COMTECH TELECOMMUNICATIONS CORP /DE/ [CMTL] Filings

10-Q 1 cmtl-20220131.htm 10-Q cmtl-20220131

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q

(Mark One)


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended January 31, 2022


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-7928

(Exact name of registrant as specified in its charter)


Delaware						11-2139466
(State or other jurisdiction of incorporation /organization)						(I.R.S. Employer Identification Number)
68 South Service Road, Suite 230, Melville, NY						11747
(Address of principal executive offices)						(Zip Code)


(631)			962-7000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.10 per share

CMTL

NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

As of March 4, 2022, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 26,516,108 shares.

Index


COMTECH TELECOMMUNICATIONS CORP. INDEX
			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements	2

		Condensed Consolidated Balance Sheets - January 31, 2022 and July 31, 2021 (Unaudited)	2

		Condensed Consolidated Statements of Operations - Three and Six Months Ended January 31, 2022 and 2021 (Unaudited)	3

		Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity - Three and Six Months Ended January 31, 2022 and 2021 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows - Six Months Ended January 31, 2022 and 2021 (Unaudited)	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64

	Item 4.	Controls and Procedures	65

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	66

	Item 1A.	Risk Factors	66

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67

	Item 4.	Mine Safety Disclosures	67

	Item 6.	Exhibits	68

		Signature Page	69

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


Assets	January 31, 2022		July 31, 2021
Current assets:
Cash and cash equivalents	$	30,918,000	30,861,000
Accounts receivable, net	138,767,000		158,110,000
Inventories, net	90,274,000		80,358,000
Prepaid expenses and other current assets	21,443,000		18,167,000
Total current assets	281,402,000		287,496,000
Property, plant and equipment, net	42,445,000		35,286,000
Operating lease right-of-use assets, net	54,328,000		44,486,000

Goodwill	347,692,000		347,698,000
Intangibles with finite lives, net	258,001,000		268,699,000
Deferred financing costs, net	1,419,000		1,824,000
Other assets, net	9,567,000		7,622,000
Total assets	$	994,854,000	993,111,000
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities:
Accounts payable	$	32,550,000	36,193,000
Accrued expenses and other current liabilities	96,899,000		89,601,000
Operating lease liabilities, current	9,531,000		8,841,000
Dividends payable	2,640,000		2,601,000
Contract liabilities	77,732,000		66,130,000
Interest payable	138,000		195,000
Total current liabilities	219,490,000		203,561,000
Non-current portion of long-term debt	114,500,000		201,000,000
Operating lease liabilities, non-current	48,892,000		39,569,000
Income taxes payable	3,204,000		2,717,000
Deferred tax liability, net	19,248,000		21,230,000
Long-term contract liabilities	10,823,000		9,808,000
Other liabilities	8,966,000		14,507,000
Total liabilities	425,123,000		492,392,000
Commitments and contingencies (See Note 19)
Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at January 31, 2022 (includes accrued dividends of $549,000)	101,867,000		—
Stockholders’ equity:
Preferred stock, par value $0.10 per share; authorized and unissued 1,875,000 shares	—		—
Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 41,553,244 and 41,281,812 shares at January 31, 2022 and July 31, 2021, respectively	4,155,000		4,128,000
Additional paid-in capital	612,780,000		605,439,000
Retained earnings	292,778,000		333,001,000
	909,713,000		942,568,000
Less:
Treasury stock, at cost (15,033,317 shares at January 31, 2022 and July 31, 2021)	(441,849,000)		(441,849,000)
Total stockholders’ equity	467,864,000		500,719,000
Total liabilities, convertible preferred stock and stockholders’ equity	$	994,854,000	993,111,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended January 31,			Six months ended January 31,

	2022		2021	2022		2021
Net sales	$	120,381,000	161,292,000	$	237,140,000	296,510,000
Cost of sales	74,523,000		105,612,000	149,547,000		190,622,000
Gross profit	45,858,000		55,680,000	87,593,000		105,888,000

Expenses:
Selling, general and administrative	29,827,000		29,462,000	58,069,000		57,002,000
Research and development	12,632,000		12,664,000	25,129,000		24,299,000
Amortization of intangibles	5,349,000		4,795,000	10,698,000		10,361,000
CEO transition costs	13,554,000		—	13,554,000		—
Proxy solicitation costs	9,086,000		—	11,248,000		—
Acquisition plan expenses	—		3,357,000	—		94,540,000
	70,448,000		50,278,000	118,698,000		186,202,000

Operating (loss) income	(24,590,000)		5,402,000	(31,105,000)		(80,314,000)

Other expenses (income):
Interest expense	988,000		1,418,000	2,595,000		3,715,000
Interest (income) and other	(30,000)		(66,000)	189,000		—
Change in fair value of convertible preferred stock purchase option liability	(398,000)		—	(702,000)		—

(Loss) income before benefit from income taxes	(25,150,000)		4,050,000	(33,187,000)		(84,029,000)
Benefit from income taxes	(3,276,000)		(155,000)	(5,329,000)		(2,394,000)


Net (loss) income	$	(21,874,000)	4,205,000	$	(27,858,000)	(81,635,000)

Adjustments to reflect redemption value of convertible preferred stock:
Convertible preferred stock issuance costs	—		—	(4,007,000)		—
Establishment of initial convertible preferred stock purchase option liability	—		—	(1,005,000)		—
Dividend on convertible preferred stock	(1,632,000)		—	(1,867,000)		—
Net (loss) income attributable to common stockholders	$	(23,506,000)	4,205,000	$	(34,737,000)	(81,635,000)

Net (loss) income per common share (See Note 6):
Basic	$	(0.89)	0.17	$	(1.31)	(3.22)
Diluted	$	(0.89)	0.17	$	(1.31)	(3.22)

Weighted average number of common shares outstanding – basic	26,472,000		25,337,000	26,449,000		25,321,000

Weighted average number of common and common equivalent shares outstanding – diluted	26,472,000		25,420,000	26,449,000		25,321,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited)


	Three months ended January 31, 2022 and 2021
	Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings		Treasury Stock			Stockholders' Equity
	Shares	Amount		Shares	Amount						Shares	Amount
Balance as of October 31, 2020	—	$	—	40,043,753	$	4,004,000	$	569,422,000	$	328,575,000	15,033,317	$	(441,849,000)	$	460,152,000
Equity-classified stock award compensation	—	—		—	—		1,287,000		—		—	—		1,287,000
Proceeds from issuance of employee stock purchase plan shares	—	—		15,857	2,000		185,000		—		—	—		187,000

Net settlement of stock-based awards	—	—		367	—		(3,000)		—		—	—		(3,000)
Cash dividends declared, net ($0.10 per share)	—	—		—	—		—		(2,495,000)		—	—		(2,495,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)	—	—		—	—		—		(49,000)		—	—		(49,000)
Net income	—	—		—	—		—		4,205,000		—	—		4,205,000
Balance as of January 31, 2021	—	$	—	40,059,977	$	4,006,000	$	570,891,000	$	330,236,000	15,033,317	$	(441,849,000)	$	463,284,000

Balance as of October 31, 2021	100,000	$	100,235,000	41,380,241	$	4,138,000	$	604,452,000	$	319,053,000	15,033,317	$	(441,849,000)	$	485,794,000
Equity-classified stock award compensation	—	—		—	—		1,983,000		—		—	—		1,983,000
CEO transition costs related to equity-classified stock-based awards (See Note 1)	—	—		—	—		7,388,000		—		—	—		7,388,000
Proceeds from issuance of employee stock purchase plan shares	—	—		11,136	1,000		224,000		—		—	—		225,000
Issuance of restricted stock	—	—		119,426	12,000		(12,000)		—		—	—		—

Net settlement of stock-based awards	—	—		42,441	4,000		(1,255,000)		—		—	—		(1,251,000)




Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)	—	1,632,000		—	—		—		(1,632,000)		—	—		(1,632,000)
Cash dividends declared, net ($0.10 per share)	—	—		—	—		—		(2,640,000)		—	—		(2,640,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)	—	—		—	—		—		(129,000)		—	—		(129,000)
Net loss	—	—		—	—		—		(21,874,000)		—	—		(21,874,000)
Balance as of January 31, 2022	100,000	$	101,867,000	41,553,244	$	4,155,000	$	612,780,000	$	292,778,000	15,033,317	$	(441,849,000)	$	467,864,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited)


	Six months ended January 31, 2022 and 2021
	Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings		Treasury Stock			Stockholders' Equity
	Shares	Amount		Shares	Amount						Shares	Amount
Balance as of July 31, 2020	—	$	—	39,924,439	$	3,992,000	$	569,891,000	$	417,265,000	15,033,317	$	(441,849,000)	$	549,299,000
Equity-classified stock award compensation	—	—		—	—		1,986,000		—		—	—		1,986,000

Proceeds from issuance of employee stock purchase plan shares	—	—		31,122	3,000		366,000		—		—	—		369,000
Issuance of restricted stock	—	—		35,975	4,000		(4,000)		—		—	—		—
Net settlement of stock-based awards	—	—		68,441	7,000		(1,348,000)		—		—	—		(1,341,000)

Cash dividends declared, net ($0.20 per share)	—	—		—	—		—		(4,988,000)		—	—		(4,988,000)
Accrual of dividend equivalents, net of reversal ($0.20 per share)	—	—		—	—		—		(191,000)		—	—		(191,000)
Adoption of current expected credit loss standard	—	—		—	—		—		(215,000)		—	—		(215,000)
Net loss	—	—		—	—		—		(81,635,000)		—	—		(81,635,000)
Balance as of January 31, 2021	—	$	—	40,059,977	$	4,006,000	$	570,891,000	$	330,236,000	15,033,317	$	(441,849,000)	$	463,284,000

Balance as of July 31, 2021	—	$	—	41,281,812	$	4,128,000	$	605,439,000	$	333,001,000	15,033,317	$	(441,849,000)	$	500,719,000
Equity-classified stock award compensation	—	—		—	—		2,904,000		—		—	—		2,904,000
CEO transition costs related to equity-classified stock-based awards (See Note 1)	—	—		—	—		7,388,000		—		—	—		7,388,000
Proceeds from issuance of employee stock purchase plan shares	—	—		21,676	2,000		452,000		—		—	—		454,000
Issuance of restricted stock	—	—		132,854	13,000		(13,000)		—		—	—		—
Net settlement of stock-based awards	—	—		116,902	12,000		(3,390,000)		—		—	—		(3,378,000)

Issuance of convertible preferred stock	100,000	100,000,000		—	—		—		—		—	—		—
Convertible preferred stock issuance costs	—	(4,007,000)		—	—		—		—		—	—		—
Establishment of initial convertible preferred stock purchase option liability	—	(1,005,000)		—	—		—		—		—	—		—
Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)	—	6,879,000		—	—		—		(6,879,000)		—	—		(6,879,000)

Cash dividends declared, net ($0.20 per share)	—	—		—	—		—		(5,269,000)		—	—		(5,269,000)
Accrual of dividend equivalents, net of reversal ($0.20 per share)	—	—		—	—		—		(217,000)		—	—		(217,000)

Net loss	—	—		—	—		—		(27,858,000)		—	—		(27,858,000)
Balance as of January 31, 2022	100,000	$	101,867,000	41,553,244	$	4,155,000	$	612,780,000	$	292,778,000	15,033,317	$	(441,849,000)	$	467,864,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six months ended January 31,

	2022		2021
Cash flows from operating activities:
Net loss	$	(27,858,000)	(81,635,000)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of property, plant and equipment	4,575,000		5,009,000
Amortization of intangible assets with finite lives	10,698,000		10,361,000
Amortization of stock-based compensation	2,904,000		1,986,000
CEO transition costs related to equity-classified stock-based awards	7,388,000		—
Amortization of deferred financing costs	405,000		368,000
Change in fair value of convertible preferred stock purchase option liability	(702,000)		—

Changes in other liabilities	(2,066,000)		(3,756,000)
(Gain) / loss on disposal of property, plant and equipment	(147,000)		29,000
Provision for allowance for doubtful accounts	12,000		204,000
Provision for excess and obsolete inventory	2,241,000		2,444,000
Deferred income tax benefit	(2,049,000)		(287,000)
Other	—		(225,000)
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	19,337,000		(23,736,000)
Inventories	(12,157,000)		(1,772,000)
Prepaid expenses and other current assets	602,000		2,124,000
Other assets	(765,000)		(115,000)
Accounts payable	(4,501,000)		14,481,000
Accrued expenses and other current liabilities	7,028,000		(6,734,000)
Contract liabilities	12,617,000		15,210,000
Other liabilities, non-current	(3,443,000)		3,687,000
Interest payable	(56,000)		102,000
Income taxes payable	(4,512,000)		(1,117,000)
Net cash provided by (used in) operating activities	9,551,000		(63,372,000)
Cash flows from investing activities:

Payment for acquisition of CGC, net of cash acquired	—		(750,000)

Purchases of property, plant and equipment	(8,811,000)		(3,686,000)
Net cash used in investing activities	(8,811,000)		(4,436,000)
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock	100,000,000		—
Net (payments) borrowings of long-term debt under Credit Facility	(86,500,000)		58,500,000
Remittance of employees' statutory tax withholding for stock awards	(4,724,000)		(2,740,000)
Cash dividends paid on common stock	(5,755,000)		(5,237,000)
Payment of convertible preferred stock issuance costs	(4,007,000)		—
Payment of deferred financing costs	(140,000)		—
Repayment of principal amounts under finance lease liabilities	(11,000)		(28,000)
Proceeds from issuance of employee stock purchase plan shares	454,000		369,000

Net cash (used in) provided by financing activities	(683,000)		50,864,000
Net increase (decrease) in cash and cash equivalents	57,000		(16,944,000)
Cash and cash equivalents at beginning of period	30,861,000		47,878,000
Cash and cash equivalents at end of period	$	30,918,000	30,934,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)


	Six months ended January 31,

	2022		2021
Supplemental cash flow disclosures:
Cash paid (received) during the period for:
Interest	$	2,101,000	3,208,000
Income taxes, net	$	1,205,000	(991,000)

Non-cash investing and financing activities:


Unpaid additions to property, plant and equipment	$	2,904,000	1,132,000

Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents)	$	2,857,000	2,686,000

Issuance of restricted stock	$	13,000	4,000

Accrued remittance of employees' statutory tax withholdings	$	1,250,000	—

Establishment of initial convertible preferred stock purchase option liability	$	1,005,000	—

Adjustment to reflect redemption value of convertible preferred stock	$	6,879,000	—

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) General

The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and six months ended January 31, 2022 and 2021 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reported period. Actual results may differ from those estimates.

Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2021 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

Impact of Coronavirus Disease 2019 Pandemic ("COVID-19") and Global Supply Chain Constraints on Our Business

Since March 2020, we conducted most of our non-production related operations using remote working arrangements, curtailed most business travel, and established social distancing safeguards. Both COVID-19 and the related global supply chain constraints have impacted our business, operating results and financial condition, as well as the operations and financial performance of many of the customers and suppliers in industries that we serve. We have experienced order and production delays, disruptions in component availability and pricing, lower levels of factory utilization and higher logistics and operational costs. Although such business conditions are expected to persist for most of our fiscal 2022, and may carry into fiscal 2023, we believe that our long-term fundamentals remain strong and that our business is well-positioned for growth once the aftershocks of the pandemic subside.

CEO Transition Costs

On December 31, 2021, our Board of Directors appointed Michael D. Porcelain as Chief Executive Officer (“CEO”). Prior to that, Mr. Porcelain served as our President and Chief Operating Officer (“COO”). Also, on January 3, 2022, Mr. Porcelain was appointed to our Board of Directors, along with Wendi Carpenter and Mark Quinlan. CEO transition costs were $13,554,000 and all expensed in the three and six months ended January 31, 2022. Of such amount, $10,304,000 related to Mr. Kornberg's severance payments and benefits upon termination of his employment; the remainder related to Mr. Kornberg agreeing to serve as a Senior Technology Advisor for a minimum of two years. Of the total CEO transition costs of $13,554,000, $7,388,000 relates to the amortization of equity-classified stock-based awards.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2) Acquisitions

UHP Networks Inc.

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, pursuant to a stock purchase agreement initially entered into in November 2019 and amended in June 2020 and on March 1, 2021, respectively. With end-markets for high-speed satellite-based networks anticipated to significantly grow, our acquisition allows us to enhance our Commercial Solutions segment's offerings with low cost time division multiple access ("TDMA") satellite modems.

The acquisition has a preliminary purchase price for accounting purposes of $37,470,000. Pursuant to the stock purchase agreement, during fiscal 2021, the initial upfront payment of approximately $23,979,000 was paid mostly in shares of our common stock, with $87,000 in cash. In August 2021, $3,991,000 of the $4,991,000 hold back amount previously placed into escrow at closing was paid to the seller in shares of our common stock, as the conditions pursuant to the stock purchase agreement were met. The stock purchase agreement also provides for a contingent earn-out payment of up to $9,000,000, also payable at our option in cash and or shares of our common stock, if specified sales milestones are reached during a defined period ending September 30, 2022. The preliminary estimated fair value of such contingent earn-out consideration at the acquisition date was $8,500,000.

Of the $23,979,000 paid at closing, $4,560,000 was placed into escrow to be released ratably over three years upon settlement of potential indemnification obligations of the seller.

We issued 1,026,567 shares of our common stock at closing, based on a volume weighted average stock price of approximately $28.14 per share, in satisfaction of initial payment and escrow arrangements under the terms of the stock purchase agreement. The terms of the stock purchase agreement provide an ability for us to substitute cash in lieu of the common stock that was initially placed into escrow.

We are accounting for the acquisition under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations" ("ASC 805"). The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of March 2, 2021 pursuant to the business combination accounting rules. Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. Our condensed consolidated statements of operations for the three and six months ended January 31, 2022 include a nominal amount of revenue contribution from the acquisition. Pro forma financial information is not disclosed, as the acquisition is not material.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the acquisition:


	Purchase Price Allocation (1)
Initial upfront payment	$	23,979,000
Hold-back amount	4,991,000
Contingent earn-out consideration	8,500,000
Preliminary purchase price at fair value	$	37,470,000
Preliminary allocation of aggregate purchase price:
Cash and cash equivalents	$	1,391,000
Current assets	1,367,000
Property, plant and equipment	10,000
Deferred tax assets	310,000
Contract liabilities	(648,000)
Accrued warranty obligations	(750,000)
Other current liabilities	(1,175,000)
Non-current liabilities	(160,000)
Net tangible assets at preliminary fair value	$	345,000
Identifiable intangibles, deferred taxes and goodwill:			Estimated Useful Lives
Technology	$	15,300,000	15 years
Customer relationships	15,500,000		15 years
Trade name	800,000		20 years
Deferred tax liabilities	(8,374,000)
Goodwill	13,899,000		Indefinite
Preliminary allocation of aggregate purchase price	$	37,470,000

(1) As reported in the Company's Quarterly Report on Form 10-Q for the three months ended October 31, 2021.

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized over their estimated useful lives. The preliminary fair value of customer relationships was estimated primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. The preliminary fair value of technology and trade name was estimated based on the discounted capitalization of royalty expense saved because we now own the assets. The preliminary estimated fair value of contingent earn-out consideration represents the present value of the estimated amount payable, based on a probability-weighted amount of net sales, as defined, during the earn-out period, which reflects significant management estimates and assumptions using unobservable Level 3 inputs, including: (i) possible outcomes for targeted net sales during the earn-out period; (ii) timing of each possible outcome; (iii) probability of each possible outcome; and (vi) discount rate reflecting the credit risk of the Company. Among the factors contributing to the recognition of goodwill, as a component of the purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Commercial Solutions segment based on specific identification and is generally not deductible for income tax purposes.

The allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions that are subject to change within the purchase price allocation period, generally one year from the acquisition date. The primary areas of the purchase price allocation not yet finalized include the purchase price (due to customary adjustments for potential indemnification obligations of the seller under the stock purchase agreement), a final assessment of assets acquired and liabilities assumed, accrued warranty obligations, income taxes and residual goodwill.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Acquisition Plan Expenses

During the three and six months ended January 31, 2021, we incurred acquisition plan expenses of $3,357,000 and $94,540,000, respectively. Of the amount recorded for the six months ended January 31, 2021, $88,343,000 related to the previously announced litigation and merger termination with Gilat Satellite Networks, Ltd. ("Gilat"), including $70,000,000 paid in cash to Gilat. The remaining costs primarily related to the April 2021 settlement of litigation associated with the 2019 acquisition of GD NG-911 as well as our acquisition of UHP, which closed in March 2021. Additionally, during the six months ended January 31, 2021, we recorded $1,178,000 of incremental interest expense related to a now terminated financing commitment letter.

(3) Adoption of Accounting Standards and Updates

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). During the six months ended January 31, 2022, we adopted:

•FASB ASU No. 2019-12, which simplifies various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. Our adoption of this ASU on August 1, 2021 did not have a material impact on our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2020-01, which clarifies the interactions between Topics 321, 323 and 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. Our adoption of this ASU on August 1, 2021 did not impact our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2020-06, which simplifies the accounting for convertible instruments by removing certain separation models (including the cash conversion model and the beneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815 or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives. On August 1, 2021, we early adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2021-08, which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, as if it had originated the contracts. Prior to this ASU, an acquirer generally recognized contract assets and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. On August 1, 2021, we early adopted this ASU. Our early adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) Revenue Recognition

In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:

•Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits.

For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly.

The cost-to-cost method is principally used to account for contracts in our Government Solutions segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Commercial Solutions segment. For service-based contracts in our public safety and location technologies product line, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide.

•Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point

COMTECH TELECOMMUNICATIONS CORP /DE/ [CMTL] Filings
10-Q	[2022-03-10]
10-Q	[2021-12-09]
10-K	[2021-10-04]
10-Q	[2021-06-08]
10-Q	[2021-03-11]
10-Q	[2020-12-09]
10-K	[2020-09-29]
10-Q	[2020-06-03]
10-Q	[2020-03-04]
10-Q	[2019-12-04]
10-K	[2019-09-24]
10-Q	[2019-06-05]
10-Q	[2019-03-06]
10-Q	[2018-12-06]
10-K	[2018-09-26]
10-Q	[2018-06-06]
10-Q	[2018-03-07]
10-Q	[2017-12-06]
10-K	[2017-09-27]
10-Q	[2017-06-07]
10-Q	[2017-03-08]
10-Q	[2016-12-07]
10-K	[2016-10-06]
10-Q	[2016-06-08]
10-Q	[2016-03-10]
10-Q	[2015-12-09]
10-K	[2015-09-28]
10-Q	[2015-06-04]
10-Q	[2015-03-11]
10-Q	[2014-12-10]
10-K	[2014-10-09]
10-Q	[2014-06-05]
10-Q	[2014-03-06]
10-Q	[2013-12-09]
10-K	[2013-10-03]
10-Q	[2013-06-06]
10-Q	[2013-03-07]
10-Q	[2012-12-06]
10-K	[2012-09-26]