Overview
We are a leading global provider of next-generation 911 emergency systems and secure wireless communications technologies to commercial and government customers around the world. Our solutions fulfill our customers' needs for secure wireless communications in some of the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial.
We manage our business through two reportable operating segments:
•Commercial Solutions - offers satellite ground station technologies (such as Single Channel per Carrier ("SCPC") and time division multiple access ("TDMA") modems and amplifiers) and public safety and location technologies (such as 911 call routing, 911 call handling and mapping solutions) to commercial customers and smaller government customers, such as state and local governments. This segment also serves certain large government customers (including theU.S. government) that have requirements for off-the-shelf commercial equipment. •Government Solutions - provides tactical satellite-based networks and ongoing support for complicated communications networks, troposcatter systems and solid-state, high-power amplifiers to large government end-users (including those of foreign countries), large international customers and domestic prime contractors. 51
-------------------------------------------------------------------------------- Our Quarterly Financial Information Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for over time. Our contracts with theU.S. government can be terminated for convenience by it at any time and orders are subject to unpredictable funding, deployment and technology decisions by theU.S. government. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, theU.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period. As such, comparisons between periods and our current results may not be indicative of a trend or future performance.
Critical Accounting Policies
We consider certain accounting policies to be critical due to the estimation process involved in each.
Revenue Recognition. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods: •Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer's specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits. For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly. The cost-to-cost method is principally used to account for contracts in our Government Solutions segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Commercial Solutions segment. For service-based contracts in our public safety and location technologies product line, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers' actual usage of the networks and platforms which we provide. 52 -------------------------------------------------------------------------------- •Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices. Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers in our Government Solutions segment. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery. In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers' specifications. Finished products, whether built to our standard specification or to a customers' specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss. When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable. When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery. When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us. When allocating the contract's transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract's transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations. 53 -------------------------------------------------------------------------------- Most of our contracts with customers are denominated inU.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts withU.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of theU.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. On large long term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material. As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such types of commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Consolidated Statements of Operations. Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. Impairment ofGoodwill and Other Intangible Assets. As ofJuly 31, 2021 , total goodwill recorded on our Consolidated Balance Sheet aggregated$347.7 million (of which$270.4 million relates to our Commercial Solutions segment and$77.3 million relates to our Government Solutions segment). Additionally, as ofJuly 31, 2021 , net intangibles recorded on our Consolidated Balance Sheet aggregated$268.7 million (of which$222.6 million relates to our Commercial Solutions segment and$46.1 million relates to our Government Solutions segment). Each of our two operating segments constitutes a reporting unit and we must make various assumptions in determining their estimated fair values. In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. OnAugust 1, 2021 (the first day of our fiscal 2022), we performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions. 54
-------------------------------------------------------------------------------- In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to ourAugust 1, 2021 total public market capitalization and assessed implied control premiums based on our common stock price of$24.97 as ofAugust 1, 2021 . Based on our quantitative evaluation, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least 22.7% and 94.1%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. It is possible that, during fiscal 2022 or beyond, business conditions (both in theU.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate. Such fluctuation could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global activity. A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2022 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial Solutions and Government Solutions reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired. In any event, we are required to perform the next annual goodwill impairment analysis onAugust 1, 2022 (the start of our fiscal 2023). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. In addition to our impairment analysis of goodwill, we also review net intangible assets with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangible assets were recoverable as ofJuly 31, 2021 . Any impairment charges that we may record in the future could be material to our results of operations and financial condition. Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition. Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal and state) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. TheU.S. federal government is our most significant income tax jurisdiction. 55 -------------------------------------------------------------------------------- Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as more likely than not to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The development of valuation allowances for deferred tax assets and reserves for income tax positions requires consideration of timing and judgments about future taxable income, tax issues and potential outcomes, and are subjective critical estimates. A portion of our deferred tax assets consist of federal research and experimentation tax credit carryforwards, some of which was acquired in connection with our acquisition of TCS. No valuation allowance has been established on these deferred tax assets based on our evaluation that our ability to realize such assets has met the criteria of "more likely than not." We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition.
Our
Research and Development Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, capitalized internally developed software costs were not material. Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and projected usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition. Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers' current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our strong cash position and the nominal amount of interest we are earning on our cash and cash equivalents, we have, on a limited basis, approved certain customer requests. We continue to monitor our accounts receivable credit portfolio. To-date, there has been no material changes in our credit portfolio as a result of the COVID-19 pandemic on worldwide business activities. Although our overall credit losses have historically been within the allowances we established, we cannot accurately predict our future credit loss experience, given the current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition. 56 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of our consolidated net sales:
Fiscal Years Ended
2021 2020 2019 Gross margin 36.8 % 36.8 % 36.8 % Selling, general and administrative expenses 19.2 % 19.0 % 19.1 % Research and development expenses 8.4 % 8.5 % 8.4 % Settlement of intellectual property litigation - % - % (0.5) % Acquisition plan expenses 17.2 % 3.4 % 0.9 % Amortization of intangibles 3.6 % 3.5 % 2.7 % Operating (loss) income (11.7) % 2.5 % 6.2 % Interest expense (income) and other 1.2 % 1.0 % 1.4 % Write-off of deferred financing costs - % - % 0.5 % (Loss) income before (benefit from) provision for income taxes (12.9) % 1.5 % 4.3 % Net (loss) income (12.6) % 1.1 % 3.7 % Adjusted EBITDA (a Non-GAAP measure) 13.2 % 12.6 % 13.9 %
For a definition and explanation of Adjusted EBITDA, see "Item 6. Selected Consolidated Financial Data - Non-GAAP Financial Data" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal 2021 and 2020 - Adjusted EBITDA."
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Impact of COVID-19 and Business Outlook for Fiscal 2022
For the fiscal year ended
•Net sales of
•GAAP operating loss of
•Non-GAAP operating income of$36.1 million and Non-GAAP net income of$22.4 million . These Non-GAAP financial measures are reconciled to the most directly comparable GAAP financial measures in the table included in the below section "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal 2021 and 2020;"
•GAAP net cash used in operating activities of
•Adjusted EBITDA (a Non-GAAP financial measure discussed below) of
As of
We achieved a fiscal 2021 consolidated book-to-bill ratio (a measure defined as bookings divided by net sales) of 1.07 and ended the year with consolidated backlog of$658.9 million , which represent substantial improvements as compared to our fiscal 2020. During fiscal 2021, we were awarded several multi-year contracts to deploy and operate next generation 911 ("NG-911") services for the states ofArizona ,Iowa ,Pennsylvania andSouth Carolina , collectively valued over$200.0 million . In addition, in connection with a multi-year contract award, we received an initial$13.0 million order from a large new customer to customize our next-generation broadband satellite technology that can be used with the thousands of Low Earth Orbit ("LEO") satellites reportedly being launched over the next several years. Our backlog (sometimes referred to herein as orders or bookings) are more fully defined in "Part I - Item 1. Business" included in this Annual Report on Form 10-K and the total value of multi-year contracts that we have received is substantially higher than our reported backlog. When adding our backlog and the total unfunded value of multi-year contracts that we have received and for which we expect future orders, our revenue visibility approximates$1.1 billion , excluding potential future orders from this large new customer that could amount to hundreds of millions of dollars. With COVID-19 continuing to impact global markets and supply chains, reliable forecasting remains challenging. Against that background,Comtech is targeting to achieve fiscal 2022 net sales within a range of$580.0 million to$600.0 million and Adjusted EBITDA between$70.0 million and$76.0 million . These targets reflect the strength of our backlog and a strong sales pipeline, offset by the lingering impacts of COVID-19, timing considerations associated with tightening global supply chain constraints and start-up costs associated with the opening of two new high-volume technology manufacturing facilities. In addition, our fiscal 2022 financial targets reflect the impact of the recently completed withdrawal ofU.S. troops fromAfghanistan and otherU.S. government program changes. Our consolidated net sales in fiscal 2022 are anticipated to reflect a higher percentage of total Commercial Solutions segment sales due to strong demand for our public safety and location technology solutions, including work on our recent contracts to design, deploy and operate NG-911 services for the states ofSouth Carolina andPennsylvania , and a higher level of annual sales in our satellite earth station product line as compared to fiscal 2021, including incremental contributions from our recently acquired TDMA modem technologies. In addition, our consolidated net sales in fiscal 2022 are anticipated to reflect strong demand for: (i) high reliability Electrical, Electronic and Electromechanical ("EEE") satellite-based space components and X/Y steerable antennas; (ii) ongoing sustainment services to theU.S. Army for the AN/TSC-198A SNAP terminal; (iii) Joint Cyber Analysis Course ("JCAC") training solutions; and (iv) sustainment services for the U.S.Army's Project Manager Mission Command ("PM MC") Blue Force Tracking ("BFT-1") program. Also, we expect additional orders for the newly introduced Comtech COMETTM, the world's smallest deployable troposcatter terminal, and our next generation troposcatter system used by theU.S. Marine Corps . 58 -------------------------------------------------------------------------------- Our GAAP operating income in fiscal 2022 will be impacted by both start-up manufacturing expenses and restructuring costs associated with the opening of our two new high-volume technology manufacturing centers, as well as COVID-19 related costs. Global supply chain issues make the amount and timing of these expenses difficult to predict. In addition, GAAP operating income in fiscal 2022 is likely to be impacted by greater than normal proxy solicitation related costs, as well as expenses associated with the appointment of a new CEO, as further discussed below. Because the amount and timing of these costs remain largely unpredictable, we are not providing GAAP operating income, GAAP net income or any GAAP EPS guidance or a reconciliation of our projected results to the most comparable GAAP measure, as such a reconciliation cannot be prepared without unreasonable effort. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results. OnOctober 4, 2021 , we announced that our Board of Directors has appointedMichael D. Porcelain , our President and Chief Operating Officer, to be Chief Executive Officer, taking over fromFred Kornberg after a short transition period. The change of leadership is expected to occur by the end of calendar 2021, at which pointMr. Porcelain will also join our Board of Directors and continue as President.Mr. Kornberg will serve as non-executive Chairman of the Board and is expect to take on a technology advisory role. Costs associated with this leadership transition will be announced once they are finalized.
On
Additional information related to our Business Outlook for Fiscal 2022 and a definition and explanation of Adjusted EBITDA is included in the below section "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal 2021 and 2020."
Comparison of Fiscal 2021 and 2020
Net Sales . Consolidated net sales were$581.7 million and$616.7 million for fiscal 2021 and 2020, respectively, representing a decrease of$35.0 million , or 5.7%. The period-over-period decrease in net sales reflects lower net sales in our Government Solutions segment, partially offset by higher net sales in our Commercial Solutions segment. Net sales by operating segment are discussed below. Commercial Solutions Net sales in our Commercial Solutions segment were$360.1 million for fiscal 2021, as compared to$353.7 million for fiscal 2020, an increase of$6.4 million , or 1.8%. Our Commercial Solutions segment represented 61.9% of consolidated net sales for fiscal 2021 as compared to 57.4% for fiscal 2020. Our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 1.23. Period-to-period fluctuations in bookings are normal for this segment. As further discussed below, long-term demand for our Commercial Solutions segment's products and technologies appears strong and we believe fiscal 2022 net sales for this segment will be higher than the amount we achieved in fiscal 2021. Net sales of our satellite ground station technologies for fiscal 2021 were higher than fiscal 2020. Fiscal 2021 benefited from a nominal amount of sales related to our acquisition ofUHP Networks Inc. ("UHP") onMarch 2, 2021 , which extended our product offerings to include TDMA satellite modems. We believe UHP developed revolutionary technology, which has the potential to transform the growing Very Small Aperture Terminal ("VSAT") market, as demand for high-speed satellite-based networks are projected to grow significantly. As a result of the acquisition, we believe we are well positioned for long-term growth in this market. While our satellite ground station product line continues to be impacted by COVID-19's effect on customer demand, particularly in international markets, which historically represents a large majority of end-users for this product line, we benefited during fiscal 2021 from a number of awards, including: (i)$11.4 million in delivery orders from theU.S. Naval Information Warfare Systems Command for our latest generation SLM-5650B satellite modems and firmware; (ii) multiple contracts aggregating$6.3 million for 500W Ka-band traveling wave tube amplifiers ("TWTAs") for both military and commercial high throughput satellite systems; (iii) multiple contracts aggregating$3.6 million from aU.S. system integrator for X-band solid-state power amplifiers ("SSPAs") and block up converters for transportable satellite communication terminals; (iv) a contract valued at more than$3.0 million for QV-band TWTAs to support a new high-speed satellite network; (v) an order valued at more than$2.0 million for state-of-the-art 500W Ka-band high power amplifiers supporting a leading high throughput satellite customer; and (vi) a$2.0 million order for rugged Ka-band high power TWTAs for aU.S. military communications system, among others. 59 -------------------------------------------------------------------------------- We expect sales of our satellite earth station products in fiscal 2022 to grow as compared to fiscal 2021 due to increased demand. This product line will also benefit from a full twelve months of sales of our new TDMA satellite network platform that we acquired inMarch 2021 . At the same time, recent spikes in COVID-19 infection rates have curtailed travel and business in many parts of the world. In addition, global supply chain constraints have become more prevalent in recent months, with lead times for certain parts extending meaningfully. We believe these issues are suppressing orders from many of our satellite earth station product line customers and impacting the timing of deliveries and installations. Although we are closely monitoring our inventory needs and supplier base, these constraints represent a significant performance headwind as we enter fiscal 2022. Net sales in fiscal 2021 of our public safety and location technology solutions were slightly higher than fiscal 2020, reflecting increased sales of our NG-911 services and location-based technology solutions, offset in part by the absence of 911 wireless call routing sales to AT&T. During fiscal 2021, we were awarded several important statewide NG-911 contracts and our strong momentum was acknowledged byFrost & Sullivan , who recognizedComtech for registering the most significant year-over-year market share increase among all NG-911 primary contract holders, growing our market share from an estimated 17.3% in 2019 to 26.2% in 2020, as calculated byFrost & Sullivan . During fiscal 2021, we were awarded and began work on a statewide contract valued at up to$175.1 million to design, deploy, and operate NG-911 services for theCommonwealth of Pennsylvania . The total contract value includes multi-year contract extension options and was initially funded at$137.4 million , of which$111.6 million was booked in fiscal 2021. This contract was awarded to us shortly after we announced the receipt of a$54.0 million contract to design, deploy and operate NG-911 services for theState of South Carolina , for which we received over$7.5 million of additional funding in fiscal 2021. In addition to these contracts, we were awarded a multi-year statewide contract valued at$35.8 million to design, deploy and operate NG-911 services for theState of Arizona , which includes a multi-year extension option. Excluding such option, the contract is valued at$23.5 million . Also, in fiscal 2021, we were awarded a statewide contract to provide NG-911 services for theState of Iowa . This multi-year contract includes contract extension options, is valued up to$48.5 million and was initially funded$23.0 million . Lastly, although not yet funded, we have also been notified that we were selected as the winner of a multi-year NG-911 contract for theState of Ohio . We anticipate that such contract will be initially funded in fiscal 2022. Other notable orders received for our public safety and location technology solutions during fiscal 2021 include: (i) a$9.8 million contract with a major tier-one mobile network operator ("MNO") for a broad suite of new capabilities and services centered around virtualized applications and 5G products; (ii) a$7.1 million contract for the deployment of a cellular-based Wireless Emergency Alerts ("WEA") solution with a tier-one MNO, which was our first major award for a WEA solution; (iii) a$5.0 million NG-911 modernization project for aU.S. government end customer; (iv) a contract valued at up to$4.7 million with a channel partner to supply new releases to messaging application software for aU.S. tier-one MNO; (v) a contract renewal worth$4.2 million for location and mapping technologies for a tier-one MNO; (vi) a$4.0 million maintenance agreement with a channel partner to continue providing messaging application support for aU.S. tier-one MNO; (vii) orders exceeding$3.8 million with a tier-one MNO for additional capabilities related to our Virtual Mobility Location Center platform; and (viii) multiple contracts valued over$6.5 million to provide NG-911 services, including our Solacom Guardian Intelligent 911 Workstations, to various police and fire rescue services inCanada , among others. We are continuing to work on other opportunities and believe there is strong interest in our public safety and location technology solutions. To-date, the business impact of COVID-19 on our public safety and location technology solutions has been relatively muted and long-term demand for our products and services appears strong. Although COVID-19 has resulted in the cancellation of some key public safety trade shows and some states and municipalities have announced budget constraints, we believe that other potential customers are increasing their funding for NG-911 solutions, recognizing the critical importance of upgrading their 911 systems. Although public safety and location technology solutions have long sales cycles and are subject to difficult-to-predict changes in the overall procurement strategies of wireless carrier customers, we believe that sales of our NG-911 solutions will be higher than the amount we achieved in fiscal 2022. Further, we believe we are well positioned for long-term growth in this market. Overall, we remain optimistic that fiscal 2022 net sales for this segment will be higher than the amount we achieved in fiscal 2021. Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. 60 -------------------------------------------------------------------------------- Government Solutions Net sales in our Government Solutions segment were$221.5 million for fiscal 2021 as compared to$263.0 million for fiscal 2020, a decrease of$41.5 million or 15.8%. Our Government Solutions segment represented 38.1% of consolidated net sales for fiscal 2021 as compared to 42.6% for fiscal 2020. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 2021 was 0.82. Period-to-period fluctuations in bookings are normal for this segment. Fiscal 2021 net sales primarily reflect lower sales of global field support services, advanced VSAT products and other programs for theU.S. Army , offset in part by higher sales of our high reliability Electrical, Electronic and Electromechanical ("EEE") satellite-based space components (including incremental sales of X/Y antenna products that we now offer as a result of ourJanuary 2020 acquisition of CGC). Fiscal 2021 net sales also included performance on our 10-year,$211.0 million IDIQ contract awarded to us by a prime contractor to provide next-generation troposcatter systems in support of theU.S. Marine Corps . During fiscal 2021, we were awarded$27.0 million of orders related to a new contract to provide system refurbishment, sustainment services and baseband equipment to theU.S Army . Such orders support the sustainment of theU.S. Army's AN/TSC-198 SNAP family of ground satellite terminals. This multi-year contract, valued at up to$235.7 million , includes a base year award and three one-year option periods exercisable by theU.S. Army . We expect that additional funding will be authorized over the remaining contract period. Other notable orders awarded in fiscal 2021 include: (i)$16.3 million of orders from theU.S. government for our JCAC training solutions; (ii) a$10.4 million contract from theU.S. military for the first phase of a full-motion large aperture antenna tracking system; (iii)$7.2 million of funding to support theU.S. Army's PM MC's BFT-1 program; (iv)$5.5 million of funding on our contract to provide theU.S. Army with global field support services for military satellite communication ("SATCOM") terminals around the world; (v) a$3.5 million contract for solid-state, high-power RF amplifiers from a major domestic medical instrumentation provider; (vi) a$3.2 million follow-on contract from the Brazilian military to supply additional satellite equipment and services for its Air Traffic Control network; (vii) a$3.0 million order from an overseas agency for maintenance of down range tracking stations; (viii)$3.0 million of additional funding for a 12-month extension on an existing contract to provide theState of Maryland's Department of Human Services with statewide information technology ("IT") services; and (ix)$2.9 million of funding on our contract to provide ongoing sustainment services and baseband equipment, among others. We are seeing strong interest across the board for our Comtech COMETTM terminals and other new solutions we are discussing with our customers. During fiscal 2021, we conducted successful in-field demonstrations including our industry leading troposcatter solution that we are currently providing to theU.S. Marine Corps . Other military commands have also shown strong interest and recently, in fiscal 2021, we were awarded a$1.7 million contract by a non-U.S. NATO family customer for multiple COMETTM terminals. This represents the second procurement of COMETTM terminals by a non-U.S. NATO family customer, in addition to the multiple COMETTM terminals already procured by theU.S. Special Operations Command. InApril 2021 , theU.S. government announced that it intended to fully withdraw troops fromAfghanistan . This change resulted in lower revenues than previously anticipated for certain programs that we currently participate in. In addition, theU.S. presidential administration released its fiscal 2022 budget request. This budget request includes less money for certain legacy programs but additional funding for modernization and new programs. We believe these budget changes will benefit us over the longer-term, but will result in a decline in overall revenues in our Government Solutions segment in fiscal 2022, as compared to fiscal 2021. Although still difficult to predict, we expect that revenues in this segment for each of the first three quarters of fiscal 2022 will be slightly lower than the$46.6 million achieved during the fourth quarter of fiscal 2021. Thereafter, this segment is expected to benefit from higher margin programs, including the receipt of new orders for the Comtech COMETTM and other troposcatter solutions.
Bookings, sales and profitability in our Government Solutions segment can
fluctuate dramatically from period-to-period due to many factors, including
unpredictable funding, deployment and technology decisions by our
61 -------------------------------------------------------------------------------- Geography and Customer Type Sales by geography and customer type, as a percentage of related sales, for the fiscal years endedJuly 31, 2021 and 2020 are as follows: Fiscal Years Ended July 31, 2021 2020 2021 2020 2021 2020 Commercial Solutions Government Solutions
Consolidated U.S. government 14.7 % 14.8 % 66.8 % 65.0 % 34.6 % 36.2 % Domestic 58.5 % 58.9 % 14.1 % 15.2 % 41.5 % 40.3 % Total U.S. 73.2 % 73.7 % 80.9 % 80.2 % 76.1 % 76.5 % International 26.8 % 26.3 % 19.1 % 19.8 % 23.9 % 23.5 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Sales to
Domestic sales include sales to commercial customers, as well as toU.S. state and local governments. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 10.7% of consolidated net sales for fiscal 2021. Except for theU.S. government, there were no customers that represented more than 10.0% of consolidated net sales for fiscal 2020. International sales for fiscal 2021 and 2020 (which include sales toU.S. domestic companies for inclusion in products that are sold to international customers) were$138.9 million and$145.1 million , respectively. Except for theU.S. , no individual country (including sales toU.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for fiscal 2021 and 2020. Gross Profit. Gross profit was$214.0 million and$226.8 million for fiscal 2021 and 2020, respectively. The decrease of$12.8 million primarily reflects the decline in consolidated net sales, as discussed above. Gross profit as a percentage of consolidated net sales was 36.8% for both fiscal periods. Our gross profit in fiscal 2021 reflects a higher percentage of consolidated net sales generated from our Commercial Solutions segment (which historically achieves higher gross margins than our Government Solutions segment), offset by increased costs due to production delays, supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs resulting from the COVID-19 pandemic. In addition, our gross profit reflects start-up costs associated with the opening of our two new high-volume technology manufacturing centers. Our gross profit for fiscal 2021 also reflects a$2.0 million benefit from the refund of historical excise tax paid, which was recorded in our Unallocated segment. Gross profit, as a percentage of related segment net sales, is further discussed below. Our Commercial Solutions segment's gross profit, as a percentage of related segment net sales, for fiscal 2021 decreased in comparison to fiscal 2020. The decrease in gross profit percentage in fiscal 2021 primarily reflects changes in products and services mix, including the cessation of sales to AT&T for 911 wireless call routing services and an increase in sales related to a recently awarded statewide NG-911 deployment (which has lower margins than our 911 wireless call routing services). Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for fiscal 2021 decreased in comparison to fiscal 2020. The decrease in gross profit percentage primarily reflects lower segment net sales and changes in products and services mix, as discussed above. Also, during fiscal 2021, we incurred$1.0 million of incremental operating costs for our antenna facility in theUnited Kingdom due to the impact of the COVID-19 pandemic. Although operations in theUnited Kingdom have largely resumed, we continue to experience lingering impacts from COVID-19 and the shut-down. Included in consolidated cost of sales for fiscal 2021 and 2020 are provisions for excess and obsolete inventory of$4.4 million and$1.6 million , respectively. As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends.
Our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment, and therefore is inherently difficult to forecast.
62 -------------------------------------------------------------------------------- Selling, General and Administrative Expenses. Selling, general and administrative expenses were$111.8 million and$117.1 million for fiscal 2021 and 2020, respectively, representing a decrease of$5.3 million , or 4.5%. As a percentage of consolidated net sales, selling, general and administrative expenses were 19.2% and 19.0% for fiscal 2021 and 2020, respectively. In fiscal 2021, we incurred$2.8 million of restructuring costs to streamline our operations, including$1.8 million related to the ongoing relocation of certain of our satellite earth station production facilities to a new 146,000 square foot facility inChandler, Arizona , and$1.0 million for the consolidation of certain administrative and operating functions in our tactical communications technologies product line. In addition, we received$3.1 million of legal expense recoveries from insurance in fiscal 2021. In fiscal 2020, we incurred estimated contract settlement costs of$0.4 million principally related to the repositioning of our location technologies solutions offerings in our Commercial Solutions segment. Excluding these costs in both periods, our selling, general and administrative expenses would have been$112.1 million , or 19.3% of consolidated net sales in fiscal 2021 and$116.7 million , or 18.9% of consolidated net sales in fiscal 2020. The decrease in our selling, general and administrative expenses, in dollars, is largely attributable to the benefit from our efforts to streamline business operations in both of our segments.
Selling, general and administrative expenses in fiscal 2022 will likely be
impacted by greater than normal proxy solicitation costs as well expenses
associated with the CEO change that was announced on
Amortization of stock-based compensation expenses recorded as selling, general and administrative expenses was$8.1 million in fiscal 2021 as compared to$7.5 million in fiscal 2020. Amortization of stock-based compensation is not allocated to our two reportable operating segments. Research and Development Expenses. Research and development expenses were$49.1 million and$52.2 million for fiscal 2021 and 2020, respectively, representing a decrease of$3.1 million , or 5.9%. As a percentage of consolidated net sales, research and development expenses were 8.4% and 8.5% for fiscal 2021 and 2020, respectively. For fiscal 2021 and 2020, research and development expenses of$41.0 million and$45.2 million , respectively, related to our Commercial Solutions segment, and$7.1 million and$6.1 million , respectively, related to our Government Solutions segment. The remaining research and development expenses of$1.0 million and$0.9 million in fiscal 2021 and 2020, respectively, related to the amortization of stock-based compensation expense. During fiscal 2021, our Government Solutions segment incurred$0.3 million of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in fiscal 2022. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During fiscal 2021 and 2020, customers reimbursed us$13.6 million and$11.9 million , respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales. Amortization of Intangibles. Amortization relating to intangible assets with finite lives was$21.0 million (of which$17.1 million was for the Commercial Solutions segment and$4.0 million was for the Government Solutions segment) for fiscal 2021 and$21.6 million (of which$17.3 million was for the Commercial Solutions segment and$4.3 million was for the Government Solutions segment) for fiscal 2020.
Our Business Outlook for Fiscal 2022 assumes total annual amortization of
intangible assets of approximately
Acquisition Plan Expenses. During fiscal 2021 and 2020, we incurred acquisition plan expenses of$100.3 million and$20.8 million , respectively. For fiscal 2021,$88.3 million related to the previously announced litigation and merger termination with Gilat, including$70.0 million paid in cash to Gilat. The remaining costs in fiscal 2021 primarily related to theApril 2021 settlement of litigation associated with our 2019 acquisition of GD NG-911 as well as theMarch 2021 closing of our acquisition of UHP. These expenses are primarily recorded in our Unallocated segment. 63 -------------------------------------------------------------------------------- Operating (Loss) Income. Operating loss for fiscal 2021 was$68.3 million as compared to operating income of$15.2 million for fiscal 2020. Operating income (loss) by reportable segment is shown in the table below: Fiscal Years Ended July 31, 2021 2020 2021 2020 2021 2020 2021 2020 ($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated Operating income (loss)$ 41.1 $ 34.8 $ 8.4 $ 20.0 $ (117.8) $ (39.6) $ (68.3) $ 15.2 Percentage of related net sales 11.4 % 9.8 % 3.8 % 7.6 % NA NA NA 2.5 % The increase in our Commercial Solutions segment operating income, both in dollars and as a percentage of the related segment net sales, for fiscal 2021 was driven primarily by higher net sales, lower research and development expenses and lower amortization of intangibles, offset in part by a lower gross profit percentage and$1.8 million of restructuring costs, as discussed above. The decrease in our Government Solutions segment operating income, both in dollars and as a percentage of related segment net sales, for fiscal 2021 was driven primarily by lower net sales, a lower gross profit percentage, higher research and development expenses and$1.0 million of restructuring costs, partially offset by lower amortization of intangibles, as discussed above. The increase in unallocated expenses for fiscal 2021 as compared to fiscal 2020 is primarily due to acquisition plan expenses, as discussed above. Amortization of stock-based compensation was$10.0 million and$9.3 million , respectively, for fiscal 2021 and 2020. Excluding (i)$100.3 million of acquisition plan expenses; (ii)$2.8 million of restructuring costs; (iii)$1.0 million of incremental operating costs due to the impact of COVID-19; and (iv)$0.3 million of strategic emerging technology costs, consolidated operating income for fiscal 2021 would have been$36.1 million , or 6.2% of consolidated net sales. Excluding$20.8 million of acquisition plan expenses and$0.4 million of estimated contract settlement costs, consolidated operating income for fiscal 2020 would have been$36.4 million , or 5.9% of consolidated net sales. The increase, as a percentage of consolidated net sales, was due primarily to lower selling, general and administrative expenses and lower research and development expenses, offset in part by lower consolidated net sales, as discussed above. GAAP operating income in fiscal 2022 will be impacted by both start-up expenses and restructuring costs associated with the opening ofComtech's new high-volume technology manufacturing centers, as well as COVID-19 related costs. In addition, as discussed above, we will likely incur greater than normal proxy solicitation costs in fiscal 2022 as well expenses associated with the CEO change that was announced onOctober 4, 2021 . Interest Expense and Other. Interest expense was$6.8 million and$6.1 million for fiscal 2021 and 2020, respectively. Interest expense for fiscal 2021 includes$1.2 million of incremental interest expense related to a now terminated financing commitment letter. Excluding the$1.2 million , our effective interest rate (including amortization of deferred financing costs) in fiscal 2021 was approximately 2.8%. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates 2.4%. Interest (Income) and Other. Interest (income) and other for both fiscal 2021 and 2020 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate. (Benefit from) Provision for Income Taxes. For fiscal 2021, we recorded a tax benefit of$1.5 million as compared to a tax provision of$2.3 million for fiscal 2020. Our effective tax rate for fiscal 2021 (excluding discrete tax items) was nominal, as compared to 37.0% for fiscal 2020. The decrease from 37.0% is primarily due to the exclusion of the$70.0 million of acquisition plan expense paid to Gilat during our first quarter of fiscal 2021, as such amount was considered an unusual and infrequently occurring item. In addition, given the nature of such item, no financial statement benefit was recorded for the$70.0 million payment to Gilat. 64 -------------------------------------------------------------------------------- During fiscal 2021, we recorded a net discrete tax benefit of$1.6 million , primarily related to: (i) the release of valuation allowances previously established on deferred tax assets of one of our Canadian subsidiaries; (ii) the finalization of certain tax accounts in connection with the filing of our fiscal 2020 federal, state and foreign income tax returns; and (iii) the settlement of certain stock-based awards during fiscal 2021.
During fiscal 2020, we recorded a net discrete tax benefit of
Our federal income tax returns for fiscal 2018 through 2020 are subject to potential futureIRS audit. None of our state income tax returns prior to fiscal 2017 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Net (Loss) Income. During fiscal 2021, our consolidated net loss was
Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both fiscal 2021 and 2020 are shown in the table below (numbers in the table may not foot due to rounding): Fiscal Years Ended July 31, 2021 2020 2021 2020 2021 2020 2021 2020 ($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated Net income (loss)$ 39.2 34.4 9.6 20.2 (122.2) (47.6)$ (73.5) 7.0 Provision for (benefit from) income taxes 1.8 0.4 (1.4) (0.1) (1.9) 2.0 (1.5) 2.3 Interest (income) and other 0.1 - 0.2 (0.2) (0.4) - (0.1) (0.2) Interest expense - - 0.1 - 6.8 6.0 6.8 6.1 Amortization of stock-based compensation - - - - 10.0 9.3 10.0 9.3 Amortization of intangibles 17.1 17.3 4.0 4.3 - - 21.0 21.6 Depreciation 7.5 8.3 1.6 1.4 0.3 0.8 9.4 10.6 Estimated contract settlement costs - 0.4 - - - - - 0.4 Acquisition plan expenses (1.1) 0.8 - - 101.3 20.0 100.3 20.8 Restructuring costs 1.8 - 1.0 - - - 2.8 - COVID-19 related costs - - 1.0 - - - 1.0 - Strategic emerging technology costs - - 0.3 - - - 0.3 - Adjusted EBITDA$ 66.3 61.7 16.3 25.7 (6.1) (9.6)$ 76.5 77.8 Percentage of related net sales 18.4 % 17.4 % 7.4 % 9.8 % NA NA 13.2 % 12.6 % The increase in consolidated Adjusted EBITDA, as a percentage of consolidated net sales, for fiscal 2021 as compared to fiscal 2020 is primarily attributable to a higher percentage of consolidated net sales in our Commercial Solutions segment, as well as lower consolidated selling, general and administrative expenses and research and development expenses, as discussed above. The increase in our Commercial Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is due to higher segment net sales, lower research and development expense and the benefit from cost savings measures previously implemented, partially offset by a lower gross profit percentage, as discussed above. The decrease in our Government Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, was driven primarily by lower segment net sales, a lower gross profit percentage and higher research and development expenses, as discussed above. 65 -------------------------------------------------------------------------------- Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each individual segment as well as unallocated spending, it is inherently difficult to forecast. Reconciliations of our GAAP consolidated operating income (loss), net income (loss) and net income (loss) per diluted share for fiscal 2021 and 2020 to the corresponding non-GAAP measures are shown in the tables below (numbers and per share amounts in the table may not foot due to rounding). Non-GAAP net income and EPS reflect non-GAAP provisions for income taxes based on full year results, as adjusted for the non-GAAP reconciling items included in the tables below. We evaluate our non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, non-GAAP income per diluted share adjustments for fiscal 2021 were computed using 25,885,000 weighted average diluted shares outstanding during the respective period: Fiscal 2021 Net (Loss) Income Operating (Loss) per ($ in millions, except for per share amount) Income Net (Loss) Income Diluted Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported$ (68.3) $ (73.5) $ (2.86) Acquisition plan expenses 100.3 93.3 3.60 Restructuring costs 2.8 2.1 0.08 COVID-19 related costs 1.0 0.8 0.03 Strategic emerging technology costs 0.3 0.3 0.01 Interest expense - 0.9 0.04 Net discrete tax benefit - (1.6) (0.06) Non-GAAP measures$ 36.1 $ 22.4 $ 0.86 Fiscal 2020 Net Income per ($ in millions, except for per share amount) Operating Income Net Income Diluted Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported$ 15.2 $ 7.0 $ 0.28 Estimated contract settlement costs 0.4 0.3 0.01 Acquisition plan expenses 20.8 13.1 0.53 Net discrete tax benefit - (1.2) (0.05) Non-GAAP measures$ 36.4 $ 19.2 $ 0.77 66
-------------------------------------------------------------------------------- Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest (income) and other, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in ourSEC filings, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures for consolidated operating income, net income and net income per diluted share reflect the GAAP measures as reported, adjusted for certain items as described. These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP in the above tables, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in ourSEC filings. We have not quantitatively reconciled our fiscal 2022 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles, interest expense and estimated proxy solicitation related costs, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.
Comparison of Fiscal 2020 and 2019
Net Sales . Consolidated net sales were$616.7 million and$671.8 million for fiscal 2020 and 2019, respectively, representing a decrease of$55.1 million , or 8.2%. The period-over-period decrease in net sales reflects lower net sales in both our Government Solutions and Commercial Solutions segments. Net sales by operating segment are discussed below. Commercial Solutions Net sales in our Commercial Solutions segment were$353.7 million for fiscal 2020, as compared to$357.3 million for fiscal 2019, a decrease of$3.6 million , or 1.0%. Our Commercial Solutions segment represented 57.4% of consolidated net sales for fiscal 2020 as compared to 53.2% for fiscal 2019. Our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 0.91. Period-to-period fluctuations in bookings are normal for this segment.
Net sales of our satellite ground station technologies in fiscal 2020 were significantly lower than fiscal 2019, primarily due to the business impact of COVID-19 pandemic.
Net sales of our public safety and location technology solutions were higher in fiscal 2020 as compared to fiscal 2019. Sales in fiscal 2020 of these products included an insignificant amount of sales from ourFebruary 2020 acquisition of NG-911. During fiscal 2020, the business impact of COVID-19 on our public safety and location technology solutions was relatively muted.
Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Government Solutions Net sales in our Government Solutions segment were$263.0 million for fiscal 2020 as compared to$314.5 million for fiscal 2019, a decrease of$51.5 million or 16.4%. Our Government Solutions segment represented 42.6% of consolidated net sales for fiscal 2020 as compared to 46.8% for fiscal 2019. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 2020 was 1.0. Period-to-period fluctuations in bookings are normal for this segment. Net sales of our tactical communications technologies during fiscal 2020 were significantly lower as compared to fiscal 2019, due primarily to the timing of and performance on orders related to our$98.6 million U.S. Army global field support contract and lower sales for high reliability Electrical, Electronic and Electromechanical ("EEE") satellite based space components. While fiscal 2020 benefited from a nominal amount of sales related to our new X/Y satellite tracking antenna product line acquired in connection with ourJanuary 2020 acquisition of CGC, it also reflected the absence of sales of our next generation MT-2025 mobile satellite transceivers. In fiscal 2019, we sold$11.7 million of such transceivers. 67
-------------------------------------------------------------------------------- Net sales of our high-performance transmission technologies in fiscal 2020 were slightly lower as compared to fiscal 2019 with increased sales of solid-state, high-power amplifiers and related switching technologies being offset by lower sales of our over-the-horizon microwave system technologies.
Bookings, sales and profitability in our Government Solutions segment can
fluctuate dramatically from period-to-period due to many factors, including
unpredictable funding, deployment and technology decisions by our
Geography and Customer Type Sales by geography and customer type, as a percentage of related sales, for the fiscal years endedJuly 31, 2020 and 2019 are as follows: Fiscal Years Ended July 31, 2020 2019 2020 2019 2020 2019 Commercial Solutions Government Solutions
Consolidated U.S. government 14.8 % 19.2 % 65.0 % 63.8 % 36.2 % 40.1 % Domestic 58.9 % 53.9 % 15.2 % 12.5 % 40.3 % 34.5 % Total U.S. 73.7 % 73.1 % 80.2 % 76.3 % 76.5 % 74.6 % International 26.3 % 26.9 % 19.8 % 23.7 % 23.5 % 25.4 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Sales to
Domestic sales include sales to commercial customers, as well as toU.S. state and local governments. Except for theU.S. government, there were no customers that represented more than 10.0% of consolidated net sales for fiscal 2020 and 2019. International sales for fiscal 2020 and 2019 (which include sales toU.S. domestic companies for inclusion in products that are sold to international customers) were$145.1 million and$170.6 million , respectively. Except for theU.S. , no individual country (including sales toU.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for fiscal 2020 and 2019. Gross Profit. Gross profit was$226.8 million and$247.4 million for fiscal 2020 and 2019, respectively. The decrease of$20.6 million primarily reflects the decline in consolidated net sales, as discussed above.
Gross profit, as a percentage of consolidated net sales, for both fiscal 2020 and fiscal 2019 was 36.8%. Our gross profit in fiscal 2020 reflects minor increases in costs due to a lower level of factory utilization and higher logistics and operational costs resulting from COVID-19. Gross profit, as a percentage of related segment net sales, is further discussed below.
Our Commercial Solutions segment's gross profit, as a percentage of related segment net sales, for fiscal 2020 decreased in comparison to fiscal 2019. The decrease in gross profit percentage in fiscal 2020 primarily reflects changes in products and services mix, primarily lower net sales of our satellite ground station technologies. Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for fiscal 2020 increased slightly in comparison to fiscal 2019. The slight increase in gross profit percentage primarily reflects a more favorable mix of mission-critical technology solutions, despite lower fiscal 2020 sales of such solutions. Included in consolidated cost of sales for fiscal 2020 and 2019 are provisions for excess and obsolete inventory of$1.6 million and$6.0 million , respectively. As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends. Selling, General and Administrative Expenses. Selling, general and administrative expenses were$117.1 million and$128.6 million for fiscal 2020 and 2019, respectively, representing a decrease of$11.5 million , or 8.9%. As a percentage of consolidated net sales, selling, general and administrative expenses were 19.0% and 19.1% for fiscal 2020 and 2019, respectively. 68 -------------------------------------------------------------------------------- Our selling, general and administrative expenses in fiscal 2020 reflect certain cost reduction actions taken in response to lower levels of business activity resulting from COVID-19. These cost savings measures included reducing global headcount, temporarily reducing salaries, suspending merit increases and eliminating certain discretionary expenses. Severance costs related to these actions were not material. Although we incurred lower travel expenses in fiscal 2020 than we did in fiscal 2019, there was a corresponding increase in information technology costs and COVID-19 safety related expenses. In fiscal 2020, we incurred estimated contract settlement costs of$0.4 million related to the repositioning of our location technologies solutions offerings in our Commercial Solutions segment. In fiscal 2019, we incurred$6.4 million of such costs and also incurred$1.4 million of facility exit costs in our Government Solutions segment. Excluding all of these costs in both periods, our selling, general and administrative expenses would have been$116.7 million , or 18.9% of consolidated net sales for fiscal 2020 and$120.8 million , or 18.0% of consolidated net sales for fiscal 2019. Amortization of stock-based compensation expenses recorded as selling, general and administrative expenses was$7.5 million in fiscal 2020 as compared to$9.3 million in fiscal 2019. This year-over-year decrease largely occurred due to the temporary suspension of stock-based awards for certain employees to reduce expenses as a response to COVID-19. Amortization of stock-based compensation is not allocated to our two reportable operating segments. Research and Development Expenses. Research and development expenses were$52.2 million and$56.4 million for fiscal 2020 and 2019, respectively, representing a decrease of$4.2 million , or 7.4%. As a percentage of consolidated net sales, research and development expenses were 8.5% and 8.4% for fiscal 2020 and 2019, respectively. For fiscal 2020 and 2019, research and development expenses of$45.2 million and$48.2 million , respectively, related to our Commercial Solutions segment, and$6.1 million and$7.2 million , respectively, related to our Government Solutions segment. The remaining research and development expenses of$0.9 million and$1.0 million in fiscal 2020 and 2019, respectively, related to the amortization of stock-based compensation expense. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During fiscal 2020 and 2019, customers reimbursed us$11.9 million and$14.7 million , respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales. Amortization of Intangibles. Amortization relating to intangible assets with finite lives was$21.6 million (of which$17.3 million was for the Commercial Solutions segment and$4.3 million was for the Government Solutions segment) for fiscal 2020 and$18.3 million (of which$14.9 million was for the Commercial Solutions segment and$3.4 million was for the Government Solutions segment) for fiscal 2019. The increase of$3.3 million was primarily due to our 2019 acquisitions of Solacom and the GD NG-911 business and our 2020 acquisition of CGC. Settlement of Intellectual Property Litigation. In fiscal 2019, we recorded a$3.2 million benefit in our Unallocated segment as a result of a favorable ruling issued by theU.S. Court of Appeals for the Federal Circuit related to a legacy TCS intellectual property matter. There was no comparable adjustment in fiscal 2020. Acquisition Plan Expenses. During fiscal 2020, we incurred acquisition plan expenses of$20.8 million , primarily related to the now terminated acquisition of Gilat (including significant litigation expenses) and our acquisition of UHP, which was completed inMarch 2021 . Fiscal 2020 acquisition plan expenses also include costs associated with our completed acquisitions of CGC and NG-911. In fiscal 2019, our acquisition plan expenses of$5.9 million primarily related to our acquisitions of Solacom and the GD NG-911 business. Except for$0.8 million of fiscal 2020 costs which are reflected in our Commercial Solutions segment, all of these expenses are primarily recorded in our Unallocated segment. 69 -------------------------------------------------------------------------------- Operating Income. Operating income for fiscal 2020 was$15.2 million as compared$41.4 million for fiscal 2019. Operating income by reportable segment is shown in the table below: Fiscal Years Ended July 31, 2020 2019 2020 2019 2020 2019 2020 2019 ($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated Operating income (loss)$ 34.8 $ 36.1 $ 20.0 $ 29.0 $ (39.6) $ (23.6) $ 15.2 $ 41.4 Percentage of related net sales 9.8 % 10.1 % 7.6 % 9.2 % NA NA 2.5 % 6.2 % The Commercial Solutions segment's operating income for fiscal 2020 and fiscal 2019 reflects$0.4 million and$6.4 million of estimated contract settlement costs, as discussed above. The segment's operating income for fiscal 2020 also reflects$0.8 million of the total acquisition plan expenses, as discussed above. Excluding such charges, operating income in our Commercial Solutions segment would have been$36.0 million , or 10.2% of related segment net sales for fiscal 2020, and$42.5 million , or 11.9% of related segment net sales for fiscal 2019. The decrease in operating income, both in dollars and as a percentage of related segment net sales, was driven primarily by lower net sales and a lower gross profit percentage and increased amortization of intangibles, as discussed above. The Government Solutions segment's operating income for fiscal 2019 included$1.4 million of facility exit costs, as discussed above. Excluding such facility exist costs, operating income in our Government Solutions segment for fiscal 2019 would have been$30.4 million , or 9.7% of related segment net sales as compared to fiscal 2020 operating income of$20.0 million , or 7.6% of related segment net sales. The decrease in our Government Solutions segment's operating income, both in dollars and as a percentage of related segment net sales, in fiscal 2020 was driven primarily by lower net sales and increased amortization of intangibles, as discussed above. The increase in unallocated expenses in fiscal 2020 as compared to fiscal 2019 is primarily due to higher acquisition plan expenses and the absence of the$3.2 million benefit related to the fiscal 2019 favorable ruling issued by theU.S. Court of Appeals for the Federal Circuit for a legacy TCS intellectual property matter, as discussed above. Amortization of stock-based compensation was$9.3 million and$11.4 million , respectively, for fiscal 2020 and 2019. Excluding the$20.8 million of acquisition plan expenses and$0.4 million of estimated contract settlement costs, consolidated operating income for fiscal 2020 would have been$36.4 million , or 5.9% of consolidated net sales. Excluding net costs of$10.5 million , consisting of$6.4 million of estimated contract settlement costs,$1.4 million of facility exit costs,$5.9 million of acquisition plan expenses and a$3.2 million benefit related to a legacy TCS intellectual property matter (all of which are discussed above), consolidated operating income for fiscal 2019 would have been$51.8 million , or 7.7% of consolidated net sales. The decrease in dollars, and as a percentage of consolidated net sales, was due primarily to lower consolidated net sales and increased amortization of intangibles, as discussed above. Interest Expense and Other. Interest expense was$6.1 million and$9.2 million for fiscal 2020 and 2019, respectively. The decrease is attributable to lower interest rates and lower outstanding indebtedness under our existing Credit Facility. Our effective interest rate (including amortization of deferred financing costs) in fiscal 2020 was approximately 3.9%. Write-off of Deferred Financing Costs. In connection with the establishment of a new Credit Facility in fiscal 2019, we wrote-off$3.2 million of deferred financing costs which primarily related to the term loan portion of our prior credit facility. There was no comparable charge in fiscal 2020.
Interest (Income) and Other. Interest (income) and other for both fiscal 2020 and 2019 was nominal.
Provision for Income Taxes. The provision for income taxes for fiscal 2020 and 2019 was$2.3 million and$3.9 million , respectively. Our effective tax rate (excluding discrete tax items) for fiscal 2020 and 2019 was 37.0% and 23.25%, respectively. The increase from 23.25% to 37.0% is primarily due to the decrease in fiscal 2020 consolidated net sales.
During fiscal 2020, we recorded a net discrete tax benefit of
70 --------------------------------------------------------------------------------
During fiscal 2019, we recorded a net discrete tax benefit of
Net Income. During fiscal 2020, consolidated net income was
Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both fiscal 2020 and 2019 are shown in the table below (numbers in the table may not foot due to rounding): Fiscal Years Ended July 31, 2020 2019 2020 2019 2020 2019 2020 2019 ($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated Net income (loss)$ 34.4 35.9 20.2 29.0 (47.6) (39.9)$ 7.0 25.0 Provision for (benefit from) income taxes 0.4 - (0.1) - 2.0 3.9 2.3 3.9 Interest (income) and other - 0.1 (0.2) - - - (0.2) - Write-off of deferred financing costs - - - - - 3.2 - 3.2 Interest expense - 0.1 - - 6.0 9.2 6.1 9.2 Amortization of stock-based compensation - - - - 9.3 11.4 9.3 11.4 Amortization of intangibles 17.3 14.9 4.3 3.4 - - 21.6 18.3 Depreciation 8.3 9.3 1.4 1.9 0.8 0.8 10.6 11.9 Estimated contract settlement costs 0.4 6.4 - - - - 0.4 6.4 Settlement of intellectual property litigation - - - - - (3.2) - (3.2) Acquisition plan expenses 0.8 - - - 20.0 5.9 20.8 5.9 Facility exit costs - -
- 1.4 - - - 1.4 Adjusted EBITDA$ 61.7 66.6 25.7 35.6 (9.6) (8.8)$ 77.8 93.5 Percentage of related net sales 17.4 % 18.6 % 9.8 % 11.3 % NA NA 12.6 % 13.9 %
The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for fiscal 2020 as compared to fiscal 2019 is primarily attributable to lower consolidated net sales, as discussed above.
The decrease in our Commercial Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is due to lower net sales and a lower gross profit percentage, as discussed above.
The decrease in our Government Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, was primarily driven by lower net sales, as discussed above.
71 -------------------------------------------------------------------------------- Reconciliations of our GAAP consolidated operating income, net income and net income per diluted share for fiscal 2020 and 2019 to the corresponding non-GAAP measures are shown in the tables below (numbers and per share amounts in the table may not foot due to rounding). Non-GAAP net income and EPS reflect non-GAAP provisions for income taxes based on full year results, as adjusted for the non-GAAP reconciling items included in the tables below. We evaluate our non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate: Fiscal 2020 Net Income per ($ in millions, except for per share amount) Operating Income Net Income Diluted Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported$ 15.2 $ 7.0 $ 0.28 Estimated contract settlement costs 0.4 0.3 0.01 Acquisition plan expenses 20.8 13.1 0.53 Net discrete tax benefit - (1.2) (0.05) Non-GAAP measures$ 36.4 $ 19.2 $ 0.77 Fiscal 2019 Net Income per ($ in millions, except for per share amount) Operating Income Net Income Diluted Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported$ 41.4 $ 25.0 $ 1.03 Estimated contract settlement costs 6.4 4.9 0.20 Settlement of intellectual property litigation (3.2) (2.5) (0.10) Facility exit costs 1.4 1.1 0.04 Acquisition plan expenses 5.9 4.5 0.19 Write-off of deferred financing costs - 2.5 0.10 Net discrete tax benefit - (2.9) (0.12) Non-GAAP measures$ 51.8 $ 32.6 $ 1.34 Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest (income) and other, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, strategic alternatives analysis expenses, proxy solicitation related costs and other. Our definition of Adjusted EBITDA may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in ourSEC filings, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures for consolidated operating income, net income and net income per diluted share reflect the GAAP measures as reported, adjusted for certain items as described. These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP in the above tables, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in ourSEC filings. 72 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our cash and cash equivalents were$30.9 million atJuly 31, 2021 as compared to$47.9 million atJuly 31, 2020 , a decrease of$17.0 million . The decrease in cash and cash equivalents during fiscal 2021 was driven by the following: •Net cash used in operating activities was$40.6 million for fiscal 2021 as compared to net cash provided by operating activities of$52.8 million for fiscal 2020. During fiscal 2021, in connection with an agreement to terminate our acquisition of Gilat, we made a$70.0 million payment to Gilat. Excluding such payment, net cash provided by operating activities would have been$29.4 million . The period-over-period decrease in cash flow from operating activities (excluding the$70.0 million payment to Gilat) reflects lower consolidated net sales and overall changes in net working capital requirements, principally the timing of shipments, billings and payments. •Net cash used in investing activities for fiscal 2021 was$15.5 million as compared to$20.2 million for fiscal 2020. During fiscal 2021, we paid$0.8 million in connection with our acquisition ofCGC Technology Limited ("CGC"). During fiscal 2020, we paid$13.0 million in connection with our acquisitions of CGC and NG-911, net of cash acquired. The remaining portion of net cash used in both periods relates to expenditures for property, plant and equipment upgrades and enhancements. Also, offsetting cash used during the most recent period is$1.3 million of net cash acquired from our acquisition of UHP, as discussed further in "Notes to Consolidated Financial Statements - Note (2) - Acquisitions -UHP Networks Inc. " included in "Part II - Item 8. - Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K. •Net cash provided by financing activities was$39.1 million for fiscal 2021 as compared to net cash used in financing activities of$30.3 million for fiscal 2020. During fiscal 2021, we had net borrowings under our Credit Facility of$51.5 million , primarily due to the$70.0 million payment we made to Gilat. During fiscal 2021 and 2020, we paid$10.3 million and$10.0 million , respectively, in cash dividends to our stockholders. We also made$2.8 million and$5.3 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the fiscal 2021 and 2020, respectively. The Credit Facility is discussed below and in "Notes to Consolidated Financial Statements - Note (7) - Credit Facility" included in "Part II - Item 8. - Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K. Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest our cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits, andU.S. Treasury securities. Many of our money market mutual funds invest in direct obligations of theU.S. government, bank securities guaranteed by theFederal Deposit Insurance Corporation , certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market. As ofJuly 31, 2021 , our material short-term cash requirements primarily consist of: (i) capital investments and tenant improvements in connection with the opening of our two new high-volume technology manufacturing centers, (ii) interest payments under our Credit Facility; (iii) payments related to lease commitments; (iv) our ongoing working capital needs, including income tax payments and other capital expenditures; and (v) payment of accrued quarterly dividends. In addition to making fiscal 2022 capital investments for our two new high-volume manufacturing centers, we plan to make significant capital expenditures to build-out cloud-based computer networks to support our NG-911 contract wins for the states ofPennsylvania ,South Carolina andArizona . Aggregate capital investments for these and other initiatives in fiscal 2022 are expected to approximate$30.0 million . 73 -------------------------------------------------------------------------------- As discussed further in "Notes to Consolidated Financial Statements - Note (2) - Acquisitions -UHP Networks Inc. " included in "Part II - Item 8. - Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K, we completed our acquisition of UHP onMarch 2, 2021 . Pursuant to the stock purchase agreement, the initial upfront payment of approximately$24.0 million was paid mostly in shares of our common stock, with a nominal amount paid in cash. InAugust 2021 , approximately$4.0 million of the$5.0 million hold back amount previously placed into escrow at closing, was paid to the seller in shares of our common stock, as the conditions pursuant to the stock purchase agreement were met. The stock purchase agreement also provides for an earn-out payment of up to$9.0 million , also payable at our option in cash and or shares of our common stock, if specified sales milestones are reached during the eighteen-month period endingSeptember 30, 2022 . OnMarch 3, 2021 , we filed a shelf registration statement with theSEC for the sale of 1,381,567 shares of our common stock by the selling shareholder of UHP. The shelf registration statement was declared effective by theSEC as ofMarch 15, 2021 . To-date, we issued 1,026,567 shares pursuant to this shelf registration statement to satisfy initial payment and escrow arrangements under the terms of the stock purchase agreement. InDecember 2018 , we filed a$400.0 million shelf registration statement with theSEC for the sale of various types of securities, including debt. The shelf registration statement was declared effective by theSEC as ofDecember 14, 2018 . As ofJuly 31, 2021 , we were authorized to repurchase up to an additional$100.0 million of our common stock, pursuant to a$100.0 million stock repurchase program. The new$100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during fiscal 2021 and 2020. OnSeptember 29, 2020 ,December 9, 2020 ,March 11, 2021 andJune 8, 2021 , our Board of Directors declared a dividend of$0.10 per common share, which was paid onOctober 27, 2020 ,February 19, 2021 ,May 21, 2021 andAugust 20, 2021 , respectively.
On
Our material long-term cash requirements primarily consist of mandatory interest payments pursuant to our Credit Facility and lease commitments.
We have historically met both our short-term and long-term cash requirements with funds provided by a combination of cash and cash equivalent balances, cash generated from operating activities and cash generated from financing transactions. Based on our anticipated level of future sales and operating income, we believe that our existing cash and cash equivalent balances, our cash generated from operating activities and amounts potentially available under our Credit Facility will be sufficient to meet both our currently anticipated short-term and long-term operating cash requirements. Although it is difficult to predict the terms and conditions of financing that may be available in the future, should our short-term or long-term cash requirements increase beyond our current expectations, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.
Credit Facility
On
The Credit Facility provides a senior secured loan facility of up to$550.0 million consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of$300.0 million ; (ii) an accordion feature allowing us to borrow up to an additional$250.0 million ; (iii) a$35.0 million letter of credit sublimit; and (iv) a swingline loan credit sublimit of$25.0 million . The Credit Facility matures onOctober 31, 2023 (the "Revolving Maturity Date"). If we issue new unsecured debt in excess of$5.0 million with a maturity date that is less than 91 days fromOctober 31, 2023 , the Revolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the maturity date of the new unsecured debt. 74 -------------------------------------------------------------------------------- As ofJuly 31, 2021 , the amount outstanding under our Credit Facility was$201.0 million , which is reflected in the non-current portion of long-term debt on our Consolidated Balance Sheet. AtJuly 31, 2021 , we had$1.5 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During fiscal 2021, we had outstanding balances under the Credit Facility ranging from$125.0 million to$219.0 million . Borrowings under the Credit Facility shall be either: (i) Alternate Base Rate borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatest of (a) the Prime Rate (as defined) in effect on such day, (b) the Federal Funds Effective Rate (as defined) in effect on such day plus 1/2 of 1.00% per annum and (c) the Adjusted LIBO Rate (as defined) on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum, plus (y) the Applicable Rate (as defined), or (ii) Eurodollar borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO Rate for such interest period plus (y) the Applicable Rate. Determination of the Applicable Rate is based on a pricing grid that is dependent upon our Secured Leverage Ratio (as defined) as of the end of each fiscal quarter for which consolidated financial statements have been most recently delivered. The Credit Facility contains customary representations, warranties and affirmative covenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility. The Credit Facility provides for, among other things: (i) no scheduled payments of principal until maturity; (ii) a maximum Secured Leverage Ratio of 3.75x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and a Maximum Total Leverage Ratio of 4.50x TTM Adjusted EBITDA, each with no step downs; and (iii) a Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. As ofJuly 31, 2021 , our Secured Leverage Ratio was 2.53x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as ofJuly 31, 2021 was 13.05x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. The obligations under the Credit Facility are guaranteed by certain of our domestic and foreign subsidiaries (the "Guarantors"). As collateral security under the Credit Facility and the guarantees thereof, we and the 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 our tangible and intangible assets. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility and the Prior Credit Facility, which have been documented and filed with theSEC . Off-Balance Sheet Arrangements As ofJuly 31, 2021 , we did not have any off-balance sheet arrangements within the meaning of Item 303 of Regulation S-K. 75 --------------------------------------------------------------------------------
Commitments
In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as ofJuly 31, 2021 , will materially adversely affect our liquidity.
At
Obligations Due by Fiscal Years or Maturity Date (in thousands)
2023 2025 and and After Total 2022 2024 2026 2026 Credit Facility - principal payments $ 201,000 - 201,000 - - Credit Facility - interest payments 11,537 5,133 6,404 - - Operating and finance lease obligations 56,705 10,408 14,689 10,798 20,810 Contractual cash obligations $ 269,242 15,541 222,093 10,798 20,810 As discussed further in "Notes to Consolidated Financial Statements - Note (7) - Credit Facility" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Annual Report on Form 10-K, our Credit Facility provides a senior secured loan facility of up to$550.0 million consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of$300.0 million ; (ii) an accordion feature allowing us to borrow up to an additional$250.0 million ; (iii) a$35.0 million letter of credit sublimit; and (iv) a swingline loan credit sublimit of$25.0 million . The Credit Facility matures onOctober 31, 2023 (the "Revolving Maturity Date"). In addition, if we issue new unsecured debt in excess of$5.0 million with a maturity date that is less than 91 days fromOctober 31, 2023 , the Revolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the maturity date of the new unsecured debt. AtJuly 31, 2021 , we have approximately$1.5 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts. Such amounts are not included in the above table. As discussed further in "Notes to Consolidated Financial Statements - Note (15) - Stockholders' Equity" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Annual Report on Form 10-K, onOctober 4, 2021 , our Board of Directors declared a dividend of$0.10 per common share, payable onNovember 12, 2021 to stockholders of record at the close of business onOctober 13, 2021 . Future Common Stock dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval. As discussed further in "Notes to Consolidated Financial Statements - Note (2) - Acquisitions -UHP Networks Inc. " included in "Part II - Item 8. - Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K, we completed our acquisition of UHP onMarch 2, 2021 . Pursuant to the stock purchase agreement, the initial upfront payment of approximately$24.0 million was paid mostly in shares of our common stock, with a nominal amount paid in cash. InAugust 2021 , approximately$4.0 million of the$5.0 million hold back amount previously placed into escrow at closing, was paid to the seller in shares of our common stock, as the conditions pursuant to the stock purchase agreement were met. The stock purchase agreement also provides for an earn-out payment of up to$9.0 million , also payable at our option in cash and or shares of our common stock, if specified sales milestones are reached during the eighteen-month period endingSeptember 30, 2022 . In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims in theComtech legacy business and the unique facts and circumstances involved in each particular agreement. As discussed further in "Notes to Consolidated Financial Statements - Note (12) - Commitments and Contingencies," included in "Part II - Item 8.- Financial Statements and Supplementary Data," included in this Annual Report on Form 10-K, we are subject to a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we have agreed to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition. 76 -------------------------------------------------------------------------------- We have change in control agreements, severance agreements and indemnification agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or an involuntary termination of employment without cause. These costs are not included in the above table. Our Consolidated Balance Sheet atJuly 31, 2021 includes total liabilities of$9.2 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities.
Recent Accounting Pronouncements
We are required to prepare our consolidated financial statements in accordance with theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritativeU.S. generally accepted accounting principles, which is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). As further discussed in "Notes to Consolidated Financial Statements - Note (1)(n) - Adoption of Accounting Standards and Updates" included in "Part II - Item 8. - Financial Statements and Supplementary Data," included in this Annual Report on Form 10-K, during fiscal 2021, we adopted: •FASB ASU No. 2016-13, which requires companies to utilize an impairment model (current expected credit loss ("CECL")) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to trade receivables and contract assets. This accounting standard replaced the incurred loss model with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate those losses. OnAugust 1, 2020 , we adopted this ASU on a modified-retrospective basis and recorded a$0.2 million decrease to opening retained earnings. •FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements in Topic 820. OnAugust 1, 2020 , we adopted this ASU. Our adoption of this ASU did not have any impact on our consolidated financial statements or disclosures. •FASB ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. OnAugust 1, 2020 , we adopted this ASU. Our adoption of this ASU did not have any impact on our consolidated financial statements or disclosures. •FASB ASU No. 2018-17, which requires entities to consider indirect interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interest in its entirety, when determining whether a decision-making fee is a variable interest. OnAugust 1, 2020 , we adopted this ASU. Our adoption of this ASU did not have any impact on our consolidated financial statements or disclosures. •FASB ASU No. 2018-18, which clarifies when certain transactions between collaborative arrangement participants should be accounted for under ASC 606 and incorporates unit-of-account guidance consistent with ASC 606 to aid in this determination. The ASU also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. OnAugust 1, 2020 , we adopted this ASU. Our adoption of this ASU did not have any impact on our consolidated financial statements or disclosures. •FASB ASU No. 2019-08, which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award. OnAugust 1, 2020 , we adopted this ASU. Our adoption of this ASU did not have any impact on our consolidated financial statements or disclosures. 77
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In addition, the following FASB ASUs have been issued and incorporated into the
FASB ASC and have not yet been adopted by us as of
•FASB ASU No. 2019-12, issued inDecember 2019 is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning afterDecember 15, 2020 . Our adoption of this ASU onAugust 1, 2021 did not have a material impact on our consolidated financial statements or disclosures. •FASB ASU No. 2020-01, issued inJanuary 2020 , clarifies the interactions between Topics 321, 323 and 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. This ASU is effective for fiscal years beginning afterDecember 15, 2020 . Our adoption of this ASU onAugust 1, 2021 did not impact our consolidated financial statements or disclosures.
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