Segment Information

Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the chief operating decision-maker ("CODM") organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer and President.

Our Commercial Solutions segment serves commercial customers and smaller government customers, such as state and local governments, that require advanced communications technologies to meet their needs. This segment also serves certain large government customers (including the U.S. government) when they have requirements for off-the-shelf commercial equipment. Commercial solutions products include satellite earth station communications equipment such as modems and traveling wave tube amplifiers, public safety technologies including those that are utilized in next generation 911 systems and enterprise technologies such as trusted location and text-messaging platforms.

Our Government Solutions segment serves large U.S. and foreign government end-users that require mission critical technologies and systems. Government solutions products include command and control technologies (such as remote sensing tracking systems, rugged solid state drives, land mobile products and quick deploy satellite systems), troposcatter technologies systems (such as digital troposcatter multiplexers, digital over-the-horizon modems, troposcatter systems and frequency converter systems) and RF power and switching technologies products (such as solid-state high-power narrow and broadband amplifiers, enhanced position location reporting system ("EPLRS") amplifier assemblies, identification friend or foe amplifiers and amplifiers used in the counteraction of improvised explosive devices).

Our CODM primarily uses a metric that we refer to as Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric does not consider any allocation of the following: income taxes, interest income and other expense, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, acquisition plan expenses, lower than estimated losses associated with the settlement of TCS intellectual property matters or strategic alternatives analysis expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Adjusted EBITDA is used by management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Secured Credit Facility) utilized for financial covenant calculations and also may differ from the definition of Adjusted EBITDA used by other companies (including TCS prior to our acquisition) and, therefore, may not be comparable to similarly titled measures used by other companies.

Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income (loss) to Adjusted EBITDA is presented in the tables below:



	Three months ended April 30, 2017
		Commercial Solutions		Government Solutions		Unallocated		Total
Net sales		$	79,409,000	48,383,000		—		$	127,792,000
Operating income		$	8,633,000	1,313,000		204,000		$	10,150,000

Net income (loss)		$	8,506,000	1,314,000		(5,403,000	)	$	4,417,000
Provision for income taxes		27,000		—		2,857,000		2,884,000
Interest (income) and other expense		51,000		—		37,000		88,000
Interest expense		49,000		(1,000	)	2,713,000		2,761,000
Amortization of stock-based compensation		—		—		991,000		991,000
Amortization of intangibles		4,425,000		1,043,000		—		5,468,000
Depreciation		2,425,000		752,000		355,000		3,532,000
Settlement of intellectual property litigation		—		—		(2,041,000	)	(2,041,000		)
Adjusted EBITDA		$	15,483,000	3,108,000		(491,000	)	$	18,100,000

Purchases of property, plant and equipment		$	1,893,000	179,000		4,000		$	2,076,000
Total assets at April 30, 2017		$	619,215,000	184,764,000		59,779,000		$	863,758,000



	Three months ended April 30, 2016
		Commercial Solutions		Government Solutions		Unallocated		Total
Net sales		$	71,985,000	52,202,000		—		$	124,187,000
Operating income (loss)		$	6,560,000	5,629,000		(25,586,000	)	$	(13,397,000	)

Net income (loss)		$	6,437,000	5,634,000		(26,426,000	)	$	(14,355,000	)
Provision for (benefit from) income taxes		2,000		—		(2,512,000	)	(2,510,000		)
Interest (income) and other expense		53,000		(5,000	)	(53,000	)	(5,000		)
Interest expense		68,000		—		3,405,000		3,473,000
Amortization of stock-based compensation		—		—		1,041,000		1,041,000
Amortization of intangibles		3,622,000		1,154,000		—		4,776,000
Depreciation		2,130,000		647,000		305,000		3,082,000
Acquisition plan expenses		—		—		16,960,000		16,960,000
Adjusted EBITDA		$	12,312,000	7,430,000		(7,280,000	)	$	12,462,000

Purchases of property, plant and equipment		$	1,119,000	142,000		339,000		$	1,600,000
Long-lived assets acquired in connection with the TCS acquisition		$	353,729,000	76,681,000		4,359,000		$	434,769,000
Total assets at April 30, 2016		$	616,247,000	209,278,000		77,803,000		$	903,328,000



	Nine months ended April 30, 2017
		Commercial Solutions			Government Solutions		Unallocated		Total
Net sales		$	237,690,000		164,916,000		—		$	402,606,000
Operating income (loss)		$	17,595,000		6,151,000		(1,475,000	)	$	22,271,000

Net income (loss)		$	17,249,000		6,179,000		(14,915,000	)	$	8,513,000
Provision for income taxes		185,000			—		4,623,000		4,808,000
Interest (income) and other expense		(11,000		)	(26,000	)	49,000		12,000
Interest expense		172,000			(2,000	)	8,768,000		8,938,000
Amortization of stock-based compensation		—			—		2,980,000		2,980,000
Amortization of intangibles		13,274,000			4,281,000		—		17,555,000
Depreciation		7,441,000			2,255,000		1,153,000		10,849,000
Settlement of intellectual property litigation		—			—		(12,020,000	)	(12,020,000		)
Adjusted EBITDA		$	38,310,000		12,687,000		(9,362,000	)	$	41,635,000

Purchases of property, plant and equipment		$	5,540,000		602,000		81,000		$	6,223,000
Total assets at April 30, 2017		$	619,215,000		184,764,000		59,779,000		$	863,758,000



	Nine months ended April 30, 2016
		Commercial Solutions		Government Solutions		Unallocated		Total
Net sales		$	165,657,000	92,970,000		—		$	258,627,000
Operating income (loss)		$	14,048,000	15,389,000		(37,477,000	)	$	(8,040,000	)

Net income (loss)		$	13,635,000	15,409,000		(39,484,000	)	$	(10,440,000	)
Provision for (benefit from) income taxes		94,000		—		(1,088,000	)	(994,000		)
Interest (income) and other expense		103,000		(20,000	)	(310,000	)	(227,000		)
Interest expense		216,000		—		3,405,000		3,621,000
Amortization of stock-based compensation		—		—		3,166,000		3,166,000
Amortization of intangibles		6,194,000		1,154,000		—		7,348,000
Depreciation		4,568,000		1,189,000		321,000		6,078,000
Acquisition plan expenses		—		—		20,689,000		20,689,000
Adjusted EBITDA		$	24,810,000	17,732,000		(13,301,000	)	$	29,241,000

Purchases of property, plant and equipment		$	2,067,000	642,000		354,000		$	3,063,000
Long-lived assets acquired in connection with the TCS acquisition		$	353,729,000	76,681,000		4,359,000		$	434,769,000
Total assets at April 30, 2016		$	616,247,000	209,278,000		77,803,000		$	903,328,000

Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs. In addition, during fiscal 2017, unallocated expenses also reflect the favorable adjustments to operating income related to the settlement of certain legacy TCS intellectual property matters. During fiscal 2016, unallocated expenses include acquisition plan expenses, most of which related to the February 23, 2016 acquisition of TCS.

Interest expense for the three and nine months ended April 30, 2017 includes $2,641,000 and $8,524,000, respectively, related to our Secured Credit Facility. Interest expense for both the three and nine months ended April 30, 2016 includes $2,981,000 related to our Secured Credit Facility. Such interest expense includes the amortization of deferred financing costs. See Note (10) - “Secured Credit Facility,” for further discussion of such debt.

Intersegment sales for the three months ended April 30, 2017 and 2016 by the Commercial Solutions segment to the Government Solutions segment were $2,812,000 and $2,198,000, respectively. Intersegment sales for the nine months ended April 30, 2017 and 2016 by the Commercial Solutions segment to the Government Solutions segment were $9,297,000 and $4,082,000, respectively. There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these periods.

Unallocated assets at April 30, 2017 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. Substantially all of our long-lived assets are located in the U.S. and all intersegment sales are eliminated in consolidation and are excluded from the tables above.