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EX-32.2 - SECTION 1350 CERTIFICATION - COMTECH TELECOMMUNICATIONS CORP /DE/exhibit322q2fy16.htm
EX-32.1 - SECTION 1350 CERTIFICATION - COMTECH TELECOMMUNICATIONS CORP /DE/exhibit321q2fy16.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - COMTECH TELECOMMUNICATIONS CORP /DE/exhibit311q2fy16.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - COMTECH TELECOMMUNICATIONS CORP /DE/exhibit312q2fy16.htm
EX-10.1 - 2000 STOCK INCENTIVE PLAN, AMENDED AND RESTATED, EFFECTIVE DECEMBER 10, 2015 - COMTECH TELECOMMUNICATIONS CORP /DE/exhibit101q2fy16.htm

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 January 31, 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               No

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).
Yes               No


Indicate 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               No

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of March 7, 2016, the number of outstanding shares of Common Stock, par value $.10 per share, of the registrant was 16,162,140 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)
 
 
January 31, 2016
 
July 31, 2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
163,466,000

 
150,953,000

Accounts receivable, net
 
53,749,000

 
69,255,000

Inventories, net
 
58,424,000

 
62,068,000

Prepaid expenses and other current assets
 
5,940,000

 
7,396,000

Deferred tax asset, net (See Note 10)
 

 
11,084,000

Total current assets
 
281,579,000

 
300,756,000

 
 
 
 
 
Property, plant and equipment, net
 
13,839,000

 
15,370,000

Goodwill
 
137,354,000

 
137,354,000

Intangibles with finite lives, net
 
17,437,000

 
20,009,000

Deferred tax asset, net, non-current (See Note 10)
 
10,512,000

 

Deferred financing costs
 
759,000

 

Other assets, net
 
690,000

 
388,000

Total assets
 
$
462,170,000

 
473,877,000

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
18,270,000

 
15,708,000

Accrued expenses and other current liabilities
 
30,579,000

 
29,470,000

Dividends payable
 
4,848,000

 
4,839,000

Customer advances and deposits
 
6,268,000

 
14,320,000

Total current liabilities
 
59,965,000

 
64,337,000

 
 
 
 
 
Other liabilities
 
2,864,000

 
3,633,000

Income taxes payable
 
1,469,000

 
1,573,000

Deferred tax liability, net (See Note 10)
 

 
2,925,000

Total liabilities
 
64,298,000

 
72,468,000

Commitments and contingencies (See Note 17)
 


 


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 31,195,457 shares and 31,165,401 shares at January 31, 2016 and July 31, 2015, respectively
 
3,120,000

 
3,117,000

Additional paid-in capital
 
429,361,000

 
427,083,000

Retained earnings
 
407,240,000

 
413,058,000

 
 
839,721,000

 
843,258,000

Less:
 
 

 
 

Treasury stock, at cost (15,033,317 shares at January 31, 2016 and July 31, 2015)
 
(441,849,000
)
 
(441,849,000
)
Total stockholders’ equity
 
397,872,000

 
401,409,000

Total liabilities and stockholders’ equity
 
$
462,170,000

 
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 January 31,
 
Six months ended January 31,
 
 
2016
 
2015
 
2016
 
2015
Net sales
 
$
70,323,000

 
81,802,000

 
134,440,000

 
158,193,000

Cost of sales
 
40,885,000

 
43,927,000

 
76,800,000

 
84,993,000

Gross profit
 
29,438,000

 
37,875,000

 
57,640,000

 
73,200,000

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Selling, general and administrative
 
15,053,000

 
16,026,000

 
30,379,000

 
31,552,000

Research and development
 
7,663,000

 
9,666,000

 
15,603,000

 
19,685,000

Acquisition plan expenses
 
2,337,000

 

 
3,729,000

 

Amortization of intangibles
 
1,196,000

 
1,560,000

 
2,572,000

 
3,121,000

 
 
26,249,000

 
27,252,000

 
52,283,000

 
54,358,000

 
 
 
 
 
 
 
 
 
Operating income
 
3,189,000

 
10,623,000

 
5,357,000

 
18,842,000

 
 
 
 
 
 
 
 
 
Other expenses (income):
 
 

 
 

 
 

 
 

Interest expense
 
73,000

 
69,000

 
148,000

 
334,000

Interest income and other
 
(110,000
)
 
(90,000
)
 
(222,000
)
 
(174,000
)
 
 
 
 
 
 
 
 
 
Income before provision for income taxes
 
3,226,000

 
10,644,000

 
5,431,000

 
18,682,000

Provision for income taxes
 
750,000

 
3,059,000

 
1,516,000

 
5,872,000

 
 
 
 
 
 
 
 
 
Net income
 
$
2,476,000

 
7,585,000

 
3,915,000

 
12,810,000

Net income per share (See Note 4):
 
 

 
 

 
 

 
 

Basic
 
$
0.15

 
0.47

 
0.24

 
0.79

Diluted
 
$
0.15

 
0.46

 
0.24

 
0.78

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
 
16,186,000

 
16,241,000

 
16,178,000

 
16,229,000

 
 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding – diluted
 
16,205,000

 
16,505,000

 
16,201,000

 
16,510,000

 
 
 
 
 
 
 
 
 
Dividends declared per issued and outstanding common share as of the applicable dividend record date
 
$
0.30

 
0.30

 
0.60

 
0.60

 
See accompanying notes to condensed consolidated financial statements.


3



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JANUARY 31, 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
 

 

 
2,398,000

 

 

 

 
2,398,000

Proceeds from exercise of options
 
4,200

 

 
119,000

 

 

 

 
119,000

Proceeds from issuance of employee stock purchase plan shares
 
16,491

 
2,000

 
477,000

 

 

 

 
479,000

Common stock issued for net settlement of stock-based awards
 
58,577

 
6,000

 
(395,000
)
 

 

 

 
(389,000
)
Cash dividends declared
 

 

 

 
(9,732,000
)
 

 

 
(9,732,000
)
Accrual of dividend equivalents
 

 

 

 
(113,000
)
 

 

 
(113,000
)
Net income tax shortfall from settlement of stock-based awards
 

 

 
(149,000
)
 

 

 

 
(149,000
)
Reversal of deferred tax assets associated with expired and unexercised stock-based awards
 

 

 
(12,000
)
 

 

 

 
(12,000
)
Net income
 

 

 

 
12,810,000

 

 

 
12,810,000

Balance as of January 31, 2015
 
31,095,737

 
$
3,110,000

 
$
423,678,000

 
$
412,408,000

 
14,857,582

 
$
(436,860,000
)
 
$
402,336,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 
2,084,000

 

 

 

 
2,084,000

Proceeds from issuance of employee stock purchase plan shares
 
20,131

 
2,000

 
346,000

 

 

 

 
348,000

Common stock issued for net settlement of stock-based awards
 
9,925

 
1,000

 
(74,000
)
 

 

 

 
(73,000
)
Cash dividends declared
 

 

 

 
(9,692,000
)
 

 

 
(9,692,000
)
Accrual of dividend equivalents, net of reversal
 

 

 

 
(41,000
)
 

 

 
(41,000
)
Net income tax shortfall from settlement of stock-based awards
 

 

 
(43,000
)
 

 

 

 
(43,000
)
Reversal of deferred tax assets associated with expired and unexercised stock-based awards
 

 

 
(35,000
)
 

 

 

 
(35,000
)
Net income
 

 

 

 
3,915,000

 

 

 
3,915,000

Balance as of January 31, 2016
 
31,195,457

 
$
3,120,000

 
$
429,361,000

 
$
407,240,000

 
15,033,317

 
$
(441,849,000
)
 
$
397,872,000


See accompanying notes to condensed consolidated financial statements.

4



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended January 31,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
3,915,000

 
12,810,000

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization of property, plant and equipment
 
2,996,000

 
3,230,000

Amortization of intangible assets with finite lives
 
2,572,000

 
3,121,000

Amortization of stock-based compensation
 
2,125,000

 
2,398,000

Amortization of deferred financing costs
 

 
65,000

(Gain) loss on disposal of property, plant and equipment
 
(2,000
)
 
3,000

Provision for allowance for doubtful accounts
 
520,000

 
74,000

Provision for excess and obsolete inventory
 
1,294,000

 
1,324,000

Excess income tax benefit from stock-based award exercises
 
(5,000
)
 
(138,000
)
Deferred income tax benefit
 
(2,479,000
)
 
(548,000
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
14,986,000

 
(14,083,000
)
Inventories
 
2,369,000

 
(7,391,000
)
Prepaid expenses and other current assets
 
1,836,000

 
475,000

Other assets
 
11,000

 
(37,000
)
Accounts payable
 
2,555,000

 
(1,006,000
)
Accrued expenses and other current liabilities
 
(484,000
)
 
(2,634,000
)
Customer advances and deposits
 
(8,112,000
)
 
(4,086,000
)
Other liabilities
 
(269,000
)
 
(290,000
)
Interest payable
 

 
(29,000
)
Income taxes payable
 
(436,000
)
 
(1,498,000
)
Net cash provided by (used in) operating activities
 
23,392,000

 
(8,240,000
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(1,463,000
)
 
(2,145,000
)
Net cash used in investing activities
 
(1,463,000
)
 
(2,145,000
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Cash dividends paid
 
(9,691,000
)
 
(9,712,000
)
Payment of shelf registration costs
 
(78,000
)
 

Proceeds from exercises of stock options
 

 
119,000

Proceeds from issuance of employee stock purchase plan shares
 
348,000

 
479,000

Excess income tax benefit from stock-based award exercises
 
5,000

 
138,000

Net cash used in financing activities
 
(9,416,000
)
 
(8,976,000
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
12,513,000

 
(19,361,000
)
Cash and cash equivalents at beginning of period
 
150,953,000

 
154,500,000

Cash and cash equivalents at end of period
 
$
163,466,000

 
135,139,000

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

5



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

 
 
Six months ended January 31,
 
 
2016
 
2015
Supplemental cash flow disclosures:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$

 
117,000

Income taxes
 
$
4,431,000

 
7,919,000

 
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
Cash dividends declared but unpaid (including accrual of dividend equivalents)
 
$
5,206,000

 
5,093,000

Accrued deferred financing costs
 
$
759,000

 

Accrued shelf registration costs
 
$
235,000

 


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 six months ended January 31, 2016 and for the three and six months ended January 31, 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.

(2)    Adoption of Accounting Standards and Updates

We are required to prepare our consolidated financial statements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) which is the source for all authoritative U.S. generally accepted accounting principles, which is commonly referred to as “GAAP.” The ASC is subject to updates by the FASB, which are known as Accounting Standards Updates (“ASUs”). During the six months ended January 31, 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 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. Our adoption of this ASU did not have any impact on our consolidated financial statements and or disclosures.


7


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


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.

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 (10) - "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.

(3)    Fair Value Measurements and Financial Instruments

As of January 31, 2016 and July 31, 2015, we had approximately $3,132,000 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.

As of January 31, 2016 and July 31, 2015, other than our cash and cash equivalents, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value.
 
(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 (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 six months ended January 31, 2016 or 2015.

Weighted average stock options and RSUs outstanding to purchase 2,369,000 and 447,000 shares for the three months ended January 31, 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 2,367,000 and 287,000 shares for the six months ended January 31, 2016 and 2015, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.


8


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


Our EPS calculations exclude 144,000 and 120,000 weighted average RSUs with performance measures (which we refer to as performance shares) outstanding for the three months ended January 31, 2016 and 2015, respectively, and 143,000 and 119,000 weighted average performance shares outstanding for the six months ended January 31, 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 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 January 31,
 
Six months ended January 31,
 
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
 
Net income for basic calculation
 
$
2,476,000

 
7,585,000

 
3,915,000

 
12,810,000

Numerator for diluted calculation
 
$
2,476,000

 
7,585,000

 
3,915,000

 
12,810,000

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Denominator for basic calculation
 
16,186,000

 
16,241,000

 
16,178,000

 
16,229,000

Effect of dilutive securities:
 
 
 
 

 
 
 
 
Stock-based awards
 
19,000

 
264,000

 
23,000

 
281,000

Denominator for diluted calculation
 
16,205,000

 
16,505,000

 
16,201,000

 
16,510,000

    
(5)    Accounts Receivable

Accounts receivable consist of the following at:
 
 
January 31, 2016
 
July 31, 2015
Billed receivables from commercial customers
 
$
27,677,000

 
39,062,000

Billed receivables from the U.S. government and its agencies
 
15,124,000

 
8,375,000

Unbilled receivables on contracts-in-progress
 
12,629,000

 
23,024,000

Total accounts receivable
 
55,430,000

 
70,461,000

Less allowance for doubtful accounts
 
1,681,000

 
1,206,000

Accounts receivable, net
 
$
53,749,000

 
69,255,000


Of the unbilled receivables at January 31, 2016 and July 31, 2015, $9,396,000 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). The remaining unbilled receivables include $1,070,000 and $1,126,000 at January 31, 2016 and July 31, 2015, respectively, due from the U.S. government and its agencies. We had virtually no retainage included in unbilled receivables at both January 31, 2016 and July 31, 2015. In the opinion of management, a majority of the unbilled receivables at January 31, 2016 will be billed and collected within one year.

As of January 31, 2016 and July 31, 2015, 17.2% and 36.3%, respectively of total accounts receivable was due from one large U.S. prime contractor customer (the majority of which related to our North African country end-customer).


9


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


(6)    Inventories

Inventories consist of the following at:
 
 
January 31, 2016
 
July 31, 2015
Raw materials and components
 
$
50,530,000

 
51,272,000

Work-in-process and finished goods
 
24,025,000

 
27,700,000

Total inventories
 
74,555,000

 
78,972,000

Less reserve for excess and obsolete inventories
 
16,131,000

 
16,904,000

Inventories, net
 
$
58,424,000

 
62,068,000


At January 31, 2016 and July 31, 2015, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $2,010,000 and $2,261,000, respectively.

At January 31, 2016 and July 31, 2015, $949,000 and $609,000, 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:
 
 
January 31, 2016
 
July 31, 2015
Accrued wages and benefits
 
$
8,678,000

 
12,134,000

Accrued warranty obligations
 
8,624,000

 
8,638,000

Accrued commissions and royalties
 
3,031,000

 
2,398,000

Other
 
10,246,000

 
6,300,000

Accrued expenses and other current liabilities
 
$
30,579,000

 
29,470,000


Included in other accrued expenses and other current liabilities as of January 31, 2016 was $2,193,000 of accrued costs associated with our acquisition of TeleCommunication Systems, Inc. ("TCS"). See Note (18) - "Subsequent Events" for further information regarding the TCS acquisition.
  
Accrued Warranty Obligations
We provide warranty coverage for most of our products for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. 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:
 
 
Six months ended January 31,
 
 
2016
 
2015
Balance at beginning of period
 
$
8,638,000

 
8,618,000

Provision for warranty obligations
 
2,096,000

 
1,992,000

Charges incurred
 
(2,110,000
)
 
(2,315,000
)
Balance at end of period
 
$
8,624,000

 
8,295,000


10


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


(8)    Radyne Acquisition-Related Restructuring Plan

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

Less: Estimated sublease income
8,600,000

Total net estimated facility exit costs
4,141,000

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

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


Our total non-cancelable lease obligations were based on the actual lease term which runs from November 1, 2008 through 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 January 31, 2016, the amount of the acquisition-related restructuring reserve is as follows:
 
Cumulative
Activity Through
January 31, 2016
Present value of estimated facility exit costs at August 1, 2008
$
2,100,000

Cash payments made
(8,242,000
)
Cash payments received
8,600,000

Accreted interest recorded
1,510,000

Liability as of January 31, 2016
3,968,000

Amount recorded as accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet
1,316,000

Amount recorded as other liabilities in the Condensed Consolidated Balance Sheet
$
2,652,000

 
As of July 31, 2015, the present value of the estimated facility exit costs was $4,235,000. During the six months ended January 31, 2016, we made cash payments of $738,000 and we received cash payments of $323,000. Interest accreted for the three and six months ended January 31, 2016 and 2015 was $73,000 and $148,000, respectively, and $69,000 and $135,000, 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
 
January 31, 2016
Future lease payments to be made
$
3,968,000

Interest expense to be accreted in future periods
530,000

Total remaining payments
$
4,498,000


11


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


(9)    Credit Facility

As of January 31, 2016, we had an uncommitted $15,000,000 secured credit facility (the "Credit Facility") with one bank that provides for the extension of credit to us in the form of revolving loans, including letters of credit and standby letters of credit, at any time and from time to time during its term, in an aggregate principal amount at any time outstanding not to exceed $15,000,000. Subject to covenant limitations, the Credit Facility may be used for working capital, capital expenditures and other general corporate purposes.

At January 31, 2016, we had $1,699,000 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 Credit Facility was terminated on February 23, 2016, when, as discussed further in Note (18) - "Subsequent Events," in connection with our acquisition of TCS, we entered into a new $400,000,000 credit facility.

Interest expense, including amortization of deferred financing costs, recorded during the six months ended January 31, 2015 was $198,000, all of which related to our $100,000,000 committed revolving credit facility that expired on October 31, 2014. There was no interest expense recorded during the three months ended January 31, 2016 and 2015 or the six months ended January 31, 2016.

(10)    Income Taxes

At January 31, 2016 and July 31, 2015, total unrecognized tax benefits were $3,055,000 and $2,796,000, respectively, including interest of $84,000 and $68,000, respectively. At January 31, 2016 and July 31, 2015, $1,469,000 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 January 31, 2016 and July 31, 2015, the remaining unrecognized tax benefits of $1,586,000 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 January 31, 2016 and July 31, 2015, $2,339,000 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. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. Adoption of this ASU resulted in a reclassification of 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.

In December 2015, we received notification from the Internal Revenue Service ("IRS") of its intent to audit our federal income tax return for fiscal 2014. Our federal income tax returns for fiscal 2012 and 2013 are also subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2011 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition. Excluding the impact of the TCS acquisition and any discrete tax items, we expect our fiscal 2016 effective tax rate to approximate 33.5%. This rate reflects the retroactive, permanent extension of the federal research and experimentation credit from December 31, 2014.



12


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


(11)    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 January 31, 2016, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 7,718,350 shares (net of 3,124,811 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 January 31, 2016, the following stock-based awards, by award type, were outstanding:

 
January 31, 2016
Stock options
2,350,258

Performance shares
174,665

RSUs and restricted stock
41,237

Share units
8,503

Total
2,574,663


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 January 31, 2016, we have cumulatively issued 609,184 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 January 31,
 
Six months ended January 31,
 
 
2016
 
2015
 
2016
 
2015
Cost of sales
 
$
100,000

 
66,000

 
163,000

 
133,000

Selling, general and administrative expenses
 
881,000

 
856,000

 
1,755,000

 
1,958,000

Research and development expenses
 
93,000

 
139,000

 
207,000

 
307,000

Stock-based compensation expense before income tax benefit
 
1,074,000

 
1,061,000

 
2,125,000

 
2,398,000

Estimated income tax benefit
 
(347,000
)
 
(383,000
)
 
(712,000
)
 
(851,000
)
Net stock-based compensation expense
 
$
727,000

 
678,000

 
1,413,000

 
1,547,000



13


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 January 31, 2016, unrecognized stock-based compensation of $8,686,000, net of estimated forfeitures of $803,000, is expected to be recognized over a weighted average period of 3.0 years. Total stock-based compensation capitalized and included in ending inventory at January 31, 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 January 31,
 
Six months ended January 31,
 
 
2016
 
2015
 
2016
 
2015
Stock options
 
$
609,000

 
731,000

 
1,212,000

 
1,489,000

Performance shares
 
390,000

 
167,000

 
724,000

 
575,000

ESPP
 
40,000

 
53,000

 
83,000

 
106,000

RSUs and restricted stock
 
35,000

 
96,000

 
106,000

 
200,000

Share units
 

 
14,000

 

 
28,000

Stock-based compensation expense before income tax benefit
 
1,074,000

 
1,061,000

 
2,125,000

 
2,398,000

Estimated income tax benefit
 
(347,000
)
 
(383,000
)
 
(712,000
)
 
(851,000
)
Net stock-based compensation expense
 
$
727,000

 
678,000

 
1,413,000

 
1,547,000


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 amount was recorded as a non-current deferred tax asset in our Condensed Consolidated Balance Sheet as of January 31, 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:

 
 
Six months ended January 31,
 
 
2016
 
2015
Actual income tax benefit recorded for the tax deductions relating to the settlement of stock-based awards
 
$
132,000

 
941,000

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

 
803,000

Excess income tax benefit recorded as an increase to additional paid-in capital
 
5,000

 
138,000

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
 
$
5,000

 
138,000



14


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


As of January 31, 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 $17,142,000 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 six months ended January 31, 2016, we recorded a $78,000 reduction to additional paid-in capital and accumulated hypothetical tax benefits, which 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 six months ended January 31, 2015, we recorded a $161,000 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 six months ended January 31, 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

 
6.89
 
$

 
 
 
 
 
 
 
 
 
Exercisable at January 31, 2016
 
1,050,880

 
$
28.59

 
5.42
 
$

 
 
 
 
 
 
 
 
 
Vested and expected to vest at January 31, 2016
 
2,259,510

 
$
28.99

 
6.84
 
$


Stock options outstanding as of January 31, 2016 have exercise prices ranging between $20.90 - $33.94. There were no stock options exercised during the three months ended January 31, 2016. The total intrinsic value relating to stock options exercised during the three months ended January 31, 2015 was $806,000. The total intrinsic value relating to stock options exercised during the six months ended January 31, 2016 and 2015 was $32,000 and $1,959,000, respectively. Stock options granted during the six months ended January 31, 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 six months ended January 31, 2016 and 2015, at the election of certain holders of vested stock options, 19,200 and 280,288 stock options, respectively, were net settled upon exercise. As a result, 706 and 45,989 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 six months ended January 31, 2016 and 2015, respectively.

15


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 six months ended January 31, 2016 was $3.69 and $5.69, respectively, and $6.46 and $6.14, respectively, during the three and six months ended January 31, 2015, which was determined using the Black-Scholes option pricing model, and included the following weighted average assumptions:
 
 
Three months ended January 31,
 
Six months ended January 31,
 
 
2016
 
2015
 
2016
 
2015
Expected dividend yield
 
5.74
%
 
3.55
%
 
4.32
%
 
3.54
%
Expected volatility
 
34.76
%
 
29.98
%
 
34.27
%
 
28.13
%
Risk-free interest rate
 
1.64
%
 
1.36
%
 
1.54
%
 
1.61
%
Expected life (years)
 
5.04

 
5.48

 
5.16

 
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 six months ended January 31, 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

 
$
4,380,000

 
 
 
 
 
 
 
Vested at January 31, 2016
 
31,181

 
$
27.15

 
$
609,000

 
 
 
 
 
 
 
Vested and expected to vest at January 31, 2016
 
214,373

 
$
28.40

 
$
4,185,000


The total intrinsic value relating to fully-vested awards converted into our common stock during the six months ended January 31, 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 January 31, 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.

16


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



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 six months ended January 31, 2016, we accrued $41,000 of dividend equivalents and paid out $8,000 when certain awards were converted to common stock. As of January 31, 2016 and July 31, 2015, accrued dividend equivalents were $358,000 and $325,000, respectively, of which $214,000 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 six months ended January 31, 2016 and 2015 were $73,000 and $389,000, respectively, which is reported as a cash outflow from operating activities in our Condensed Consolidated Statements of Cash Flows for each respective period.

(12)    Customer and Geographic Information

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

 
 
Three months ended January 31,
 
Six months ended January 31,
 
 
2016
 
2015
 
2016
 
2015
United States
 
 
 
 
 
 
 
 
U.S. government
 
42.0
%
 
27.5
%
 
41.7
%
 
26.2
%
Commercial
 
20.0
%
 
11.7
%
 
17.4
%
 
12.8
%
Total United States
 
62.0
%
 
39.2
%
 
59.1
%
 
39.0
%
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
North African country
 
2.4
%
 
15.0
%
 
4.2
%
 
14.8
%
Other international
 
35.6
%
 
45.8
%
 
36.7
%
 
46.2
%
Total International
 
38.0
%
 
60.8
%
 
40.9
%
 
61.0
%

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.


17


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


International sales for the three months ended January 31, 2016 and 2015 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $26,731,000 and $49,768,000, respectively. International sales for the six months ended January 31, 2016 and 2015 (which include sales to U.S. domestic companies for inclusion in products that will be sold to international customers) were $54,983,000 and $96,524,000, respectively.

Sales to a U.S. prime contractor customer represented approximately 14.4% of consolidated net sales for both three and six months ended January 31, 2015. Almost all of these sales related to our North African country end-customer. For the three and six months ended January 31, 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.

(13)    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 organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. As of January 31, 2016, our chief operating decision maker function, for purposes of FASB ASC 280, consisted of our President and Chief Executive Officer ("CEO").

While our results of operations are primarily reviewed on a consolidated basis, during the three and six months ended January 31, 2016, our chief operating decision maker managed the enterprise in three operating segments: (i) telecommunications transmission, (ii) RF microwave amplifiers, and (iii) mobile data communications, which are the same as our reportable operating segments.

Telecommunications transmission products include satellite earth station products (such as analog and digital modems, frequency converters, power amplifiers, transceivers and voice gateways) and over-the-horizon microwave communications products and systems (such as digital troposcatter modems).

RF microwave amplifier products include traveling wave tube amplifiers and solid-state, high-power narrow and broadband amplifier products that use the microwave and radio frequency spectrums.

Mobile data communications products and services substantially relate to our support of the U.S. Army's BFT-1 program, which is currently in a sustainment mode. We currently perform engineering services and satellite network operations on a cost-plus-fixed fee basis and program management services on a firm-fixed-price basis and we license certain of our intellectual property to the U.S. Army.

Segment information is presented in the tables below:

 
 
Three months ended January 31, 2016
 
 
Telecommunications
Transmission
 
RF Microwave
Amplifiers
 
Mobile Data
Communications
 
Unallocated
 
Total
Net sales
 
$
38,544,000

 
24,933,000

 
6,846,000

 

 
$
70,323,000

Operating income (loss)
 
4,803,000

 
1,382,000

 
3,735,000

 
(6,731,000
)
 
3,189,000

Interest income and other (expense)
 
(15,000
)
 
(7,000
)
 
2,000

 
130,000

 
110,000

Interest expense
 
73,000

 

 

 

 
73,000

Depreciation and amortization
 
1,715,000

 
860,000

 
79,000

 
1,082,000

 
3,736,000

Expenditure for long-lived assets, including intangibles
 
777,000

 
29,000

 
8,000

 
13,000

 
827,000

Total assets at January 31, 2016
 
212,211,000

 
87,070,000

 
6,415,000

 
156,474,000

 
462,170,000


18


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



 
 
Three months ended January 31, 2015
 
 
Telecommunications
Transmission
 
RF Microwave
Amplifiers
 
Mobile Data
Communications
 
Unallocated
 
Total
Net sales
 
$
53,867,000

 
21,646,000

 
6,289,000

 

 
$
81,802,000

Operating income (loss)
 
11,049,000

 
969,000

 
2,709,000

 
(4,104,000
)
 
10,623,000

Interest income and other (expense)
 
(26,000
)
 
(7,000
)
 
3,000

 
120,000

 
90,000

Interest expense
 
69,000

 

 

 

 
69,000

Depreciation and amortization
 
2,196,000

 
906,000

 
72,000

 
1,069,000

 
4,243,000

Expenditure for long-lived assets, including intangibles
 
742,000

 
582,000

 
60,000

 
14,000

 
1,398,000

Total assets at January 31, 2015
 
240,413,000

 
92,918,000

 
6,002,000

 
132,154,000

 
471,487,000


 
 
Six months ended January 31, 2016
 
 
Telecommunications
Transmission
 
RF Microwave
Amplifiers
 
Mobile Data
Communications
 
Unallocated
 
Total
Net sales
 
$
73,793,000

 
47,587,000

 
13,060,000

 

 
$
134,440,000

Operating income (loss)
 
7,164,000

 
3,350,000

 
6,734,000

 
(11,891,000
)
 
5,357,000

Interest income and other (expense)
 
(32,000
)
 
(7,000
)
 
5,000

 
256,000

 
222,000

Interest expense
 
148,000

 

 

 

 
148,000

Depreciation and amortization
 
3,658,000

 
1,734,000

 
160,000

 
2,141,000

 
7,693,000

Expenditure for long-lived assets, including intangibles
 
1,247,000

 
171,000

 
30,000

 
15,000

 
1,463,000

Total assets at January 31, 2016
 
212,211,000

 
87,070,000

 
6,415,000

 
156,474,000

 
462,170,000


 
 
Six months ended January 31, 2015
 
 
Telecommunications
Transmission
 
RF Microwave
Amplifiers
 
Mobile Data
Communications
 
Unallocated
 
Total
Net sales
 
$
105,223,000

 
40,410,000

 
12,560,000

 

 
$
158,193,000

Operating income (loss)
 
19,215,000

 
2,032,000

 
5,576,000

 
(7,981,000
)
 
18,842,000

Interest income and other (expense)
 
(55,000
)
 
(25,000
)
 
6,000

 
248,000

 
174,000

Interest expense
 
136,000

 

 

 
198,000

 
334,000

Depreciation and amortization
 
4,409,000

 
1,785,000

 
142,000

 
2,413,000

 
8,749,000

Expenditure for long-lived assets, including intangibles
 
1,280,000

 
674,000

 
144,000

 
47,000

 
2,145,000

Total assets at January 31, 2015
 
240,413,000

 
92,918,000

 
6,002,000

 
132,154,000

 
471,487,000



19


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


Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs. In addition, unallocated expenses include amortization of stock-based compensation of $1,074,000, and $2,125,000, respectively, for the three and six months ended January 31, 2016 and $1,061,000 and $2,398,000, respectively, for the three and six months ended January 31, 2015. Interest expense for the six months ended January 31, 2015 includes interest on a committed $100,000,000 secured revolving credit facility that expired on October 31, 2014 and amortization of deferred financing costs, neither of which is allocated to the operating segments. Unallocated expenses for the three and six months ended January 31, 2016 include $2,337,000 and $3,729,000, respectively, of transaction costs primarily related to our acquisition of TCS. Unallocated expenses for the six months ended January 31, 2015 include $585,000 of expenses related to our strategic alternatives analysis which we concluded in December 2014. There were no such expenses during the three months ended January 31, 2015. Unallocated assets at January 31, 2016 consist principally of cash and deferred tax assets.

Intersegment sales for the three months ended January 31, 2016 and 2015 by the telecommunications transmission segment to the RF microwave amplifiers segment were $652,000 and $720,000, respectively. Intersegment sales for the six months ended January 31, 2016 and 2015 by the telecommunications transmission segment to the RF microwave amplifiers segment were $1,305,000 and $1,009,000, respectively.

Intersegment sales for the three months ended January 31, 2016 and 2015 by the telecommunications transmission segment to the mobile data communications segment were $87,000 and $141,000, respectively. Intersegment sales for the six months ended January 31, 2016 and 2015 by the telecommunications transmission segment to the mobile data communications segment were $108,000 and $337,000, respectively.

Intersegment sales for the three and six months ended January 31, 2016 by the RF microwave amplifiers segment to the telecommunications transmission segment were $13,000 and $32,000, respectively. There were no intersegment sales for the three and six months ended January 31, 2015 by the RF microwave amplifiers segment to the telecommunications transmission segment.

Substantially all of our long-lived assets are located in the U.S. and all intersegment sales are eliminated in consolidation and are excluded from the tables above.

As discussed further in Note (18) - "Subsequent Events," in connection with the TCS acquisition, which closed on February 23, 2016 (the first month of our third quarter of fiscal 2016), we announced a new organizational structure in which our chief operating decision maker will manage the enterprise in two operating segments: commercial solutions and government solutions. As a result of these changes, effective with our third quarter ending April 30, 2016, we anticipate no longer reporting our financial results in three operating segments but rather our two new operating segments. We anticipate that historical operating segment financial information will be retrospectively reported for certain periods in a future SEC filing.

(14)    Goodwill

The carrying amount of goodwill by segment as of January 31, 2016 and July 31, 2015 are as follows:
 
 
Telecommunications
Transmission
 
RF Microwave
Amplifiers
 
Mobile Data
Communications
 
Total
Goodwill
 
$
107,779,000

 
29,575,000

 
13,249,000

 
$
150,603,000

Accumulated impairment
 

 

 
(13,249,000
)
 
(13,249,000
)
Balance
 
$
107,779,000

 
29,575,000

 

 
$
137,354,000


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 Step One (described below), we would do a Step Two test which compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.


20


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


On August 1, 2015 (the first day of our fiscal 2016), we performed a quantitative assessment (commonly referred to as a Step One test) using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. Based on our quantitative evaluation performed on August 1, 2015, we determined that our telecommunications transmission and RF microwave amplifiers reporting units had estimated fair values in excess of their carrying values of at least 14.0% and 14.2%, respectively, and concluded that our goodwill was not impaired. As such, we did not perform a Step Two assessment.
 
As discussed further in Note (18) - "Subsequent Events," in connection with the TCS acquisition, which closed on February 23, 2016 (the first month of our third quarter of fiscal 2016), we announced a new organizational structure in which our chief operating decision maker will manage the enterprise in two operating segments: commercial solutions and government solutions. In connection with this reporting change, we intend to perform a “Before Reorganization” and an “After Reorganization” interim goodwill impairment test during our three months ending April 30, 2016. Although these tests have not yet been finalized, we believe that no impairment of goodwill will result from our change to a new segment organizational structure.

In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2016 (the start of our fiscal 2017). This test will include an evaluation of the substantial goodwill that is expected to result from the TCS acquisition. During the interim periods, if our expected financial results materially decline below our initial expectations
or if other events and circumstances change which indicate the potential for impairment (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 interim impairment charges if we perform and fail an interim test. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

(15)    Intangible Assets

Intangible assets with finite lives as of January 31, 2016 and July 31, 2015 are as follows:
 
 
January 31, 2016
 
 
Weighted Average
Amortization Period
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Technologies
 
13.0
 
$
47,370,000

 
40,245,000

 
$
7,125,000

Customer relationships
 
10.0
 
29,831,000

 
22,456,000

 
7,375,000

Trademarks and other
 
20.0
 
5,794,000

 
2,857,000

 
2,937,000

Total
 
 
 
$
82,995,000

 
65,558,000

 
$
17,437,000


 
 
July 31, 2015
 
 
Weighted Average
Amortization Period
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Technologies
 
12.1
 
$
47,370,000

 
39,266,000

 
$
8,104,000

Customer relationships
 
10.0
 
29,831,000

 
20,981,000

 
8,850,000

Trademarks and other
 
20.0
 
5,794,000

 
2,739,000

 
3,055,000

Total
 
 
 
$
82,995,000

 
62,986,000

 
$
20,009,000


The weighted average amortization period in the above table excludes fully amortized intangible assets.

Amortization expense for the three months ended January 31, 2016 and 2015 was $1,196,000 and $1,560,000, respectively. Amortization expense for the six months ended January 31, 2016 and 2015 was $2,572,000 and $3,121,000, respectively.

Excluding the impact of the TCS acquisition which closed on February 23, 2016 and which is further discussed in Note (18) - "Subsequent Events," the estimated amortization expense for the fiscal years ending July 31, 2016, 2017, 2018, 2019, and 2020 is $4,962,000, $4,782,000, $4,782,000, $862,000 and $862,000, respectively.



21


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


(16)    Stockholders’ Equity

Stock Repurchase Program
As of January 31, 2016 and March 9, 2016, we were authorized to repurchase up to an additional $8,664,000 of our common stock, pursuant to our current $100,000,000 stock repurchase program. Our stock repurchase program has no time restrictions and repurchases may be made in open-market or privately negotiated transactions and may be made pursuant to SEC Rule 10b5-1 trading plans.

There were no repurchases of our common stock during the six months ended January 31, 2016 and 2015.

Dividends
The current targeted dividend amount that was established by our Board of Directors for fiscal 2016 is $1.20 per common share.

During the six months ended January 31, 2016, our Board of Directors declared quarterly dividends of $0.30 per common share on September 28, 2015 and December 9, 2015, which were paid to shareholders on November 20, 2015 and February 17, 2016, respectively.

On March 10, 2016, our Board of Directors declared a dividend of $0.30 per common share, payable on May 20, 2016, to shareholders of record at the close of business on April 20, 2016.

(17)    Legal Proceedings and Other Matters

Licensed Technology Dispute
In May 2015, we notified a third party that we were terminating their rights to use certain of our technology because they failed to remit payments owed to us pursuant to a written agreement. The technology relates to certain mobile data communications products that we no longer sell. In response, the third party informed us that they believed we were in breach of a written agreement and demanded a return of royalties paid. During the three months ended January 31, 2016, this matter was settled in our favor and we received payments owed to us.

TCS Legal Proceedings
Infringement Matters
As discussed further in Note (18) - "Subsequent Events," on February 23, 2016, we acquired TCS which is a party to a number of legal proceedings relating to customers seeking indemnification under contractual arrangements for claims and other costs associated with defending lawsuits alleging infringement of patents through their use of TCS’s products and services, including in combination with products and services of other vendors. In some cases, TCS has agreed to assume the defense of lawsuits and in other situations, TCS did not believe that its technology was infringing or that certain customers were entitled to indemnification. Due to the inherent difficulty of predicting the outcome of the TCS legal proceedings, it may be difficult to estimate the amount or range of reasonably possible loss in excess of amounts that TCS accrued as of the date of the acquisition. Resolution of any particular legal proceeding could have a material adverse effect on our future consolidated results of operations, financial position, or cash flows.


22


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


Acquisition-Related Lawsuits
On December 9, 2015, a putative class action, Stanley Magee v. TeleCommunication Systems, Inc., was commenced by the filing of a complaint in Maryland state court, in the Circuit Court for Anne Arundel County, against TCS, members of the TCS Board of Directors, Comtech and a wholly owned subsidiary of Comtech formed to effect the acquisition, Typhoon Acquisition Corp. (“Acquisition Corp.”). Three other complaints were filed on December 15, 2015: James Morakis v. TeleCommunication Systems, Inc., in the same Circuit Court; and Rafal Sawicz v. TeleCommunication Systems, Inc., and Wesley Shaffron v. TeleCommunication Systems, Inc., both filed in Maryland state court in the Circuit Court for Baltimore County. All of the complaints raise similar putative class claims against TCS, members of the TCS Board, Comtech and Acquisition Corp., in challenging (i) the process undertaken by TCS leading up to the Agreement and Plan of Merger (the “Merger Agreement”), dated November 22, 2015, among TCS, the Company and Acquisition Corp., (ii) the consideration to be received by TCS stockholders and (iii) the disclosures made in connection with the tender offer made pursuant to the Merger Agreement. The complaints generally allege breaches of fiduciary duty by members of the TCS Board in connection with the Merger Agreement, and allege that some or all of TCS, Comtech and Acquisition Corp. aided and abetted the purported breaches of fiduciary duty. The complaints seek equitable and injunctive relief, including an order enjoining the defendants from having completed the Acquisition, rescission of any consummated transaction, unspecified damages and attorneys’ fees. In the actions pending in Baltimore City, the defendants moved to dismiss the complaints and the plaintiffs moved for a preliminary injunction against completion of the acquisition. A hearing on these motions was held on January 18, 2016. The court in Baltimore City, however, did not rule on the preliminary injunction motion prior to the expiration of the tender offer or the closing of the acquisition which actually occurred on February 23, 2016.

On February 29, 2016, the court in Baltimore City issued a “Memorandum to Counsel” stating that the court had determined to grant defendants’ motion to dismiss the complaints in the actions pending in that court and would issue a decision within seven to ten days. With respect to the two actions pending in Anne Arundel County, on February 10, 2016, the court consolidated the two actions. There has been no further activity in that court with respect to those actions. The Company intends to seek dismissal of the Anne Arundel County actions following receipt of the decision by the Baltimore City court dismissing the actions pending there.

Other Proceedings
There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations.

23


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


(18)    Subsequent Events

On February 23, 2016, we completed our acquisition of 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 control (also known as Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (“C4ISR”) applications). The TCS acquisition was a significant step in our strategy of entering complementary markets and expanding our domestic and international commercial offerings. TCS is now a wholly-owned legal subsidiary.

A total of approximately 55,871,832 shares of Class A common stock, par value $0.01 per share (the “Class A Shares”), and Class B common stock, par value $0.01 per share (the “Class B Shares”, together with the Class A Shares, the “Shares”) (including Shares delivered through notices of guaranteed delivery), were validly tendered and not validly withdrawn in the tender offer (the “Offer”) to acquire all of the issued and outstanding Shares at a price of $5.00 per share (the “Offer Price”), representing approximately 88.32% of the issued and outstanding Shares as of the expiration of the Offer. The Offer expired at 5:00 P.M., New York City time, on Thursday, February 18, 2016. The number of Shares tendered in the Offer were accepted for payment and constituted a majority of all outstanding Shares satisfying the Minimum Condition (as defined in the Merger Agreement).

Following the completion of the Offer, all conditions to the Merger set forth in the Merger Agreement were satisfied, and on February 23, 2016, we completed our acquisition of TCS by effecting a merger in accordance with Section 3-106.1 of the Maryland General Corporation Law, pursuant to which Merger Sub was merged with and into TCS, with TCS surviving the merger as a wholly owned subsidiary of Comtech (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each outstanding Share, other than any Shares owned by Comtech, Merger Sub or any subsidiary of Comtech, Merger Sub or TCS immediately prior to the Effective Time, was automatically converted into the right to receive an amount in cash, without interest and subject to applicable withholding taxes, equal to the Offer Price.
 
At the Effective Time, each option to purchase Shares outstanding immediately prior to the Effective Time, by virtue of the Merger, was cancelled and converted into the right to receive an amount in cash, if any, without interest and less the amount of any tax withholdings, equal to the product of (i) the number of Shares underlying such option and (ii) an amount equal to (x) the Offer Price less (y) the per share exercise price of such option. In addition, at the Effective Time, each Share subject to forfeiture or other restrictions outstanding immediately prior to the Effective Time, by virtue of the Merger, was cancelled and converted into the right to receive an amount in cash, without interest and less the amount of any withholding taxes, equal to the product of (i) the number of Shares underlying such restricted share and (ii) the Offer Price; provided that any payments in respect of such restricted shares to which a former holder thereof may be eligible to receive will be earned subject to the same vesting schedule and other vesting terms and conditions which applied to such restricted shares prior to the Effective Time, and such payment shall become payable on the date or dates that such restricted shares would have become vested under the vesting schedule in place immediately prior to the Effective Time.

During the twelve months ended December 31, 2015, based on unaudited financial results, TCS generated revenue of approximately $360,000,000. On February 23, 2016, based on unaudited financial results, TCS had $61,405,000 of cash and cash equivalents and debt (including accrued interest) of approximately $144,124,000.

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 $423,151,000. We have funded and expect to fully fund the acquisition (including $48,000,000 of transaction and merger related expenditures) and repay the large majority of TCS debt by redeploying a significant amount of our combined cash and cash equivalents, with the remaining funds coming from a new $400,000,000 credit facility (the "New Credit Facility"). On the closing date, on a pro-forma combined basis, and assuming all transaction costs and TCS outstanding debt have been paid or assumed, the combined companies had more than $50,000,000 of cash and cash equivalents and outstanding debt of approximately $361,604,000.


24


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


Our New Credit Facility contains 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 New 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 the Company’s business. The obligations under our New Credit Facility are guaranteed by certain of the Company’s domestic subsidiaries (the “Subsidiary Guarantors”). As collateral security under the New Credit Facility and the guarantees thereof, the Company and the Subsidiary Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of their tangible and intangible assets. The agreements for our New Credit Facility were filed in a separate Current Report on Form 8-K dated February 29, 2016, with the SEC. In addition, under certain circumstances, we may be required to enter into amendments to the agreements in connection with the further syndication of our New Credit Facility. Any such material amendment will be disclosed in a future SEC filing.

We expect to incur transaction and merger related expenditures of approximately $48,000,000, which includes significant amounts for: (i) change-in-control payments, (ii) severance, (iii) costs associated with establishing our New Credit Facility, and (iv) professional fees for financial and legal advisors for both Comtech and TCS. Given that the TCS transaction closed on February 23, 2016, it was not practicable to perform and complete an analysis and assessment of the fair values of assets acquired and liabilities assumed as well as the accounting treatment related to expected transaction and merger related expenditures. Some of these expenditures are expected to be immediately expensed, some expensed during the first year following the closing and some capitalized in accordance with purchase accounting rules. The acquisition is expected to result in a material increase to Comtech’s annual amortization expense related to intangible assets as well as a material increase in annual interest expense.

In connection with the TCS acquisition, and beginning with our third quarter of fiscal 2016, we began managing our business in two operating segments: commercial solutions and government solutions. Our commercial solutions segment serves commercial customers (including smaller governments such as state and local governments) who require advanced technologies to meet their needs. We believe this segment has leadership positions in the areas of satellite communications, public safety systems and enterprise application technologies. Our government solutions segment serves large government end-users (including those of foreign countries) who require mission critical technologies and systems. We believe this segment has leadership positions in the areas of command and control applications, troposcatter communications and RF power and switching technologies.

25



ITEM 2. 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements, including but not limited to, information relating to our future performance and financial condition, plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, among other things: the possibility that the expected synergies from the acquisition of TeleCommunication Systems, Inc. ("TCS") will not be fully realized, or will not be realized within the anticipated time period; the risk that Comtech’s and TCS’s businesses will not be integrated successfully; the possibility of disruption from the merger, making it more difficult to maintain business and operational relationships or retain key personnel; the nature and timing of receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements; changing customer demands; changes in prevailing economic and political conditions; changes in the price of oil in global markets; changes in foreign currency exchange rates; risks associated with our legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our revolving credit facility and acquisition debt; risks associated with our large contracts; and other factors described in this and our other filings with the Securities and Exchange Commission (“SEC”).

OVERVIEW

We design, develop, produce and market innovative products, systems and services for advanced communications solutions. We sell our products to a diverse customer base in the global commercial and government communications markets. We believe we are a leader in most of the market segments that we serve.

In connection with the TCS acquisition, which closed on February 23, 2016 (the first month of our third quarter of fiscal 2016), we have announced that we will manage our combined business in two operating segments: commercial solutions and government solutions. The TCS acquisition is further discussed in the below section, entitled “Business Outlook for Fiscal 2016.”

As of January 31, 2016, we operated our business in three segments: (i) telecommunications transmission, (ii) RF microwave amplifiers and (iii)