Acquisition
 9 Months Ended
Apr. 30, 2017
Business Combinations [Abstract]  
Acquisition
Acquisition

On February 23, 2016, we completed the acquisition of TeleCommunication Systems, Inc. ("TCS"), pursuant to the Agreement and Plan of Merger, dated as of November 22, 2015 (the “Merger Agreement”), among Comtech, TCS and Typhoon Acquisition Corp., a Maryland corporation and a direct, wholly owned subsidiary of Comtech (“Merger Sub”).

TCS is a leading provider of commercial solutions such as public safety systems and enterprise application technologies and government solutions such as command and control (also known as Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (“C4ISR”) applications). The TCS acquisition resulted in Comtech entering complementary markets and expanding our domestic and international commercial offerings. TCS is now a wholly-owned subsidiary of Comtech.

The acquisition has an aggregate purchase price for accounting purposes of $340,432,000 (also referred to as the transaction equity value) and an enterprise value of $423,629,000. The fair value of consideration transferred in connection with the TCS acquisition was $280,535,000 in cash, which is net of $59,897,000 of cash acquired. We funded the acquisition (including transaction and merger related expenditures) and repaid $134,101,000 of debt assumed in connection with the acquisition by redeploying a significant amount of our combined cash and cash equivalents, with the remaining funds coming from a $400,000,000 Secured Credit Facility (the "Secured Credit Facility"), which is discussed further in Note (10) - "Secured Credit Facility."

We have incurred transaction and merger related expenditures which include significant amounts primarily for: (i) change-in-control payments, (ii) severance, (iii) costs associated with establishing our Secured Credit Facility, and (iv) professional fees for financial and legal advisors for both Comtech and TCS. There were $16,960,000 and $20,689,000, respectively, of transaction and merger related expenses recorded during the three and nine months ended April 30, 2016. There were no transaction and merger related expenses during the three and nine months ended April 30, 2017. Cumulatively, through April 30, 2017, acquisition plan expenses were $21,276,000 and primarily related to the TCS acquisition. Additional transaction and merger related expenditures were either accounted for by TCS prior to being acquired by Comtech or were capitalized by us (such as deferred financing costs) or recorded as a reduction to additional paid-in capital (such as issuance costs related to our June 2016 equity offering) on our Condensed Consolidated Balance Sheet.

Our condensed consolidated financial results include net sales from TCS operations of $66,693,000 and $220,578,000, for the three and nine months ended April 30, 2017, respectively, and $65,957,000 for both the three and nine months ended April 30, 2016.
 
We have accounted for the TCS acquisition under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations." The purchase price was allocated to the assets acquired and liabilities assumed, based on their fair value at February 23, 2016, pursuant to the business combination accounting rules. Acquisition-related transaction costs are not included as components of consideration transferred but are expensed in the period incurred. The following table summarizes the final estimated fair values of the assets acquired and liabilities assumed in connection with the TCS acquisition:
 
Purchase Price Allocation
 
      Shares of TCS common stock purchased
$
318,605,000

 
      Stock-based awards settled
21,827,000

 
Aggregate purchase price at fair value
$
340,432,000

 
Allocation of aggregate purchase price:
 
 
      Cash and cash equivalents
$
59,897,000

 
      Current assets
115,913,000

 
      Deferred tax assets, net, non-current
85,490,000

 
      Property, plant and equipment
25,689,000

 
      Other assets, non-current
2,641,000

 
      Current liabilities (excluding interest accrued on debt)
(123,956,000
)
 
      Debt (including interest accrued)
(134,101,000
)
 
      Capital lease obligations
(8,993,000
)
 
      Other liabilities
(9,156,000
)
 
Net tangible assets at fair value
$
13,424,000

 
Identifiable intangible assets, deferred taxes and goodwill:
 
Estimated Useful Lives
      Customer relationships and backlog
$
223,100,000

21 years
      Trade names
20,000,000

10 to 20 years
      Technology
35,000,000

5 to 15 years
      Deferred tax liabilities
(104,371,000
)
 
      Goodwill
153,279,000

Indefinite
Allocation of aggregate purchase price
$
340,432,000

 


The purchase price allocation shown in the above table includes the final estimated fair value of contingent liabilities associated with TCS's intellectual property matters and the warranty obligations for TCS's 911 call handling software, which are discussed in more detail in Note (19) - "Legal Proceedings and Other Matters" and Note (8) - "Accrued Expenses and Other Current Liabilities," respectively. These estimated fair values reflect market participant assumptions, as required by FASB ASC 850 "Business Combinations," and do not reflect our settlement position or amounts we actually may pay.

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives. The fair value of technologies and trade names was based on the discounted capitalization of royalty expense saved because we now own the assets. The estimated fair value of customer relationships and backlog was primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. Among the factors contributing to the recognition of goodwill, as a component of the purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Government Solutions and Commercial Solutions segments based on specific identification and, while generally not deductible for income tax purposes, certain goodwill related to previous business combinations by TCS will be deductible for income tax purposes.

The unaudited pro forma financial information in the table below, for the three months ended April 30, 2016, combines the historical results of Comtech for the three months ended April 30, 2016 and, due to the differences in the companies’ reporting periods, the historical results of TCS for the three months ended March 31, 2016, as if the acquisition had occurred on August 1, 2014. The unaudited pro forma financial information in the table below, for the nine months ended April 30, 2016, combines the historical results of Comtech for the nine months ended April 30, 2016 and, due to the differences in the companies’ reporting periods, the historical results of TCS for the nine months ended March 31, 2016, as if the acquisition had occurred on August 1, 2014.
 
Three months ended April 30, 2016
 
Nine months ended April 30, 2016
 
 
Net sales
$
130,238,000

 
$
453,475,000

Net loss
(21,395,000
)
 
(27,694,000
)
Basic net loss per share
(1.32
)
 
(1.71
)
Diluted net loss per share
(1.32
)
 
(1.71
)


The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and cash paid had taken place as of August 1, 2014. The pro forma financial information includes adjustments for:

•
The elimination of historical sales between Comtech and TCS of $1,569,000 and $7,331,000 for the three and nine months ended April 30, 2016, respectively.

•
The reduction to capitalized software amortization of $937,000 and $3,062,000, for the three and nine months ended April 30, 2016, respectively, related to the difference between the historical value and the estimated fair value of TCS's capitalized software.

•
The elimination of acquisition plan expenses of $22,464,000 and $25,507,000 for the three and nine months ended April 30, 2016, respectively, due to the assumption that all of the acquisition plan expenses were incurred on August 1, 2014.

•
The incremental amortization expense of $1,581,000 and $7,935,000 for the three and nine months ended April 30, 2016, respectively, associated with the increase in acquired other intangible assets.

•
The reduction in interest expense of $1,836,000 for the three months ended April 30, 2016 and increase in interest expense of $1,731,000 for the nine months ended April 30, 2016 due to the assumed August 1, 2014 repayment of TCS's legacy debt and related new borrowings under our Secured Credit Facility which was utilized to partially fund the TCS acquisition.

•
The reduction to interest income of $124,000 and $585,000 for the three and nine months ended April 30, 2016, respectively, due to the assumed cash payments relating to the TCS acquisition.

•
The related decrease to the provision for income taxes, based on Comtech’s effective tax rate for the respective periods.