Company Quick10K Filing
Quick10K
Comtech Telecommunications
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$23.69 24 $572
10-Q 2019-01-31 Quarter: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-K 2018-07-31 Annual: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-K 2017-07-31 Annual: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-K 2016-07-31 Annual: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-K 2015-07-31 Annual: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-K 2014-07-31 Annual: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-01-07 Regulation FD, Exhibits
8-K 2018-12-06 Earnings, Regulation FD, Exhibits
8-K 2018-12-04 Shareholder Vote
8-K 2018-10-31 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-09-26 Earnings, Regulation FD, Exhibits
8-K 2018-09-26 Officers, Exhibits
8-K 2018-06-06 Earnings, Regulation FD, Exhibits
ITUB Itau Unibanco Holding 82,420
TEF Telefonica 43,560
HWC Hancock Whitney 3,860
MSTR Microstrategy 1,550
XTNT Xtant Medical Holdings 43
ECRD Ecard 0
DBE Invesco DB Energy Fund 0
RGBD Regional Brands 0
FDMG Frontier Digital Media Group 0
VIST Vist Financial 0
CMTL 2019-01-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
EX-31.1 exhibit311q2fy19.htm
EX-31.2 exhibit312q2fy19.htm
EX-32.1 exhibit321q2fy19.htm
EX-32.2 exhibit322q2fy19.htm

Comtech Telecommunications Earnings 2019-01-31

CMTL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cmtl0131201910q.htm CURRENT REPORT Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended January 31, 2019
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:    0-7928
form10-qa09.jpg
(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)

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.
checkboxa14.jpg Yes              blankboxa11.jpg 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).
checkboxa14.jpg Yes              blankboxa11.jpg 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
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Accelerated filer
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Emerging growth company
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Non-accelerated filer
blankboxa11.jpg
Smaller reporting company
blankboxa11.jpg
 
 
    

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. blankboxa11.jpg

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
blankboxa11.jpg Yes              checkboxa14.jpg No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 1, 2019, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 24,125,899 shares.



COMTECH TELECOMMUNICATIONS CORP.
INDEX
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 6.
 
 
 
 
 
 



1


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
January 31, 2019
 
July 31, 2018
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
45,997,000

 
43,484,000

Accounts receivable, net
 
138,920,000

 
147,439,000

Inventories, net
 
87,395,000

 
75,076,000

Prepaid expenses and other current assets
 
13,493,000

 
13,794,000

Total current assets
 
285,805,000

 
279,793,000

Property, plant and equipment, net
 
28,391,000

 
28,987,000

Goodwill
 
290,633,000

 
290,633,000

Intangibles with finite lives, net
 
232,219,000

 
240,796,000

Deferred financing costs, net
 
3,495,000

 
2,205,000

Other assets, net
 
2,784,000

 
2,743,000

Total assets
 
$
843,327,000

 
845,157,000

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
30,057,000

 
43,928,000

Accrued expenses and other current liabilities
 
60,343,000

 
65,034,000

Dividends payable
 
2,382,000

 
2,356,000

Contract liabilities
 
35,027,000

 
34,452,000

Current portion of long-term debt
 

 
17,211,000

Current portion of capital lease and other obligations
 
1,284,000

 
1,836,000

Interest payable
 
640,000

 
499,000

Total current liabilities
 
129,733,000

 
165,316,000

Non-current portion of long-term debt, net
 
174,500,000

 
148,087,000

Non-current portion of capital lease and other obligations
 
490,000

 
765,000

Income taxes payable
 
414,000

 
2,572,000

Deferred tax liability, net
 
13,521,000

 
10,927,000

Long-term contract liabilities
 
8,336,000

 
7,689,000

Other liabilities
 
3,456,000

 
4,117,000

Total liabilities
 
330,450,000

 
339,473,000

Commitments and contingencies (See Note 19)
 


 


Stockholders’ equity:
 
 

 
 

Preferred stock, par value $0.10 per share; shares authorized and unissued 2,000,000
 

 

Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 38,950,547 shares and 38,860,571 shares at January 31, 2019 and July 31, 2018, respectively
 
3,895,000

 
3,886,000

Additional paid-in capital
 
539,273,000

 
538,453,000

Retained earnings
 
411,558,000

 
405,194,000

 
 
954,726,000

 
947,533,000

Less:
 
 

 
 

Treasury stock, at cost (15,033,317 shares at January 31, 2019 and July 31, 2018)
 
(441,849,000
)
 
(441,849,000
)
Total stockholders’ equity
 
512,877,000

 
505,684,000

Total liabilities and stockholders’ equity
 
$
843,327,000

 
845,157,000


See accompanying notes to condensed consolidated financial statements.

2



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
 
Three months ended January 31,
 
Six months ended January 31,
 
 
 
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
164,133,000

 
133,731,000

 
$
324,977,000

 
255,300,000

Cost of sales
 
102,888,000

 
82,930,000

 
205,963,000

 
156,783,000

Gross profit
 
61,245,000

 
50,801,000

 
119,014,000

 
98,517,000

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Selling, general and administrative
 
31,987,000

 
27,215,000

 
63,834,000

 
55,690,000

Research and development
 
13,983,000

 
13,435,000

 
27,193,000

 
27,185,000

Amortization of intangibles
 
4,288,000

 
5,268,000

 
8,577,000

 
10,537,000

Settlement of intellectual property litigation
 
(3,204,000
)
 

 
(3,204,000
)
 

Acquisition plan expenses
 
1,778,000

 

 
2,908,000

 

 
 
48,832,000

 
45,918,000

 
99,308,000

 
93,412,000

 
 
 
 
 
 
 
 
 
Operating income
 
12,413,000

 
4,883,000

 
19,706,000

 
5,105,000

 
 
 
 
 
 
 
 
 
Other expenses (income):
 
 

 
 

 
 

 
 

Interest expense
 
2,267,000

 
2,519,000

 
4,936,000

 
5,107,000

Write-off of deferred financing costs
 

 

 
3,217,000

 

Interest (income) and other
 
(51,000
)
 
(48,000
)
 
15,000

 
(9,000
)
 
 
 
 
 
 
 
 
 
Income before provision for (benefit from) income taxes
 
10,197,000

 
2,412,000

 
11,538,000

 
7,000

Provision for (benefit from) income taxes
 
2,371,000

 
(13,349,000
)
 
244,000

 
(14,094,000
)
 
 
 
 
 
 
 
 
 
Net income
 
$
7,826,000

 
15,761,000

 
$
11,294,000

 
14,101,000

Net income per share (See Note 6):
 
 

 
 

 
 

 
 

Basic
 
$
0.33

 
0.66

 
$
0.47

 
0.59

Diluted
 
$
0.32

 
0.66

 
$
0.47

 
0.59

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
 
24,034,000

 
23,816,000

 
24,017,000

 
23,805,000

 
 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding – diluted
 
24,168,000

 
23,953,000

 
24,245,000

 
23,942,000

 
See accompanying notes to condensed consolidated financial statements.

3



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
 
Three months ended January 31, 2019 and 2018
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Stockholders'
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Balance as of October 31, 2017
 
38,640,511

 
$
3,864,000

 
$
532,940,000

 
$
381,064,000

 
15,033,317

 
$
(441,849,000
)
 
$
476,019,000

Equity-classified stock award compensation
 

 

 
1,080,000

 

 

 

 
1,080,000

Proceeds from issuance of employee stock purchase plan shares
 
12,548

 
1,000

 
207,000

 

 

 

 
208,000

Net settlement of stock-based awards
 
371

 

 
(3,000
)
 

 

 

 
(3,000
)
Cash dividends declared, net ($0.10 per share)
 

 

 

 
(2,350,000
)
 

 

 
(2,350,000
)
Accrual of dividend equivalents, net of reversal ($0.10 per share)
 
 

 

 

 
(94,000
)
 

 

 
(94,000
)
Net income
 

 

 

 
15,761,000

 

 

 
15,761,000

Balance as of January 31, 2018
 
38,653,430

 
$
3,865,000

 
$
534,224,000

 
$
394,381,000

 
15,033,317

 
$
(441,849,000
)
 
$
490,621,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 31, 2018
 
38,938,844

 
$
3,894,000

 
$
537,852,000

 
$
406,199,000

 
15,033,317

 
$
(441,849,000
)
 
$
506,096,000

Equity-classified stock award compensation
 

 

 
1,191,000

 

 

 

 
1,191,000

Proceeds from issuance of employee stock purchase plan shares
 
11,337

 
1,000

 
234,000

 

 

 

 
235,000

Net settlement of stock-based awards
 
366

 

 
(4,000
)
 

 

 

 
(4,000
)
Cash dividends declared, net ($0.10 per share)
 

 

 

 
(2,383,000
)
 

 

 
(2,383,000
)
Accrual of dividend equivalents, net of reversal ($0.10 per share)
 

 

 

 
(84,000
)
 

 

 
(84,000
)
Net income
 

 

 

 
7,826,000

 

 

 
7,826,000

Balance as of January 31, 2019
 
38,950,547

 
$
3,895,000

 
$
539,273,000

 
$
411,558,000

 
15,033,317

 
$
(441,849,000
)
 
$
512,877,000



See accompanying notes to condensed consolidated financial statements. (Continued)

4




COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(Unaudited)
 
 
Six months ended January 31, 2019 and 2018
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Stockholders'
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Balance as of July 31, 2017
 
38,619,467

 
$
3,862,000

 
$
533,001,000

 
$
385,136,000

 
15,033,317

 
$
(441,849,000
)
 
$
480,150,000

Equity-classified stock award compensation
 

 

 
1,827,000

 

 

 

 
1,827,000

Proceeds from issuance of employee stock purchase plan shares
 
24,222

 
2,000

 
395,000

 

 

 

 
397,000

Forfeiture of restricted stock
 
(10,254
)
 
(1,000
)
 
1,000

 

 

 

 

Net settlement of stock-based awards
 
19,995

 
2,000

 
(1,000,000
)
 

 

 

 
(998,000
)
Cash dividends declared, net ($0.20 per share)
 

 

 

 
(4,701,000
)
 

 

 
(4,701,000
)
Accrual of dividend equivalents, net of reversal ($0.20 per share)
 

 

 

 
(155,000
)
 

 

 
(155,000
)
Net income
 

 

 

 
14,101,000

 

 

 
14,101,000

Balance as of January 31, 2018
 
38,653,430

 
$
3,865,000

 
$
534,224,000

 
$
394,381,000

 
15,033,317

 
$
(441,849,000
)
 
$
490,621,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of July 31, 2018
 
38,860,571

 
$
3,886,000

 
$
538,453,000

 
$
405,194,000

 
15,033,317

 
$
(441,849,000
)
 
$
505,684,000

Equity-classified stock award compensation
 

 

 
2,237,000

 

 

 

 
2,237,000

Proceeds from exercises of stock options
 
6,100

 
1,000

 
173,000

 

 

 

 
174,000

Proceeds from issuance of employee stock purchase plan shares
 
20,198

 
2,000

 
474,000

 

 

 

 
476,000

Issuance of restricted stock
 
10,386

 
1,000

 
(1,000
)
 

 

 

 

Net settlement of stock-based awards
 
53,292

 
5,000

 
(2,063,000
)
 

 

 

 
(2,058,000
)
Cash dividends declared, net ($0.20 per share)
 

 

 

 
(4,764,000
)
 

 

 
(4,764,000
)
Accrual of dividend equivalents, net of reversal ($0.20 per share)
 

 

 

 
(166,000
)
 

 

 
(166,000
)
Net income
 

 

 

 
11,294,000

 

 

 
11,294,000

Balance as of January 31, 2019
 
38,950,547

 
$
3,895,000

 
$
539,273,000

 
$
411,558,000

 
15,033,317

 
$
(441,849,000
)
 
$
512,877,000



See accompanying notes to condensed consolidated financial statements.

5



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended January 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
11,294,000

 
14,101,000

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization of property, plant and equipment
 
5,700,000

 
6,663,000

Amortization of intangible assets with finite lives
 
8,577,000

 
10,537,000

Amortization of stock-based compensation
 
2,237,000

 
1,827,000

Amortization of deferred financing costs
 
732,000

 
1,098,000

Write-off of deferred financing costs
 
3,217,000

 

Estimated contract settlement costs
 
3,886,000

 

Settlement of intellectual property litigation
 
(3,204,000
)
 

Loss on disposal of property, plant and equipment
 
40,000

 

Provision for allowance for doubtful accounts
 
487,000

 
577,000

Provision for excess and obsolete inventory
 
1,749,000

 
2,433,000

Deferred income tax expense (benefit)
 
2,594,000

 
(11,218,000
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
3,229,000

 
5,801,000

Inventories
 
(14,068,000
)
 
(13,537,000
)
Prepaid expenses and other current assets
 
1,568,000

 
1,745,000

Other assets
 
107,000

 
(257,000
)
Accounts payable
 
(14,693,000
)
 
(2,259,000
)
Accrued expenses and other current liabilities
 
3,282,000

 
(5,146,000
)
Contract liabilities
 
(857,000
)
 
235,000

Other liabilities, non-current
 
275,000

 
(242,000
)
Interest payable
 
177,000

 
(199,000
)
Income taxes payable
 
(3,291,000
)
 
(2,982,000
)
Net cash provided by operating activities
 
13,038,000

 
9,177,000

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(4,181,000
)
 
(2,836,000
)
Net cash used in investing activities
 
(4,181,000
)
 
(2,836,000
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Net borrowings of long-term debt under Credit Facility
 
174,500,000

 

Net (payments) borrowings under Revolving Loan portion of Prior Credit Facility
 
(48,603,000
)
 
9,400,000

Repayment of debt under Term Loan portion of Prior Credit Facility
 
(120,121,000
)
 
(10,354,000
)
Remittance of employees' statutory tax withholdings for stock awards
 
(5,021,000
)
 
(998,000
)
Cash dividends paid
 
(4,998,000
)
 
(4,821,000
)
Payment of deferred financing costs
 
(1,808,000
)
 

Repayment of principal amounts under capital lease and other obligations
 
(863,000
)
 
(1,337,000
)
Proceeds from issuance of employee stock purchase plan shares
 
476,000

 
397,000

Payment of shelf registration costs
 
(80,000
)
 

Proceeds from exercises of stock options
 
174,000

 

Net cash used in financing activities
 
(6,344,000
)
 
(7,713,000
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
2,513,000

 
(1,372,000
)
Cash and cash equivalents at beginning of period
 
43,484,000

 
41,844,000

Cash and cash equivalents at end of period
 
$
45,997,000

 
40,472,000

See accompanying notes to condensed consolidated financial statements. (Continued)

6



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

 
 
Six months ended January 31,
 
 
2019
 
2018
Supplemental cash flow disclosures:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
3,844,000

 
3,977,000

Income taxes, net
 
$
941,000

 
108,000

 
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
Cash dividends declared but unpaid (including dividend equivalents)
 
$
2,548,000

 
2,506,000

Accrued additions to property, plant and equipment
 
$
963,000

 
1,102,000

Accrued deferred financing costs
 
$
4,000

 

Accrued shelf registration costs
 
$
68,000

 

Issuance (forfeiture) of restricted stock
 
$
1,000

 
(1,000
)

See accompanying notes to condensed consolidated financial statements.


7


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, 2019 and 2018 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, 2018 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

As disclosed in more detail in Note (15) - "Segment Information," we manage our business in two reportable segments: Commercial Solutions and Government Solutions.

Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the current fiscal period presentation.

(2)    Solacom Acquisition - Subsequent Event

On February 28, 2019, we completed our acquisition of Solacom Technologies Inc. ("Solacom"), pursuant to the Arrangement Agreement, dated as of January 7, 2019, by and among Solacom, Comtech and Solar Acquisition Corp., a Canadian corporation and a direct, wholly-owned subsidiary of Comtech. Solacom is a leading provider of Next Generation 911 ("NG911") solutions for public safety agencies. Effective during our third quarter of fiscal 2019, its financial results will be included in our Commercial Solutions segment. The acquisition of Solacom was a significant step in our strategy of enhancing our safety and security solutions. The acquisition has a preliminary purchase price for accounting purposes of $31,533,000, of which $25,927,000 was settled in cash and $5,606,000 was settled with the issuance of 208,699 shares of Comtech’s common stock at a volume weighted average stock price of $26.86. The cash portion of the purchase price was funded principally through borrowings under our Credit Facility. The preliminary purchase price for accounting purposes is subject to finalization.

(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, 2019, we adopted:

FASB ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."See Note (4) - "Revenue" for further information.

FASB ASU No. 2016-16 "Intra-Entity Transfers of Assets Other Than Inventory," which eliminates a prior exception and now requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory (for example, intellectual property and property, plant and equipment) when the transfer occurs. We adopted this ASU on August 1, 2018. There was no material impact to our condensed consolidated financial statements (including any cumulative-effect adjustment) and disclosures upon such adoption.


8


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


During the six months ended January 31, 2019, the SEC issued Final Rule Release No. 33-10532 "Disclosure Update and Simplification," which revised certain of the SEC’s disclosure requirements that have become superseded in light of other SEC and or U.S. GAAP disclosure requirements. As a result of the final rule’s amendments, the SEC now requires a registrant to reconcile its changes in stockholders' equity for both the current and comparative interim and year-to-date periods, with subtotals. Our Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended January 31, 2019 and 2018 reflect our adoption of this final rule.

(4)    Revenue

On August 1, 2018, we adopted ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)" or "ASC 606" applying the modified retrospective transition method. Except for new presentation or disclosure requirements, the impact of adoption, both as of August 1, 2018 and for the three and six months ended January 31, 2019, was not material to our business, results of operations or financial condition. As a practical expedient, we adopted the new standard only for existing contracts as of August 1, 2018. All periods prior to August 1, 2018 will continue to be reported under the accounting standards in effect in those periods. As a result of ASC 606, we made the following adjustments to our Condensed Consolidated Balance Sheet as of August 1, 2018:

 
As reported at
 
Adoption of
 
Balance at
 
July 31, 2018
 
ASC 606
 
August 1, 2018
Accrued expenses and other current liabilities(1)
$
65,034,000

 
$
(2,079,000
)
 
$
62,955,000

Contract liabilities, current and non-current(2)
42,141,000

 
2,079,000

 
44,220,000


(1) See Note (9) - "Accrued Expenses and Other Current Liabilities" for further discussion of reclassification.
(2) Formerly presented on the face of our Condensed Consolidated Balance Sheet as "Customer advances and deposits, current and non-current" prior to our adoption of ASC 606.

The core principle of ASC 606 is that revenue should be recorded 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.


9


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


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 command and control solutions and over-the-horizon microwave systems product lines and, to a lesser extent, certain location-based and messaging infrastructure contracts in our enterprise technology solutions product line. For service-based contracts in both our enterprise technology solutions and safety and security technology solutions product lines, we 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.

Point in time accounting is principally applied to contracts in our satellite earth station product line (which includes satellite modems, traveling wave tube amplifiers ("TWTAs") and solid-state power amplifiers ("SSPAs")) and solid-state high-power narrow and broadband amplifiers. Point in time accounting is also applied to certain contracts in our command and control solutions product line. 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 of delivery.

In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss.

When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable.


10


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To-date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery.

When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us.

When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations.

Almost all of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:
 
 
Three months ended January 31,
 
Six months ended January 31,
 
 
2019
 
2018
 
2019
 
2018
United States
 
 
 
 
 
 
 
 
U.S. government
 
45.2
%
 
31.5
%
 
44.7
%
 
32.0
%
Domestic
 
32.0
%
 
42.0
%
 
31.7
%
 
43.1
%
Total United States
 
77.2
%
 
73.5
%
 
76.4
%
 
75.1
%
 
 
 
 
 
 
 
 
 
International
 
22.8
%
 
26.5
%
 
23.6
%
 
24.9
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%


11


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Sales to U.S. government customers include sales to the U.S. Department of Defense ("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"). Sales to Verizon were 10.1% of consolidated net sales for the three months ended January 31, 2019. Sales to Verizon were 10.5% and 11.1%, respectively, of consolidated net sales for the three and six months ended January 31, 2018. International sales include sales to U.S. domestic companies for inclusion in products that are sold to international customers. 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 the three and six months ended January 31, 2019 and 2018.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our chief operating decision-maker ("CODM") for the three and six months ended January 31, 2019. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business:

 
 
Three months ended January 31, 2019
 
Six months ended January 31, 2019
 
 
Commercial Solutions
 
Government Solutions
 
Total
 
Commercial Solutions
 
Government Solutions
 
Total
Geographical region and customer type
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
 
$
20,911,000

 
53,389,000

 
$
74,300,000

 
$
35,131,000

 
110,213,000

 
$
145,344,000

Domestic
 
43,693,000

 
8,761,000

 
52,454,000

 
85,930,000

 
17,035,000

 
102,965,000

Total United States
 
64,604,000

 
62,150,000

 
126,754,000

 
121,061,000

 
127,248,000

 
248,309,000

 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
22,131,000

 
15,248,000

 
37,379,000

 
43,647,000

 
33,021,000

 
76,668,000

Total
 
$
86,735,000

 
77,398,000

 
$
164,133,000

 
$
164,708,000

 
160,269,000

 
$
324,977,000

Contract type
 
 
 
 
 
 
 
 
 
 
 
 
Firm fixed price
 
$
85,567,000

 
57,017,000

 
$
142,584,000

 
$
161,857,000

 
120,628,000

 
$
282,485,000

Cost reimbursable
 
1,168,000

 
20,381,000

 
21,549,000

 
2,851,000

 
39,641,000

 
42,492,000

Total
 
$
86,735,000

 
77,398,000

 
$
164,133,000

 
$
164,708,000

 
160,269,000

 
$
324,977,000

Transfer of control
 
 
 
 
 
 
 
 
 
 
 
 
Point in time
 
$
46,031,000

 
45,182,000

 
$
91,213,000

 
$
83,976,000

 
97,805,000

 
$
181,781,000

Over time
 
40,704,000

 
32,216,000

 
72,920,000

 
80,732,000

 
62,464,000

 
143,196,000

Total
 
$
86,735,000

 
77,398,000

 
$
164,133,000

 
$
164,708,000

 
160,269,000

 
$
324,977,000


The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in what we have historically presented as unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the six months ended January 31, 2019. On large long term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the total contract liabilities at August 1, 2018, $24,606,000 was recognized as revenue during the six months ended January 31, 2019.


12


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.

As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations. As for commissions payable to third party sales representatives related to large long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such types of commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Condensed Consolidated Statements of Operations.

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of January 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $586,412,000. We expect that a significant portion of our remaining performance obligations at January 31, 2019 will be completed and recognized as revenue during the next twelve month period. During the three and six months ended January 31, 2019, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.

(5)    Fair Value Measurements and Financial Instruments

Using the fair value hierarchy described in FASB ASC 820 "Fair Value Measurements and Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices.

We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable, accrued expenses and the current portion of our favorable AT&T warranty settlement) approximate their fair values due to their short-term maturities.

The fair value of our Credit Facility that we entered into on October 31, 2018 approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. We believe the fair value of our non-current portion of capital lease and other obligations, which currently has a blended interest rate of approximately 7.0%, would not be materially different than its carrying value as of January 31, 2019.

The fair value of the non-current portion of our favorable AT&T warranty settlement would not be materially different than its carrying value as of as of January 31, 2019, given our belief that the present value of such liability reflects market participants' assumptions for a similar junior, unsecured debt instrument. See Note (9) - "Accrued Expenses and Other Current Liabilities" for further discussion of the favorable AT&T warranty settlement.

As of January 31, 2019 and July 31, 2018, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(6)    Earnings Per Share

Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")), outstanding during each respective period. Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 "Earnings Per Share," equity-classified stock-based awards that are subject to performance conditions are not considered in our diluted EPS calculations until the respective performance conditions have been satisfied. When calculating our diluted earnings per share, we consider 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.


13


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


There were no purchases of our common stock during the three or six months ended January 31, 2019 or 2018. See Note (18) - "Stockholders’ Equity" for more information.

Weighted average stock options, RSUs and restricted stock outstanding of 1,678,000 and 1,812,000 for the three months ended January 31, 2019 and 2018, respectively, and 609,000 and 1,821,000 for the six months ended January 31, 2019 and 2018, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 245,000 and 259,000 weighted average performance shares outstanding for the three months ended January 31, 2019 and 2018, respectively, and 240,000 and 211,000 for the six months ended January 31, 2019 and 2018, respectively, as the performance conditions have not yet been satisfied. However, the compensation expense related to these awards is included in net income (the numerator) for EPS calculations for each respective period.

The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
 
 
Three months ended January 31,
 
Six months ended January 31,
 
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
 
Net income for basic calculation
 
$
7,826,000

 
15,761,000

 
$
11,294,000

 
14,101,000

Numerator for diluted calculation
 
$
7,826,000

 
15,761,000

 
$
11,294,000

 
14,101,000

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Denominator for basic calculation
 
24,034,000

 
23,816,000

 
24,017,000

 
23,805,000

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock-based awards
 
134,000

 
137,000

 
228,000

 
137,000

Denominator for diluted calculation
 
24,168,000

 
23,953,000

 
24,245,000

 
23,942,000

    
(7)    Accounts Receivable

Accounts receivable consist of the following at:
 
 
January 31, 2019
 
July 31, 2018
Receivables from commercial and international customers
 
$
80,828,000

 
83,411,000

Unbilled receivables from commercial and international customers
 
12,902,000

 
19,731,000

Receivables from the U.S. government and its agencies
 
45,300,000

 
26,251,000

Unbilled receivables from the U.S. government and its agencies
 
1,850,000

 
19,807,000

Total accounts receivable
 
140,880,000

 
149,200,000

Less allowance for doubtful accounts
 
1,960,000

 
1,761,000

Accounts receivable, net
 
$
138,920,000

 
147,439,000


Unbilled receivables as of January 31, 2019 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, which we adopted on August 1, 2018 (see Note (4) - "Revenue"), unbilled receivables constitute contract assets. Management estimates that substantially all amounts not yet billed at January 31, 2019 will be billed and collected within one year.

Of the unbilled receivables from commercial and international customers at January 31, 2019 and July 31, 2018, approximately $1,545,000 and $1,558,000, respectively, relates to a large over-the-horizon microwave systems contract with our large U.S. prime contractor customer (all of which related to our North African country end-customer).

As of January 31, 2019, the U.S. government (and its agencies) and Verizon represented 33.5% and 11.6%, respectively, of total accounts receivable. As of July 31, 2018, the U.S. government (and its agencies) and Verizon represented 30.9% and 10.1%, respectively, of total accounts receivable.


14


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


(8)    Inventories

Inventories consist of the following at:
 
 
January 31, 2019
 
July 31, 2018
Raw materials and components
 
$
56,283,000

 
53,649,000

Work-in-process and finished goods
 
48,173,000

 
38,854,000

Total inventories
 
104,456,000

 
92,503,000

Less reserve for excess and obsolete inventories
 
17,061,000

 
17,427,000

Inventories, net
 
$
87,395,000

 
75,076,000


As of January 31, 2019 and July 31, 2018, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $1,337,000 and $1,249,000, respectively, and the amount of inventory related to contracts from third party commercial customers who outsource their manufacturing to us was $1,641,000 and $1,310,000, respectively.

(9)    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following at:
 
 
January 31, 2019
 
July 31, 2018
Accrued wages and benefits
 
$
23,239,000

 
23,936,000

Accrued contract costs
 
11,202,000

 
10,016,000

Accrued warranty obligations
 
9,576,000

 
11,738,000

Accrued legal costs
 
2,625,000

 
6,179,000

Accrued commissions and royalties
 
3,541,000

 
4,654,000

Other
 
10,160,000

 
8,511,000

Accrued expenses and other current liabilities
 
$
60,343,000

 
65,034,000


On August 1, 2018, in connection with our adoption of ASC 606, $2,079,000 of accrued expenses and other current liabilities were reclassified to contract liabilities on our Condensed Consolidated Balance Sheet. Of this total amount, $1,679,000 and $400,000, respectively, was reclassified from the "accrued warranty obligations" and "other" categories presented in the above table to contract liabilities, as they represented deferred revenue related to service-type warranty performance obligations. See Note (4) - "Revenue" for further discussion of our adoption of ASC 606.

Other accrued expenses as of January 31, 2019 include $811,000 for the current portion of the facility exit costs related to the closure of a manufacturing facility, as discussed in more detail in Note (10) - "Cost Reduction Actions."

Accrued legal costs as of July 31, 2018 included $3,372,000 related to estimated costs associated with a certain TeleCommunication Systems, Inc. ("TCS") intellectual property matter. During the three and six months ended January 31, 2019, this matter was favorably resolved. As a result, we reduced such accrued legal costs and recorded a $3,204,000 benefit in the Condensed Consolidated Statement of Operations. See Note (19) - "Legal Proceedings and Other Matters" for additional information.

Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for invoices not yet received from vendors or reflected in accounts payable.

Accrued warranty obligations as of January 31, 2019 relate to estimated liabilities for assurance-type warranty coverage that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at least one year from the date of delivery. We record a liability for estimated warranty expense based on historical claims, product failure rates, a consideration of contractual obligations, future costs to resolve software issues and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs.

15


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)



Changes in our accrued warranty obligations during the six months ended January 31, 2019 and 2018 were as follows:
 
 
Six months ended January 31,
 
 
2019
 
2018
Balance at beginning of period
 
$
11,738,000

 
17,617,000

Reclass to contract liabilities as of August 1, 2018
 
(1,679,000
)
 

Provision for warranty obligations
 
1,738,000

 
2,278,000

Charges incurred
 
(3,066,000
)
 
(3,914,000
)
Warranty settlement and reclass (see below)
 
845,000

 
(3,500,000
)
Balance at end of period
 
$
9,576,000

 
12,481,000


Our current accrued warranty obligations at January 31, 2019 and July 31, 2018 include $4,169,000 and $4,650,000, respectively, of warranty obligations for a small product line that we refer to as the TCS 911 call handling software solution. This solution was licensed to customers prior to our acquisition of TCS. During the six months ended January 31, 2018, we entered into a full and final warranty settlement with AT&T, the largest customer/distributor of this product line, pursuant to which we issued thirty-six credits to AT&T of $153,000 which AT&T can apply on a monthly basis to purchases of solutions from us, beginning October 2017 through September 2020. As of January 31, 2019, the total present value of these monthly credits is $2,840,000, of which $1,656,000 is included in our current accrued warranty obligations and $1,184,000 is reflected in other liabilities (non-current) on our Condensed Consolidated Balance Sheet. In connection with this favorable settlement, during the six months ended January 31, 2018, we recorded a benefit to cost of sales of $660,000.

(10)    Cost Reduction Actions

During the three months ended October 31, 2018, we took steps to improve our future operating results and successfully consolidated our Government Solutions segment’s manufacturing facility located in Tampa, Florida with another facility that we maintain in Orlando, Florida. In doing so, we accrued $1,373,000 of facility exit costs, which were recorded in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

During the three and six months ended January 31, 2019, we made cash payments of $181,000 related to such facility exit cost accrual. As of January 31, 2019, the remaining estimated facility exit costs amounted to $1,192,000, of which $811,000 and $381,000, respectively, was included in "accrued expenses and other current liabilities" and "other liabilities (non-current)" on our Condensed Consolidated Balance Sheet. To-date, we have incurred an immaterial amount of severance and retention costs related to our Florida facilities consolidation.

(11)    Credit Facility

On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders, replacing our prior Credit Agreement dated as of February 23, 2016 (as amended by that certain First Amendment, dated as of June 6, 2017 (the "Prior Credit Facility")). In connection with the establishment of our new Credit Facility, during the three months ended October 31, 2018, we wrote-off $3,217,000 of deferred financing costs primarily related to the Term Loan Facility portion of our Prior Credit Facility and capitalized deferred financing costs of $1,812,000 related to the new Credit Facility.

The new Credit Facility provides a senior secured loan facility of up to $550,000,000 consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $300,000,000; (ii) an accordion feature allowing us to borrow up to an additional $250,000,000; (iii) a $35,000,000 letter of credit sublimit; and (iv) a swingline loan credit sublimit of $25,000,000.

The Credit Facility matures on October 31, 2023 (the "Revolving Maturity Date"). If we issue new unsecured debt in excess of $5,000,000 with a maturity date that is less than 91 days from October 31, 2023, the Revolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the maturity date of the new unsecured debt.
 

16


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


The proceeds of the new Credit Facility were used, in part, to repay in full the outstanding borrowings under the Prior Credit Facility, and additional proceeds of the Credit Facility are expected to be used by us for working capital and other general corporate purposes. As of January 31, 2019, the amount outstanding under our Credit Facility was $174,500,000, which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. At January 31, 2019, we had $2,331,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the three months ended January 31, 2019, we had outstanding balances under the new Credit Facility ranging from $160,000,000 to $174,500,000.

As of January 31, 2019, total net deferred financing costs related to the Credit Facility were $3,495,000 and are being amortized over the term of our Credit Facility through October 31, 2023.

Interest expense, including amortization of deferred financing costs, for the three months ended January 31, 2019 and 2018 was $2,171,000 and $2,350,000, respectively. The amount for the most recent fiscal quarter relates to our new Credit Facility; whereas, the amount in the comparable prior year period relates to our Prior Credit Facility. Interest expense, including amortization of deferred financing costs, for the six months ended January 31, 2019 and 2018 was $4,713,000 and $4,815,000, respectively. The amount for the most recent fiscal year-to-date period relates to both our Prior Credit Facility and new Credit Facility; whereas, the amount in the comparable prior year period relates only to our Prior Credit Facility. Our blended interest rate approximated 5.08% and 5.10%, respectively, for the three months ended January 31, 2019 and 2018, and approximated 5.54% and 5.20%, respectively, for the six months ended January 31, 2019 and 2018.

Borrowings under the Credit Facility shall be either: (i) Alternate Base Rate borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatest of (a) the Prime Rate (as defined) in effect on such day, (b) the Federal Funds Effective Rate (as defined) in effect on such day plus 1/2 of 1.00% per annum and (c) the Adjusted LIBO Rate (as defined) on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum, plus (y) the Applicable Rate (as defined), or (ii) Eurodollar borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO Rate for such interest period plus (y) the Applicable Rate. Determination of the Applicable Rate is based on a pricing grid that is dependent upon our Secured Leverage Ratio (as defined) as of the end of each fiscal quarter for which consolidated financial statements have been most recently delivered.

The Credit Facility contains customary representations, warranties and affirmative covenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility.

The Credit Facility provides for, among other things: (i) a significant increase in our balance sheet flexibility; (ii) no scheduled payments of principal until maturity; (iii) a maximum Secured Leverage Ratio of 3.75x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and a Maximum Total Leverage Ratio of 4.50x TTM Adjusted EBITDA, each with no step downs; (iv) a Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA; (v) reduced interest rates of approximately 25 basis points as compared to the Prior Credit Facility (based on our Secured Leverage Ratio as of July 31, 2018); and (vi) the elimination or relaxation of many restrictive covenants in our Prior Credit Facility.

As of January 31, 2019, our Secured Leverage Ratio was 1.85x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of January 31, 2019 was 12.16x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future.


17


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


The obligations under the Credit Facility are guaranteed by certain of our domestic subsidiaries (the "Guarantors"). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets.

On December 6, 2018, we entered into the first amendment to the Credit Facility. The purpose of the amendment is to provide for a mechanism to replace the LIBO Rate for Eurodollar borrowings with an alternative benchmark interest rate, should the LIBO Rate generally become unavailable in the future on an other-than-temporary basis.

The Prior Credit Facility was a $400,000,000 secured credit facility and comprised of a senior secured term loan A facility of $250,000,000 (the "Term Loan Facility") and a secured revolving loan facility of up to $150,000,000, including a $25,000,000 letter of credit sublimit (the "Revolving Loan Facility"). The proceeds of the Prior Credit Facility were primarily used to finance our acquisition of TCS, including the repayment of certain existing indebtedness of TCS. During the three months ended October 31, 2018, we had outstanding balances under the Revolving Loan Facility, ranging from $34,904,000 to $63,804,000.

As of July 31, 2018, the net amount outstanding under the Prior Credit Facility was as follows:
 
 
July 31, 2018

Term Loan Facility
 
$
120,121,000

Less unamortized deferred financing costs related to Term Loan Facility
 
3,427,000

Term Loan Facility, net
 
116,694,000

Revolving Loan Facility
 
48,604,000

Amount outstanding under Prior Credit Facility, net
 
165,298,000

Less current portion of long-term debt
 
17,211,000

Non-current portion of long-term debt
 
$
148,087,000


Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility and the Prior Credit Facility, which have been documented and filed with the SEC.

(12)    Capital Lease and Other Obligations

We lease certain equipment under capital leases. As of January 31, 2019 and July 31, 2018, the net book value of the leased assets which collateralize the capital lease and other obligations was $1,542,000 and $2,547,000, respectively, and consisted primarily of machinery and equipment. Depreciation of leased assets is included in depreciation expense.

As of January 31, 2019, our capital lease and other obligations reflect a blended interest rate of approximately 7.0%. Our capital leases generally contain provisions whereby we can purchase the equipment at the end of the lease for a one dollar buyout.
 
Future minimum payments under capital lease and other obligations consisted of the following at January 31, 2019:
Remainder of fiscal 2019
$
1,070,000

Fiscal 2020
780,000

Fiscal 2021 and beyond

Total minimum lease payments
1,850,000

Less: amounts representing interest
76,000

Present value of net minimum lease payments
1,774,000

Current portion of capital lease and other obligations
1,284,000

Non-current portion of capital lease and other obligations
$
490,000



18


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


(13)    Income Taxes

On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Reform"), was enacted in the U.S. Tax Reform significantly lowered the amount of our current and future income tax expense primarily due to the reduction in the U.S. statutory income tax rate from 35.0% to 21.0%. This provision went into effect on January 1, 2018 and required us to remeasure our deferred tax assets and liabilities. In fiscal 2019 and beyond, Tax Reform will result in the loss of our ability to take the domestic production activities deduction, which has been repealed, and is also likely to result in lower tax deductions for certain executive compensation expenses.
 
For fiscal 2018, we were subject to a 35.0% statutory income tax rate with respect to the period August 1, 2017 through December 31, 2017 and a 21.0% statutory income tax rate with respect to the period January 1, 2018 through July 31, 2018, or a blended statutory income tax rate for fiscal 2018 of approximately 27.0%. As such, our effective tax rate for accounting purposes in fiscal 2018, excluding discrete items, was 27.0%. We expect to fully benefit from the lower statutory income tax rate in fiscal 2019 and thereafter.

In connection with Tax Reform, during the three months ended January 31, 2018, we recorded an initial estimated net discrete tax benefit of $14,018,000, primarily related to the remeasurement of deferred tax liabilities associated with non-deductible amortization related to intangible assets. This remeasurement was recorded pursuant to ASC 740 "Income Taxes" and SEC Staff Accounting Bulletin ("SAB") 118, using estimates based on reasonable and supportable assumptions and available information as of such reporting date. The remeasurement of deferred taxes as a result of Tax Reform may change if the estimated timing of the deferred tax impacts shift between fiscal 2018 and fiscal 2019 and beyond, which will become known after we file our federal and state income tax returns for fiscal 2018. In addition, it is possible that the Internal Revenue Service ("IRS") will issue clarifying or interpretive guidance related to Tax Reform, which may ultimately result in a change to our estimated income tax.

At January 31, 2019 and July 31, 2018, total unrecognized tax benefits were $7,506,000 and $9,339,000, respectively, including interest of $58,000 and $202,000, respectively. At January 31, 2019 and July 31, 2018, $414,000 and $2,572,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Condensed Consolidated Balance Sheets. The remaining unrecognized tax benefits of $7,092,000 and $6,767,000 at January 31, 2019 and July 31, 2018, respectively, were presented as an offset to the associated non-current deferred tax assets on our Condensed Consolidated Balance Sheets. Of the total unrecognized tax benefits, $6,852,000 and $8,563,000, at January 31, 2019 and July 31, 2018, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our condensed consolidated financial statements. Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense.

During the six months ended January 31, 2019, the IRS finalized its audit of our federal income tax return for fiscal 2016 without assessing additional taxes. Our federal income tax returns for fiscal 2015 and 2017 remain subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2014 are subject to audit. TCS's federal income tax returns for tax year 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential future IRS audit. None of TCS's state income tax returns prior to calendar year 2014 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

(14)    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, as amended and restated effective December 4, 2018 (the "ESPP"), and recognize related stock-based compensation in our condensed 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.

19


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)



As of January 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 January 31, 2019, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 8,320,017 shares (net of 3,953,739 expired and canceled awards), of which an aggregate of 5,880,653 have been exercised or settled.

As of January 31, 2019, the following stock-based awards, by award type, were outstanding:
Stock options
1,582,195

Performance shares
260,262

RSUs and restricted stock
441,101

Share units
155,806

Total
2,439,364


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 January 31, 2019, we have cumulatively issued 763,933 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 Condensed Consolidated Statements of Operations:
 
 
Three months ended January 31,
 
Six months ended January 31,
 
 
2019
 
2018
 
2019
 
2018
Cost of sales
 
$
60,000

 
51,000

 
$
118,000

 
91,000

Selling, general and administrative expenses
 
1,051,000

 
954,000

 
1,956,000

 
1,608,000

Research and development expenses
 
80,000

 
75,000

 
163,000

 
128,000

Stock-based compensation expense before income tax benefit
 
1,191,000

 
1,080,000

 
2,237,000

 
1,827,000

Estimated income tax benefit
 
(260,000
)
 
(234,000
)
 
(488,000
)
 
(494,000
)
Net stock-based compensation expense
 
$
931,000

 
846,000

 
$
1,749,000

 
1,333,000


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 January 31, 2019, unrecognized stock-based compensation of $10,021,000, net of estimated forfeitures of $874,000, is expected to be recognized over a weighted average period of 3.0 years. Total stock-based compensation capitalized and included in ending inventory at both January 31, 2019 and July 31, 2018 was $48,000. There are no liability-classified stock-based awards outstanding as of January 31, 2019 or July 31, 2018.


20


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


Stock-based compensation expense (benefit), by award type, is summarized as follows:
 
 
Three months ended January 31,
 
Six months ended January 31,
 
 
2019
 
2018
 
2019
 
2018
Stock options
 
$
181,000

 
268,000

 
$
352,000

 
536,000

Performance shares
 
386,000

 
371,000

 
792,000

 
483,000

RSUs and restricted stock
 
568,000

 
390,000

 
1,115,000

 
774,000

ESPP
 
56,000

 
51,000

 
108,000

 
96,000

Share units
 

 

 
(130,000
)
 
(62,000
)
Stock-based compensation expense before income tax benefit
 
1,191,000

 
1,080,000

 
2,237,000

 
1,827,000

Estimated income tax benefit
 
(260,000
)
 
(234,000
)
 
(488,000
)
 
(494,000
)
Net stock-based compensation expense
 
$
931,000

 
846,000

 
$
1,749,000

 
1,333,000


ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants in the ESPP. During the six months ended January 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 Condensed Consolidated Balance Sheet as of January 31, 2019 and July 31, 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 during the six months ended January 31, 2019:
 
 
Awards
(in Shares)
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Contractual
Term (Years)
 
Aggregate
Intrinsic Value
Outstanding at July 31, 2018
 
1,668,975

 
$
28.72

 
 
 
 
Exercised
 
(78,930
)
 
28.37

 
 
 
 
Outstanding at October 31, 2018
 
1,590,045

 
28.74

 
 
 
 
Expired/canceled
 
(7,850
)
 
29.30

 
 
 
 
Outstanding at January 31, 2019
 
1,582,195

 
$
28.74

 
4.01
 
$
91,000

 
 
 
 
 
 
 
 
 
Exercisable at January 31, 2019
 
1,385,023

 
$
28.73

 
3.69
 
$
33,000

 
 
 
 
 
 
 
 
 
Vested and expected to vest at January 31, 2019
 
1,550,570

 
$
28.73

 
3.97
 
$
79,000


Stock options outstanding as of January 31, 2019 have exercise prices ranging from $20.90 to $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. There were no stock options exercised during the three months ended January 31, 2019, or three and six months ended January 31, 2018. The total intrinsic value relating to stock options exercised during the six months ended January 31, 2019 was $561,000. There were no stock options granted since fiscal 2017.

During the six months ended January 31, 2019, at the election of certain holders of vested stock options, 72,830 stock options were net settled upon exercise. As a result, 9,345 net shares of our common stock were issued during the six months ended January 31, 2019 after reduction of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements.

21


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)



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, 2018
 
818,438

 
$
19.78

 
 
Granted
 
177,908

 
34.27

 
 
Settled
 
(121,790
)
 
21.08

 
 
Forfeited
 
(17,659
)
 
27.23

 
 
Outstanding at October 31, 2018
 
856,897

 
22.44

 
 
Granted
 
2,599

 
25.01

 
 
Settled
 
(526
)
 
11.40

 
 
Forfeited
 
(1,801
)
 
22.70

 
 
Outstanding at January 31, 2019
 
857,169

 
$
22.46

 
$
21,404,000

 
 
 
 
 
 
 
Vested at January 31, 2019
 
216,718

 
$
27.71

 
$
5,411,000

 
 
 
 
 
 
 
Vested and expected to vest at January 31, 2019
 
821,528

 
$
22.59

 
$
20,514,000


The total intrinsic value relating to fully-vested awards settled during the three and six months ended January 31, 2019 was $14,000 and $4,224,000, respectively. The total intrinsic value relating to fully-vested awards settled during the three and six months ended January 31, 2018 was $11,000 and $1,948,000, 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 January 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. Cumulatively through January 31, 2019, 270,979 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 post vesting 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.


22


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


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 shares into shares of our common stock. During the three and six months ended January 31, 2019, we accrued $84,000 and $166,000, respectively, of dividend equivalents (net of forfeitures) and paid out $1,000 and $260,000, respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of January 31, 2019 and July 31, 2018, accrued dividend equivalents were $619,000 and $713,000, respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three and six months ended January 31, 2019, we recorded a $4,000 income tax expense and a $453,000 income tax benefit, respectively, and during the three and six months ended January 31, 2018, we recorded a $14,000 income tax benefit and a $71,000 income tax expense, respectively. Such income tax expense generally relates to the reversal of deferred tax assets associated with expired and unexercised stock-based awards and any net income tax shortfalls upon settlement.  Such income tax benefit generally relates to any net excess income tax benefits upon settlement.

(15)    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 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 communication technologies to meet their needs. This segment also serves certain large government customers (including the U.S. government) that have requirements for off-the-shelf commercial equipment. We believe this segment is a leading provider of satellite communications (such as satellite earth station modems and TWTAs), public safety systems (such as NG911 technologies) and enterprise application technologies (such as messaging and trusted location-based technologies).

Our Government Solutions segment serves large government end-users (including those of foreign countries) that require mission-critical technologies and systems. Government solutions products include command and control applications (such as the design, installation and operation of data networks that integrate computing and communications, including both satellite and terrestrial links), ongoing network operation and management support services (including project management and fielding and maintenance solutions related to satellite ground terminals), troposcatter communications (such as digital troposcatter multiplexers, digital over-the-horizon modems, troposcatter systems and frequency converter systems) and RF power and switching technologies (such as solid-state high-power broadband amplifiers, enhanced position location reporting system (commonly known as "EPLRS") amplifier assemblies, identification friend or foe ("IFF") amplifiers and amplifiers used in the counteraction of improvised explosive devices).

Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Commercial Solutions and Government Solutions segments do not consider any allocation of indirect expenses, including the following: income taxes, interest (income) and other, interest expense, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, estimated contract settlement costs, facility exit costs, settlement of intellectual property litigation, acquisition plan expenses or strategic alternatives analysis expenses and other expenses that relate to our Unallocated segment. 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. Any amounts shown in the Adjusted EBITDA calculation for our Commercial Solutions and Government Solutions segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our 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 Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies.


23


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)


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

 
 
Three months ended January 31, 2019
 
 
Commercial Solutions
 
Government Solutions
 
Unallocated
 
Total
Net sales
 
$
86,735,000

 
77,398,000

 

 
$
164,133,000

Operating income (loss)
 
$
8,758,000

 
7,783,000

 
(4,128,000
)
 
$
12,413,000

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
8,725,000

 
7,822,000

 
(8,721,000
)
 
$
7,826,000

     Provision for income taxes