Goodwill

9 Months Ended

Apr. 30, 2024

The following table represents goodwill by reportable operating segment as of April 30, 2024 and July 31, 2023.


	Satellite and Space Communications		Terrestrial and Wireless Networks	Total
Balance as of July 31, 2023	$	173,602,000	174,090,000	$	347,692,000
PST Divestiture	(14,587,000)		—	(14,587,000)
Balance as of April 30, 2024	$	159,015,000	174,090,000	$	333,105,000

In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

On August 1, 2023 (the first day of fiscal 2024), we performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions.

In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our total public market capitalization and assessed implied control premiums based on our common stock price of $10.09 as of the date of testing.

Ultimately, based on our quantitative evaluations, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 18.3% and 8.9%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment.

During the first quarter of fiscal 2024, we determined that the PST Disposal Group met the criteria to be classified as held for sale. Because the PST Disposal Group represented the disposal of a portion of the Satellite and Space Communications reporting unit, we assigned $14,587,000 of goodwill to the PST Disposal Group on a relative fair value basis. For purposes of allocating goodwill to the PST Disposal Group, we determined the fair value of the PST Disposal Group (based on consideration received from the sale transaction) and the fair value of the retained businesses of the Satellite and Space Communications reporting unit (based on a combination of the income and market approach). In conjunction with the relative fair value allocation, we tested goodwill assigned to the PST Disposal Group and retained businesses of the Satellite and Space Communications reporting unit for impairment and concluded that no impairment existed at the time the held for sale criteria were met. As discussed further in Note (2) - "Business Divestiture," we completed the PST Divestiture in the second quarter of fiscal 2024 and reduced goodwill by $14,587,000 as part of determining the estimated gain on business divestiture, net.

During the second and third quarters of fiscal 2024, net sales (primarily in our Satellite and Space Communications segment) reflected delays in the timing of our receipt of and performance on orders, principally as a result of our financial condition at the time, including uncertainties relating to the refinancing of our Prior Credit Facility (which we completed subsequent to quarter end). Such conditions affected our liquidity and gave rise to substantial doubt regarding our ability to continue as a going concern, which we believe: (i) temporarily slowed down our receipt of orders from customers, as well as components from suppliers, and (ii) caused a decline in our common stock price of approximately 81.4% between August 1, 2023 and April 30, 2024, from $10.09 per share to $1.88 per share. We determined the sustained decline in market capitalization, based on our publicly quoted share price, represented a triggering event requiring an interim impairment test of goodwill. We performed an interim step one quantitative test for our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units as of April 30, 2024, utilizing the same approaches as the August 1, 2023 quantitative test discussed above. Ultimately, based on our quantitative evaluations, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 10.2% and 11.7%, respectively, and concluded that our goodwill was not impaired.

Our interim analysis used significant assumptions, including expected future revenue growth rates, profit margins and discount rates. Although we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Different assumptions of the anticipated future results and growth from our businesses could result in an impairment charge, which would decrease GAAP operating income and result in lower asset values on our condensed consolidated balance sheet. The estimated fair values of our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units exceed their carrying values by more than 10.0%. As a measure of sensitivity of the fair value for the Satellite and Space Communications and Terrestrial and Wireless Networks reporting units, while holding all other assumptions constant, an increase in the discount rate of 100 basis points or a decrease of 100 basis points in the revenue growth rate assumptions for each forecasted period used to determine the fair value of each reporting unit would not result in an impairment of goodwill.

In addition, as disclosed in Note (1) - "General - Liquidity and Going Concern," we have engaged a third-party financial advisor to assist us with, among other things, discussions and negotiations with our existing and new lenders, as well as to seek other sources of credit and outside capital. Although we have completed the refinancing of our Prior Credit Facility subsequent to quarter end, a sustained significant decline in our actual operating performance, as compared to our forecast, and/or a continued sustained decline in our common stock price, may require us to perform another interim quantitative goodwill impairment test, which may result in an impairment of the goodwill assigned to one or both of our reporting units by an amount that could be material if we conclude our forecasted operating results will be adversely impacted for the foreseeable future.

In any event, we are required to perform our next annual goodwill impairment analysis on August 1, 2024 (the start of our fiscal 2025). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.