Item 1. Business
ITEM 1. BUSINESS
We are a leading global provider of next-generation 911 emergency systems ("NG-911") and secure wireless communications technologies. 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. In recent years, an increase in market demand for global voice, video and data usage has contributed to our growth. We provide our solutions to both commercial and governmental customers.
As more fully described elsewhere in this Form 10-K, we navigated the challenges of operating our global business during the period where COVID-19 impacted many of our customers. We achieved fiscal 2021 consolidated net sales of $581.7 million and achieved significant year-over-year bookings and backlog growth. We completed the acquisition of a leading provider of innovative and disruptive satellite ground station technology solutions. We also entered into a multi-year agreement enabling a large new customer to potentially order hundreds of millions of dollars of our next-generation satellite earth station technology that can be used with thousands of Low-Earth-Orbit ("LEO") satellites reportedly being launched over the next several years. Adding to our strength, we won over $200.0 million of new NG-911 contract awards that we believe can provide years of recurring revenue. We believe that as COVID-19 subsides and the global economy fully reopens, our business performance in future periods will improve from current levels.
Our Business Outlook for Fiscal 2022 is discussed further in Part II - "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 and Business Outlook for Fiscal 2022 ." For a definition and explanation of Adjusted EBITDA, see Part II - "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Fiscal 2021 and 2020 - Adjusted EBITDA ."
Our Internet website is www.comtechtel.com and we make available on our website: our filings with the Securities and Exchange Commission ("SEC"), including annual reports, quarterly reports, current reports and any amendments to those filings. The reference to our website address does not constitute incorporation by reference of the information contained therein into this Form 10-K. We also use our website to disseminate other material information to our investors (on the Home Page and in the "Investor Relations" section). Among other things, we post on our website our press releases and information about our public conference calls (including the scheduled dates, times and the methods by which investors and others can listen to those calls), and we make available for replay webcasts of those calls and other presentations for a limited time.
We also use social media channels to communicate with customers and the public about our Company, our products, services and other issues, and we use social media and the Internet to communicate with investors, including information about our stockholder meetings. Information and updates about our Annual Meetings will continue to be posted on our website at www.comtechtel.com in the "Investor Relations" section.
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We are incorporated in the state of Delaware and were founded in 1967.
Corporate Strategies
We intend to manage our business with the following principal corporate strategies:
• Seek leadership positions in markets where we can provide differentiated products and technology solutions;
• Identify and participate in emerging technologies that enhance or expand our product portfolio;
• Maximize responsiveness to our customers, including offering more integrated systems and solutions;
• Expand and further penetrate our diversified and balanced customer base; and
• Pursue acquisitions of complementary businesses and technologies.
Competitive Strengths
The successful execution of our principal corporate strategies is based on our competitive strengths, including the following:
(1) We Have Significant Exposure to Large, Growing End Markets
We believe we are well positioned to capitalize on some of the most significant long-term technology trends occurring worldwide and that customers around the world will increasingly turn to us to fulfill their 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. These important technology trends include the expansion of 5G mobile networks and the integration of satellite communications into mobile phones, the need for public safety agencies to seamlessly integrate various networks and protocols and utilize precise location to connect individuals with first responders, the expanding breadth of High Definition ("HD") and 4K broadcasting content, and the need for governments to have more modern and mobile communications and transmission equipment to successfully complete mission-critical goals. We believe that all these long-term trends generate growth in global voice, video and data usage that, in turn, drives increased long-term demand for the secure wireless communications solutions that we provide.
We are in the process of further focusing both our research and development and marketing efforts to advance our next-generation satellite technology solution offerings that are targeted for use on new broadband satellite constellations. Thousands of new LEO, medium-earth-orbit ("MEO") and even geosynchronous equatorial orbit ("GEO") satellites are reportedly being launched over the next several years. Satellite constellations will provide internet access across the world, support increasing demand for data transmission, and will be facilitated by solutions that we provide, including ground station equipment such as Single Channel per Carrier ("SCPC") and time division multiple access (“TDMA”) modems, solid-state amplifiers and X/Y steerable antennas. In fiscal 2021, we entered into a strategic and highly valued multi-year agreement enabling a large new customer to potentially order hundreds of millions of dollars of our next-generation satellite earth station technology that can be used with the thousands of LEO satellites reportedly being launched over the next several years. Shortly after we signed this agreement, we received our first order valued at more than $13.0 million to make certain customizations on behalf of this customer. Work on these efforts commenced immediately.
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(2) We Believe We Are a Market Leader in the End-Markets That We Serve
Commercial Solutions Segment
Satellite Ground Station Technologies - We believe we are the leading provider of satellite earth station modems, solid-state amplifiers and traveling wave tube amplifiers. Many of our key satellite earth station modems incorporate Turbo Product Code ("TPC") or Low Density Parity Check ("LDPC") forward error correction and bandwidth compression technologies, which enable our customers to optimize their satellite networks by either reducing their satellite transponder lease costs or increasing data throughput. We hold leadership positions in the market for high throughput modems used in cellular backhaul, a market that has been rapidly growing due to increased mobile phone use as well as LTE and 5G deployments. In fiscal 2021, we added to our product portfolio software-defined TDMA technology, which delivers industry-leading bandwidth-efficiency and flexibility to our customers. Our amplifier products are used to amplify signals carrying voice, video or data for air-to-satellite-to-ground communications and are vital to satellite communication applications such as traditional broadcast, direct-to-home ("DTH") broadcast and satellite newsgathering. We differentiate our amplifier product offerings by our ability to develop the most efficient size, weight and power profile. We believe that our expertise complying with regulatory and performance restrictions, particularly in challenging frequency bands such as X, Ka and Q, is a key differentiator. Demand for equipment in these challenging frequency bands is expected to grow over the coming years as new constellations are launched, such as Amazon Kuiper, SpaceX Starlink, Telesat Lightspeed and High Throughput Satellites ("HTS") from other providers. Certain of our amplifiers are DO-160 certified (an airborne quality standard) and when incorporated into an aircraft satellite communication system, can provide passengers, both commercial and military, with email, Internet access and video conferencing.
Public Safety and Location Technologies - In fiscal 2021, we were recognized by Frost & Sullivan, a leading industry research firm, 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 by Frost & Sullivan. By closing statewide contracts in Arizona, Iowa, Ohio, Pennsylvania and South Carolina, our direct NG-911 contracts now represent a population of over 60 million in the U.S., and over 25 million in Australia via Next Generation 000 contracts. As such, we believe that we are a leader in public safety communication and location technologies. We meet the ISO 27001 data security standard and believe we have significant market share in the routing of U.S. wireless 911 calls, Voice over Internet Protocol ("VoIP") 911 calls and Text to 911 messaging. We believe we are one of a limited number of companies fulfilling the Federal Communications Commission ("FCC") requirements for Enhanced 911 ("E911") call-routing to Public Safety Answering Points ("PSAPs") for wireless and VoIP network operators. E911 refers to 911 calls for both wireline and wireless telephones that are enhanced to provide the caller's location information. We are focusing our marketing and research and development efforts to meet system standards for NG-911, which refers to an Internet Protocol ("IP") based system that defines how digital information (e.g., voice, photos, videos and text messages) flows seamlessly from the public to the PSAPs, and on to emergency responders. With more than 85 global deployments of our Location Based Services (“LBS”) platform, we are a leading global provider of device location for both public safety and commercial applications. Leveraging decades of our location-based technology expertise, our solutions support the generation and distribution of location information for both indoor and outdoor environments. We have developed industry leading 2G through 5G mobile network and WiFi location functions, robust mapping, navigation and geolocation solutions incorporated by industry verticals such as public safety, automotive manufacturing, mobile network operators (“MNOs”) and retail. We provide a high-capacity, multiprotocol Short-Messaging-Service (“SMS”) platform for Person-to-Person (“P2P”), Application-to-Person (“A2P”) and Machine-to-Machine (“M2M”) communications. In addition, we offer Location Studio®, a complete end-to-end location application platform consisting of maps, map data, geo-services, application program interfaces (“APIs”) and software development kits ("SDKs") enabling MNOs, application developers, public safety ecosystems, and enterprises to build custom and unique applications.
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Government Solutions Segment
Tactical Communications Technologies - We are a key supplier to large governments (particularly the U.S. government) and large prime contractors for tactical communications technologies, primarily tactical satellite-based technology solutions, field support services and satellite component supply chain management. We are a prime contractor under several indefinite delivery, indefinite quantity ("IDIQ") defense contract vehicles, including the: (i) U.S. Army’s Global Tactical Advanced Communications Systems ("GTACS") contract; (ii) U.S. Army’s Global Tactical Advanced Communications Systems (“GTACS II”) contract; (iii) U.S. Navy’s Seaport Next Generation (“SeaPort-Nxg”) contract; (iv) Complex Commercial SATCOM Solutions ("CS3") contract; (v) Communications Electronics Command ("CECOM") Responsive Strategic Sourcing for Services ("RS3") contract with the U.S. Army Contracting Command - Aberdeen Proving Ground (“ACC-APG”); and (vi) Advanced Battle Management System ("ABMS") contract for the Air Force Life Cycle Management Center. We provide field support sustainment services, centralized and deployed depot services and technology insertion services to the U.S. Army’s AN/TSC-198 family of communication systems that are commonly referred to as "SNAP" (Secret Internet Protocol Router ("SIPR") and Non-secure Internet Protocol Router ("NIPR") Access Point) Very Small Aperture Terminals ("VSATs"). Our field support services include providing U.S. Department of Defense ("DoD") personnel with curriculum development and training services to support cybersecurity workforce development. We provide high reliability Electrical, Electronic and Electromechanical (“EEE”) parts for use in satellite, launch vehicle and manned space applications. We also provide services encompassing all aspects of ground station life cycle to include requirements definition and analysis; design, development and integration of turnkey systems from antenna to data processing; civil works and construction; station installation and verification; operations and maintenance; and decommissioning at end of life. We also provide to customers worldwide a line of X/Y steerable satellite tracking antenna systems ideal for LEO, MEO and GEO constellations.
High-Performance Transmission Technologies - We are a world leader in the design and supply of troposcatter equipment, and a key supplier of radio frequency ("RF") microwave solid-state, high-power amplifier and switching control technologies. We have designed, manufactured and delivered troposcatter systems (sometimes referred to as over-the-horizon ("OTH") microwave products and systems) for over fifty years and are one of the largest independent suppliers of solid-state, high-power RF microwave amplifiers and integrated transmit receive hardware, which reproduce signals with higher power, are extremely complex, and are critical to the performance of the systems into which they are incorporated.
Our CS67PLUS software defined, adaptive troposcatter radio can operate at over 200 megabits per second ("Mbps"). The radio is MIL-STD 461 EMI and MIL-STD 810G environmentally compliant. Our Modular Tactical Transmission System ("MTTS") provides a high capacity, troposcatter and beyond-line-of-sight modular communications system designed for easy and rapid deployment. Our best-in-class troposcatter solutions led to our equipment being chosen to be used on the U.S. Marine Corps’ next generation troposcatter system Program of Record. These dual frequency systems are designed to operate in harsh environmental conditions and are protected from Electromagnetic Interference and Electromagnetic Pulse (“EMI/EMP”).
Many solid-state RF microwave amplifier and switching control technologies are produced in-house by large companies; however, our expertise has created a cost-effective and technologically superior alternative to in-house sourcing. Some of the companies who have outsourced amplifier development and production to us include Rockwell Collins, Inc., European Aeronautic Defense and Space Company ("EADS"), Lockheed Martin Corporation, L3Harris Technologies, Inc., Northrop Grumman Corporation, BAE Systems Plc, the U.S. Navy and Raytheon Technologies Corporation. Our amplifiers are also used in oncology treatment systems that allow physicians to give cancer patients higher doses of radiation that are more closely focused on cancerous tissue, thereby minimizing damage to healthy tissue.
(3) We Believe We Provide Industry Leading Innovation, Capabilities and Solutions
We have established a leading position of technology innovation in our fields through internal and customer-funded research and development activities, which have yielded significant advances. Examples of our industry-leading innovation include:
Our VSAT Networking Technologies and Platforms – For the past several years, we have developed and manufactured Heights TM ("Heights"). Heights TM is an advanced satellite earth station networking platform that combines our most efficient waveforms, compression engines and the ability to provide dynamic bandwidth and power management to meet the demands of customers operating on traditional fixed satellite service systems ("FSS"), while providing advantages for customers who plan to transition to HTS systems in the future. Heights TM is ideally suited for cellular backhaul, universal service obligation networks and other applications that require high performance in a hub-spoke environment. Heights TM solutions are designed to deliver the highest Internet Protocol bits per Hertz in its class.
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In fiscal 2021, we introduced a TDMA technology solution which offers best-in-class support for very large networks. With an estimated 3 billion people globally who are not connected to any wireless services, this technology allows our customers to cost-effectively provide services to end-users with the quality and reassurance of the Comtech brand and service offerings. We also intend to offer a solution that combines our Heights Dynamic Network Access ("H-DNA") and TDMA technologies in a single VSAT platform so that we can deliver a solution that will deliver increased value to our customers. Additionally, at the start of our fiscal 2022, we announced a technology and business development partnership with Kymeta Corporation, a satellite communications company to broaden network offerings by combining the Kymeta TM u8 terminal with our SLM-5650B modem and UHP-200 Universal Satellite Router. This solution will enable new and existing U.S. Department of Defense and commercial customers to operate state-of-the art technologies using cost-effective and seamless VSAT router solutions.
Our Solacom Software Solutions – We offer a best-in-class call handling solution marketed under the Solacom Guardian brand name, which provides an integrated text-to-and-from 911 solution on a unified platform. The solution provides a flexible user interface, adapts to varying customer environments and preferences, provides powerful call conferencing capabilities, enhanced reporting capabilities and offers geospatial 911 location call display directly from a customized map. Because of its advanced features, it allows us to offer an immediate upgrade path to existing and new customers and has expanded our presence in the public safety solutions market. We are investing in product enhancements of the Guardian software, including developing a cloud-based version so that we can offer software as a service ("SaaS") type solutions to our public safety customers.
Our Compact Over-the-horizon Mobile Expeditionary Terminal (“COMET TM ”) – We offer the Comtech COMET TM , the world’s smallest OTH microwave troposcatter terminal. Our Comtech COMET TM is rapidly deployable, low power and highly portable. Troposcatter technology has long been associated with large antennas and high-power amplifiers that require kilowatts of prime power and large trucks to transport them to the field. The COMET TM has fundamentally changed this paradigm. The COMET TM is capable of being transported in a carrying case by a single individual and set up in under fifteen minutes. The COMET TM is ideally suited for situations where high bandwidth backhaul communications are required, extending critical services into areas where there is no communications infrastructure, or the infrastructure has been destroyed. U.S. Special Forces, as well as non-U.S. NATO forces, have already begun procuring and deploying the COMET TM for high reliability, mission essential communications.
Our "XyPoint ® " Mobile Location Platform – Provided to MNOs globally, our virtualized LBS platform is a high availability robust solution with multiple positioning technologies, that allows authorized users to locate and track specific mobile devices and monitor specific areas of interest. MNOs can use this platform for location accuracy to support a wide variety of use cases, including public safety, location intelligence, network optimization and big data analytics. On the legacy front, our LBS platform is compatible within 2G through 4G wireless networks, as well as an enabler to the MNOs to seamlessly migrate to cloud native environments, as they start their migrations to 5G.
(4) We Have a Diverse Global Customer Base
We have established long-standing relationships with thousands of customers worldwide, including leading system and network suppliers in the global satellite (such as Intelsat S.A. and SES S.A.), mobile cellular (such as Verizon Wireless), defense, broadcast and aerospace industries, as well as the U.S. federal government (such as the U.S. Army and Navy), U.S. state and local governments, and foreign governments. Our global commercial and government customers are increasingly seeking integrated solutions to meet their operational needs. We believe that our customers recognize our ability to develop improved technologies and to meet stringent program requirements. Our ability to solve complex problems is well known and we believe we have strong relationships with our customers. We hold prime positions on several key contracts and have had a long history of servicing key programs.
Business Segments
Fundamentally, we offer advanced secure wireless communications technologies with expertise in the satellite communications and cellular markets. We believe these markets are undergoing a period of significant growth and rapid technological change. We manage our business through two reportable operating segments: Commercial Solutions and Government Solutions. Our corporate senior management team supports the business segments by, among other things, actively seeking to exploit potential synergies that exist between the segments, including in areas such as manufacturing, technology, sales, marketing, customer support and finance. The diagram below summarizes our key products, systems and services by our two reportable operating segments:
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Commercial Solutions Segment Technologies
(approximately 61.9% of fiscal 2021 net sales) Government Solutions Segment Technologies
(approximately 38.1% of fiscal 2021 net sales)
Satellite Ground Station
Technologies Public Safety and Location
Technologies Tactical Communications
Technologies High-Performance Transmission
Technologies
• Satellite ground station technologies such as SCPC modems, TDMA modems and networking platforms that facilitate the transmission of voice, video and data over satellite links including LEO and HTS satellite constellations
• Solid-state and traveling wave tube amplifiers used to amplify signals from satellite ground stations
• Wireless/VolP 911 service for network operators
• NextGen 911 solutions
• ESInet (Emergency Services IP Network)
• Call Handling applications for PSAPs
• Software and equipment for location-based and messaging services for various applications, including both public safety and commercial services
• Tactical satellite-based communications, field support and end-to-end integration
• Satellite-based mobile communications and tracking systems, including high precision full motion fixed and mobile X/Y satellite tracking antennas, RF feeds, reflectors and radomes
• Procurement and supply chain management of high reliability EEE parts for satellite, launch vehicle and manned space applications
• Over-the-horizon microwave equipment that can transmit digitized voice, video and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET TM
• Solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, jamming, medical and aviation applications
Commercial Solutions Segment
Representative Customers Government Solutions Segment
Representative Customers
Satellite systems integrators, wireless and other communication service providers and broadcasters
Domestic and international defense customers, as well as U.S. and foreign governments, prime contractors and system suppliers, such as General Dynamics Corporation, Lockheed Martin Corporation, L3Harris Technologies, Inc., Raytheon Technologies Corporation, SED Systems (a division of Calian Ltd.), and ViaSat Inc.
Satellite broadcasters, such as The DIRECTV Group and EchoStar Corporation
U.S. state and local governments, such as Arizona, the Commonwealth of Massachusetts, the Commonwealth of Pennsylvania, Iowa, Maine, South Carolina and the state of Washington
End-customers also include AT&T Inc., BT Group plc., China Mobile Limited, CenturyLink, Inc., Claro Argentina, Comcast Corporation, Intelsat S.A., Speedcast International Limited, Nokia Corporation, QUALCOMM Incorporated, SES S.A., T-Mobile USA, Inc. and Verizon Communications Inc. U.S. Army, the U.S. Marine Corps, the U.S. Navy, prime contractors to the U.S. Armed Forces, NATO and foreign governments (i.e., ministries of defense)
Domestic and international defense customers, prime contractors and system suppliers such as Lockheed Martin Corporation, L3 Harris Technologies, Inc., Northrop Grumman Corporation, Raytheon Technologies Corporation., SES S.A., and The Boeing Company
Medical equipment companies, such as Varian Medical Systems, Inc., and aviation industry system integrators such as Collins Aerospace (a subsidiary of Raytheon Technologies Corporation) and Telephonics Corporation
Foreign government customers in the Middle East, Europe, North Africa, Latin America and Asia Pacific and related prime contractors and systems integrators
Oil companies such as Shell Oil Company and PETRONAS
Financial information about our business segments, including net sales, operating income, Adjusted EBITDA (a Non-GAAP financial measure), total assets, and our operations outside the United States, is provided in "Notes to Consolidated Financial Statements - Note (11) Segment Information" included in "Part II - Item 8. - Financial Statements and Supplementary Data."
The markets and key technologies for each segment are further described below.
Commercial Solutions Segment
Overview
Our Commercial Solutions segment offers satellite ground station technologies (such as SCPC and 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 the U.S. government) that have requirements for off-the-shelf commercial equipment.
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Key Markets and Technology Solutions
Satellite Ground Station Technologies
We offer our customers one-stop-shopping for satellite ground station technologies, including SCPC and TDMA modems, amplifiers, frequency converters and network software for customers who utilize satellite communications. Our products are used to modulate, demodulate and amplify signals, carry voice, video and/or data over networks and are vital to satellite communication applications, including air-to-ground communications, video broadcasting and the backhaul of cellular traffic. Our Commercial Solutions segment manufactures most of the satellite ground station equipment we sell to our customers.
We believe that the overall satellite ground station equipment industry will grow over the next few years, and will be increasingly connected to existing and new cellular networks. This growth is expected to occur as a result of widespread deployment and upgrades of 4G and 5G ground-based systems, including satellite earth stations, as well as the integration of high-performance amplifiers necessary to meet long-term demand for high-performance satellite communications applications, such as satellite-based wireless backhaul, DTH, HD and 4K broadcasting and in-flight connectivity. We believe that Comtech is well positioned to capitalize on this demand through sales of our market leading satellite ground station technologies, including new next-generation satellite earth station technologies that can be used with the thousands of new LEO, MEO and large HTS satellite constellations that are reportedly being launched over the next several years.
Examples of end-market applications that are driving long-term demand for our satellite-based communication technologies include:
• Satellite-Based Cellular Backhaul. Demand for satellite-based cellular backhaul services is anticipated to grow rapidly as a result of the increased penetration of smart cellular phones and network upgrades to 4G and 5G in developing regions of the world. Ultimately, as 5G services continue to be deployed, mobile data services will become more critical. As mobile data penetration expands and mobile data consumption increases, wireless carriers must invest in their mobile network infrastructure and businesses will require back-up communications. In developing regions of the world and in remote areas where terrestrial network infrastructure is lacking, wireless network operators often backhaul, or transport, their wireless data traffic using satellite-based networking technologies. Comtech is well positioned to serve the high-performance, high availability needs of satellite-based cellular backhaul through sales of our SCPC and TDMA satellite modems as well as our Heights TM and UHP networking platforms.
• New LEO, MEO and HTS Satellites. There are thousands of new satellites reportedly being launched over the next several years, which believe will lead to increasingly complex satellite networks. As service providers work to offer connectivity to these high-speed, high-bandwidth satellites and expand their networks to handle the demand for new LEO, MEO and HTS applications, we believe our Heights TM and UHP networking platforms, our solid-state amplifiers and our X/Y antennas will ultimately be incorporated into many new installations and necessary upgrades of equipment.
• High Definition and Ultra-High Definition Transmission. Reports indicate that in recent years, consumers have purchased millions of HD televisions and Ultra-High Definition or "4K" televisions and streaming high-definition videos over mobile devices. We believe this will require a significant amount of satellite bandwidth, which will require satellite service providers to upgrade equipment and find new ways to manage the cost and transmission efficiency of their networks. We believe that these requirements will drive increased demand for our satellite ground station technologies.
• Integration of Satellite Systems into 911 Systems. 911 service is a vital part of the U.S. government's nationwide emergency response and disaster preparedness system. In recent years, the FCC has taken steps to increase public safety by encouraging and coordinating development of a nationwide, seamless communication system for emergency systems. Increasingly, satellite services are playing a more important role in the nationwide 911 network not only in rural areas but as back-up for Public Safety Answering Points ("PSAP") and individual callers. For instance, in August 2021, it was reported that Apple was developing satellite capabilities for its iPhone models that would allow users to call and/or send texts in emergency situations. We believe that satellite systems, supported by our SCPC and TDMA networking platforms, will be incorporated into 911 systems. Given our expertise in public safety and location technology solutions, we believe we are uniquely positioned to be a leader in this growing market.
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Public Safety and Location Technologies
We are a leading provider of public safety and location technologies. Our next generation solutions enable rich, multimedia information to be delivered with 911 calls; our E911 call routing solutions allow cellular carriers and voice over the Internet ("VoIP") carriers to deliver emergency calls to Public Safety emergency call centers nationwide. When someone places an emergency call, our technologies can identify the call as an emergency call, access the user’s location information from the wireless network and route the call to the assigned public safety jurisdiction. Today, we provide public safety and location technologies to many U.S. telecommunication carriers, the largest being Verizon for which we provide their 911 call routing via cellular service. We believe we service a significant portion of the carrier market for 911 cellular call routing applications, along with another leading competitor.
In addition to 911 call routing, we provide systems integration, satellite and location infrastructure terminals, and linkage to NG-911 Emergency Services IP Networks ("ESInet"). We also offer best-in-class 911 call handling solutions under the Solacom brand name. We believe state and local governments have a need to upgrade existing call handling systems and old networks to more modern NG-911 systems, including 911 text messaging services, advanced data, real-time photos and other types of information sharing over IP networks.
As the U.S. adopts upgraded call handling and NG-911 solutions, we believe that other countries will do so as well. Our public safety and location technology solutions have been deployed since 2006 and are utilized by domestic MNOs as well as internationally to provide reliable device location determination for public safety and commercial applications. Many of our technologies, such as positioning, mapping and text messaging, are embedded in our public safety and location offerings to help address mapping, routing and geolocations. We address the FCC mandates for emergency services as it relates to location by supporting precise location in our solutions. Our text messaging platforms are used by wireless carriers to provide SMS to their end-customers and are also used to communicate with 911 PSAPs through major network operators.
In order to maximize market growth opportunities, we have repositioned certain of our location technology solutions to increase our penetration into the public safety space and are focusing on international markets. As satellite services play a more important role in the nationwide 911 network, we believe demand for our location products will grow.
Our Location Studio TM platform enables customers, especially public safety agencies, to build their own applications with end-user functionality, such as maps, search, geocoding, routing and navigation, using their own brand. We believe that customers and prospects are increasingly looking for alternatives to mapping services that are subject to change by the provider and which meet market privacy and security requirements. The Location Studio TM platform is a complete end-to-end location application consisting of maps, map data, including our Trusted OpenStreetMap ("TOSM") geo-services, application program interfaces ("APIs") and software development kits ("SDKs") enabling public safety ecosystems and enterprises to build custom and unique mapping applications. Map data includes positioning, search, enhanced local content, custom maps, navigation, geo-fencing, tracking integrated with third party data sources like camera feeds and Internet of Things ("IoT") sensor data via cross-platform APIs and SDKs supporting all leading operating systems. We believe that as the industry moves toward digital transformation, customers will be looking for situational awareness solutions that are built on top of mapping and geo-services. Our location technology solutions enable the determination of a mobile phone's geospatial position in a variety of environments, leveraging a wide range of signals including Global Positioning System ("GPS"), Global Navigation Satellite Systems ("GNSS") and multiple cellular positioning technologies ranging from 2G through 5G mobile networks. For our installed base of systems, we provide ongoing operational support, including administration of system components, system optimization, configuration management and maintenance services, including tracking customer support issues, troubleshooting and developing and installing maintenance releases.
In fiscal 2022, we have begun marketing Smart Response TM , a newly developed cloud-based solution, that offers a common operational picture to first responders for an effective data-driven response for security agencies and first responders. This new solution can offer streaming live feeds from traffic cameras at and near incident location, access caller information like past residences, criminal history, or next-of-kin information at the tap of a button. Offering a bird-eye view of integrated data, the Smart Response TM solution empowers PSAP employees to ensure the appropriate resources are on the scene and to better serve the public in emergency situations.
Government Solutions Segment
Overview
Our Government Solutions segment 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.
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Key Markets and Technology Solutions
Tactical Communications Technologies
With persistent threats from state and non-state actors, governments around the world are increasingly seeking ways to mitigate vulnerabilities using information and more reliable communication systems to increase decision-makers’ situational awareness. In response to this demand, we offer a variety of mission-critical technologies, including the supply and field support of tactical satellite-based networks (including satellite modems, ruggedized routers and solid-state drives), sustainment services for the AN/TSC-198A SNAP (SIPR and NIPR Access Point) VSATs. Many of our mission-critical technologies are part of integrated communication infrastructure systems such as the U.S. Military Command, Control, Communications, Computers, Cyber Intelligence, Surveillance and Reconnaissance (also known as "C5ISR") systems and similar complicated networks for international governments. We also provide a variety of in-class and on-line training services, labs and assessments to our customers to help them protect networks from cyber attacks.
We are recognized as an industry leader and global supplier of high reliability products. Our solutions include supply chain management and engineering services for high reliability EEE space parts and satellite and launch vehicle tracking solutions in support of critical National Aeronautics and Space Administration ("NASA") programs and for international space and defense agencies. Through our acquisition of CGC Technology Limited, we are also a leading, world-wide provider of high precision, full motion fixed and mobile X/Y satellite tracking antennas, reflectors, RF feeds, radomes and other ground station equipment.
High-Performance Transmission Technologies
We offer several unique high-performance transmission technologies that are used in sophisticated communication systems, such as electronic warfare, radar and identification friend or foe ("IFF"). As our customers push the envelope for mobility, speed and higher frequency, we believe that demand for high-performance transmission products will grow from current levels.
Our troposcatter technologies (sometimes referred to as over-the-horizon or "OTH" microwave systems) are extremely reliable and secure and are a cost-effective alternative or compliment to satellite communication as it does not require the leasing of expensive satellite transponder space with its attendant recurring costs. Our over-the-horizon microwave systems, which include our patented forward error correction technology, can transmit video and other broadband applications at throughputs of up to 200 Mbps. U.S. and foreign governments use our over-the-horizon microwave systems to, among other things, transmit radar tracking, run C4ISR applications and connect to remote border locations. Additionally, energy companies use our systems to enable communication links for offshore oil rigs and other remote locations, as well as for exploration activities. Our MTTS, the first truly modular, rapidly deployable transit case-based troposcatter system, has been purchased by the U.S. Army, incorporated into the SNAP family of products used by the U.S. military and designated the Tactical Transportable TROPO ("SNAP 3T") or AN/TRC 198(V3). We also recently introduced the Comtech COMET TM , a rapidly deployable OTH microwave system. The Comtech COMET TM has a medium range (up to 60 km) and high bandwidth (up to 210 Mbps) that fills a void in distances that have long been desired by tactical communications planners. The Comtech COMET TM uniquely addresses the special operations command (or “SOCOM”) community’s concern of low probability of intercept and low probability of detection (“LPI/LPD”), while providing high reliability, mission essential communications.
Our solid-state, high-power RF microwave amplifiers and related switching control technologies are utilized in several critical applications, including electronic warfare, communications, radar, IFF and medical applications such as oncology cancer treatment systems. In the electronic warfare marketplace, we support a variety of legacy systems and are participating in the ongoing migration to platforms that require smaller and lighter amplifiers integrated with additional signal processing functionality. Our solutions increase the flexibility of systems by providing wider bandwidth capabilities to address communication needs. We also believe that the desire for increased situational awareness of the airspace may create increased opportunities for our radar and IFF products, which are used by government and commercial customers around the world. Our high power and highly reliable Gallium Nitride ("GaN") amplifier technology is increasingly used both to update existing radar systems for improved sensitivity and range as well as for new radar installations. In addition to technologies that enhance performance of primary radars, we also supply solutions for IFF systems that provide positive identification of radar targets for secondary surveillance systems.
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Acquisitions
In order to position ourselves to take advantage of additional growth opportunities and meet our strategic objectives, we have followed, and will continue to follow, a disciplined approach in identifying, executing and capitalizing on acquisitions.
Completed Acquisitions
In the past several years, we have acquired businesses and enabling technologies.
On February 23, 2016, we acquired TeleCommunication Systems Inc. ("TCS"), a leading provider of commercial solutions (such as public safety and location technologies) and government solutions (such as tactical communications technologies). The TCS acquisition had an aggregate purchase price for accounting purposes of $340.4 million (also referred to as the transaction equity value) and an enterprise value of $423.6 million. The TCS acquisition, which has been fully integrated into our business, resulted in Comtech entering complementary markets and expanding our domestic and international commercial offerings.
On February 28, 2019, we completed our acquisition of Solacom, a leading provider of NG-911 solutions for public safety agencies. The acquisition of Solacom was a significant step in our strategy of enhancing our public safety and location technologies. The Solacom acquisition had an aggregate purchase price for accounting purposes of $32.9 million and was fully integrated into our Commercial Solutions segment.
On April 29, 2019, we acquired the state and local government NG-911 business from General Dynamics Information Technology, Inc. (the "GD NG-911 business") and at the same time announced a five-year contract award in excess of $100.0 million to develop, implement and operate a NG-911 emergency communications system for a Northeastern state. The acquisition strengthened our position in the growing NG-911 solutions market. The GD NG-911 business had an aggregate purchase price for accounting purposes of $11.0 million and was fully integrated into our Commercial Solutions segment.
On January 27, 2020, we completed the acquisition of CGC Technology Limited ("CGC"), a small privately held company located in the United Kingdom. CGC is a leading provider of high precision full motion fixed and mobile X/Y satellite tracking antennas, reflectors, RF feeds, radomes and other ground station equipment around the world. The acquisition brought established relationships with several top-tier European aerospace companies and other government entities, and we expect it to allow us to participate in the anticipated growth in the number of LEO and MEO satellite constellations. The CGC business had an aggregate purchase price for accounting purposes of $23.7 million and was fully integrated into our Government Solutions segment.
On February 21, 2020, we acquired NG-911, Inc. ("NG-911"), a small privately held company based in Iowa, Illinois and Missouri. NG-911 is a pioneer in providing next generation 911 solutions, including those designed by Solacom, to public safety agencies in the Midwest. The acquisition allows us to cost-effectively expand sales of our industry leading Solacom Guardian call management solutions for public safety. The NG-911 product line had an aggregate purchase price for accounting purposes of $1.2 million and was fully integrated into our Commercial Solutions segment.
On March 2, 2021, we completed our acquisition of UHP Networks Inc. ("UHP"), a leading provider of innovative and disruptive satellite ground station technology solutions. With end-markets for high-speed satellite-based network anticipated to significantly grow, our acquisition allows us to enhance our Commercial Solutions segment's offerings with low cost TDMA satellite modems. The UHP business has a preliminary purchase price for accounting purposes of $37.5 million and was fully integrated into our Commercial Solutions segment.
Sales, Marketing and Customer Support
Sales and marketing strategies include direct sales through sales, marketing and engineering personnel, indirect sales through independent representatives, value-added resellers, and sales through a combination of the foregoing. We devote resources to evaluating and responding to requests for proposals by governmental agencies around the world and, as needed, we employ the use of specialized consultants to develop our proposals and bids.
We intend to continue to expand international marketing efforts by engaging additional independent sales representatives, distributors and value-added resellers and by establishing additional foreign sales offices. In addition, we also leverage our relationships with larger companies (such as prime contractors to the U.S. government and large mobile wireless operators) to market our technology solutions. In fiscal 2022, we expect to significantly expand our social media and Internet presence and develop an updated marketing and branding strategy.
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We are pre-qualified as an approved vendor for certain government contracts. We collaborate in sales efforts under various arrangements with integrators. Our marketing efforts also include advertising, public relations, speaking engagements and attending and sponsoring industry conferences.
Our management, technical and marketing personnel establish and maintain relationships with customers. Our sales strategies include a commitment to providing ongoing customer support for our systems and equipment. This support involves providing direct access to engineering staff or trained technical representatives to resolve technical or operational issues.
Our products and services in many of our product lines have long sales cycles. Once a product is designed into a system, customers may be reluctant to change the incumbent supplier due to the extensive qualification process and potential redesign required in using alternative sources. In addition, in recent years, we have found that overall sales cycles for each of our product lines have significantly increased.
Sales by geography and customer type, as a percentage of related net sales, are as follows:
Fiscal Years Ended July 31,
2021 2020 2019 2021 2020 2019 2021 2020 2019
Commercial Solutions Government Solutions Consolidated
U.S. government 14.7 % 14.8 % 19.2 % 66.8 % 65.0 % 63.8 % 34.6 % 36.2 % 40.1 %
Domestic 58.5 % 58.9 % 53.9 % 14.1 % 15.2 % 12.5 % 41.5 % 40.3 % 34.5 %
Total U.S. 73.2 % 73.7 % 73.1 % 80.9 % 80.2 % 76.3 % 76.1 % 76.5 % 74.6 %
International 26.8 % 26.3 % 26.9 % 19.1 % 19.8 % 23.7 % 23.9 % 23.5 % 25.4 %
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors.
Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which represented 10.7% of consolidated net sales for fiscal 2021. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during fiscal 2020 and 2019.
International sales for fiscal 2021, 2020 and 2019 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $138.9 million, $145.1 million and $170.6 million, respectively. When we sell internationally, we denominate most of our contracts in U.S. dollars. Some of our sales to international customers are paid for by letters of credit or on an open account. From time to time, some of our international customers may require us to provide performance guarantees.
Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for fiscal 2021, 2020 and 2019.
Backlog
Our backlog as of July 31, 2021 was $658.9 million (of which $526.4 million was attributed to the Commercial Solutions segment and $132.5 million was attributed to the Government Solutions segment). We estimate that a substantial portion of the backlog as of July 31, 2021 will be recognized as sales during the next twenty-four month period, with the rest thereafter.
At July 31, 2021, 79.8% of our backlog consisted of orders for use by U.S. commercial customers, 8.9% consisted of U.S. government contracts, subcontracts and government funded programs and 11.3% consisted of orders for use by international customers (including sales to U.S. domestic companies for inclusion in products that will be sold to international customers).
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Our backlog is defined as orders (sometimes also referred to herein as bookings) that we believe to be firm. Backlog that is derived from U.S. government orders relates to U.S. government contracts that have been awarded, signed and funded. Backlog for our U.S. government customers also includes amounts appropriated by Congress and allotted to the contract by the procuring government agency. Our backlog does not include the value of options that may be exercised in the future on multi-year contracts, nor does it include the value of additional purchase orders that we may receive under indefinite delivery/indefinite quantity ("IDIQ") contracts or basic ordering agreements. In some cases, such as contracts received from large U.S. based telecommunication companies, our backlog is computed by multiplying the most recent month’s contract or revenue by the months remaining under the existing long-term agreements, which we consider to be the best available information for anticipating revenue under those agreements. When we acquire a company with existing contracts, we only record bookings for those contracts that meet our definition. Almost all of the contracts in our backlog (including firm orders previously received from the U.S. government) are subject to modification, cancellation at the convenience of the customer, or for default in the event that we are unable to perform under the contract.
A significant portion of the backlog from our U.S. commercial customers relates to large, multi-year contracts to provide state and local governments (and their agencies) with public safety and location technology solutions. Although the contracts themselves represent legal, binding obligations of these governments, funding is often subject to the approval of budgets (for example, on an annual or bi-annual basis). Although funding for these multi-year contracts is dependent on future budgets being approved, we include the full estimated value of these large, multi-year contracts in our backlog given the critical nature of the services being provided and the positive historical experience of our state and local government customers passing their respective budgets.
There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The actual amount and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual recognition of revenue on contracts included in backlog may never occur or may change because a program schedule could change, a customer may not follow up with order details (e.g., delivery instructions), fluctuations in currency exchange rates after an order is placed could cause our products to become too expensive for a foreign customer, a customer’s program could be canceled, a contract could be reduced, modified or terminated early due to changes in a customer’s priorities, funding may not be included in future budgets, actual indirect rates being reimbursed on U.S. government contracts may ultimately be less than those indirect rates included in our initial proposals, or an option that we had assumed would be exercised is not exercised. As a result of these contingencies, we may adjust our backlog if we determine that such orders are no longer firm and or funded. In addition to adjustments from these types of contingencies, variations in backlog from time to time are attributable, in part, to changes in sales mix, the timing of contract proposals, the timing of contract awards, delivery schedules on specific contracts and new bookings obtained through acquisitions. A large majority of the solutions in our satellite ground station technologies product line operate under short lead times. Our Government Solutions segment backlog is highly influenced by the nature and timing of orders received from the U.S. government, which is subject to unpredictable funding, deployment and technology decisions. As a result, we believe our backlog and orders, at any point in time, are not necessarily indicative of the total sales anticipated for any future period.
Manufacturing and Service
Our manufacturing operations consist principally of the assembly and testing of electronic products that we design and build from purchased fabricated parts, printed circuits and electronic components. We consider our facilities to be well maintained and adequate for current and planned production requirements. All our manufacturing facilities, including those that serve the military market, must comply with stringent customer specifications. We employ formal quality management programs and other training programs, including the International Standard Organization’s quality procedure registration programs.
To support our long-term business goals, in fiscal 2021, we commenced a 15-year lease for a new 146,000 square foot facility in Chandler, Arizona and began shifting production of our satellite earth station products from our existing Tempe, Arizona locations. We also signed a new 10-year lease in the United Kingdom to expand our Government Solutions segment's manufacturing capabilities. This facility is expected to support the production of X/Y satellite tracking antennas that can be used in connection with the thousands of new LEO, MEO and large HTS satellite constellations reportedly being launched over the next several years. COVID-19 has delayed efforts to get our new technology manufacturing centers operational and has increased our start-up costs. Although things can be further delayed, we anticipate that our new facilities will be operational by the end of our fiscal 2022 or early part of fiscal 2023. Increased usage of our high-volume technology manufacturing centers will allow us to secure volume discounts on key components, better control the quality of our manufacturing process and maximize the utilization of our manufacturing capacity.
All of our other manufacturing facilities are located in the United States.
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Our ability to deliver products to customers on a timely basis is dependent, in part, upon the availability and timely delivery by subcontractors and suppliers (including, at times, the U.S. government) of the components and subsystems that we use in manufacturing our products. Electronic components and raw materials used in our products are generally obtained from independent suppliers. Some components are standard items and are available from several suppliers. Others are manufactured to our specifications by subcontractors. Although we obtain certain components and subsystems from a single source or a limited number of sources, we believe that most components and equipment are available from multiple sources. Certain U.S. government contracts may require us to incorporate government furnished parts into our products. Delays in receipt of such parts can adversely impact the timing of our performance on the related contracts. While not individually material, during fiscal 2021, as a result of COVID-19, we have experienced longer lead times for certain components and raw materials from certain suppliers as well as higher freight costs due to an overwhelmed global transport network. We expect that these supply chain issues will ease during the second half of fiscal 2022.
Research and Development
We have established a leading technology position in our fields through internal and customer-funded research and development activities.
Internal research and development expenses are reported as research and development expenses for financial reporting purposes and were $49.1 million, $52.2 million and $56.4 million in fiscal 2021, 2020 and 2019, respectively, representing 8.4%, 8.5% and 8.4% of total consolidated net sales, respectively, for these periods. Customer-funded research and development activities relate to the adaptation of our basic technology to specialized customer requirements which is recoverable under contracts and is reflected in net sales with the related costs included in cost of sales. Certain of our government customers also contract with us from time to time to conduct research on telecommunications software, equipment and systems. During fiscal 2021, 2020 and 2019, we were reimbursed by customers for such activities in the amounts of $13.6 million, $11.9 million and $14.7 million, respectively. During fiscal 2021, we 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.
Intellectual Property
We rely upon trade secrets, technical know-how, continuing technological innovation and, with respect to certain technologies, patents to develop and maintain our competitive position. The products we sell require significant engineering design and manufacturing expertise. For technological capabilities that are not protected by patents or licenses, we generally rely on the expertise of our employees and our learned experiences in both the design and manufacture of our products and the delivery of our services.
Some of our key Commercial Solutions segment technology is protected by patents that are significant to protecting our proprietary technology. We have been issued several U.S. patents relating to forward error correction technology that is utilized in our TPC-enabled satellite modems. Due to our market leadership position, we do not expect that upon expiration of these patents, our future results will be negatively impacted.
We have a portfolio of several hundred patents worldwide relating to wireless location services, text messaging, GPS ephemeris data, emergency public safety data routing, electronic commerce and other areas. To-date, our strategy has been to avoid offensive and defensive patent litigation and focus on building meaningful partnerships with other companies through direct licensing, cross licensing, and other forms of agreements. We do not believe that any single patent or group of patents, patent application or patent license agreement is material to our operations.
We have filed additional patent applications for certain apparatus and processes we believe we have invented covering key features of the location services, wireless text alerts, SMS Center, mobile-originated data and E911 network software. There is no assurance that any patent application will result in a patent being issued by the U.S. Patent and Trademark Office or other patent offices, nor is there any guarantee that any issued patent will be valid and enforceable. Additionally, foreign patent rights may or may not be available or pursued in any technology area for which U.S. patent applications have been filed.
Almost all the products and services we sell to the U.S. government include technology and other technical know-how that we have internally developed. In past instances where we have provided government-purpose rights, to our knowledge, the U.S. government has not exercised any of these rights. To the extent that we have provided or will provide government-purpose rights in the future, we believe that given the rapidly changing nature of our technology, our future success will depend primarily on the technical competence and creative skill of our personnel, rather than any contractual protection.
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Competition
Our businesses are highly competitive and are characterized by rapid technological change. Some of our competitors are substantially larger, have significantly greater financial, marketing, research and development, technological and operating resources and broader product lines than we have. Other companies are developing new technologies and the shift towards open standards such as IP-based satellite networks will likely result in increased competition. A significant technological breakthrough by others, including new companies, our existing competitors and our customers, could have a material adverse effect on our business. Our future success depends on, among other things, our ability to keep pace with such changes and developments and to respond to the increasing variety of electronic equipment users and transmission technologies.
Some large defense-based companies, such as Northrop Grumman Corporation, have subsidiaries or divisions that compete against us in one or more business segments. In addition, new and potential competitors are always emerging. Certain of our customers, such as prime contractors who currently outsource their engineering and manufacturing requirements to us, have technological capabilities in our product areas and could choose to replace our products with products they develop. In some cases, we partner or team with companies (both large and mid-tier) to compete against other teams for large defense programs. In some cases, these same companies may be among our competitors.
Listed below, in alphabetical order, are some of our competitors in each of our two business segments:
Commercial Solutions - ACTIA Group, Advantech Co., Ltd., Agilis Satcom, AnaCom, Inc., Bandwidth.com, CalAmp Corp., Codan Limited, CPI International, Inc., Datum Systems, Inc., dB Control Corp. (a subsidiary of HEICO Corp.), 8x8, Inc., ENENSYS Technologies, ETM, Inc., Gilat Satellite Networks Ltd., Google Inc. (a subsidiary of Alphabet Inc.), Here Technologies, Honeywell Aerospace (a subsidiary of Honeywell International Inc.), Infinite Convergence Solutions, Inc., Intermap Technologies Corporation, Intrado Corporation, Iridium Communications Inc., ITS Electronics Inc., KVH Industries Inc., LM Ericsson Telephone Company, L3Harris Technologies, Inc., Mission Microwave Technologies, LLC., Motorola Solutions, Inc., ND Satcom GmbH, Nokia Networks (a subsidiary of Nokia Corporation), NOVELSAT, Novra Technologies Inc., Orbcomm Inc., Panasonic Corporation, Paradise Datacom Ltd. (a subsidiary of Teledyne Technologies Incorporated), Polarity Inc., SatixFy Israel Ltd., SatPath Systems, Inc., Spacepath Communications Limited, Speedcast International Limited, ST Engineering iDirect, Inc. (including Newtec), Telenav, Inc., Terrasat Communications Inc, TMD Technologies LLC., TomTom N.V. and ViaSat, Inc.
Government Solutions - Aethercomm Inc., AMERGINT Technologies, Inc., CACI International Inc., CalAmp Corp., CPI International, Inc., Cubic Corporation, dB Control Corp. (a subsidiary of HEICO Corp.), DXC Technology, Empower RF Systems, Inc., Envistacom, LLC, Escape Communications, Inc., General Dynamics Corporation, International Datacasting Corporation (a subsidiary of Novra Technologies Inc.), Kratos Defense & Security Solutions, Inc., L3Harris Technologies, Inc., Mercury Systems, Inc., NeuStar, Inc., Northrop Grumman Corporation (including the former Orbital ATK, Inc.), Raytheon Technologies Corporation, Teledyne Technologies Incorporated, The KeyW Holding Corporation, Ultra Electronics Holdings plc. and ViaSat, Inc.
We believe that competition in all our markets is based primarily on technology innovation, product performance, reputation, delivery times, customer support and price. Due to our proprietary know-how, we believe we can develop, produce and deliver products and services on a cost-effective basis faster than many of our competitors.
Human Capital
At July 31, 2021, we had 2,038 employees (including temporary employees and contractors), 1,238 of whom were engaged in production and production support, 420 in research and development and other engineering support, and 380 in marketing and administrative functions. None of our U.S. based employees are represented by a labor union. Of our 2,038 employees, 489 employees are based outside of the United States including 217 employees in the United Kingdom. We believe that our employee relations are good.
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U.S. Government Contracts and Security Clearances
The U.S. government operates on an October-to-September fiscal year. Generally, in February of each year, the President of the United States presents to the U.S. Congress ("Congress") the proposed budget for the upcoming fiscal year and from February through September of each year, the appropriations and authorization committees of Congress review the President’s budget proposals and establish the funding levels for the upcoming fiscal year. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies. Thereafter, we can receive orders pursuant to sole-source or competitively awarded contracts, which we describe below.
The U.S. government may be unable to complete its budget process before the end of any given government fiscal year and when the fiscal budget is not approved in a timely manner, the U.S. government is required either to shut down or be funded pursuant to a so-called "continuing resolution" that authorizes agencies of the U.S. government to continue operations but does not authorize new spending initiatives, either of which could result in reduced or delayed orders or payments for products and services we provide.
Sole-source contracts are generally awarded to a single contractor without a formal competition when a single contractor is deemed to have an expertise or technology superior to that of competing contractors or when there is an urgent need by the U.S. government that cannot wait for a full competitive process. Potential suppliers compete informally through research and development and marketing efforts. Competitively-bid contracts are awarded based on a formal proposal evaluation established by the procuring agency and interested contractors prepare bids. Competitively-bid contracts are awarded after a formal bid and proposal competition among suppliers.
The U.S. government has a stated policy direction to reduce the number of sole-source contract awards across all procuring agencies. In addition, the U.S. government is increasing the use of multiple-award IDIQ contracts to increase its procurement options. IDIQ contracts allow the U.S. government to select a group of eligible contractors for the same program. When the government awards IDIQ contracts to multiple bidders under the same program, a company that has already competed to be selected as a participant in the program must subsequently compete for individual delivery orders. As a result of this U.S. government shift toward multiple award IDIQ contracts, we expect to face greater competition for future U.S. government contracts and, at the same time, greater opportunities for us to participate in program areas that we do not currently participate in.
As a U.S. government contractor and subcontractor, we are subject to a variety of rules and regulations, such as the Federal Acquisition Regulations ("FAR"). Individual agencies can also have acquisition regulations. For example, the Department of Defense implements the FAR through the Defense Federal Acquisition Regulation supplement (commonly known as "DFARs"). For all Federal government entities, the FAR regulates the phases of any product or service acquisition, including: acquisition planning, competition requirements, contractor qualifications, protection of source selection and vendor information, and acquisition procedures. In addition, the FAR addresses the allowability of supplier costs, while Cost Accounting Standards address how those costs can be allocated to contracts. The FAR also subjects suppliers to audits and other government reviews. These reviews cover issues such as cost, performance and accounting practices relating to our contracts. The government may challenge a supplier's costs and fees. Suppliers are also required to comply with the National Industrial Security Program Operating Manual which relates to the handling of classified materials and programs and is administered by the Defense Counterintelligence and Security Agency (“DCSA”). Suppliers who do not comply with these various regulations may lose and/or become ineligible for facility security clearances and/or participation in classified programs.
Under firm fixed-price contracts, we perform for an agreed-upon price and we can derive benefits from cost savings, but bear the risk of cost overruns. Our cost-reimbursable type contracts typically provide for reimbursement of allowable costs incurred plus a negotiated fee. Cost-plus-incentive-fee orders typically provide for sharing with the U.S. government savings accrued from orders performed for less than the target costs and costs incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost), and for the supplier to carry the entire burden of costs exceeding the negotiated ceiling price.
In fiscal 2021, $201.1 million or 34.6% of our consolidated net sales were to the U.S. government (including sales to prime contractors to the U.S. government). Of this amount, firm fixed-price and cost-reimbursable type contracts (including fixed-fee, incentive-fee and time and material type contracts) accounted for approximately $121.8 million and $79.3 million, respectively.
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Regulatory Matters
In addition to the rules and regulations that pertain to us as a U.S. government contractor and subcontractor, we are also subject to a variety of local, state and federal governmental regulations.
Our products that are incorporated into wireless communications systems must comply with various government regulations, including those of the FCC. Our manufacturing facilities, which may store, handle, emit, generate and dispose of hazardous substances that are used in the manufacture of our products, are subject to a variety of local, state and federal regulations, including those issued by the Environmental Protection Agency. Our products are also subject to European Union directives related to the recycling of electrical and electronic equipment.
Our international sales are subject to U.S. and foreign regulations such as the Arms Export Control Act, the International Emergency Economic Powers Act ("IEEPA"), the International Traffic in Arms Regulations ("ITAR"), the Export Administration Regulations ("EAR") and the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC"), the Department of Commerce ("DoC") as well as other applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations. We must comply with all applicable export control laws and regulations of the U.S. and other countries. Certain of our products and systems may require licenses from U.S. government agencies for export from the U.S., and some of our products are not permitted to be exported. We cannot be certain that we will be able to obtain necessary export licenses, and such failure would materially adversely affect our operations. If we are unable to receive appropriate export authorizations in the future, we may be prohibited from selling our products and services internationally, which may limit our sales and have a material adverse effect on our business, results of operations and financial condition. In addition, in certain cases, U.S. export controls also severely limit unlicensed technical discussions, such as discussions with any persons who are not U.S. citizens or permanent residents. As a result, in cases where we may need an export license, our ability to compete against a non-U.S. domiciled foreign company that may not be subject to the same U.S. laws may be materially adversely affected. In addition, we are subject to the Foreign Corrupt Practices Act ("FCPA") and other local laws that generally bar bribes or unreasonable gifts to foreign governments or officials. Violations of these laws or regulations could result in significant sanctions, including disgorgement of profits, fines, and criminal sanctions against us, our officers, our directors, or our employees, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. A violation of any of the regulations enumerated above could materially adversely affect our business, financial condition and results of operations. Additionally, changes in regulatory requirements which could further restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the IEEPA or similar legislation could negatively impact our business.
In the past, we have self-reported violations of export control laws or regulations to the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC"), DoC and OFAC. In addition, we have made various commitments to U.S. government agencies that oversee trade and export matters that we will maintain certain policies and procedures including maintaining a company-wide Office of Trade Compliance and conducting ongoing internal assessments and reporting any future violations to those agencies.
Our financial reporting, corporate governance, public disclosure and compliance practices are governed by laws such as the Sarbanes-Oxley Act of 2002, Dodd-Frank Act of 2010, and rules and regulations issued by the SEC. The SEC has adopted rules which require, among other things, public companies to conduct certain inquiries to determine whether or not Conflict Minerals (as that term is defined in the SEC rules) that are necessary to the functionality of their manufactured products or their product's production processes originated in a Covered Country (as that term is defined in the SEC rules) and ultimately file a report with the SEC. Conflict Minerals are widely used in many industries, including the telecommunications industry and almost all of our products include component parts purchased from third-party suppliers and we must rely heavily on information received from suppliers to determine the origin of those materials. We have implemented a due diligence program consistent with the Organization for Economic Co-operation and Development guidelines to collect information concerning the country of origin of Conflict Minerals and in that regard, have adopted a policy that requires our suppliers (both public and private) to commit to a code of conduct relating to the responsible sourcing of minerals and to establish a policy to reasonably assure that the products they manufacture do not contain Conflict Minerals that originated in a Covered Country. Efforts to comply with this SEC rule have resulted in additional costs to us and, we believe, to our suppliers. As such, the availability of raw materials used in our operations could be negatively impacted and/or raw material prices could increase. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage and could harm our reputation.
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Laws and regulations have been enacted that affect companies conducting business on the Internet, including the European General Data Protection Regulation ("GDPR"). The GDPR imposes certain privacy related requirements on companies that receive or process personal data of residents of the European Union that are currently different than those in the United States and include significant penalties for non-compliance. Similarly, there are several legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for personal data protection. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. Our costs to comply with the GDPR as well any other similar laws and regulations that emerge may negatively impact our business.