Stock-Based Compensation

Overview

We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended, (the "Plan") and our 2001 Employee Stock Purchase Plan (the "ESPP") and recognize related stock-based compensation in our consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii) RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, "share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations.

On August 1, 2017 (the start of our first quarter of fiscal 2018), we adopted ASU No. 2016-09, which amended several aspects of the accounting for and reporting of our share-based payment transactions, including:

Excess tax benefits and shortfalls - ASU No. 2016-09 requires that all tax effects related to our share-based awards be recognized in the Consolidated Statement of Operations. ASU No. 2016-09 also removed the prior requirement to delay recognition of excess tax benefits until it reduces current taxes payable; instead, we are now required to recognize excess tax benefits as discrete items in the interim period in which they occur, subject to normal valuation allowance considerations. As ASU No. 2016-09 eliminated the concept of accumulated hypothetical tax benefits, excess tax benefits and shortfalls are no longer recognized in stockholders’ equity. As a result, ASU No. 2016-09 is expected to result in future volatility of our income tax expense (as the future tax effects of share-based awards will be dependent on the price of our common stock at the time of settlement). Additionally, on a prospective basis, excess income tax benefits from the settlement of share-based awards are presented as a cash inflow from operating activities in our Consolidated Statement of Cash Flows.

Diluted earnings per share - Prior to the adoption of ASU No. 2016-09, in addition to considering the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized, when calculating our diluted earnings per share, the assumed proceeds also included the amount of excess tax benefits, if any, that would have been credited to additional paid-in capital assuming exercise of in-the-money stock-based awards. Effective with our adoption of ASU No. 2016-09, excess tax benefits are to be excluded from the calculation on a prospective basis. As a result, the denominator for our diluted calculations could increase in the future as compared to prior calculations.

Forfeitures - As permitted by ASU No. 2016-09, we elected to continue to estimate forfeitures of share-based awards.

Statutory Tax Withholding Requirements - ASU No. 2016-09 now allows us, when net settling share-based awards, to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction, without resulting in liability classification of the award. To qualify, we must have at least some withholding obligation. This aspect of adopting ASU No. 2016-09 did not have any material impact on us. However, with respect to cash payments that we make to taxing authorities on behalf of employees for such shares withheld, on a retrospective basis, we are required to present such payments as a cash outflow from financing activities in our Consolidated Statements of Cash Flows (as opposed to operating activities).

As of July 31, 2019, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 10,362,500. Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a stockholder who owns stock representing more than 10.0% of the voting power, no more than five years. We expect to settle all outstanding awards under the Plan and employee purchases under the ESPP with the issuance of new shares of our common stock.

As of July 31, 2019, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 8,546,187 shares (net of 3,989,425 expired and canceled awards), of which an aggregate of 6,035,956 have been exercised or settled.

As of July 31, 2019, the following stock-based awards, by award type, were outstanding:



	July 31, 2019
Stock options	1,555,555
Performance shares	261,336
RSUs and restricted stock	432,550
Share units	260,790
Total	2,510,231

Our ESPP provides for the issuance of up to 1,050,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85% of fair market value at the date of issuance. Through July 31, 2019, we have cumulatively issued 787,051 shares of our common stock to participating employees in connection with our ESPP.

Stock-based compensation for awards issued is reflected in the following line items in our Consolidated Statements of Operations:



	Fiscal Years Ended July 31,
	2019			2018		2017
Cost of sales	$	1,047,000		758,000		760,000
Selling, general and administrative expenses	9,336,000			6,866,000		7,071,000
Research and development expenses	1,044,000			945,000		675,000
Stock-based compensation expense before income tax benefit	11,427,000			8,569,000		8,506,000
Estimated income tax benefit	(2,553,000		)	(2,005,000	)	(3,065,000	)
Net stock-based compensation expense	$	8,874,000		6,564,000		5,441,000

Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At July 31, 2019, unrecognized stock-based compensation of $7,714,000, net of estimated forfeitures of $869,000, is expected to be recognized over a weighted average period of 2.8 years. Total stock-based compensation capitalized and included in ending inventory at both July 31, 2019 and 2018 was $48,000. There are no liability-classified stock-based awards outstanding as of July 31, 2019 or 2018.

Stock-based compensation expense, by award type, is summarized as follows:



	Fiscal Years Ended July 31,
	2019			2018		2017
Stock options	$	739,000		1,089,000		1,400,000
Performance shares	1,554,000			1,013,000		1,607,000
RSUs and restricted stock	2,149,000			1,458,000		829,000
ESPP	215,000			205,000		162,000
Share units	6,770,000			4,804,000		4,508,000
Stock-based compensation expense before income tax benefit	11,427,000			8,569,000		8,506,000
Estimated income tax benefit	(2,553,000		)	(2,005,000	)	(3,065,000	)
Net stock-based compensation expense	$	8,874,000		6,564,000		5,441,000

ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants in the ESPP. During the fiscal years ended July 31, 2019 and 2018, we recorded benefits of $130,000 and $62,000, respectively, which primarily represents the recoupment of certain share units.

The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Consolidated Balance Sheet as of July 31, 2019 and 2018. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting.

Stock Options

The following table summarizes the Plan's activity:



	Awards (in Shares)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at July 31, 2016	2,256,679		$	28.87
Expired/canceled	(400,804	)	30.15
Outstanding at July 31, 2017	1,855,875		28.60
Expired/canceled	(72,190	)	27.58
Exercised	(114,710	)	27.44
Outstanding at July 31, 2018	1,668,975		28.72
Expired/canceled	(32,490	)	30.11
Exercised	(80,930	)	28.18
Outstanding at July 31, 2019	1,555,555		$	28.72	3.54	$	2,512,000

Exercisable at July 31, 2019	1,389,895		$	28.73	3.26	$	2,186,000

Vested and expected to vest at July 31, 2019	1,538,930		$	28.75	3.51	$	2,460,000

Stock options outstanding as of July 31, 2019 have exercise prices ranging from $20.90 - $33.94, representing the fair market value of our common stock on the date of grant, a contractual term of five or ten years and a vesting period of three or five years. The total intrinsic value relating to stock options exercised during the fiscal years ended July 31, 2019 and 2018 was $576,000 and $469,000, respectively. There were no stock options exercised during the fiscal year ended 2017.

During fiscal 2019 and 2018, at the election of certain holders of vested stock options, 72,830 and 101,610 stock options, respectively, were net settled upon exercise. As a result, 9,345 and 8,706 net shares of our common stock were issued during the fiscal years ended July 31, 2019 and 2018, respectively, after reduction of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements.

Performance Shares, RSUs, Restricted Stock and Share Unit Awards

The following table summarizes the Plan's activity relating to performance shares, RSUs, restricted stock and share units:



	Awards (in Shares)		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at July 31, 2016	217,213		$	28.32
Granted	705,241		14.31
Settled	(61,462	)	26.63
Forfeited	(30,795	)	17.13
Outstanding at July 31, 2017	830,197		16.95
Granted	473,005		22.45
Settled	(354,822	)	17.66
Canceled/Forfeited	(129,942	)	17.26
Outstanding at July 31, 2018	818,438		19.78
Granted	442,363		29.76
Settled	(275,619	)	26.05
Canceled/Forfeited	(30,506	)	25.52
Outstanding at July 31, 2019	954,676		$	22.40	$	28,411,000

Vested at July 31, 2019	321,702		$	25.82	$	9,574,000

Vested and expected to vest at July 31, 2019	914,082		$	22.55	$	27,203,000

The total intrinsic value relating to fully-vested awards settled during the fiscal years ended July 31, 2019, 2018 and 2017 was $8,772,000, $10,473,000 and $1,039,000 respectively.

The performance shares granted to employees since fiscal 2014 principally vest over a three-year performance period, if pre-established performance goals are attained, or as specified pursuant to the Plan and related agreements. As of July 31, 2019, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level.

RSUs and restricted stock granted to non-employee directors have a vesting period of three years and are convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. RSUs granted to employees have a vesting period of five years and are convertible into shares of our common stock generally at the time of vesting, on a one-for-one basis for no cash consideration.

Share units granted prior to July 31, 2017 were vested when issued and are convertible into shares of our common stock, generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. Share units granted on or after July 31, 2017 were granted to certain employees in lieu of non-equity incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the respective grant date.

On July 31, 2019, 257,608 fully vested share units were granted to certain employees in lieu of fiscal 2019 non-equity incentive compensation. Also, on July 31, 2019, 146,410 fully vested share units (previously granted in lieu of fiscal 2018 non-equity incentive compensation) were settled by delivery of 90,928 shares of our common stock after reduction of share units retained to satisfy employees’ statutory tax withholding requirements. Cumulatively, through July 31, 2019, 421,966 share units granted have been settled.

The fair value of performance shares, RSUs, restricted stock and share units is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive and an applicable estimated discount for any post-vesting transfer restrictions. RSUs, performance shares and restricted stock granted since fiscal 2013 are entitled to dividend equivalents unless forfeited before vesting occurs. Share units granted since fiscal 2014 are entitled to dividend equivalents while the underlying shares are unissued.

Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying award. During fiscal 2019, 2018 and 2017, we accrued $327,000, $300,000 and $273,000, respectively, of dividend equivalents (net of forfeitures) and paid out $263,000, $141,000 and $176,000, respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of July 31, 2019 and 2018, accrued dividend equivalents were $777,000 and $713,000, respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the fiscal years ended July 31, 2019 and 2018 we recorded income tax benefits of $479,000 and $1,193,000, respectively, which primarily represent the net excess income tax benefits upon settlement of stock-based awards during each of the respective periods. During fiscal 2017, net income tax shortfalls from similar items totaled $670,000 and, pursuant to prior GAAP, were recorded as a reduction to additional paid-in capital.

Subsequent Events

In the first quarter of fiscal 2020, our Board of Directors authorized the issuance of stock-based awards with a total unrecognized compensation expense, net of estimated forfeitures, of approximately $5,632,000.