69,255,000 | ||||
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 $118,000 of retainage included in unbilled receivables at April 30, 2016 and virtually no retainage at July 31, 2015 and in the opinion of management, a majority of the total unbilled receivables at April 30, 2016 will be billed and collected within one year. Of the unbilled receivables from commercial and international customers at April 30, 2016 and July 31, 2015, $6,922,000 and $20,256,000, respectively, relates to our two large over-the-horizon microwave system contracts with our large U.S. prime contractor customer (all of which related to our North African country end-customer).
As of April 30, 2016, the U.S. government (and its agencies) and Verizon Communications Inc. (through various divisions) represented 37.6% and 10.1%, respectively of total accounts receivable. As of July 31, 2015, the U.S. government (and its agencies) and one large U.S. prime contractor customer (the majority of which related our North African country end-customer) represented 13.5% and 36.3%, respectively of total accounts receivable.
(7) Inventories
Inventories consist of the following at:
April 30, 2016 | July 31, 2015 | ||||||
Raw materials and components | $ | 54,956,000 | 51,272,000 | ||||
Work-in-process and finished goods | 36,514,000 | 27,700,000 | |||||
Total inventories | 91,470,000 | 78,972,000 | |||||
Less reserve for excess and obsolete inventories | 16,146,000 | 16,904,000 | |||||
Inventories, net | $ | 75,324,000 | 62,068,000 | ||||
At April 30, 2016 and July 31, 2015, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $2,606,000 and $2,261,000, respectively.
At April 30, 2016 and July 31, 2015, $1,234,000 and $609,000, respectively, of the inventory balance above related to contracts from third party commercial customers who outsource their manufacturing to us.
13
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at:
April 30, 2016 | July 31, 2015 | |||||||
Accrued wages and benefits | $ | 21,432,000 | 12,134,000 | |||||
Accrued legal costs | 9,707,000 | 275,000 | ||||||
Accrued warranty obligations | 8,639,000 | 8,638,000 | ||||||
Accrued acquisition-related costs | 8,051,000 | 69,000 | ||||||
Accrued contract costs | 10,941,000 | 749,000 | ||||||
Accrued commissions and royalties | 2,333,000 | 2,398,000 | ||||||
Other | 14,034,000 | 5,207,000 | ||||||
Accrued expenses and other current liabilities | $ | 75,137,000 | $ | 29,470,000 | ||||
Included in accrued acquisition-related costs in the above table as of April 30, 2016 was $7,067,000 of change-in-control payments and $984,000 of professional fees for financial and legal advisors.
Accrued legal costs in the above table as of April 30, 2016 includes $4,500,000 of preliminary estimated losses and $3,529,000 of legal fees related to TCS's intellectual property matters and contract disputes, which are discussed further in the "Legacy TCS Intellectual Property Matters" section of Note (19) - "Legal Proceedings and Other Matters."
Accrued contract costs in the above table include direct and indirect costs on contracts as well as estimates 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 and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs. Changes in our product warranty liability were as follows:
Nine months ended April 30, | |||||||
2016 | 2015 | ||||||
Balance at beginning of period | $ | 8,638,000 | 8,618,000 | ||||
Provision for warranty obligations | 3,183,000 | 3,255,000 | |||||
Additions (in connection with the TCS acquisition) | 154,000 | — | |||||
Charges incurred | (3,336,000 | ) | (3,580,000 | ) | |||
Balance at end of period | $ | 8,639,000 | 8,293,000 | ||||
(9) 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 | |
14
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 remainder 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, 2016, the amount of the acquisition-related restructuring reserve is as follows:
Cumulative Activity Through April 30, 2016 | |||
Present value of estimated facility exit costs at August 1, 2008 | $ | 2,100,000 | |
Cash payments made | (8,628,000 | ) | |
Cash payments received | 8,600,000 | ||
Accreted interest recorded | 1,578,000 | ||
Liability as of April 30, 2016 | 3,650,000 | ||
Amount recorded as accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet | 1,350,000 | ||
Amount recorded as other liabilities in the Condensed Consolidated Balance Sheet | $ | 2,300,000 | |
As of July 31, 2015, the present value of the estimated facility exit costs was $4,235,000. During the nine months ended April 30, 2016, we made cash payments of $1,124,000 and we received cash payments of $323,000. Interest accreted for the three and nine months ended April 30, 2016 and 2015 was $68,000 and $216,000, respectively, and $71,000 and $206,000, respectively, and is included in interest expense for each respective fiscal period.
Future cash payments associated with our restructuring plan are summarized below:
As of | |||
April 30, 2016 | |||
Future lease payments to be made | $ | 3,650,000 | |
Interest expense to be accreted in future periods | 462,000 | ||
Total remaining payments | $ | 4,112,000 | |
(10) 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 provides a senior secured term loan A facility of $250,000,000 (the “Term Loan Facility”) and a senior 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 in five years, on February 23, 2021. The proceeds of these borrowings were used to finance in part our acquisition of TCS, including the repayment of certain existing indebtedness of TCS.
15
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of April 30, 2016, amounts outstanding under our Secured Credit Facility, net, were as follows:
April 30, 2016 | |||||
Term Loan Facility | $ | 246,875,000 | |||
Less unamortized deferred financing costs related to Term Loan Facility | 6,231,000 | ||||
Term Loan Facility, net | 240,644,000 | ||||
Revolving Credit Facility | 101,904,000 | ||||
Amount outstanding under Secured Credit Facility, net | 342,548,000 | ||||
Current portion of long-term debt | 14,062,000 | ||||
Non-current portion of long-term debt | $ | 328,486,000 | |||
Interest expense, including amortization of deferred financing costs, for both the three and nine months ended April 30, 2016 related to the Secured Credit Facility was 2,981,000 and reflects a blended current weighted interest rate of approximately 5.0%. Interest expense recorded during the nine months ended April 30, 2015 was $198,000, all of which related to a $100,000,000 committed revolving credit facility that expired on October 31, 2014. There was no interest expense recorded during the three months ended April 30, 2015. At April 30, 2016, we had $2,352,000 of standby letters of credit outstanding related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit.
The Revolving Loan Facility will be 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) 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 the fiscal quarter for which financial statements have most recently been delivered. 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. In addition, under certain circumstances, we may be required to enter into amendments to the Secured Credit Facility in connection with the further syndication of up to $15,000,000 of the principal amount of the Secured Credit Facility.
The obligations under the Secured Credit Facility are guaranteed by certain of our domestic subsidiaries (the “Subsidiary Guarantors”). As collateral security for amount outstanding under our Secured Credit Facility 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 credit agreement, dated as of February 23, 2016, pursuant to which the Secured Credit Facility is documented and which has been filed with the SEC.
16
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(11) Capital Lease Obligations
We lease certain equipment under capital leases, the majority of which we assumed in connection with our acquisition of TCS. The net book value of the leased assets which collateralize the capital lease obligation was $9,975,000 as of April 30, 2016, and consisted primarily of machinery and equipment. As of April 30, 2016, our capital lease obligations reflect a blended interest rate of approximately 5.3%. Our capital leases generally contain provisions whereby 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.
Future minimum payments under capital lease obligations consisted of the following at April 30, 2016:
Remainder of fiscal 2016 | $ | 1,144,000 | |
Fiscal 2017 | 3,920,000 | ||
Fiscal 2018 | 2,472,000 | ||
Fiscal 2019 | 1,476,000 | ||
Fiscal 2020 | 305,000 | ||
Total minimum lease payments | 9,317,000 | ||
Less: amounts representing interest | (667,000 | ) | |
Present value of net minimum lease payments | 8,650,000 | ||
Current portion of capital lease obligation | 3,770,000 | ||
Non-current portion of capital lease obligation | $ | 4,880,000 | |
(12) Income Taxes
At April 30, 2016 and July 31, 2015, total unrecognized tax benefits were $8,811,000 and $2,796,000, respectively, including interest of $59,000 and $68,000, respectively. At April 30, 2016 and July 31, 2015, $3,262,000 and $1,573,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable in our Condensed Consolidated Balance Sheets. At April 30, 2016 and July 31, 2015, the remaining unrecognized tax benefits of $5,549,000 and $1,223,000, respectively, were presented as an offset to the associated non-current deferred tax asset in our Condensed Consolidated Balance Sheets. Of the total unrecognized tax benefits at April 30, 2016 and July 31, 2015, $7,974,000 and $2,138,000, respectively, net of the reversal of the federal benefit recognized as deferred tax assets relating to state reserves, excluding interest, would positively impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our condensed consolidated financial statements. Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense.
On August 1, 2015, we adopted FASB ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” on a prospective basis. TCS adopted FASB ASU No. 2015-17 during 2015 on a prospective basis. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. At April 30, 2016, this ASU resulted in a reclassification of our net deferred tax assets and liabilities to the net non-current deferred tax liability in our Condensed Consolidated Balance Sheet. No prior periods were retrospectively adjusted.
During the quarter ended April 30, 2016, the Internal Revenue Service ("IRS") continued to audit our federal income tax return for fiscal 2014. Our federal income tax returns for fiscal 2013 and 2015 are also subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2011 are subject to audit. TCS’s federal income tax returns for calendar year 2013 and 2014 are subject to potential future IRS audit. None of TCS’s state income tax returns prior to calendar year 2011 are subject to audit. 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. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
17
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(13) 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”), as amended and restated, 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) RSUs, (iii) performance shares, (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, “share units”) and (vi) stock appreciation rights (“SARs”), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations. The aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 8,962,500. Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a shareholder who owns stock representing more than 10.0% of the voting power, no more than five years. We expect to settle all outstanding awards under the Plan and ESPP with new shares.
As of April 30, 2016, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 7,737,852 shares (net of 3,157,309 expired and canceled awards), of which an aggregate of 5,143,687 have been exercised or converted into common stock, substantially all of which related to stock options.
As of April 30, 2016, the following stock-based awards, by award type, were outstanding:
April 30, 2016 | ||
Stock options | 2,362,198 | |
Performance shares | 183,665 | |
RSUs and restricted stock | 39,799 | |
Share units | 8,503 | |
Total | 2,594,165 | |
Our ESPP provides for the issuance of 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. In December 2015, our shareholders approved an amendment to increase the number of shares authorized under the ESPP from 675,000 to 800,000. Through April 30, 2016, we have cumulatively issued 618,123 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, | ||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||
Cost of sales | $ | 70,000 | 71,000 | 233,000 | 204,000 | ||||||||
Selling, general and administrative expenses | 875,000 | 1,005,000 | 2,630,000 | 2,963,000 | |||||||||
Research and development expenses | 96,000 | 168,000 | 303,000 | 475,000 | |||||||||
Stock-based compensation expense before income tax benefit | 1,041,000 | 1,244,000 | 3,166,000 | 3,642,000 | |||||||||
Estimated income tax benefit | (391,000 | ) | (432,000 | ) | (1,103,000 | ) | (1,283,000 | ) | |||||
Net stock-based compensation expense | $ | 650,000 | 812,000 | 2,063,000 | 2,359,000 | ||||||||
18
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At April 30, 2016, unrecognized stock-based compensation of $7,941,000, net of estimated forfeitures of $743,000, 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 April 30, 2016 and July 31, 2015 was $51,000 and $92,000, respectively.
Stock-based compensation expense, by award type, is summarized as follows:
Three months ended April 30, | Nine months ended April 30, | ||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||
Stock options | $ | 591,000 | 778,000 | 1,803,000 | 2,267,000 | ||||||||
Performance shares | 369,000 | 308,000 | 1,093,000 | 883,000 | |||||||||
ESPP | 35,000 | 52,000 | 118,000 | 158,000 | |||||||||
RSUs and restricted stock | 46,000 | 106,000 | 152,000 | 306,000 | |||||||||
Share units | — | — | — | 28,000 | |||||||||
Stock-based compensation expense before income tax benefit | 1,041,000 | 1,244,000 | 3,166,000 | 3,642,000 | |||||||||
Estimated income tax benefit | (391,000 | ) | (432,000 | ) | (1,103,000 | ) | (1,283,000 | ) | |||||
Net stock-based compensation expense | $ | 650,000 | 812,000 | 2,063,000 | 2,359,000 | ||||||||
ESPP stock-based compensation expense primarily relates to the 15% discount offered to employees participating in the ESPP.
The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded as part of our non-current deferred tax liability in our Condensed Consolidated Balance Sheet as of April 30, 2016. 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 Condensed Consolidated Statements of Cash Flows:
Nine months ended April 30, | |||||||
2016 | 2015 | ||||||
Actual income tax benefit recorded for the tax deductions relating to the settlement of stock-based awards | $ | 150,000 | 1,032,000 | ||||
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 | 127,000 | 892,000 | |||||
Excess income tax benefit recorded as an increase to additional paid-in capital | 23,000 | 140,000 | |||||
Less: Tax benefit initially disclosed but not previously recognized on settled equity-classified stock-based awards vesting prior to the adoption of accounting standards that require us to expense stock-based awards | — | — | |||||
Excess income tax benefit from settled equity-classified stock-based awards reported as a cash flow from financing activities in our Condensed Consolidated Statements of Cash Flows | $ | 23,000 | 140,000 | ||||
19
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of April 30, 2016 and July 31, 2015, the amount of hypothetical tax benefits related to stock-based awards, recorded as a component of additional paid-in capital, was $17,139,000 and $17,220,000, respectively. These amounts represent the initial hypothetical tax benefit of $8,593,000 determined upon adoption of ASC 718 (which reflects our estimate of cumulative actual tax deductions for awards issued and settled prior to August 1, 2005), adjusted for actual excess income tax benefits or shortfalls since that date. During the nine months ended April 30, 2016, we recorded an $81,000 reduction to additional paid-in capital and accumulated hypothetical tax benefits, which primarily represents net income tax shortfalls recognized from the settlement of stock-based awards and the reversal of unrealized deferred tax assets associated with certain vested equity-classified stock-based awards that expired during the respective period. During the nine months ended April 30, 2015, we recorded a $260,000 reduction to additional paid-in capital and accumulated hypothetical tax benefits, which primarily represents net income tax shortfalls recognized from the settlement of stock-based awards during the respective period.
Stock Options
The following table summarizes the Plan's activity during the nine months ended April 30, 2016:
Awards (in Shares) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||
Outstanding at July 31, 2015 | 2,119,683 | $ | 29.33 | ||||||||||
Granted | 480,265 | 28.00 | |||||||||||
Expired/canceled | (182,250 | ) | 29.84 | ||||||||||
Exercised | (19,200 | ) | 27.24 | ||||||||||
Outstanding at October 31, 2015 | 2,398,498 | 29.04 | |||||||||||
Granted | 10,000 | 20.90 | |||||||||||
Expired/canceled | (58,240 | ) | 28.84 | ||||||||||
Outstanding at January 31, 2016 | 2,350,258 | 29.01 | |||||||||||
Granted | 43,000 | 21.50 | |||||||||||
Expired/canceled | (31,060 | ) | 29.34 | ||||||||||
Outstanding at April 30, 2016 | 2,362,198 | $ | 28.87 | 6.70 | $ | 149,000 | |||||||
Exercisable at April 30, 2016 | 1,042,962 | $ | 28.59 | 5.17 | $ | — | |||||||
Vested and expected to vest at April 30, 2016 | 2,287,266 | $ | 28.85 | 6.65 | $ | 142,000 | |||||||
Stock options outstanding as of April 30, 2016 have exercise prices ranging between $20.90 - $33.94. There were no stock options exercised during the three months ended April 30, 2016. The total intrinsic value relating to stock options exercised during the three months ended April 30, 2015 was $265,000. The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2016 and 2015 was $32,000 and $2,224,000, respectively. Stock options granted during the nine months ended April 30, 2016 and 2015 had exercise prices equal to 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.
During the nine months ended April 30, 2016 and 2015, at the election of certain holders of vested stock options, 19,200 and 293,988 stock options, respectively, were net settled upon exercise. As a result, 706 and 47,532 net shares of our common stock were issued after reduction of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements during the nine months ended April 30, 2016 and 2015, respectively.
20
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The estimated per-share weighted average grant-date fair value of stock options granted during the three and nine months ended April 30, 2016 was $3.95 and $5.55, respectively, and $4.53 and $6.13, respectively, during the three and nine months ended April 30, 2015, which was determined using the Black-Scholes option pricing model, and included the following weighted average assumptions:
Three months ended April 30, | Nine months ended April 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Expected dividend yield | 5.58 | % | 4.09 | % | 4.42 | % | 3.55 | % | ||||
Expected volatility | 35.80 | % | 27.00 | % | 34.39 | % | 28.12 | % | ||||
Risk-free interest rate | 1.39 | % | 1.37 | % | 1.53 | % | 1.61 | % | ||||
Expected life (years) | 5.04 | 5.22 | 5.15 | 5.45 | ||||||||
Expected dividend yield is the expected annual dividend as a percentage of the fair market value of our common stock on the date of grant, based on our Board's annual dividend target at the time of grant, which was $1.20 per share for grants in the nine months ended April 30, 2016 and 2015. 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.
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, 2015 | 224,165 | $ | 28.26 | ||||||||
Granted | 62,440 | 28.35 | |||||||||
Converted to common stock | (6,988 | ) | 25.28 | ||||||||
Forfeited | (45,154 | ) | 28.14 | ||||||||
Outstanding at October 31, 2015 | 234,463 | 28.39 | |||||||||
Converted to common stock | (4,725 | ) | 26.77 | ||||||||
Forfeited | (5,333 | ) | 29.07 | ||||||||
Outstanding at January 31, 2016 | 224,405 | 28.41 | |||||||||
Granted | 9,000 | 21.50 | |||||||||
Forfeited | (1,438 | ) | 28.35 | ||||||||
Outstanding at April 30, 2016 | 231,967 | $ | 28.14 | $ | 5,614,000 | ||||||
Vested at April 30, 2016 | 31,181 | $ | 27.15 | $ | 755,000 | ||||||
Vested and expected to vest at April 30, 2016 | 220,551 | $ | 28.14 | $ | 5,337,000 | ||||||
21
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The total intrinsic value relating to fully-vested awards converted into our common stock during the nine months ended April 30, 2016 and 2015 was $275,000 and $504,000, respectively. Performance shares granted to employees prior to fiscal 2014 vest over a 5.3 year period, beginning on the date of grant if pre-established performance goals are attained, and are convertible into shares of our common stock generally at the time of vesting, on a one-for-one basis for no cash consideration. The performance shares granted to employees since fiscal 2014 principally vest over a three-year performance period, if pre-established performance goals are attained or as specified pursuant to the Plan and related agreements. As of April 30, 2016, 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 are vested when issued and are convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. No share units granted to date have been converted into common stock.
The fair value of performance shares, RSUs, restricted stock and share units is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive. RSUs and performance shares granted in fiscal 2012 are not entitled to dividend equivalents. RSUs, performance shares and restricted stock granted in fiscal 2013 through 2016 are entitled to dividend equivalents unless forfeited before vesting occurs; however, performance shares granted in fiscal 2013 were not entitled to such dividend equivalents until our Board of Directors determined that the pre-established performance goals were met. Share units granted prior to fiscal 2014 are not entitled to dividend equivalents. Share units granted in fiscal 2014 and thereafter are entitled to dividend equivalents while the underlying shares are unissued.
Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of conversion of the underlying shares into our common stock. During the nine months ended April 30, 2016, we accrued $97,000 of dividend equivalents and paid out $8,000 when certain awards were converted to common stock. As of April 30, 2016 and July 31, 2015, accrued dividend equivalents were $414,000 and $325,000, respectively, of which $247,000 and $306,000, respectively, were included in other liabilities with the remainder included in accrued expenses and other current liabilities in our Condensed Consolidated Balance Sheets for the respective periods. Such amounts were recorded as a reduction to retained earnings.
Cash payments to remit employees' minimum statutory tax withholding requirements related to the net settlement of stock-based awards for the nine months ended April 30, 2016 and 2015 were $74,000 and $420,000, respectively, which is reported as a cash outflow from operating activities in our Condensed Consolidated Statements of Cash Flows for each respective period.
22
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(14) 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, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
United States | ||||||||||||
U.S. government | 41.9 | % | 37.5 | % | 41.8 | % | 29.7 | % | ||||
Domestic | 35.2 | % | 11.9 | % | 26.0 | % | 12.5 | % | ||||
Total United States | 77.1 | % | 49.4 | % | 67.8 | % | 42.2 | % | ||||
International | ||||||||||||
North African country | 0.9 | % | 17.3 | % | 2.6 | % | 15.6 | % | ||||
Other international | 22.0 | % | 33.3 | % | 29.6 | % | 42.2 | % | ||||
Total International | 22.9 | % | 50.6 | % | 32.2 | % | 57.8 | % | ||||
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.
International sales for the three months ended April 30, 2016 and 2015 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $28,417,000 and $36,243,000, respectively. International sales for the nine months ended April 30, 2016 and 2015 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $83,401,000 and $132,767,000, respectively.
For the three and nine months ended April 30, 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. For the three and nine months ended April 30, 2015, sales to a U.S. prime contractor represented approximately 17.0% and 15.2% of total net sales, respectively. Almost all of these sales relate to our North African country end-customer.
(15) 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. As of April 30, 2016, our chief operating decision maker, for purposes of FASB ASC 280, is our President and Chief Executive Officer ("CEO").
Beginning with our third quarter of fiscal 2016, we began managing our business in two reportable segments: Commercial Solutions and Government Solutions.
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 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.
23
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Our Government Solutions segment serves large U.S. and foreign government end-users who 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 EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric does not consider any allocation of the following: 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. Adjusted EBITDA is used by management in assessing the Company's operating results. The Company's definition of Adjusted EBITDA may differ from the definition of EBITDA used by other companies (including TCS prior to our acquisition) and may not be comparable to similarly titled measures used by other companies.
Operating segment information, along with a reconciliation of segment net income and consolidated net income to Adjusted EBITDA is presented in the tables below:
Three months ended April 30, 2016 | ||||||||||||||
Commercial Solutions | Government Solutions | Unallocated | Total | |||||||||||
Net sales | $ | 71,985,000 | 52,202,000 | — | $ | 124,187,000 | ||||||||
Operating income (loss) | $ | 6,560,000 | 5,629,000 | (25,586,000 | ) | $ | (13,397,000 | ) | ||||||
Net income (loss) | $ | 6,437,000 | 5,634,000 | (26,426,000 | ) | $ | (14,355,000 | ) | ||||||
Income taxes | 2,000 | — | (2,512,000 | ) | (2,510,000 | ) | ||||||||
Interest (income) and other expense | 53,000 | (5,000 | ) | (53,000 | ) | (5,000 | ) | |||||||
Interest expense | 68,000 | — | 3,405,000 | 3,473,000 | ||||||||||
Amortization of stock-based compensation | — | — | 1,041,000 | 1,041,000 | ||||||||||
Amortization of intangibles | 3,622,000 | 1,154,000 | — | 4,776,000 | ||||||||||
Depreciation | 2,130,000 | 647,000 | 305,000 | 3,082,000 | ||||||||||
Acquisition plan expenses | — | — | 16,960,000 | 16,960,000 | ||||||||||
Adjusted EBITDA | $ | 12,312,000 | 7,430,000 | (7,280,000 | ) | $ | 12,462,000 | |||||||
Purchases of property, plant and equipment | $ | 1,119,000 | 142,000 | 339,000 | $ | 1,600,000 | ||||||||
Long-lived assets acquired in connection with the TCS acquisition | $ | 353,729,000 | 76,681,000 | 4,359,000 | $ | 434,769,000 | ||||||||
Total assets at April 30, 2016 | $ | 616,247,000 | 209,278,000 | 77,803,000 | $ | 903,328,000 | ||||||||
24
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Three months ended April 30, 2015 | ||||||||||||||
Commercial Solutions | Government Solutions | Unallocated | Total | |||||||||||
Net sales | $ | 47,531,000 | 24,102,000 | — | $ | 71,633,000 | ||||||||
Operating income (loss) | $ | 3,201,000 | 7,978,000 | (4,019,000 | ) | $ | 7,160,000 | |||||||
Net income (loss) | $ | 3,259,000 | 7,987,000 | (6,286,000 | ) | $ | 4,960,000 | |||||||
Income taxes | (135,000 | ) | — | 2,370,000 | 2,235,000 | |||||||||
Interest (income) and other expense | 5,000 | (9,000 | ) | (103,000 | ) | (107,000 | ) | |||||||
Interest expense | 72,000 | — | — | 72,000 | ||||||||||
Amortization of stock-based compensation | — | — | 1,244,000 | 1,244,000 | ||||||||||
Amortization of intangibles | 1,561,000 | — | — | 1,561,000 | ||||||||||
Depreciation | 1,328,000 | 327,000 | 11,000 | 1,666,000 | ||||||||||
Adjusted EBITDA | $ | 6,090,000 | 8,305,000 | (2,764,000 | ) | $ | 11,631,000 | |||||||
Purchases of property, plant and equipment | $ | 379,000 | 290,000 | 19,000 | $ | 688,000 | ||||||||