UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2018
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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
(Exact name of registrant as specified in its charter) |
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Delaware | | 11-2139466 |
(State or other jurisdiction of incorporation /organization) | | (I.R.S. Employer Identification Number) |
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68 South Service Road, Suite 230, Melville, NY | | 11747 |
(Address of principal executive offices) | | (Zip Code) |
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(631) | 962-7000 |
(Registrant’sRegistrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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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 |
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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 and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted 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 and post 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.
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Large accelerated filer | ☐ | | Accelerated filer | ☒ | Emerging growth company | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting 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 ☒NoAPPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 2, 2018,3, 2023, the number of outstanding shares of Common Stock, par value $.10$0.10 per share, of the registrant was 23,620,11327,863,934 shares.
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COMTECH TELECOMMUNICATIONS CORP. INDEX |
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PART I. FINANCIAL INFORMATION |
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COMTECH TELECOMMUNICATIONS CORP.
INDEX
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PART I. FINANCIAL INFORMATION |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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PART II. OTHER INFORMATION |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 4. | | |
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| Item 6. | | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | January 31, 2018 | | July 31, 2017 | | | | | | | | | | | | |
Assets | | | | | Assets | | January 31, 2023 | | July 31, 2022 |
Current assets: | | | | | Current assets: | | | | |
Cash and cash equivalents | | $ | 40,472,000 |
| | 41,844,000 |
| Cash and cash equivalents | | $ | 21,504,000 | | | 21,654,000 | |
Accounts receivable, net | | 117,973,000 |
| | 124,962,000 |
| Accounts receivable, net | | 134,922,000 | | | 123,711,000 | |
Inventories, net | | 71,707,000 |
| | 60,603,000 |
| Inventories, net | | 100,130,000 | | | 96,317,000 | |
Prepaid expenses and other current assets | | 14,915,000 |
| | 13,635,000 |
| Prepaid expenses and other current assets | | 19,871,000 | | | 21,649,000 | |
Total current assets | | 245,067,000 |
| | 241,044,000 |
| Total current assets | | 276,427,000 | | | 263,331,000 | |
Property, plant and equipment, net | | 30,122,000 |
| | 32,847,000 |
| Property, plant and equipment, net | | 54,146,000 | | | 50,363,000 | |
Operating lease right-of-use assets, net | | Operating lease right-of-use assets, net | | 47,633,000 | | | 49,767,000 | |
| Goodwill | | 290,633,000 |
| | 290,633,000 |
| Goodwill | | 347,692,000 | | | 347,692,000 | |
Intangibles with finite lives, net | | 251,334,000 |
| | 261,871,000 |
| Intangibles with finite lives, net | | 236,605,000 | | | 247,303,000 | |
Deferred financing costs, net | | 2,635,000 |
| | 3,065,000 |
| Deferred financing costs, net | | 3,274,000 | | | 1,014,000 | |
Other assets, net | | 2,860,000 |
| | 2,603,000 |
| Other assets, net | | 17,895,000 | | | 14,827,000 | |
Total assets | | $ | 822,651,000 |
| | 832,063,000 |
| Total assets | | $ | 983,672,000 | | | 974,297,000 | |
Liabilities and Stockholders’ Equity | | |
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Liabilities, Convertible Preferred Stock and Stockholders’ Equity | | Liabilities, Convertible Preferred Stock and Stockholders’ Equity | | | | |
Current liabilities: | | |
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| Current liabilities: | | | | |
Accounts payable | | $ | 27,662,000 |
| | 29,402,000 |
| Accounts payable | | $ | 38,491,000 | | | 44,591,000 | |
Accrued expenses and other current liabilities | | 60,585,000 |
| | 68,610,000 |
| Accrued expenses and other current liabilities | | 68,655,000 | | | 72,662,000 | |
Current portion of long-term debt | | Current portion of long-term debt | | 3,125,000 | | | — | |
Operating lease liabilities, current | | Operating lease liabilities, current | | 8,218,000 | | | 8,685,000 | |
Dividends payable | | 2,351,000 |
| | 2,343,000 |
| Dividends payable | | 2,775,000 | | | 2,746,000 | |
Customer advances and deposits | | 24,848,000 |
| | 25,771,000 |
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Current portion of long-term debt | | 17,211,000 |
| | 15,494,000 |
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Current portion of capital lease obligations | | 1,858,000 |
| | 2,309,000 |
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Contract liabilities | | Contract liabilities | | 63,847,000 | | | 64,601,000 | |
Interest payable | | 83,000 |
| | 282,000 |
| Interest payable | | 1,132,000 | | | 172,000 | |
Total current liabilities | | 134,598,000 |
| | 144,211,000 |
| Total current liabilities | | 186,243,000 | | | 193,457,000 | |
Non-current portion of long-term debt, net | | 174,225,000 |
| | 176,228,000 |
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Non-current portion of capital lease obligations | | 885,000 |
| | 1,771,000 |
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Non-current portion of long-term debt | | Non-current portion of long-term debt | | 164,385,000 | | | 130,000,000 | |
Operating lease liabilities, non-current | | Operating lease liabilities, non-current | | 42,923,000 | | | 44,423,000 | |
Income taxes payable | | 2,558,000 |
| | 2,515,000 |
| Income taxes payable | | 3,468,000 | | | 3,007,000 | |
Deferred tax liability, net | | 6,088,000 |
| | 17,306,000 |
| Deferred tax liability, net | | 13,603,000 | | | 15,355,000 | |
Customer advances and deposits, non-current | | 8,385,000 |
| | 7,227,000 |
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Long-term contract liabilities | | Long-term contract liabilities | | 13,270,000 | | | 9,975,000 | |
Other liabilities | | 5,291,000 |
| | 2,655,000 |
| Other liabilities | | 5,033,000 | | | 6,291,000 | |
Total liabilities | | 332,030,000 |
| | 351,913,000 |
| Total liabilities | | 428,925,000 | | | 402,508,000 | |
Commitments and contingencies (See Note 18) | |
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| Commitments and contingencies (See Note 18) | |
Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at January 31, 2023 and July 31, 2022 (includes accrued dividends of $585,000 and $566,000, respectively) | | Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at January 31, 2023 and July 31, 2022 (includes accrued dividends of $585,000 and $566,000, respectively) | | 108,651,000 | | | 105,204,000 | |
Stockholders’ equity: | | |
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| Stockholders’ equity: | | | | |
Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 | | — |
| | — |
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Common stock, par value $.10 per share; authorized 100,000,000 shares; issued 38,653,430 shares and 38,619,467 shares at January 31, 2018 and July 31, 2017, respectively | | 3,865,000 |
| | 3,862,000 |
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Preferred stock, par value $0.10 per share; authorized and unissued 1,875,000 shares | | 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 42,900,871 and 42,672,827 shares at January 31, 2023 and July 31, 2022, respectively | | Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 42,900,871 and 42,672,827 shares at January 31, 2023 and July 31, 2022, respectively | | 4,290,000 | | | 4,267,000 | |
Additional paid-in capital | | 534,224,000 |
| | 533,001,000 |
| Additional paid-in capital | | 630,233,000 | | | 625,484,000 | |
Retained earnings | | 394,381,000 |
| | 385,136,000 |
| Retained earnings | | 253,422,000 | | | 278,683,000 | |
| | 932,470,000 |
| | 921,999,000 |
| | 887,945,000 | | | 908,434,000 | |
Less: | | |
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| Less: | | | | |
Treasury stock, at cost (15,033,317 shares at January 31, 2018 and July 31, 2017) | | (441,849,000 | ) | | (441,849,000 | ) | |
Treasury stock, at cost (15,033,317 shares at January 31, 2023 and July 31, 2022) | | Treasury stock, at cost (15,033,317 shares at January 31, 2023 and July 31, 2022) | | (441,849,000) | | | (441,849,000) | |
Total stockholders’ equity | | 490,621,000 |
| | 480,150,000 |
| Total stockholders’ equity | | 446,096,000 | | | 466,585,000 | |
Total liabilities and stockholders’ equity | | $ | 822,651,000 |
| | 832,063,000 |
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Total liabilities, convertible preferred stock and stockholders’ equity | | Total liabilities, convertible preferred stock and stockholders’ equity | | $ | 983,672,000 | | | 974,297,000 | |
See accompanying notes to condensed consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | Three months ended January 31, | | Six months ended January 31, | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended January 31, | | Six months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | | 2023 | | 2022 | | 2023 | | 2022 |
Net sales | | $ | 133,731,000 |
| | 139,028,000 |
| | 255,300,000 |
| | 274,814,000 |
| Net sales | | $ | 133,725,000 | | | 120,381,000 | | | $ | 264,864,000 | | | 237,140,000 | |
Cost of sales | | 82,930,000 |
| | 85,824,000 |
| | 156,783,000 |
| | 169,502,000 |
| Cost of sales | | 87,801,000 | | | 74,523,000 | | | 172,137,000 | | | 149,547,000 | |
Gross profit | | 50,801,000 |
| | 53,204,000 |
| | 98,517,000 |
| | 105,312,000 |
| Gross profit | | 45,924,000 | | | 45,858,000 | | | 92,727,000 | | | 87,593,000 | |
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Expenses: | | |
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| Expenses: | | | | |
Selling, general and administrative | | 27,215,000 |
| | 30,988,000 |
| | 55,690,000 |
| | 63,673,000 |
| Selling, general and administrative | | 28,915,000 | | | 29,827,000 | | | 58,252,000 | | | 58,069,000 | |
Research and development | | 13,435,000 |
| | 13,314,000 |
| | 27,185,000 |
| | 27,410,000 |
| Research and development | | 12,441,000 | | | 12,632,000 | | | 25,192,000 | | | 25,129,000 | |
Amortization of intangibles | | 5,268,000 |
| | 6,032,000 |
| | 10,537,000 |
| | 12,087,000 |
| Amortization of intangibles | | 5,349,000 | | | 5,349,000 | | | 10,698,000 | | | 10,698,000 | |
Settlement of intellectual property litigation | | — |
| | (9,979,000 | ) | | — |
| | (9,979,000 | ) | |
CEO transition costs | | CEO transition costs | | — | | | 13,554,000 | | | 9,090,000 | | | 13,554,000 | |
Proxy solicitation costs | | Proxy solicitation costs | | — | | | 9,086,000 | | | — | | | 11,248,000 | |
| | 45,918,000 |
| | 40,355,000 |
| | 93,412,000 |
| | 93,191,000 |
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| | | | | | | | | | | 46,705,000 | | | 70,448,000 | | | 103,232,000 | | | 118,698,000 | |
Operating income | | 4,883,000 |
| | 12,849,000 |
| | 5,105,000 |
| | 12,121,000 |
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| Operating loss | | Operating loss | | (781,000) | | | (24,590,000) | | | (10,505,000) | | | (31,105,000) | |
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Other expenses (income): | | |
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| Other expenses (income): | | | | |
Interest expense | | 2,519,000 |
| | 2,852,000 |
| | 5,107,000 |
| | 6,177,000 |
| Interest expense | | 3,791,000 | | | 988,000 | | | 6,026,000 | | | 2,595,000 | |
Interest (income) and other | | (48,000 | ) | | (74,000 | ) | | (9,000 | ) | | (76,000 | ) | Interest (income) and other | | 455,000 | | | (30,000) | | | 200,000 | | | 189,000 | |
Change in fair value of convertible preferred stock purchase option liability | | Change in fair value of convertible preferred stock purchase option liability | | — | | | (398,000) | | | — | | | (702,000) | |
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Income before (benefit from) provision for income taxes | | 2,412,000 |
| | 10,071,000 |
| | 7,000 |
| | 6,020,000 |
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(Benefit from) provision for income taxes | | (13,349,000 | ) | | 3,486,000 |
| | (14,094,000 | ) | | 1,924,000 |
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Loss before benefit from income taxes | | Loss before benefit from income taxes | | (5,027,000) | | | (25,150,000) | | | (16,731,000) | | | (33,187,000) | |
Benefit from income taxes | | Benefit from income taxes | | (222,000) | | | (3,276,000) | | | (830,000) | | | (5,329,000) | |
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Net income | | $ | 15,761,000 |
| | 6,585,000 |
| | 14,101,000 |
| | 4,096,000 |
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Net income per share (See Note 4): | | |
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| Net loss | | Net loss | | $ | (4,805,000) | | | (21,874,000) | | | $ | (15,901,000) | | | (27,858,000) | |
| Adjustments to reflect redemption value of convertible preferred stock: | | Adjustments to reflect redemption value of convertible preferred stock: | |
Dividend on convertible preferred stock | | Dividend on convertible preferred stock | | (1,737,000) | | | (1,632,000) | | | (3,447,000) | | | (1,867,000) | |
Convertible preferred stock issuance costs | | Convertible preferred stock issuance costs | | — | | | — | | | — | | | (4,007,000) | |
Establishment of initial convertible preferred stock purchase option liability | | Establishment of initial convertible preferred stock purchase option liability | | — | | | — | | | — | | | (1,005,000) | |
Net loss attributable to common stockholders | | Net loss attributable to common stockholders | | $ | (6,542,000) | | | (23,506,000) | | | $ | (19,348,000) | | | (34,737,000) | |
| Net loss per common share (See Note 5): | | Net loss per common share (See Note 5): | | | | |
Basic | | $ | 0.66 |
| | 0.28 |
| | 0.59 |
| | 0.17 |
| Basic | | $ | (0.23) | | | (0.89) | | | $ | (0.69) | | | (1.31) | |
Diluted | | $ | 0.66 |
| | 0.28 |
| | 0.59 |
| | 0.17 |
| Diluted | | $ | (0.23) | | | (0.89) | | | $ | (0.69) | | | (1.31) | |
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Weighted average number of common shares outstanding – basic | | 23,816,000 |
| | 23,428,000 |
| | 23,805,000 |
| | 23,406,000 |
| Weighted average number of common shares outstanding – basic | | 27,954,000 | | | 26,472,000 | | | 27,892,000 | | | 26,449,000 | |
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Weighted average number of common and common equivalent shares outstanding – diluted | | 23,953,000 |
| | 23,445,000 |
| | 23,942,000 |
| | 23,427,000 |
| Weighted average number of common and common equivalent shares outstanding – diluted | | 27,954,000 | | | 26,472,000 | | | 27,892,000 | | | 26,449,000 | |
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Dividends declared per issued and outstanding common share as of the applicable dividend record date | | $ | 0.10 |
| | 0.10 |
| | 0.20 |
| | 0.40 |
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See accompanying notes to condensed consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JANUARY 31, 2018 AND 2017(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, 2023 and 2022 | | |
| | 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, 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 | | | |
Issuance of employee stock purchase plan shares | | — | | | — | | | 11,136 | | | 1,000 | | | 224,000 | | | — | | | — | | | — | | | 225,000 | | | |
Issuance of restricted stock, net of forfeiture | | — | | | — | | | 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 | | | |
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Balance as of October 31, 2022 | | 100,000 | | | $ | 106,914,000 | | | 42,810,846 | | | $ | 4,281,000 | | | $ | 629,027,000 | | | $ | 262,902,000 | | | 15,033,317 | | | $ | (441,849,000) | | | $ | 454,361,000 | | | |
Equity-classified stock award compensation | | — | | | — | | | — | | | — | | | 1,268,000 | | | — | | | — | | | — | | | 1,268,000 | | | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of employee stock purchase plan shares | | — | | | — | | | 14,443 | | | 1,000 | | | 87,000 | | | — | | | — | | | — | | | 88,000 | | | |
Issuance of restricted stock, net of forfeiture | | — | | | — | | | 82,373 | | | 8,000 | | | (8,000) | | | — | | | — | | | — | | | — | | | |
Net settlement of stock-based awards | | — | | | — | | | (6,791) | | | — | | | (141,000) | | | — | | | — | | | — | | | (141,000) | | | |
Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) | | — | | | 1,737,000 | | | — | | | — | | | — | | | (1,737,000) | | | — | | | — | | | (1,737,000) | | | |
Cash dividends declared, net ($0.10 per share) | | — | | | — | | | — | | | — | | | — | | | (2,775,000) | | | — | | | — | | | (2,775,000) | | | |
Accrual of dividend equivalents, net of reversal ($0.10 per share) | | — | | | — | | | — | | | — | | | — | | | (163,000) | | | — | | | — | | | (163,000) | | | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (4,805,000) | | | — | | | — | | | (4,805,000) | | | |
Balance as of January 31, 2023 | | 100,000 | | | $ | 108,651,000 | | | 42,900,871 | | | $ | 4,290,000 | | | $ | 630,233,000 | | | $ | 253,422,000 | | | 15,033,317 | | | $ | (441,849,000) | | | $ | 446,096,000 | | | |
(Unaudited)
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| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Stockholders' Equity |
| | Shares | | Amount | | | | Shares | | Amount | |
Balance as of July 31, 2016 | | 38,367,997 |
| | $ | 3,837,000 |
| | $ | 524,797,000 |
| | $ | 383,616,000 |
| | 15,033,317 |
| | $ | (441,849,000 | ) | | $ | 470,401,000 |
|
Equity-classified stock award compensation | | — |
| | — |
| | 1,989,000 |
| | — |
| | — |
| | — |
| | 1,989,000 |
|
Proceeds from issuance of employee stock purchase plan shares | | 33,226 |
| | 3,000 |
| | 345,000 |
| | — |
| | — |
| | — |
| | 348,000 |
|
Issuance of restricted stock | | 144,899 |
| | 15,000 |
| | (15,000 | ) | | — |
| | — |
| | — |
| | — |
|
Net settlement of stock-based awards | | 40,354 |
| | 4,000 |
| | (248,000 | ) | | — |
| | — |
| | — |
| | (244,000 | ) |
Cash dividends declared, net | | — |
| | — |
| | — |
| | (9,351,000 | ) | | — |
| | — |
| | (9,351,000 | ) |
Accrual of dividend equivalents, net of reversal | | — |
| | — |
| | — |
| | (179,000 | ) | | — |
| | — |
| | (179,000 | ) |
Net income tax shortfall from settlement of stock-based awards | | — |
| | — |
| | (257,000 | ) | | — |
| | — |
| | — |
| | (257,000 | ) |
Reversal of deferred tax assets associated with expired and unexercised stock-based awards | | — |
| | — |
| | (344,000 | ) | | — |
| | — |
| | — |
| | (344,000 | ) |
Net income | | — |
| | — |
| | — |
| | 4,096,000 |
| | — |
| | — |
| | 4,096,000 |
|
Balance as of January 31, 2017 | | 38,586,476 |
| | $ | 3,859,000 |
| | $ | 526,267,000 |
| | $ | 378,182,000 |
| | 15,033,317 |
| | $ | (441,849,000 | ) | | $ | 466,459,000 |
|
| | | | | | | | | | | | | | |
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 | | — |
| | — |
| | — |
| | (4,701,000 | ) | | — |
| | — |
| | (4,701,000 | ) |
Accrual of dividend equivalents, net of reversal | | — |
| | — |
| | — |
| | (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 |
|
See accompanying notes to condensed consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | | | | |
| | Six months ended January 31, |
| | 2018 | | 2017 |
Cash flows from operating activities: | | | | |
Net income | | $ | 14,101,000 |
| | 4,096,000 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
Depreciation and amortization of property, plant and equipment | | 6,663,000 |
| | 7,317,000 |
|
Amortization of intangible assets with finite lives | | 10,537,000 |
| | 12,087,000 |
|
Amortization of stock-based compensation | | 1,827,000 |
| | 1,989,000 |
|
Amortization of deferred financing costs | | 1,098,000 |
| | 968,000 |
|
Settlement of intellectual property litigation | | — |
| | (9,979,000 | ) |
Gain on disposal of property, plant and equipment | | — |
| | (146,000 | ) |
Provision for allowance for doubtful accounts | | 577,000 |
| | 433,000 |
|
Provision for excess and obsolete inventory | | 2,433,000 |
| | 1,061,000 |
|
Excess income tax benefit from stock-based awards | | — |
| | (61,000 | ) |
Deferred income tax (benefit) expense | | (11,218,000 | ) | | 4,307,000 |
|
Changes in assets and liabilities: | | |
| | |
|
Accounts receivable | | 5,801,000 |
| | 24,989,000 |
|
Inventories | | (13,537,000 | ) | | (875,000 | ) |
Prepaid expenses and other current assets | | 1,745,000 |
| | 409,000 |
|
Other assets | | (257,000 | ) | | 201,000 |
|
Accounts payable | | (2,259,000 | ) | | (8,572,000 | ) |
Accrued expenses and other current liabilities | | (5,146,000 | ) | | (3,882,000 | ) |
Customer advances and deposits | | 235,000 |
| | (2,989,000 | ) |
Other liabilities, non-current | | (242,000 | ) | | (749,000 | ) |
Interest payable | | (199,000 | ) | | (471,000 | ) |
Income taxes payable | | (2,982,000 | ) | | (4,525,000 | ) |
Net cash provided by operating activities | | 9,177,000 |
| | 25,608,000 |
|
| | | | |
Cash flows from investing activities: | | |
| | |
|
Purchases of property, plant and equipment | | (2,836,000 | ) | | (4,147,000 | ) |
Net cash used in investing activities | | (2,836,000 | ) | | (4,147,000 | ) |
| | | | |
Cash flows from financing activities: | | |
| | |
|
Net borrowings (repayments) under Revolving Loan Facility | | 9,400,000 |
| | (4,100,000 | ) |
Repayment of long-term debt under Term Loan Facility | | (10,354,000 | ) | | (4,427,000 | ) |
Cash dividends paid | | (4,821,000 | ) | | (14,177,000 | ) |
Remittance of employees' statutory tax withholdings for stock awards | | (998,000 | ) | | (244,000 | ) |
Repayment of principal amounts under capital lease obligations | | (1,337,000 | ) | | (1,853,000 | ) |
Proceeds from issuance of employee stock purchase plan shares | | 397,000 |
| | 348,000 |
|
Payment of issuance costs related to equity offering | | — |
| | (626,000 | ) |
Payment of deferred financing costs | | — |
| | (104,000 | ) |
Excess income tax benefit from stock-based awards | | — |
| | 61,000 |
|
Net cash used in financing activities | | (7,713,000 | ) | | (25,122,000 | ) |
| | | | |
Net decrease in cash and cash equivalents | | (1,372,000 | ) | | (3,661,000 | ) |
Cash and cash equivalents at beginning of period | | 41,844,000 |
| | 66,805,000 |
|
Cash and cash equivalents at end of period | | $ | 40,472,000 |
| | 63,144,000 |
|
See accompanying notes to condensed consolidated financial statements. (Continued) |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES |
| | | | | | | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
|
| | Six months ended January 31, |
| | 2018 | | 2017 |
Supplemental cash flow disclosures: | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 3,977,000 |
| | 5,538,000 |
|
Income taxes, net | | $ | 108,000 |
| | 2,143,000 |
|
| | | | |
Non-cash investing and financing activities: | | | | |
Cash dividends declared but unpaid (including dividend equivalents) | | $ | 2,506,000 |
| | 2,522,000 |
|
Accrued additions to property, plant and equipment | | $ | 1,102,000 |
| | 1,147,000 |
|
(Forfeiture) issuance of restricted stock | | $ | (1,000 | ) | | 15,000 |
|
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, 2023 and 2022 | | |
| | 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, 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 | | | |
Issuance of employee stock purchase plan shares | | — | | | — | | | 21,676 | | | 2,000 | | | 452,000 | | | — | | | — | | | — | | | 454,000 | | | |
Issuance of restricted stock, net of forfeiture | | — | | | — | | | 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 | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of July 31, 2022 | | 100,000 | | | $ | 105,204,000 | | | 42,672,827 | | | $ | 4,267,000 | | | $ | 625,484,000 | | | $ | 278,683,000 | | | 15,033,317 | | | $ | (441,849,000) | | | $ | 466,585,000 | | | |
Equity-classified stock award compensation | | — | | | — | | | — | | | — | | | 2,172,000 | | | — | | | — | | | — | | | 2,172,000 | | | |
CEO transition costs related to equity-classified stock-based awards (See Note 1) | | — | | | — | | | — | | | — | | | 3,764,000 | | | — | | | — | | | — | | | 3,764,000 | | | |
Issuance of employee stock purchase plan shares | | — | | | — | | | 29,460 | | | 3,000 | | | 204,000 | | | — | | | — | | | — | | | 207,000 | | | |
Issuance of restricted stock, net of forfeiture | | — | | | — | | | 93,091 | | | 9,000 | | | (9,000) | | | — | | | — | | | — | | | — | | | |
Net settlement of stock-based awards | | — | | | — | | | 105,493 | | | 11,000 | | | (1,382,000) | | | — | | | — | | | — | | | (1,371,000) | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) | | — | | | 3,447,000 | | | — | | | — | | | — | | | (3,447,000) | | | — | | | — | | | (3,447,000) | | | |
| | | | | | | | | | | | | | | | | | | | |
Cash dividends declared, net ($0.20 per share) | | — | | | — | | | — | | | — | | | — | | | (5,549,000) | | | — | | | — | | | (5,549,000) | | | |
Accrual of dividend equivalents, net of reversal ($0.20 per share) | | — | | | — | | | — | | | — | | | — | | | (364,000) | | | — | | | — | | | (364,000) | | | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (15,901,000) | | | — | | | — | | | (15,901,000) | | | |
Balance as of January 31, 2023 | | 100,000 | | | $ | 108,651,000 | | | 42,900,871 | | | $ | 4,290,000 | | | $ | 630,233,000 | | | $ | 253,422,000 | | | 15,033,317 | | | $ | (441,849,000) | | | $ | 446,096,000 | | | |
See accompanying notes to condensed consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | Six months ended January 31, | |
| | | | | | | |
| | 2023 | | 2022 | |
Cash flows from operating activities: | | | | | | | |
Net loss | | $ | (15,901,000) | | | (27,858,000) | | | | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | |
Depreciation and amortization of property, plant and equipment | | 5,765,000 | | | 4,575,000 | | | | |
Amortization of intangible assets with finite lives | | 10,698,000 | | | 10,698,000 | | | | |
Amortization of stock-based compensation | | 2,172,000 | | | 2,904,000 | | | | |
Amortization of cost to fulfill assets | | 480,000 | | | — | | | | |
CEO transition costs related to equity-classified stock-based awards | | 3,764,000 | | | 7,388,000 | | | | |
Amortization of deferred financing costs | | 664,000 | | | 405,000 | | | | |
Change in fair value of convertible preferred stock purchase option liability | | — | | | (702,000) | | | | |
| | | | | | | |
Changes in other liabilities | | (2,067,000) | | | (2,066,000) | | | | |
Loss (gain) on disposal of property, plant and equipment | | 78,000 | | | (147,000) | | | | |
Provision for allowance for doubtful accounts | | 553,000 | | | 12,000 | | | | |
Provision for excess and obsolete inventory | | 1,276,000 | | | 2,241,000 | | | | |
Deferred income tax benefit | | (2,034,000) | | | (2,049,000) | | | | |
| | | | | | | |
Changes in assets and liabilities, net of effects of business acquisitions: | | | | | | | |
Accounts receivable | | (11,764,000) | | | 19,337,000 | | | | |
Inventories | | (5,725,000) | | | (12,157,000) | | | | |
Prepaid expenses and other current assets | | 1,781,000 | | | 602,000 | | | | |
Other assets | | (3,319,000) | | | (765,000) | | | | |
Accounts payable | | (6,939,000) | | | (4,501,000) | | | | |
Accrued expenses and other current liabilities | | (693,000) | | | 7,028,000 | | | | |
Contract liabilities | | 2,541,000 | | | 12,617,000 | | | | |
Other liabilities, non-current | | 465,000 | | | (3,443,000) | | | | |
Interest payable | | 961,000 | | | (56,000) | | | | |
Income taxes payable | | 458,000 | | | (4,512,000) | | | | |
Net cash (used in) provided by operating activities | | (16,786,000) | | | 9,551,000 | | | | |
Cash flows from investing activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Purchases of property, plant and equipment | | (9,918,000) | | | (8,811,000) | | | | |
Net cash used in investing activities | | (9,918,000) | | | (8,811,000) | | | | |
Cash flows from financing activities: | | | | | | | |
Net borrowings (payments) of long-term debt under Revolving Loan Facility | | 39,000,000 | | | (86,500,000) | | | | |
| | | | | | | |
Repayment of debt under Term Loan | | (625,000) | | | — | | | | |
Cash dividends paid on common stock | | (5,870,000) | | | (5,755,000) | | | | |
Payment of deferred financing costs | | (3,616,000) | | | (140,000) | | | | |
Remittance of employees' statutory tax withholding for stock awards | | (2,473,000) | | | (4,724,000) | | | | |
Proceeds from issuance of employee stock purchase plan shares | | 243,000 | | | 454,000 | | | | |
Payment of shelf registration costs | | (101,000) | | | — | | | | |
Repayment of principal amounts under finance lease liabilities | | (4,000) | | | (11,000) | | | | |
Proceeds from issuance of convertible preferred stock | | — | | | 100,000,000 | | | | |
Payment of convertible preferred stock issuance costs | | — | | | (4,007,000) | | | | |
| | | | | | | |
Net cash provided by (used in) financing activities | | 26,554,000 | | | (683,000) | | | | |
Net (decrease) increase in cash and cash equivalents | | (150,000) | | | 57,000 | | | | |
Cash and cash equivalents at beginning of period | | 21,654,000 | | | 30,861,000 | | | | |
Cash and cash equivalents at end of period | | $ | 21,504,000 | | | 30,918,000 | | | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
| | | | | | | | | | | | | | |
| | Six months ended January 31, |
| | | | |
| | 2023 | | 2022 |
Supplemental cash flow disclosures: | | | | |
Cash paid (received) during the period for: | | | | |
Interest | | $ | 4,352,000 | | | 2,101,000 | |
Income taxes, net | | $ | 609,000 | | | 1,205,000 | |
| | | | |
Non-cash investing and financing activities: | | | | |
Accrued additions to property, plant and equipment | | $ | 3,339,000 | | | 2,904,000 | |
| | | | |
Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents) | | $ | 3,139,000 | | | 2,857,000 | |
| | | | |
Adjustment to reflect redemption value of convertible preferred stock | | $ | 3,447,000 | | | 6,879,000 | |
| | | | |
Accrued deferred financing costs | | $ | 173,000 | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Accrued remittance of employees' statutory tax withholdings | | $ | — | | | 1,250,000 | |
| | | | |
Establishment of initial convertible preferred stock purchase option liability | | $ | — | | | 1,005,000 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
See accompanying notes to condensed consolidated financial statements.
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, 20182023 and 20172022 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, 20172022 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 (14) - "Segment Information," we manage our business in two reportable segments: Commercial Solutions and Government Solutions.Reclassifications
Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the current fiscal period2023 presentation.
CEO Transition Costs & Related
On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and Chief Executive Officer ("CEO"). Transition costs related to our former President and CEO, Michael D. Porcelain, pursuant to his separation agreement with the Company, were $7,424,000, of which $3,764,000 related to the acceleration of unamortized stock based compensation, with the remaining $3,660,000 related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3,660,000 was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $1,000,000 expense related to a cash sign-on bonus, which was paid to Mr. Peterman in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment during the first quarter of fiscal 2023. During fiscal 2022, we expensed $13,554,000 of transition costs related to another former CEO, Fred Kornberg.
Since being appointed President and CEO, Mr. Peterman, along with his senior leadership team, has been driving transformational changes at Comtech to, among other things, integrate our individual businesses into two segments and improve operational performance. This transformation, which we refer to as “One Comtech,” has provided insight into opportunities to manage costs, streamline operations, improve efficiency, and accelerate decision making by eliminating management layers and other redundancies – resulting in a reduction in our workforce during the third quarter of fiscal 2023. Severance costs relating to these actions are not anticipated to be material to our results of operations.
(2) Adoption of Accounting Standards and Updates
We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting StandardStandards 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 endedASUs issued, but not effective until after January 31, 2018, we adopted FASB ASU 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements2023, are not expected to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which amends several aspects of the accounting for and reporting of share-based payment transactions. Our adoption of this ASU, on August 1, 2017, did not have a material impact on our condensed consolidated financial statements. See Note (12)statements or disclosures.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Revenue Recognition
In accordance with FASB ASC 606 - "Stock-Based Compensation"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 further information regardinggoods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our adoptioncustomer; (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 Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Terrestrial and Wireless Networks segment. For service-based contracts in our Terrestrial and Wireless Networks segment, 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.
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 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.
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 ASU.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. (3)
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Most 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, |
| | 2023 | | 2022 | | 2023 | | 2022 |
United States | | | | | | | | |
U.S. government | | 29.8 | % | | 27.1 | % | | 30.9 | % | | 28.6 | % |
Domestic | | 46.7 | % | | 47.6 | % | | 46.7 | % | | 48.0 | % |
Total United States | | 76.5 | % | | 74.7 | % | | 77.6 | % | | 76.6 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
International | | 23.5 | % | | 25.3 | % | | 22.4 | % | | 23.4 | % |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
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"), which accounted for 11.3% and 11.9% of consolidated net sales for the three and six months ended January 31, 2023, respectively, and 11.1% and 11.4% of consolidated net sales for the three and six months ended January 31, 2022, respectively. 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 10.0% of consolidated net sales for the three and six months ended January 31, 2023 and 2022.
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, 2023 and 2022. 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, 2023 | | Six months ended January 31, 2023 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total |
Geographical region and customer type | | | | | | | | | | | | |
U.S. government | | $ | 38,947,000 | | | 948,000 | | | $ | 39,895,000 | | | $ | 79,960,000 | | | 1,986,000 | | | $ | 81,946,000 | |
Domestic | | 14,429,000 | | | 47,976,000 | | | 62,405,000 | | | 29,673,000 | | | 93,987,000 | | | 123,660,000 | |
Total United States | | 53,376,000 | | | 48,924,000 | | | 102,300,000 | | | 109,633,000 | | | 95,973,000 | | | 205,606,000 | |
| | | | | | | | | | | | |
International | | 27,031,000 | | | 4,394,000 | | | 31,425,000 | | | 51,647,000 | | | 7,611,000 | | | 59,258,000 | |
Total | | $ | 80,407,000 | | | 53,318,000 | | | $ | 133,725,000 | | | $ | 161,280,000 | | | 103,584,000 | | | $ | 264,864,000 | |
Contract type | | | | | | | | | | | | |
Firm fixed-price | | $ | 72,458,000 | | | 53,318,000 | | | $ | 125,776,000 | | | $ | 142,333,000 | | | 103,584,000 | | | $ | 245,917,000 | |
Cost reimbursable | | 7,949,000 | | | — | | | 7,949,000 | | | 18,947,000 | | | — | | | 18,947,000 | |
Total | | $ | 80,407,000 | | | 53,318,000 | | | $ | 133,725,000 | | | $ | 161,280,000 | | | 103,584,000 | | | $ | 264,864,000 | |
Transfer of control | | | | | | | | | | | | |
Point in time | | $ | 66,287,000 | | | 1,642,000 | | | $ | 67,929,000 | | | $ | 121,287,000 | | | 1,726,000 | | | $ | 123,013,000 | |
Over time | | 14,120,000 | | | 51,676,000 | | | 65,796,000 | | | 39,993,000 | | | 101,858,000 | | | 141,851,000 | |
Total | | $ | 80,407,000 | | | 53,318,000 | | | $ | 133,725,000 | | | $ | 161,280,000 | | | 103,584,000 | | | $ | 264,864,000 | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, 2022 | | Six months ended January 31, 2022 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total |
Geographical region and customer type | | | | | | | | | | | | |
U.S. government | | $ | 31,155,000 | | | 1,396,000 | | | $ | 32,551,000 | | | $ | 65,052,000 | | | 2,668,000 | | | $ | 67,720,000 | |
Domestic | | 12,263,000 | | | 45,057,000 | | | 57,320,000 | | | 23,050,000 | | | 90,825,000 | | | 113,875,000 | |
Total United States | | 43,418,000 | | | 46,453,000 | | | 89,871,000 | | | 88,102,000 | | | 93,493,000 | | | 181,595,000 | |
| | | | | | | | | | | | |
International | | 25,762,000 | | | 4,748,000 | | | 30,510,000 | | | 45,638,000 | | | 9,907,000 | | | 55,545,000 | |
Total | | $ | 69,180,000 | | | 51,201,000 | | | $ | 120,381,000 | | | $ | 133,740,000 | | | 103,400,000 | | | $ | 237,140,000 | |
Contract type | | | | | | | | | | | | |
Firm fixed-price | | $ | 62,166,000 | | | 51,201,000 | | | $ | 113,367,000 | | | $ | 119,069,000 | | | 103,400,000 | | | $ | 222,469,000 | |
Cost reimbursable | | 7,014,000 | | | — | | | 7,014,000 | | | 14,671,000 | | | — | | | 14,671,000 | |
Total | | $ | 69,180,000 | | | 51,201,000 | | | $ | 120,381,000 | | | $ | 133,740,000 | | | 103,400,000 | | | $ | 237,140,000 | |
Transfer of control | | | | | | | | | | | | |
Point in time | | $ | 46,522,000 | | | 1,277,000 | | | $ | 47,799,000 | | | $ | 87,138,000 | | | 1,424,000 | | | $ | 88,562,000 | |
Over time | | 22,658,000 | | | 49,924,000 | | | 72,582,000 | | | 46,602,000 | | | 101,976,000 | | | 148,578,000 | |
Total | | $ | 69,180,000 | | | 51,201,000 | | | $ | 120,381,000 | | | $ | 133,740,000 | | | 103,400,000 | | | $ | 237,140,000 | |
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 unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the three and six months ended January 31, 2023 and 2022, respectively. 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 contract liability balance of $64,601,000 at July 31, 2022 and $66,130,000 at July 31, 2021, $34,126,000 and $35,517,000 was recognized as revenue during the six months ended January 31, 2023 and 2022, respectively.
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; otherwise, such costs are capitalized and amortized over the estimated life of the contract. During the six months ended January 31, 2023 and 2022, 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 our third-party sales representatives related to 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.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $701,955,000 (which represents the amount of our consolidated funded backlog). We estimate that a substantial portion of our remaining performance obligations at January 31, 2023 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During the six months ended January 31, 2023, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.
(4) 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 and accrued expenses and the current portions of our Secured Credit Facility and favorable AT&T warranty settlement)expenses) approximate their fair values due to their short-term maturities.
The fair value of the non-current portion of our Secured Credit Facility as of January 31, 2018credit facility 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 obligations, which currently has a blended interest rate of 5.9%, would not be materially different than its carrying value as of January 31, 2018.See Note (9) - "Credit Facility" for more information.
The fair value of the non-current portion of our favorable AT&T warranty settlement as of January 31, 2018 approximates its carrying amount given our belief that the present value of such liability reflects market participants' assumptions for a similar junior, unsecured debt instrument. See Note (7) - "Accrued Expenses and Other Current Liabilities" for further discussion of the favorable AT&T warranty settlement.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of January 31, 20182023 and July 31, 2017,2022, 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.
(4) (5) 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, settlement of escrow arrangements related to our acquisition of UHP Networks Inc. ("UHP") and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 "Earnings Per Share," equity-classified stock-based awards that are subject to performanceshares whose issuance is contingent upon the satisfaction of certain conditions are not consideredincluded in our diluted EPS calculations untilbased on the respective performance conditions have been satisfied.number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. 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. On August 1, 2017, we adopted ASU 2016-09, which amends several aspects of the accounting for and reporting of share-based payment transactions. As a result of our adoption of ASU 2016-09, the amount of excess tax benefits assuming exercise of in-the-money stock-based awards is no longer included in the calculation of diluted earnings per share on a prospective basis and the denominator for our diluted calculations could increase in the future as compared to prior calculations. See Note (12) - "Stock-Based Compensation" for more information on the impact of adopting ASU 2016-09.
There were no purchasesrepurchases of our common stock during the three or six months ended January 31, 20182023 or 2017.2022. See Note (17) - "Stockholders’ Equity""Stockholders’ Equity" for more information.
Weighted average stock options, RSUs and restricted stock outstanding of 1,812,000967,000 and 2,173,0001,467,000 for the three months ended January 31, 20182023 and 2017,2022, respectively, and 1,821,0001,023,000 and 2,305,0001,498,000 shares for the six months ended January 31, 20182023 and 2017,2022, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.
Our EPS calculations exclude 259,000431,000 and 237,000273,000 weighted average performance shares outstanding for the three months ended January 31, 20182023 and 2017,2022, respectively, and 211,000352,000 and 229,000 weighted average performance shares outstanding258,000 for the six months ended January 31, 20182023 and 2017,2022, 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)numerator for EPS calculations for each respective period.period is reduced by the compensation expense related to these awards.
Weighted average common shares of 324,000 and 477,000 for the three months ended January 31, 2023 and 2022, respectively, and 324,000 and 409,000 for the six months ended January 31, 2023 and 2022, respectively, related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation because their effect would have been anti-dilutive.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Weighted average common shares underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, of 4,533,000 and 4,158,000 for the three months ended January 31, 2023 and 2022, respectively, and 4,496,000 and 2,358,000 for the six months ended January 31, 2023 and 2022, respectively, were not included in our diluted EPS calculation for the respective periods because their effect would have been anti-dilutive. As a result, the numerator for our basic and diluted EPS calculation for the three and six months ended January 31, 2023 and 2022 is the respective net loss attributable to common stockholders.
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, |
| 2023 | | 2022 | | 2023 | | 2022 |
Numerator: | | | | | | | |
Net loss | $ | (4,805,000) | | | (21,874,000) | | | $ | (15,901,000) | | | (27,858,000) | |
Dividend on convertible preferred stock | (1,737,000) | | | (1,632,000) | | | (3,447,000) | | | (1,867,000) | |
Convertible preferred stock issuance costs | — | | | — | | | — | | | (4,007,000) | |
Establishment of initial convertible preferred stock purchase option liability | — | | | — | | | — | | | (1,005,000) | |
Net loss attributable to common stockholders | $ | (6,542,000) | | | (23,506,000) | | | $ | (19,348,000) | | | (34,737,000) | |
| | | | | | | |
Denominator: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Denominator for basic and diluted calculation | 27,954,000 | | | 26,472,000 | | | 27,892,000 | | | 26,449,000 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
As discussed further in Note (16) - "Convertible Preferred Stock," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260. As a result, our EPS calculations for the three and six months ended January 31, 2023 and 2022 were based on the two-class method. Given the net loss attributable to common stockholders for the three and six months ended January 31, 2023 and 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.
(6) Accounts Receivable
|
| | | | | | | | | | | | | |
| | Three months ended January 31, | | Six months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | | | | |
Net income for basic calculation | | $ | 15,761,000 |
| | 6,585,000 |
| | 14,101,000 |
| | 4,096,000 |
|
Numerator for diluted calculation | | $ | 15,761,000 |
| | 6,585,000 |
| | 14,101,000 |
| | 4,096,000 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Denominator for basic calculation | | 23,816,000 |
| | 23,428,000 |
| | 23,805,000 |
| | 23,406,000 |
|
Effect of dilutive securities: | | | | | | | | |
Stock-based awards | | 137,000 |
| | 17,000 |
| | 137,000 |
| | 21,000 |
|
Denominator for diluted calculation | | 23,953,000 |
| | 23,445,000 |
| | 23,942,000 |
| | 23,427,000 |
|
Accounts receivable consist of the following at:
| | | | | | | | | | | | | | |
| | January 31, 2023 | | July 31, 2022 |
Receivables from commercial and international customers | | $ | 63,169,000 | | | 59,922,000 | |
Unbilled receivables from commercial and international customers | | 45,450,000 | | | 39,826,000 | |
Receivables from the U.S. government and its agencies | | 23,370,000 | | | 24,776,000 | |
Unbilled receivables from the U.S. government and its agencies | | 5,736,000 | | | 1,524,000 | |
Total accounts receivable | | 137,725,000 | | | 126,048,000 | |
Less allowance for doubtful accounts | | 2,803,000 | | | 2,337,000 | |
Accounts receivable, net | | $ | 134,922,000 | | | 123,711,000 | |
Unbilled receivables as of January 31, 2023 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, unbilled receivables constitute contract assets. Management estimates that a substantial portion of the amounts not yet billed at January 31, 2023 will be billed and collected within one year. Accounts receivable in the table above excludes $2,584,000 of long-term unbilled receivables presented within "Other assets, net" in the condensed consolidated balance sheet as of January 31, 2023.
As of January 31, 2023, except for the U.S. government (and its agencies), AT&T and Verizon, which represented 21.1%, 11.9% and 11.6%, of total accounts receivable, respectively, there were no other customers which accounted for greater than 10% of total accounts receivable.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(5) Accounts Receivable
Accounts receivable consist of the following at:
|
| | | | | | | |
| | January 31, 2018 | | July 31, 2017 |
Billed receivables from commercial and international customers | | $ | 68,478,000 |
| | 71,404,000 |
|
Unbilled receivables from commercial and international customers | | 14,726,000 |
| | 24,668,000 |
|
Billed receivables from the U.S. government and its agencies | | 21,235,000 |
| | 18,497,000 |
|
Unbilled receivables from the U.S. government and its agencies | | 15,410,000 |
| | 11,693,000 |
|
Total accounts receivable | | 119,849,000 |
| | 126,262,000 |
|
Less allowance for doubtful accounts | | 1,876,000 |
| | 1,300,000 |
|
Accounts receivable, net | | $ | 117,973,000 |
| | 124,962,000 |
|
Unbilled receivables relate to contracts-in-progress for which revenue has been recognized but we have not yet billed the customer for work performed. We had $125,000 and $118,000 of retainage included in unbilled receivables at January 31, 2018 and July 31, 2017, respectively, and management estimates that substantially all of the unbilled receivables at January 31, 2018 will be billed and collected within one year. Of the unbilled receivables from commercial and international customers at January 31, 2018 and July 31, 2017, approximately $2,012,000 and $2,995,000, respectively, relates to a large over-the-horizon microwave system contract with our large U.S. prime contractor customer (all of which related to our North African country end-customer).
As of JanuaryJuly 31, 2018,2022, except for the U.S. government (and its agencies) and Verizon, Communications Inc. (through various divisionswhich represented 20.9% and collectively, "Verizon") represented 30.6% and 12.0%, respectively,13.4% of total accounts receivable. As of July 31, 2017, except for the U.S. government (and its agencies), which represented 23.9% of total accounts receivable, respectively, there were no other customers which accounted for greater than 10.0%10% of total accounts receivable.
(6) (7) Inventories
Inventories consist of the following at:
| | | | | | | | | | | | | | |
| | January 31, 2023 | | July 31, 2022 |
Raw materials and components | | $ | 82,469,000 | | | 78,478,000 | |
Work-in-process and finished goods | | 41,401,000 | | | 40,960,000 | |
Total inventories | | 123,870,000 | | | 119,438,000 | |
Less reserve for excess and obsolete inventories | | 23,740,000 | | | 23,121,000 | |
Inventories, net | | $ | 100,130,000 | | | 96,317,000 | |
| | | | |
| | | | |
|
| | | | | | | |
�� | | January 31, 2018 | | July 31, 2017 |
Raw materials and components | | $ | 52,592,000 |
| | 50,569,000 |
|
Work-in-process and finished goods | | 35,162,000 |
| | 26,053,000 |
|
Total inventories | | 87,754,000 |
| | 76,622,000 |
|
Less reserve for excess and obsolete inventories | | 16,047,000 |
| | 16,019,000 |
|
Inventories, net | | $ | 71,707,000 |
| | 60,603,000 |
|
As of January 31, 20182023 and July 31, 2017,2022, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $1,420,000$5,492,000 and $2,148,000, respectively.
As$4,100,000, respectively, and the amount of January 31, 2018 and July 31, 2017, $1,528,000 and $1,718,000, respectively, of the inventory balance above related to contracts from third partythird-party commercial customers who outsource their manufacturing to us.us was $2,361,000 and $1,866,000, respectively.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(7) (8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at:
| | | | | | | | | | | | | | |
| | January 31, 2023 | | July 31, 2022 |
Accrued wages and benefits | | $ | 23,048,000 | | | 25,675,000 | |
Accrued warranty obligations | | 7,553,000 | | | 9,420,000 | |
Accrued contract costs | | 16,053,000 | | | 15,921,000 | |
| | | | |
Accrued commissions and royalties | | 6,631,000 | | | 5,697,000 | |
Accrued legal costs | | 1,454,000 | | | 2,514,000 | |
Other | | 13,916,000 | | | 13,435,000 | |
Accrued expenses and other current liabilities | | $ | 68,655,000 | | | 72,662,000 | |
|
| | | | | | | |
| | January 31, 2018 | | July 31, 2017 |
Accrued wages and benefits | | $ | 20,911,000 |
| | 19,622,000 |
|
Accrued warranty obligations | | 12,481,000 |
| | 17,617,000 |
|
Accrued legal costs | | 7,747,000 |
| | 8,402,000 |
|
Accrued contract costs | | 6,439,000 |
| | 8,644,000 |
|
Accrued commissions and royalties | | 2,328,000 |
| | 3,600,000 |
|
Other | | 10,679,000 |
| | 10,725,000 |
|
Accrued expenses and other current liabilities | | $ | 60,585,000 |
| | 68,610,000 |
|
Accrued legal costs as of January 31, 2018 and July 31, 2017 include $3,623,000 and $4,120,000, respectively, related to estimated costs associated with certain TeleCommunication Systems, Inc. ("TCS") intellectual property matters. The accrued potential settlement costs do not reflect the final amounts we may actually pay. Ongoing legal costs associated with defending legacy TCS intellectual property matters and the ultimate resolution could vary and have a material adverse effect on our future consolidated results of operations, financial position or cash flows. TCS intellectual property matters are discussed in more detail in Note (18) - "Legal Proceedings and Other Matters."
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, 2023 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.
Changes in our current accrued warranty obligations during the six months ended January 31, 2018 and 2017 were as follows:
|
| | | | | | | |
| | Six months ended January 31, |
| | 2018 | | 2017 |
Balance at beginning of period | | $ | 17,617,000 |
| | 15,362,000 |
|
Provision for warranty obligations | | 2,278,000 |
| | 3,234,000 |
|
Charges incurred | | (3,914,000 | ) | | (3,782,000 | ) |
Warranty settlement and reclass (see below) | | (3,500,000 | ) | | — |
|
Adjustments to TCS pre-acquisition contingent liability | | — |
| | 4,200,000 |
|
Balance at end of period | | $ | 12,481,000 |
| | 19,014,000 |
|
Our current accrued warranty obligations at January 31, 2018 and July 31, 2017 include $5,234,000 and $9,909,000, 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, 2018, the total present value of these monthly credits is $4,361,000, of which $1,521,000 is included in our current accrued warranty obligations and $2,840,000 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.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(8) Acquisition-Related Restructuring Plans
Radyne
In connection withChanges in our August 1, 2008 acquisition of Radyne, we adopted a restructuring plan for which we recorded $2,713,000 of estimated restructuring costs. Of this amount, $613,000 related to severance for Radyne employees which was paid in fiscal 2009. The remaining estimated amounts relate to facility exit costs and were determined as follows:
|
| | | |
| At August 1, 2008 |
Total non-cancelable lease obligations | $ | 12,741,000 |
|
Less: Estimated sublease income | 8,600,000 |
|
Total net estimated facility exit costs | 4,141,000 |
|
Less: Interest expense to be accreted | 2,041,000 |
|
Present value of estimated facility exit costs | $ | 2,100,000 |
|
Our total non-cancelable leaseaccrued warranty obligations were based on the actual lease term which runs from November 1, 2008 through October 31, 2018. We estimated sublease income based on (i) the terms of a fully executed sublease agreement that expired on October 31, 2015, and (ii) our assessment of future uncertainties relating to the commercial real estate market. Based on our assessment of commercial real estate market conditions, we currently believe that it is not probable that we will be able to sublease the facility for the remaining lease term. As such, in accordance with grandfathered accounting standards that were not incorporated into the FASB’s ASC, we recorded these costs, at fair value, as assumed liabilities as of August 1, 2008, with a corresponding increase to goodwill.
As of January 31, 2018, the amount of the acquisition-related restructuring reserve is as follows:
|
| | | |
| Cumulative Activity Through January 31, 2018 |
Present value of estimated facility exit costs at August 1, 2008 | $ | 2,100,000 |
|
Cash payments made | (11,393,000 | ) |
Cash payments received | 8,600,000 |
|
Accreted interest recorded | 1,886,000 |
|
Liability recorded as of period end as accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet | $ | 1,193,000 |
|
As of July 31, 2017, the present value of the estimated facility exit costs was $1,941,000. Duringduring the six months ended January 31, 2018, we made cash payments of $805,000. Interest accreted for2023 and 2022 were as follows:
| | | | | | | | | | | | | | |
| | Six months ended January 31, |
| | 2023 | | 2022 |
Balance at beginning of period | | $ | 9,420,000 | | | 17,600,000 | |
Provision for warranty obligations | | 555,000 | | | 587,000 | |
Adjustments for changes in estimates | | (1,500,000) | | | (2,500,000) | |
Charges incurred | | (922,000) | | | (1,956,000) | |
| | | | |
| | | | |
Balance at end of period | | $ | 7,553,000 | | | 13,731,000 | |
During the three and six months ended January 31, 20182023 and 2017 was $25,0002022, we recorded benefits of $1,500,000 and $57,000,$2,500,000, respectively, to cost of sales in our Terrestrial and $51,000 and $107,000, respectively, and is included in interest expense for each respective fiscal period.
Future cash paymentsWireless Networks segment due to lower than expected warranty claims associated with our restructuring plan are summarized below:previously acquired NG-911 technologies.
|
| | | |
| As of January 31, 2018 |
Future lease payments to be made | $ | 1,193,000 |
|
Interest expense to be accreted in future periods | 154,000 |
|
Total remaining payments | $ | 1,347,000 |
|
TCS
In connection with our February 23, 2016 acquisition of TCS, we continue to implement a tactical shift in strategy in our Government Solutions segment and have initiated certain cost reduction actions. To date, we have incurred an immaterial amount of severance and retention costs related to our shift in strategy.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(9) Secured Credit Facility
On February 23, 2016, in connection with our acquisition of TCS,October 31, 2018, we entered into a $400,000,000 secured credit facilityFirst Amended and Restated Credit Agreement (the "Secured Credit"Credit Facility") with a syndicate of lenders. The SecuredAs of July 31, 2022, the amount outstanding under our Credit Facility was $130,000,000, which is reflected in the non-current portion of long-term debt on our condensed consolidated balance sheet.
On November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as amended June 6, 2017 (the "June 2017 Amendment"the “Credit Facility”), comprises with the existing lenders. The Credit Facility provides a senior secured term loan A facility of $250,000,000 (the "Term Loan Facility") and a secured revolving loan facility of up to $300,000,000 consisting of: (i) a revolving loan facility (“Revolving Loan Facility”) with a borrowing limit of $150,000,000, including a $25,000,000$20,000,000 letter of credit sublimit (the "Revolving Loan Facility") and together,a swingline loan credit sublimit of $15,000,000; (ii) a $50,000,000 term loan A (“Term Loan”); and (iii) an accordion feature allowing us to make a request to borrow up to an additional $100,000,000 subject to the satisfaction of specified conditions, including approval by our lenders. The Credit Facility has a maturity date of October 31, 2024 (“Maturity Date”). In connection with entering the Term Loan Facility, matures on February 23, 2021. The proceeds of these borrowings were primarily used to finance our acquisition of TCS, including the repayment of certain existing indebtedness of TCS. The Term Loan Facility requires mandatory quarterly repayments. During the six months ended January 31, 2018 and 2017, we repaid $10,354,000 and $4,427,000, respectively, principal amount of borrowings under the Term Loan Facility. Under the Revolving LoanCredit Facility, we had outstanding balances ranging from $41,904,000capitalized $3,789,000 of financing costs, and accounted for the amendment to $66,804,000 during the six months ended January 31, 2018.Credit Facility as a debt modification.
As of January 31, 2018 and July 31, 2017, amounts2023, the amount outstanding under our Secured Credit Facility net, werewas as follows:
| | | | | |
| January 31, 2023 |
Term Loan | $ | 49,375,000 | |
Less unamortized deferred financing costs related to Term Loan | 865,000 | |
Term Loan, net | 48,510,000 | |
Revolving Loan Facility | 119,000,000 | |
Amount outstanding under Credit Facility, net | 167,510,000 | |
Less current portion of long-term debt | 3,125,000 | |
Non-current portion of long-term debt | $ | 164,385,000 | |
|
| | | | | | | |
| | January 31, 2018 |
| | July 31, 2017 |
|
Term Loan Facility | | $ | 128,726,000 |
| | 139,080,000 |
|
Less unamortized deferred financing costs related to Term Loan Facility | | 4,094,000 |
| | 4,763,000 |
|
Term Loan Facility, net | | 124,632,000 |
| | 134,317,000 |
|
Revolving Loan Facility | | 66,804,000 |
| | 57,405,000 |
|
Amount outstanding under Secured Credit Facility, net | | 191,436,000 |
| | 191,722,000 |
|
Less current portion of long-term debt | | 17,211,000 |
| | 15,494,000 |
|
Non-current portion of long-term debt | | $ | 174,225,000 |
| | 176,228,000 |
|
Interest expense, including amortization of deferred financing costs, recorded during the three and six months ended January 31, 2018 and 2017 related to the Secured Credit Facility was $2,350,000 and $4,815,000, respectively, and $2,708,000 and $5,883,000, respectively, and reflects a blended interest rate of approximately 5.10% and 5.06% for the three months ended January 31, 2018 and 2017, respectively, and 5.20% and 4.79% for the six months ended January 31, 2018 and 2017, respectively.
At January 31, 2018,2023, we had $2,660,000$319,000 of standby letters of credit outstanding under our Secured Credit Facility as amended, related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the six months ended January 31, 2023, we had outstanding balances under the Credit Facility ranging from $130,000,000 to $181,000,000.
TheAs of January 31, 2023, total net deferred financing costs related to the Credit Facility were $4,139,000 and are being amortized over the term of our Credit Facility through the Maturity Date.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended January 31, 2023 and 2022 was $3,761,000 and $981,000, respectively. Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the six months ended January 31, 2023 and 2022 was $6,001,000 and $2,474,000, respectively. Our blended interest rate approximated 8.80% and 3.40%, respectively, for the three months ended January 31, 2023 and 2022 and approximated 7.40% and 3.10%, respectively, for the six months ended January 31, 2023 and 2022.
Under the Credit Facility, borrowings under the Revolving Loan Facility is primarily used for working capital and other general corporate purposes of the Company and its subsidiaries, including the issuance of letters of credit. Borrowings under the Secured Credit Facility, pursuant to terms defined in the Secured Credit Facility, shall be eitherTerm Loan are either: (i) Alternate Base Rate ("ABR") borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatesthighest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% per annum and (c) the Adjusted LIBO RateTerm SOFR for a one-month tenor in effect on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%), plus (y) the Applicable Rate, or (ii) EurodollarSOFR borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO RateTerm SOFR for such interest period (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%) plus (y) the Applicable Rate. TheDetermination of the Applicable Rate is determined based on a pricing grid that is dependent upon our leverage ratioLeverage Ratio as of the end of each fiscal quarter. quarter for which consolidated financial statements have been most recently delivered.
The Secured Credit Facility contains customary representations, warranties and affirmative covenants andcovenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, onincluding 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 Secured 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.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The June 2017 Amendment is expected to result in increased operating and acquisition flexibility and simplify the calculations of our financial covenants. The June 2017 Amendment resulted in,Credit Facility provides for, among other things, that the:
| |
(i) | Consolidated EBITDA definition more closely aligns with our Adjusted EBITDA metric by eliminating favorable adjustments to operating income related to settlements of TCS intellectual property matters; |
| |
(ii) | Leverage Ratio is calculated on a "gross" basis using the quotient of Total Indebtedness (excluding unamortized deferred financing costs) divided by our TTM Consolidated EBITDA. The prior Leverage Ratio was calculated on a "net" basis but did not include a reduction for any cash or cash equivalents above $50,000,000; |
| |
(iii) | Fixed Charge Coverage Ratio includes a deduction for all cash dividends, regardless of the amount of our cash and cash equivalents and the related allowable Quarterly Dividend Amount, as defined, will now align with our current quarterly dividend target of $0.10 per common share; |
| |
(iv) | Balloon or final payment of the Term Loan Facility (which is not due until February 23, 2021) was reduced by $22,500,000 through increased borrowings from the Revolving Loan Facility (which does not expire until February 23, 2021); and |
| |
(v) | Leverage Ratios will be adjusted, in certain conditions, to provide for additional flexibility for us to make acquisitions. |
In connectionthings: (i) scheduled payments of principal under the Term Loan totaling $2,500,000 in the first year after closing and $5,000,000 in the second year after closing, with the June 2017 Amendment, there were no changes to: (i) the committed borrowing capacity; (ii) the maturity date; or (iii) interest rates payable (except that the interest rate pricing grid will now be based on the new Leverage Ratio). Also, the June 2017 Amendment did not result in an extinguishment for accounting purposes (as such term is defined in ASC 470 - "Debt"); instead, the June 2017 Amendment was accounted for as a debt modification. As a result, deferred financing costs (including incremental fees for the June 2017 Amendment) will continue to be amortized over the remaining maturity termbalance of the Secured Credit Facility.Term Loan due upon maturity; (ii) a maximum Leverage Ratio of 4.25x trailing twelve months ("TTM") Adjusted EBITDA at the fiscal quarter ended January 31, 2023, stepping down to 4.00x at the fiscal quarter ending April 30, 2023, 3.75x at the fiscal quarter ending July 31, 2023, and 3.50x at the fiscal quarter ending January 31, 2024 and thereafter; (iii) a Minimum Interest Coverage Ratio of 3.25x TTM Adjusted EBITDA; and (iv) Minimum Liquidity of $25,000,000.
As of January 31, 2018,2023, our Secured Leverage Ratio was 2.78x3.81x TTM Consolidated EBITDAAdjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") compared to the maximum allowable Secured Leverage Ratio of 3.35x4.25x TTM ConsolidatedAdjusted EBITDA. During the second half of fiscal 2018, the maximum allowable Leverage Ratio will decrease each quarter until reaching 3.00x TTM Consolidated EBITDA in the fourth quarter of fiscal 2018, with no further reductions thereafter. Our Fixed ChargeInterest Expense Coverage Ratio as of January 31, 20182023 was 2.09x5.98x TTM Adjusted EBITDA compared to the minimum required Fixed ChargeMinimum Interest Expense Coverage Ratio of 1.25x. The Fixed Charge Coverage Ratio will not change for3.25x TTM Adjusted EBITDA. Our Minimum Liquidity was $40,500,000 compared to the remaining termMinimum Liquidity requirement of the Secured Credit Facility, as amended. Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Secured Credit Facility, as amended, for the foreseeable future.$25,000,000.
The obligations under the Secured Credit Facility as amended, are guaranteed by certain of our domestic and foreign subsidiaries (the "Subsidiary Guarantors"“Guarantors”). As collateral security for amounts outstanding under our Securedthe Credit Facility as amended, and the guarantees thereof, we and our Subsidiarythe Guarantors have granted to anthe 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.
Capitalized terms used but not defined herein have the meanings set forth for such terms in the Secured Credit Facility, dated as of February 23, 2016, and the First Amendment of the Secured Credit Facility, dated as of June 6, 2017, both of which havehas been documented and filed with the SEC.
(10) Capital Lease Obligations
We lease certain equipment under capital leases. As of January 31, 2018 and July 31, 2017, the net book value of the leased assets which collateralize the capital lease obligations was $3,815,000 and $5,419,000, respectively, and consisted primarily of machinery and equipment. As of January 31, 2018, our capital lease obligations reflect a blended interest rate of approximately 5.9%. Our capital leases generally contain provisions whereby we can purchase the equipment at the end of the lease for a one dollar buyout. Depreciation of leased assets is included in depreciation expense.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(10) Leases
Future minimum payments under capitalOur leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 - "Leases" ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease obligations consistedand whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the following atfuture lease payments over the estimated lease term. We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term.
Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions).
For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies).
Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of January 31, 2018:
|
| | | |
Remainder of fiscal 2018 | $ | 1,061,000 |
|
Fiscal 2019 | 1,492,000 |
|
Fiscal 2020 | 318,000 |
|
Fiscal 2021 and beyond | — |
|
Total minimum lease payments | 2,871,000 |
|
Less: amounts representing interest | 128,000 |
|
Present value of net minimum lease payments | 2,743,000 |
|
Current portion of capital lease obligations | 1,858,000 |
|
Non-current portion of capital lease obligations | $ | 885,000 |
|
(11) 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 amount2023, none of our currentleases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased.
The components of lease expense are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2023 | | 2022 | | 2023 | | 2022 | | |
Finance lease expense: | | | | | | | | | |
Amortization of ROU assets | $ | 1,000 | | | 3,000 | | | $ | 4,000 | | | 7,000 | | | |
| | | | | | | | | |
Operating lease expense | 2,756,000 | | | 2,940,000 | | | 5,593,000 | | | 5,864,000 | | | |
Short-term lease expense | 117,000 | | | 117,000 | | | 218,000 | | | 211,000 | | | |
Variable lease expense | 1,011,000 | | | 1,142,000 | | | 2,098,000 | | | 2,318,000 | | | |
Sublease income | (16,000) | | | (16,000) | | | (33,000) | | | (33,000) | | | |
Total lease expense | $ | 3,869,000 | | | 4,186,000 | | | $ | 7,880,000 | | | 8,367,000 | | | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additional information related to leases is as follows:
| | | | | | | | | | | |
| Six months ended January 31, |
| 2023 | | 2022 |
| | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating leases - Operating cash outflows | $ | 5,593,000 | | | $ | 5,850,000 | |
| | | |
Finance leases - Financing cash outflows | 4,000 | | | 11,000 | |
ROU assets obtained in the exchange for lease liabilities (non-cash): | | | |
Operating leases | $ | 2,838,000 | | | $ | 14,812,000 | |
| | | |
The following table is a reconciliation of future income tax expense primarily duecash flows relating to the reduction in the U.S. statutory income taxoperating lease liabilities presented on our Condensed Consolidated Balance Sheet as of January 31, 2023:
| | | | | | | | | |
| | | | | |
Remainder of fiscal 2023 | $ | 4,892,000 | | | | | |
Fiscal 2024 | 9,261,000 | | | | | |
Fiscal 2025 | 8,641,000 | | | | | |
Fiscal 2026 | 7,220,000 | | | | | |
Fiscal 2027 | 5,174,000 | | | | | |
Thereafter | 25,979,000 | | | | | |
Total future undiscounted cash flows | 61,167,000 | | | | | |
Less: Present value discount | 10,026,000 | | | | | |
Lease liabilities | $ | 51,141,000 | | | | | |
| | | | | |
Weighted-average remaining lease terms (in years) | 8.56 | | | | |
Weighted-average discount rate | 3.42% | | | | |
We lease our Melville, New York production facility from 35.0% to 21.0%. This provision went into effect on January 1, 2018 and required us to remeasurea partnership controlled by 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 will be 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, is now expected to approximate 27.75% as compared to our prior estimate of 34.5%. We expect to fully benefit from the lower statutory income tax rate in fiscal 2019 and thereafter.
In connection with Tax Reform,former CEO. Lease payments made during the threesix months ended January 31, 2018, we recorded an 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"2023 and SEC Staff Accounting Bulletin ("SAB") 118, using estimates based on reasonable2022 were $343,000 and supportable assumptions and available information as$333,000, respectively. The current lease provides for our use of the reporting date. premises as they exist through December 2031. The annual rent of the facility for calendar year 2023 is $691,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility.
As such,of January 31, 2023, we expect to finalize this net discrete tax benefit during the second half of fiscal 2018. In addition, it is possibledo not have any material rental commitments 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.have not already commenced.
(11) Income Taxes
At January 31, 20182023 and July 31, 2017,2022, total unrecognized tax benefits were $9,043,000$10,365,000 and $8,681,000,$10,008,000, respectively, including interest of $147,000$440,000 and $95,000,$330,000, respectively. At January 31, 20182023 and July 31, 2017, $2,558,0002022, $3,468,000 and $2,515,000,$3,007,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable inon our Condensed Consolidated Balance Sheets. The remaining unrecognized tax benefits of $6,485,000$6,897,000 and $6,166,000$7,001,000 at January 31, 20182023 and July 31, 2017,2022, respectively, were presented as an offset to the associated non-current deferred tax assets inon our Condensed Consolidated Balance Sheets. Of the total unrecognized tax benefits, $8,351,000$9,272,000 and $7,727,000,$9,034,000 at January 31, 20182023 and July 31, 2017,2022, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, excluding interest, would positivelyfavorably 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. The amount by which the gross unrecognized tax benefits could decrease in the next twelve months did not significantly change during the first six months of fiscal 2023.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense.
In November 2017, we received notification from the IRS that it will audit ourU.S. federal income tax returnreturns for fiscal 2016. Our federal income tax return for fiscal 2015 is also2019 through 2021 are subject to potential future IRSInternal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 20132018 are subject to audit. TCS’s federal income tax returns for tax years 2014 and 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential IRS audit. None of TCS’s state income tax returns prior to calendar year 2013 are subject to audit. The results of the IRS tax audit for fiscal 2016, futureFuture tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
(12) Stock-Based Compensation COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(12) 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 and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (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.
On August 1, 2017, we adopted ASU 2016-09, which amended several aspects of the accounting for and reporting of our share-based payment transactions, including:
Excess tax benefits and shortfalls - ASU 2016-09 requires that all tax effects related to our share-based awards be recognized in the Condensed Consolidated Statement of Operations. ASU 2016-09 also removes the prior requirement to delay recognition of excess tax benefits until it reduces current taxes payable; instead, we are now required to recognize excess tax benefits as discrete items in the interim period in which they occur, subject to normal valuation allowance considerations. As ASU 2016-09 eliminated the concept of accumulated hypothetical tax benefits, excess tax benefits and shortfalls are no longer recognized in stockholders’ equity. As a result, ASU 2016-09 is expected to result in future volatility of our income tax expense (as the future tax effects of share-based awards will be dependent on the price of our common stock at the time of settlement). Additionally, on a prospective basis, excess income tax benefits from the settlement of share-based awards are presented as a cash inflow from operating activities in our Condensed Consolidated Statement of Cash Flows.
Diluted earnings per share - Prior to the adoption of ASU 2016-09, in addition to considering the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized, when calculating our diluted earnings per share, the assumed proceeds also included the amount of excess tax benefits, if any, that would have been credited to additional paid-in capital assuming exercise of in-the-money stock-based awards. Effective with our adoption of ASU 2016-09, excess tax benefits are to be excluded from the calculation on a prospective basis. As a result, the denominator for our diluted calculations could increase in the future as compared to prior calculations.
Forfeitures - As permitted by ASU 2016-09, we elected to continue to estimate forfeitures of share-based awards.
Statutory Tax Withholding Requirements - ASU 2016-09 now allows us, when net settling share-based awards, to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction, without resulting in liability classification of the award. To qualify, we must have at least some withholding obligation. This aspect of adopting ASU 2016-09 did not have any material impact on us. However, with respect to cash payments that we make to taxing authorities on behalf of employees for such shares withheld, on a retrospective basis, we are required to present such payments as a cash outflow from financing activities in our Condensed Consolidated Statements of Cash Flows (as opposed to operating activities).
As of January 31, 2018,2023, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 10,362,500.11,962,500. 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, 2018,2023, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 8,086,92010,084,166 shares (net of 3,840,5185,671,929 expired and canceled awards), of which an aggregate of 5,310,7228,124,301 have been exercised or settled.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As of January 31, 2018,2023, the following stock-based awards, by award type, were outstanding:
|
| | | | |
Stock options | 1,805,485 | January 31, 2023 |
Performance sharesStock options | 277,881291,620 |
|
Performance shares | 662,775 | |
RSUs, and restricted stock and share units | 425,2261,005,470 |
|
Share units | 267,606 |
|
Total | 2,776,198 |
Total | 1,959,865 | |
Our ESPP provides for the issuance of up to 800,0001,300,000 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 aton the datefirst or last day of issuance.each calendar quarter, whichever is lower. Through January 31, 2018,2023, we have cumulatively issued 722,961973,369 shares of our common stock to participating employees in connection with our ESPP.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Cost of sales | | $ | 153,000 | | | 76,000 | | | $ | 311,000 | | | 149,000 | |
Selling, general and administrative expenses | | 1,015,000 | | | 1,836,000 | | | 1,663,000 | | | 2,608,000 | |
Research and development expenses | | 100,000 | | | 71,000 | | | 198,000 | | | 147,000 | |
Stock-based compensation expense before CEO transition costs | | 1,268,000 | | | 1,983,000 | | | 2,172,000 | | | 2,904,000 | |
CEO transition costs related to equity-classified stock-based awards | | — | | | 7,388,000 | | | 3,764,000 | | | 7,388,000 | |
Total stock-based compensation expense before income tax benefit | | 1,268,000 | | | 9,371,000 | | | 5,936,000 | | | 10,292,000 | |
Estimated income tax benefit | | (293,000) | | | (1,030,000) | | | (786,000) | | | (1,223,000) | |
Net stock-based compensation expense | | $ | 975,000 | | | 8,341,000 | | | $ | 5,150,000 | | | 9,069,000 | |
|
| | | | | | | | | | | | | |
| | Three months ended January 31, | | Six months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Cost of sales | | $ | 51,000 |
| | 58,000 |
| | 91,000 |
| | 106,000 |
|
Selling, general and administrative expenses | | 954,000 |
| | 878,000 |
| | 1,608,000 |
| | 1,729,000 |
|
Research and development expenses | | 75,000 |
| | 83,000 |
| | 128,000 |
| | 154,000 |
|
Stock-based compensation expense before income tax benefit | | 1,080,000 |
| | 1,019,000 |
| | 1,827,000 |
| | 1,989,000 |
|
Estimated income tax benefit | | (234,000 | ) | | (361,000 | ) | | (494,000 | ) | | (702,000 | ) |
Net stock-based compensation expense | | $ | 846,000 |
| | 658,000 |
| | 1,333,000 |
| | 1,287,000 |
|
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, 2018,2023, unrecognized stock-based compensation of $9,015,000,$10,669,000, net of estimated forfeitures of $902,000,$789,000, is expected to be recognized over a weighted average period of 3.02.6 years. Total stock-based compensation capitalized and included in ending inventory at both January 31, 20182023 and July 31, 20172022 was $12,000.$48,000. There are no liability-classified stock-based awards outstanding as of January 31, 20182023 or July 31, 2017.2022.
Stock-based compensation expense, (benefit), by award type, is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, | | Six months ended January 31, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Stock options | | $ | 19,000 | | | 364,000 | | | $ | 44,000 | | | 442,000 | |
Performance shares | | 281,000 | | | 364,000 | | | 355,000 | | | 713,000 | |
RSUs, restricted stock and share units | | 937,000 | | | 1,200,000 | | | 1,711,000 | | | 1,639,000 | |
ESPP | | 31,000 | | | 55,000 | | | 62,000 | | | 110,000 | |
| | | | | | | | |
Stock-based compensation expense before CEO transition costs | | 1,268,000 | | | 1,983,000 | | | 2,172,000 | | | 2,904,000 | |
CEO transition costs related to equity-classified stock-based awards | | — | | | 7,388,000 | | | 3,764,000 | | | 7,388,000 | |
Total stock-based compensation expense before income tax benefit | | 1,268,000 | | | 9,371,000 | | | 5,936,000 | | | 10,292,000 | |
Estimated income tax benefit | | (293,000) | | | (1,030,000) | | | (786,000) | | | (1,223,000) | |
Net stock-based compensation expense | | $ | 975,000 | | | 8,341,000 | | | $ | 5,150,000 | | | 9,069,000 | |
|
| | | | | | | | | | | | | |
| | Three months ended January 31, | | Six months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Stock options | | $ | 268,000 |
| | 386,000 |
| | 536,000 |
| | 632,000 |
|
Performance shares | | 371,000 |
| | 372,000 |
| | 483,000 |
| | 866,000 |
|
RSUs and restricted stock | | 390,000 |
| | 224,000 |
| | 774,000 |
| | 412,000 |
|
ESPP | | 51,000 |
| | 37,000 |
| | 96,000 |
| | 79,000 |
|
Share units | | — |
| | — |
| | (62,000 | ) | | — |
|
Stock-based compensation expense before income tax benefit | | 1,080,000 |
| | 1,019,000 |
| | 1,827,000 |
| | 1,989,000 |
|
Estimated income tax benefit | | (234,000 | ) | | (361,000 | ) | | (494,000 | ) | | (702,000 | ) |
Net stock-based compensation expense | | $ | 846,000 |
| | 658,000 |
| | 1,333,000 |
| | 1,287,000 |
|
ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants in the ESPP.
During the six months ended January 31, 2018, we recorded a $62,000 net benefit which primarily represents the recoupment of certain share units.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 inon our Condensed Consolidated Balance Sheet as of January 31, 20182023 and July 31, 2017.2022. 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.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Options
The following table summarizes the Plan's activity during the six months ended January 31, 2018:Plan’s activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Awards (in Shares) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at July 31, 2022 | | 483,480 | | | $ | 24.43 | | | | | |
| | | | | | | | |
Expired/canceled | | (9,460) | | | 26.55 | | | | | |
| | | | | | | | |
Outstanding at October 31, 2022 | | 474,020 | | | 24.38 | | | | | |
| | | | | | | | |
Expired/canceled | | (182,400) | | | 24.75 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding at January 31, 2023 | | 291,620 | | | $ | 24.15 | | | 4.11 | | $ | — | |
| | | | | | | | |
Exercisable at January 31, 2023 | | 246,740 | | | $ | 25.29 | | | 3.53 | | $ | — | |
| | | | | | | | |
Vested and expected to vest at January 31, 2023 | | 289,009 | | | $ | 24.21 | | | 4.08 | | $ | — | |
|
| | | | | | | | | | | | | |
| | Awards (in Shares) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at July 31, 2017 | | 1,855,875 |
| | $ | 28.60 |
| | | | |
Expired/canceled | | (41,040 | ) | | 28.97 |
| | | | |
Outstanding at October 31, 2017 | | 1,814,835 |
| | 28.59 |
| | | | |
Expired/canceled | | (9,350 | ) | | 29.02 |
| | | | |
Outstanding at January 31, 2018 | | 1,805,485 |
| | $ | 28.59 |
| | 5.06 | | $ | 11,000 |
|
| | | | | | | | |
Exercisable at January 31, 2018 | | 1,366,876 |
| | $ | 28.61 |
| | 4.55 | | $ | 4,000 |
|
| | | | | | | | |
Vested and expected to vest at January 31, 2018 | | 1,755,904 |
| | $ | 28.58 |
| | 5.01 | | $ | 10,000 |
|
Stock options outstanding as of January 31, 20182023 have exercise prices ranging from $20.90 to$17.88 - $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 noThe total intrinsic value relating to stock options granted or exercised during the six months ended January 31, 2018 and 2017. As there2022 was $7,000. There were no exercisesstock options exercised during the six months ended January 31, 2018 and 2017, there were no net settlements of stock options or the related issuance of common stock during the respective periods.2023.
Performance Shares, RSUs, Restricted Stock and Share Unit Awards
The following table summarizes the Plan'sPlan’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, 2022 | | 1,110,750 | | | $ | 19.05 | | | |
Granted | | 785,092 | | | 11.13 | | | |
Settled | | (256,069) | | | 24.55 | | | |
Canceled/Forfeited | | (37,805) | | | 16.44 | | | |
Outstanding at October 31, 2022 | | 1,601,968 | | | 14.35 | | | |
Granted | | 105,887 | | | 12.40 | | | |
Settled | | (16,374) | | | 19.01 | | | |
Canceled/Forfeited | | (23,236) | | | 17.98 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Outstanding at January 31, 2023 | | 1,668,245 | | | $ | 14.13 | | | $ | 26,458,000 | |
| | | | | | |
Vested at January 31, 2023 | | 533,735 | | | $ | 15.70 | | | $ | 8,465,000 | |
| | | | | | |
Vested and expected to vest at January 31, 2023 | | 1,617,569 | | | $ | 14.09 | | | $ | 25,655,000 | |
|
| | | | | | | | | | | |
| | Awards (in Shares) | | Weighted Average Grant Date Fair Value | | Aggregate Intrinsic Value |
Outstanding at July 31, 2017 | | 830,197 |
| | $ | 16.95 |
| | |
Granted | | 307,194 |
| | 18.25 |
| | |
Settled | | (100,321 | ) | | 20.67 |
| | |
Forfeited | | (61,520 | ) | | 18.88 |
| | |
Outstanding at October 31, 2017 | | 975,550 |
| | 16.86 |
| | |
Settled | | (526 | ) | | 11.40 |
| | |
Forfeited | | (4,311 | ) | | 15.26 |
| | |
Outstanding at January 31, 2018 | | 970,713 |
| | $ | 16.86 |
| | $ | 20,997,000 |
|
| | | | | | |
Vested at January 31, 2018 | | 309,853 |
| | $ | 17.55 |
| | $ | 6,702,000 |
|
| | | | | | |
Vested and expected to vest at January 31, 2018 | | 932,413 |
| | $ | 16.88 |
| | $ | 20,168,000 |
|
The total intrinsic value relating to fully-vested awards settled during the three and six months ended January 31, 20182023 was $195,000 and 2017 was $11,000 and $208,000,$2,964,000, respectively. The total intrinsic value relating to fully-vested awards settled during the three and six months ended January 31, 20182022 was $4,569,000 and 2017 was $1,948,000 and $633,000,$9,464,000, respectively.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Performance shares granted to employees prior to fiscal 2014 generally vest over a 5.3 year period, beginning on the date of grant once pre-established performance goals were attained, and are convertible into shares of our common stock at the time of vesting, on a one-for-one basis for no cash consideration. 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, 2018,2023, 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.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RSUs and restricted stock granted to non-employee directors haveprior to August 2022 had a vesting period of threefive 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. Commencing in August 2022, such awards have a vesting period of one year.
RSUs granted to employees prior to August 2022 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. RSUs granted to employees commencing in August 2022 have a vesting period of three years.
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 fiscal 2017 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, 2018, 14,777 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 vestingany post-vesting transfer restrictions. RSUs, performance shares and restricted stock granted since fiscal 2013 are entitled to dividend equivalents unless forfeited before vesting occurs; however, performance shares granted in fiscal 2013 were not entitled to such dividend equivalents until our Board of Directors determined that the pre-established performance goals were met.occurs. Share units granted prior to fiscal 2014 are not entitled to dividend equivalents. Share units granted since fiscal 2014 are entitled to dividend equivalents while the underlying shares are unissued.
Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying shares into our common stock.award. During the three and six months ended January 31, 2018,2023, we accrued $155,000$163,000 and $364,000, respectively, of dividend equivalents (net of forfeitures) and paid out $128,000.$4,000 and $350,000, respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of January 31, 20182023 and July 31, 2017,2022, accrued dividend equivalents were $581,000$756,000 and $554,000,$742,000, respectively.
We recorded $71,000 of income tax expense in our Condensed Consolidated Statements of Operations forWith respect to the six months ended January 31, 2018, which represents net income tax shortfalls from theactual settlement of stock-based awards and the reversal of deferred tax assets associated with expired and unexercised stock-based awards. During the six months ended January 31, 2017, netfor income tax shortfalls from similar items totaled $601,000 and, pursuant to prior GAAP, were recorded as a reduction to additional paid-in capital.
(13) Customer and Geographic Information
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, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | |
U.S. government | | 31.5 | % | | 32.1 | % | | 32.0 | % | | 33.7 | % |
Domestic | | 42.0 | % | | 35.8 | % | | 43.1 | % | | 36.3 | % |
Total United States | | 73.5 | % | | 67.9 | % | | 75.1 | % | | 70.0 | % |
| | | | | | | | |
International | | 26.5 | % | | 32.1 | % | | 24.9 | % | | 30.0 | % |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
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 which represented 10.5% and 11.1% of consolidated net sales forreporting, during the three and six months ended January 31, 2018, respectively. Sales to Verizon were less than 10.0%2023, we recorded an income tax expense of consolidated net sales for$182,000 and $545,000, respectively, and during the three and six months ended January 31, 2017.
International sales for the three months ended January 31, 20182022, we recorded an income tax benefit of $86,000 and 2017 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $35,400,000 and $44,623,000, respectively. International sales for the six months ended January 31, 2018 and 2017 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $63,714,000 and $82,457,000,$139,000, respectively.
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, 2018 and 2017.
(14) (13) Segment Information
Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the chief operating decision-maker ("CODM")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 OfficerOfficer.
In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and President.services and our CODM began managing our business in two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” As a result, the segment information for the prior fiscal year has been recast to conform to the current year presentation.
Our Commercial Solutions segment serves commercial customersSatellite and smaller government customers, such as stateSpace Communications is organized into four technology areas: satellite modem technologies and local governments, that require advanced communicationsamplifier technologies, to meet their needs.troposcatter and SATCOM solutions, space components and antennas, and high-power amplifiers and switches technologies. This segment also serves certain large government customers (includingoffers customers: satellite ground station technologies, services and system integration that facilitate the U.S. government) when they have requirements for off-the-shelf commercial equipment. Commercial solutions products includetransmission of voice, video and data over GEO, MEO and LEO satellite earth station communications equipment such as modemsconstellations, including solid-state and traveling wave tube power amplifiers, public safety technologiesmodems, VSAT platforms and frequency converters; satellite communications and tracking antenna systems, including thosehigh precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; over-the-horizon microwave equipment that are utilized incan transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET™; solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and procurement and supply chain management of high reliability EEE parts for satellite, launch vehicle and manned space applications.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Terrestrial and Wireless Networks is organized into four service areas: next generation 911 systems and enterprise technologies such ascall delivery, Solacom call handling solutions, trusted location and text-messaging platforms.messaging solutions, and cyber security training and services. This segment offers customers: SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for PSAPs; wireless emergency alerts solutions for network operators; software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services, and cybersecurity training, skills labs, and competency assessments for both technical and non-technical applications.
Our Government Solutions segment serves large U.S. and foreign government end-users that require mission critical technologies and systems. Government solutions products include command and control technologies (such as mobile satellite transceivers used on the Blue Force Tracking-1 and Blue Force Tracking-2 programs), troposcatter technologies systems (such as digital troposcatter multiplexers, digital over-the-horizon modems, troposcatter systems and frequency converter systems) and RF power and switching technologies products (such as solid-state high-power narrow and broadband amplifiers, enhanced position location reporting system ("EPLRS") amplifier assemblies, identification friend or foe amplifiers and amplifiers used in the counteraction of improvised explosive devices).
Our CODM primarily uses a metric that we refer to as Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA")EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric doesfor the Satellite and Space Communications and Terrestrial and Wireless Networks segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest, (income) and other expense, interest expense,change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, settlementamortization of intellectual property litigation,cost to fulfill assets, acquisition plan expenses, orrestructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Satellite and Space Communications and Terrestrial and Wireless Networks 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 Secured Credit Facility, as amended)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.
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 (loss) to Adjusted EBITDA is presented in the tables below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three months ended January 31, 2023 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Total |
Net sales | | $ | 80,407,000 | | | 53,318,000 | | | — | | | $ | 133,725,000 | |
Operating income (loss) | | $ | 3,327,000 | | | 3,312,000 | | | (7,420,000) | | | $ | (781,000) | |
| | | | | | | | |
Net income (loss) | | $ | 3,123,000 | | | 3,563,000 | | | (11,491,000) | | | $ | (4,805,000) | |
(Benefit from) provision for income taxes | | (422,000) | | | (116,000) | | | 316,000 | | | (222,000) | |
Interest (income) and other | | 597,000 | | | (135,000) | | | (7,000) | | | 455,000 | |
| | | | | | | | |
Interest expense | | 29,000 | | | — | | | 3,762,000 | | | 3,791,000 | |
Amortization of stock-based compensation | | — | | | — | | | 1,268,000 | | | 1,268,000 | |
Amortization of intangibles | | 1,828,000 | | | 3,521,000 | | | — | | | 5,349,000 | |
Depreciation | | 1,010,000 | | | 1,921,000 | | | 36,000 | | | 2,967,000 | |
Amortization of cost to fulfill assets | | 240,000 | | | — | | | — | | | 240,000 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Restructuring costs | | 1,089,000 | | | — | | | 454,000 | | | 1,543,000 | |
| | | | | | | | |
Strategic emerging technology costs | | 738,000 | | | — | | | — | | | 738,000 | |
Adjusted EBITDA | | $ | 8,232,000 | | | 8,754,000 | | | (5,662,000) | | | $ | 11,324,000 | |
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 119,000 | | | 2,414,000 | | | 164,000 | | | $ | 2,697,000 | |
| | | | | | | | |
Total assets at January 31, 2023 | | $ | 486,426,000 | | | 471,358,000 | | | 25,888,000 | | | $ | 983,672,000 | |
|
| | | | | | | | | | | | | | |
| | Three months ended January 31, 2018 |
| | Commercial Solutions | | Government Solutions | | Unallocated | | Total |
Net sales | | $ | 85,824,000 |
| | 47,907,000 |
| | — |
| | $ | 133,731,000 |
|
Operating income (loss) | | $ | 8,922,000 |
| | (299,000 | ) | | (3,740,000 | ) | | $ | 4,883,000 |
|
| | | | | | | | |
Net income (loss) | | $ | 8,958,000 |
| | (313,000 | ) | | 7,116,000 |
| | $ | 15,761,000 |
|
Benefit from income taxes | | (7,000 | ) | | — |
| | (13,342,000 | ) | | (13,349,000 | ) |
Interest (income) and other expense | | (58,000 | ) | | 14,000 |
| | (4,000 | ) | | (48,000 | ) |
Interest expense | | 29,000 |
| | — |
| | 2,490,000 |
| | 2,519,000 |
|
Amortization of stock-based compensation | | — |
| | — |
| | 1,080,000 |
| | 1,080,000 |
|
Amortization of intangibles | | 4,424,000 |
| | 844,000 |
| | — |
| | 5,268,000 |
|
Depreciation | | 2,457,000 |
| | 588,000 |
| | 272,000 |
| | 3,317,000 |
|
Adjusted EBITDA | | $ | 15,803,000 |
| | 1,133,000 |
| | (2,388,000 | ) | | $ | 14,548,000 |
|
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 1,418,000 |
| | 189,000 |
| | 121,000 |
| | $ | 1,728,000 |
|
Total assets at January 31, 2018 | | $ | 602,872,000 |
| | 178,970,000 |
| | 40,809,000 |
| | $ | 822,651,000 |
|
|
| | | | | | | | | | | | | | |
| | Three months ended January 31, 2017 |
| | Commercial Solutions | | Government Solutions | | Unallocated | | Total |
Net sales | | $ | 82,103,000 |
| | 56,925,000 |
| | — |
| | $ | 139,028,000 |
|
Operating income | | $ | 5,864,000 |
| | 2,338,000 |
| | 4,647,000 |
| | $ | 12,849,000 |
|
| | | | | | | | |
Net income (loss) | | $ | 5,730,000 |
| | 2,362,000 |
| | (1,507,000 | ) | | $ | 6,585,000 |
|
Provision for income taxes | | 135,000 |
| | — |
| | 3,351,000 |
| | 3,486,000 |
|
Interest (income) and other expense | | (60,000 | ) | | (23,000 | ) | | 9,000 |
| | (74,000 | ) |
Interest expense | | 59,000 |
| | (1,000 | ) | | 2,794,000 |
| | 2,852,000 |
|
Amortization of stock-based compensation | | — |
| | — |
| | 1,019,000 |
| | 1,019,000 |
|
Amortization of intangibles | | 4,413,000 |
| | 1,619,000 |
| | — |
| | 6,032,000 |
|
Depreciation | | 2,429,000 |
| | 752,000 |
| | 387,000 |
| | 3,568,000 |
|
Settlement of intellectual property litigation | | — |
| | — |
| | (9,979,000 | ) | | (9,979,000 | ) |
Adjusted EBITDA | | $ | 12,706,000 |
| | 4,709,000 |
| | (3,926,000 | ) | | $ | 13,489,000 |
|
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 1,652,000 |
| | 413,000 |
| | 7,000 |
| | $ | 2,072,000 |
|
Total assets at January 31, 2017 | | $ | 620,147,000 |
| | 197,035,000 |
| | 66,326,000 |
| | $ | 883,508,000 |
|
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three months ended January 31, 2022 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Total |
Net sales | | $ | 69,180,000 | | | 51,201,000 | | | — | | | $ | 120,381,000 | |
Operating (loss) income | | $ | (2,500,000) | | | 6,856,000 | | | (28,946,000) | | | $ | (24,590,000) | |
| | | | | | | | |
Net (loss) income | | $ | (2,508,000) | | | 6,965,000 | | | (26,331,000) | | | $ | (21,874,000) | |
Provision for (benefit from) income taxes | | 82,000 | | | (209,000) | | | (3,149,000) | | | (3,276,000) | |
Interest (income) and other | | (80,000) | | | 100,000 | | | (50,000) | | | (30,000) | |
Change in fair value of convertible preferred stock purchase option liability | | — | | | — | | | (398,000) | | | (398,000) | |
Interest expense | | 6,000 | | | — | | | 982,000 | | | 988,000 | |
Amortization of stock-based compensation | | — | | | — | | | 1,983,000 | | | 1,983,000 | |
Amortization of intangibles | | 1,828,000 | | | 3,521,000 | | | — | | | 5,349,000 | |
Depreciation | | 773,000 | | | 1,510,000 | | | 51,000 | | | 2,334,000 | |
CEO transition costs | | — | | | — | | | 13,554,000 | | | 13,554,000 | |
Restructuring costs | | 1,726,000 | | | — | | | — | | | 1,726,000 | |
COVID-19 related costs | | 355,000 | | | — | | | — | | | 355,000 | |
Proxy solicitation costs | | — | | | — | | | 9,086,000 | | | 9,086,000 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 2,182,000 | | | 11,887,000 | | | (4,272,000) | | | $ | 9,797,000 | |
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 3,187,000 | | | 1,986,000 | | | — | | | $ | 5,173,000 | |
| | | | | | | | |
Total assets at January 31, 2022 | | $ | 482,989,000 | | | 485,155,000 | | | 26,710,000 | | | $ | 994,854,000 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, 2023 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Total |
Net sales | | $ | 161,280,000 | | | 103,584,000 | | | — | | | $ | 264,864,000 | |
Operating income (loss) | | $ | 8,343,000 | | | 4,056,000 | | | (22,904,000) | | | $ | (10,505,000) | |
| | | | | | | | |
Net income (loss) | | $ | 8,938,000 | | | 4,168,000 | | | (29,007,000) | | | $ | (15,901,000) | |
(Benefit from) provision for income taxes | | (644,000) | | | (281,000) | | | 95,000 | | | (830,000) | |
Interest (income) and other | | 22,000 | | | 169,000 | | | 9,000 | | | 200,000 | |
| | | | | | | | |
Interest expense | | 27,000 | | | — | | | 5,999,000 | | | 6,026,000 | |
Amortization of stock-based compensation | | — | | | — | | | 2,172,000 | | | 2,172,000 | |
Amortization of intangibles | | 3,656,000 | | | 7,042,000 | | | — | | | 10,698,000 | |
Depreciation | | 2,030,000 | | | 3,658,000 | | | 77,000 | | | 5,765,000 | |
Amortization of cost to fulfill assets | | 480,000 | | | — | | | — | | | 480,000 | |
CEO transition costs | | — | | | — | | | 9,090,000 | | | 9,090,000 | |
| | | | | | | | |
| | | | | | | | |
Restructuring costs | | 2,145,000 | | | — | | | 723,000 | | | 2,868,000 | |
| | | | | | | | |
Strategic emerging technology costs | | 1,484,000 | | | — | | | — | | | 1,484,000 | |
Adjusted EBITDA | | $ | 18,138,000 | | | 14,756,000 | | | (10,842,000) | | | $ | 22,052,000 | |
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 4,554,000 | | | 4,956,000 | | | 408,000 | | | $ | 9,918,000 | |
| | | | | | | | |
Total assets at January 31, 2023 | | $ | 486,426,000 | | | 471,358,000 | | | 25,888,000 | | | $ | 983,672,000 | |
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, 2022 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Total |
Net sales | | $ | 133,740,000 | | | 103,400,000 | | | — | | | $ | 237,140,000 | |
Operating (loss) income | | $ | (7,813,000) | | | 12,958,000 | | | (36,250,000) | | | $ | (31,105,000) | |
| | | | | | | | |
Net (loss) income | | $ | (7,582,000) | | | 12,943,000 | | | (33,219,000) | | | $ | (27,858,000) | |
Benefit from income taxes | | (517,000) | | | (68,000) | | | (4,744,000) | | | (5,329,000) | |
Interest (income) and other | | 167,000 | | | 82,000 | | | (60,000) | | | 189,000 | |
| | | | | | | | |
Change in fair value of convertible preferred stock purchase option liability | | — | | | — | | | (702,000) | | | (702,000) | |
Interest expense | | 120,000 | | | | | 2,475,000 | | | 2,595,000 | |
Amortization of stock-based compensation | | — | | | — | | | 2,904,000 | | | 2,904,000 | |
Amortization of intangibles | | 3,656,000 | | | 7,042,000 | | | — | | | 10,698,000 | |
Depreciation | | 1,598,000 | | | 2,874,000 | | | 103,000 | | | 4,575,000 | |
CEO transition costs | | — | | | — | | | 13,554,000 | | | 13,554,000 | |
Proxy solicitation costs | | — | | | — | | | 11,248,000 | | | 11,248,000 | |
Restructuring costs | | 2,438,000 | | | — | | | — | | | 2,438,000 | |
COVID-19 related costs | | 1,029,000 | | | — | | | — | | | 1,029,000 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 909,000 | | | 22,873,000 | | | (8,441,000) | | | $ | 15,341,000 | |
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 4,224,000 | | | 4,587,000 | | | — | | | $ | 8,811,000 | |
| | | | | | | | |
Total assets at January 31, 2022 | | $ | 482,989,000 | | | 485,155,000 | | | 26,710,000 | | | $ | 994,854,000 | |
|
| | | | | | | | | | | | | | |
| | Six months ended January 31, 2018 |
| | Commercial Solutions | | Government Solutions | | Unallocated | | Total |
Net sales | | $ | 161,938,000 |
| | 93,362,000 |
| | — |
| | $ | 255,300,000 |
|
Operating income (loss) | | $ | 13,714,000 |
| | (940,000 | ) | | (7,669,000 | ) | | $ | 5,105,000 |
|
| | | | | | | | |
Net income (loss) | | $ | 13,660,000 |
| | (955,000 | ) | | 1,396,000 |
| | $ | 14,101,000 |
|
Benefit from income taxes | | (1,000 | ) | | — |
| | (14,093,000 | ) | | (14,094,000 | ) |
Interest (income) and other expense | | (10,000 | ) | | 12,000 |
| | (11,000 | ) | | (9,000 | ) |
Interest expense | | 65,000 |
| | 3,000 |
| | 5,039,000 |
| | 5,107,000 |
|
Amortization of stock-based compensation | | — |
| | — |
| | 1,827,000 |
| | 1,827,000 |
|
Amortization of intangibles | | 8,849,000 |
| | 1,688,000 |
| | — |
| | 10,537,000 |
|
Depreciation | | 4,900,000 |
| | 1,204,000 |
| | 559,000 |
| | 6,663,000 |
|
Adjusted EBITDA | | $ | 27,463,000 |
| | 1,952,000 |
| | (5,283,000 | ) | | $ | 24,132,000 |
|
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 2,377,000 |
| | 282,000 |
| | 177,000 |
| | $ | 2,836,000 |
|
Total assets at January 31, 2018 | | $ | 602,872,000 |
| | 178,970,000 |
| | 40,809,000 |
| | $ | 822,651,000 |
|
|
| | | | | | | | | | | | | | |
| Six months ended January 31, 2017 |
| | Commercial Solutions | | Government Solutions | | Unallocated | | Total |
Net sales | | $ | 158,281,000 |
| | 116,533,000 |
| | — |
| | $ | 274,814,000 |
|
Operating income (loss) | | $ | 8,962,000 |
| | 4,838,000 |
| | (1,679,000 | ) | | $ | 12,121,000 |
|
| | | | | | | | |
Net income (loss) | | $ | 8,743,000 |
| | 4,865,000 |
| | (9,512,000 | ) | | $ | 4,096,000 |
|
Provision for income taxes | | 158,000 |
| | — |
| | 1,766,000 |
| | 1,924,000 |
|
Interest (income) and other expense | | (62,000 | ) | | (26,000 | ) | | 12,000 |
| | (76,000 | ) |
Interest expense | | 123,000 |
| | (1,000 | ) | | 6,055,000 |
| | 6,177,000 |
|
Amortization of stock-based compensation | | — |
| | — |
| | 1,989,000 |
| | 1,989,000 |
|
Amortization of intangibles | | 8,849,000 |
| | 3,238,000 |
| | — |
| | 12,087,000 |
|
Depreciation | | 5,016,000 |
| | 1,503,000 |
| | 798,000 |
| | 7,317,000 |
|
Settlement of intellectual property litigation | | — |
| | — |
| | (9,979,000 | ) | | (9,979,000 | ) |
Adjusted EBITDA | | $ | 22,827,000 |
| | 9,579,000 |
| | (8,871,000 | ) | | $ | 23,535,000 |
|
| | | | | | | | |
Purchases of property, plant and equipment | | $ | 3,647,000 |
| | 423,000 |
| | 77,000 |
| | $ | 4,147,000 |
|
Total assets at January 31, 2017 | | $ | 620,147,000 |
| | 197,035,000 |
| | 66,326,000 |
| | $ | 883,508,000 |
|
Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. In addition, during fiscal 2017, unallocated expenses also reflect the favorable adjustments to operating incomeSee Note (1) - "General - CEO Transition Costs & Related" for information related to the settlement of certain legacy TCS intellectual property matters.
Interest expense forsuch costs. During the three and six months ended January 31, 20182023, our Unallocated segment incurred $454,000 and 2017 includes $2,350,000$723,000, respectively, of restructuring costs focused on streamlining our operations. There were no similar costs incurred in fiscal 2022. Also, during the three and $4,815,000,six months ended January 31, 2022, we incurred $9,086,000 and $11,248,000, respectively, of proxy solicitation costs (including legal and $2,708,000advisory fees and $5,883,000,costs associated with a related lawsuit) as a result of a now-settled proxy contest. There were no similar costs incurred in fiscal 2023.
During the three and six months ended January 31, 2023, our Satellite and Space Communications segment recorded $1,089,000 and $2,145,000, respectively, of restructuring costs primarily incurred to streamline our operations, including costs related to the ongoing relocation of certain of our satellite ground station production facilities to a new 146,000 square foot facility in Chandler, Arizona. Similar restructuring costs of $1,726,000 and $2,438,000 were incurred during the three and six months ended January 31, 2022, respectively. In addition, during the three and six months ended January 31, 2023, we incurred $738,000 and $1,484,000 of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. There were no similar costs incurred in fiscal 2022. During the three and six months ended January 31, 2022, our Satellite and Space Communications segment recorded $355,000 and $1,029,000, respectively, of incremental operating costs related to our Securedantenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. There were no similar incremental operating costs during the corresponding periods in fiscal 2023.
Interest expense in the tables above primarily relates to our Credit Facility, as amended, and includes the amortization of deferred financing costs. See Note (9) - "Secured "Credit Facility"Facility" for further discussion of such debt.discussion.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Intersegment sales for both the three months ended January 31, 2018 and 2017 by the Commercial Solutions segment to the Government Solutions segment were $2,328,000 and $3,059,000, respectively. Intersegment sales for the six months ended January 31, 20182023 and 2017 by2022 between the Commercial SolutionsSatellite and Space Communications segment toand the Government SolutionsTerrestrial and Wireless Networks segment were $4,949,000 and $6,485,000, respectively. There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these periods.nominal. All intersegment sales are eliminated in consolidation and are excluded from the tables above.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unallocated assets at January 31, 20182023 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. Substantially allThe large majority of our long-lived assets are located in the U.S.
(15) (14) Goodwill
The following table represents goodwill by reportable operating segment as of January 31, 20182023 and July 31, 2017:2022.
|
| | | | | | | | | | | | |
| | Commercial Solutions | | Government Solutions | | Total |
Goodwill | | $ | 231,440,000 |
| | $ | 59,193,000 |
| | $ | 290,633,000 |
|
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Total |
| | | | | | |
| | | | | | |
Goodwill | | $ | 173,602,000 | | | 174,090,000 | | | $ | 347,692,000 | |
| | | | | | |
In accordance with FASB ASC 350,"Intangibles - Goodwill and Other," we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), pursuant to our adoption of FASB ASU No. 2017-04 in fiscal 2017, we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
On August 1, 2017 (the first dayAs discussed in Note (13) - "Segment Information," as a result of our segment restructuring in the fourth quarter of fiscal 2018),2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed an interim quantitative assessment as of July 29, 2022 and estimated the fair value of each of our annualreporting units, both before and after the change, using a combination of the income and market approaches.
We performed our quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions.
In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, and reflectedwhich reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our August 1, 2017 total public market capitalization and assessed implied control premiums based on our common stock price of $18.47$11.62 as of August 1, 2017.the date of testing.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
BasedUltimately, based on our quantitative evaluation,evaluations, we determined that our Commercial SolutionsSatellite and Government SolutionsSpace Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 17.8%18.4% and 52.9%11.6%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. However, in orderAlso, given its proximity to sensitizeour next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim quantitative assessment to conclude that our goodwill impairment test, we performed a second analysis using only the income approachwas not impaired and concluded that neither of our two reporting units' goodwillunits was impaired or at risk of failing the quantitative assessment. assessment as of August 1, 2022. Additionally, the carrying value of goodwill was reallocated to our new reporting units based on their respective estimated relative fair value.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
It is possible that, during the remainder of fiscal 20182023 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could decline. fluctuate.
A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 20182023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial SolutionsSatellite and Government SolutionsSpace Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired. Any impairment charges that we may record in the future could be material to our results of operation and financial condition.
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 20182023 (the start of our fiscal 2019)2024). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.
(16) (15) Intangible Assets
Intangible assets with finite lives are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 31, 2023 |
| | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | | 20.2 | | $ | 302,058,000 | | | 114,643,000 | | | $ | 187,415,000 | |
Technologies | | 14.8 | | 114,949,000 | | | 78,235,000 | | | 36,714,000 | |
Trademarks and other | | 16.7 | | 32,926,000 | | | 20,450,000 | | | 12,476,000 | |
Total | | | | $ | 449,933,000 | | | 213,328,000 | | | $ | 236,605,000 | |
|
| | | | | | | | | | | | | |
| | As of January 31, 2018 |
| | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | | 20.3 | | $ | 249,831,000 |
| | 48,636,000 |
| | $ | 201,195,000 |
|
Technologies | | 12.3 | | 82,370,000 |
| | 51,504,000 |
| | 30,866,000 |
|
Trademarks and other | | 16.4 | | 28,894,000 |
| | 9,621,000 |
| | 19,273,000 |
|
Total | | | | $ | 361,095,000 |
| | 109,761,000 |
| | $ | 251,334,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 31, 2022 |
| | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | | 20.2 | | $ | 302,058,000 | | | 107,500,000 | | | $ | 194,558,000 | |
Technologies | | 14.8 | | 114,949,000 | | | 75,798,000 | | | 39,151,000 | |
Trademarks and other | | 16.7 | | 32,926,000 | | | 19,332,000 | | | 13,594,000 | |
Total | | | | $ | 449,933,000 | | | 202,630,000 | | | $ | 247,303,000 | |
|
| | | | | | | | | | | | | |
| | As of July 31, 2017 |
| | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | | 20.3 | | $ | 249,831,000 |
| | 41,923,000 |
| | $ | 207,908,000 |
|
Technologies | | 12.3 | | 82,370,000 |
| | 48,623,000 |
| | 33,747,000 |
|
Trademarks and other | | 16.4 | | 28,894,000 |
| | 8,678,000 |
| | 20,216,000 |
|
Total | | | | $ | 361,095,000 |
| | 99,224,000 |
| | $ | 261,871,000 |
|
The weighted average amortization period in the above table excludes fully amortized intangible assets.
Amortization expense for both the three months ended January 31, 20182023 and 20172022 was $5,268,000$5,349,000 and $6,032,000, respectively. Amortization expense for both the six months ended January 31, 20182023 and 20172022 was $10,537,000 and $12,087,000, respectively.$10,698,000.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The estimated amortization expense consists of the following for the fiscal years ending July 31,:31:
| | | | | |
2023 | $ | 21,556,000 | |
2024 | 21,154,000 | |
2025 | 21,039,000 | |
2026 | 19,888,000 | |
2027 | 18,534,000 | |
|
| | | |
2018 | $ | 21,075,000 |
|
2019 | 17,155,000 |
|
2020 | 17,155,000 |
|
2021 | 16,196,000 |
|
2022 | 14,955,000 |
|
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. No such event has occurred during the six months ended January 31, 2018. WeBased on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of January 31, 2018.2023. However, if business conditions deteriorate, we may be required to record impairment losses, and or increase the amortization of intangibles in the future. Any impairment charges that we may record in the future could be material to our results of operationoperations and financial condition.
(17) Stockholders’ Equity(16) Convertible Preferred Stock
SaleOn October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of Common Stock
In June 2016,White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the Company sold 7,145,000“Investors”), relating to the issuance and sale of up to 125,000 shares of itsa new series of the Company's Series A Convertible Preferred Stock, par value $0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $125,000,000, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100,000,000. The Investors have a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $25,000,000. This purchase option is commonly referred to as a “Green Shoe” and together with the Initial Issuance, is collectively referred to as the “Issuance.”
The adjusted conversion price for the shares issued in the Initial Issuance is $23.97, and the adjusted conversion price for the Green Shoe is $31.21 subject to certain adjustments set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware.
The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5% per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of our $0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a public offeringcash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations.
Effective September 29, 2022, the Convertible Preferred Stock is convertible into shares of common stock at the option of the holders. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days.
Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $25,000,000 of shares of common stock), dispositions of businesses or assets, the incurrence of certain indebtedness and certain amendments or extensions of our existing Credit Facility.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Holders will have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the publicliquidation preference or (b) in connection with a conversion of $14.00 per share, resulting in proceedsConvertible Preferred Stock, pursuant to which the Companynumber of $95,029,000, netshares of underwriting discountscommon stock issuable upon such conversion would exceed 19.99% of the issued and commissions. Asoutstanding shares of January 31, 2018 and March 7, 2018, an aggregate registered amountcommon stock as of $74,970,000 underOctober 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference.
We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 meets the definition of a freestanding financial instrument that should be accounted for as a liability. As such, we established an initial convertible preferred stock purchase option liability of $1,005,000 and reduced the proceeds from the Initial Issuance by such amount. The liability will be remeasured to its estimated fair value each reporting period until such instrument is exercised or expires. Changes in its estimated fair value are recognized as a non-cash charge or benefit and presented on the condensed consolidated statement of operations.
In accordance with ASC 480, "Distinguishing Liabilities from Equity," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement: Classification and Measurement of Redeemable Securities, we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option. Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $100,000,000. We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $108,651,000, which includes $8,066,000 of cumulative dividends paid in kind and $585,000 of accumulated and unpaid dividends. As such, a total adjustment of $1,737,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during the six months ended January 31, 2023.
(17) Stockholders’ Equity
Shelf Registration Statement
On July 13, 2022, we filed a $200,000,000 shelf registration statement with the SEC remains available for the sale of various types of securities, including debt. The shelf registration was declared effective by the SEC as of July 25, 2022. To-date, we have not issued any securities pursuant to our $200,000,000 shelf registration statement.
Common Stock Repurchase Program
AsOn September 29, 2020, our Board of January 31, 2018 and March 7, 2018, we wereDirectors authorized to repurchase up to an additional $8,664,000 of our common stock, pursuant to our currenta new $100,000,000 stock repurchase program, which replaced our prior program. OurThe new $100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, and may be made pursuant to SEC Rule 10b5-1 trading plans.or by other means in accordance with federal securities laws. There were no repurchases madeof our common stock during the six months ended January 31, 20182023 or 2017.2022.
Common Stock Dividends
Since September 2010, we have paid quarterly dividends pursuant to an annual targeted dividend amount that was established by our Board of Directors. On September 27, 201729, 2022 and December 6, 2017,8, 2022, our Board of Directors declared a dividend of $0.10 per common share, which was paid on November 17, 201718, 2022 and February 16, 2018,17, 2023, respectively. On March 7, 2018,In connection with our CEO transition and One Comtech transformation, discussed further in Note (1) – “General – CEO Transition Costs & Related,” the Board, together with management, adjusted the Company’s capital allocation plans during the third quarter of Directors declaredfiscal 2023 and determined to forgo a common stock dividend, of $0.10 perthereby increasing our financial flexibility. Future common share, payable on May 18, 2018 to stockholders of record at the close of business on April 18, 2018.
Futurestock dividends, if any, remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.approval and certain voting rights of holders of our Series A Convertible Preferred Stock.
(18) Legal Proceedings and Other Matters
Legacy TCS Intellectual Property Matter - Vehicle IP
In December 2009, Vehicle IP, LLC ("Vehicle IP") filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware (the "District Court"), seeking monetary damages, fees and expenses and other relief from, among others, our customer Verizon Wireless ("Verizon"), based on the VZ Navigator product, and TCS is defending Verizon against Vehicle IP. In 2013, the District Court granted the defendants’ motion for summary judgment on the basis that the products in question did not infringe plaintiff’s patent. Plaintiff appealed that decision and, in 2014, the U.S. Court of Appeals for the Federal Circuit reversed the District Court's claim construction, overturned the District Court's grant of summary judgment of noninfringement, and remanded the case for further proceedings. Fact discovery and expert discovery has closed. Substantive settlement conversations have occurred but, to date, the parties have been unable to reach a settlement. As discussed in Note (7) -"Accrued Expenses and Other Current Liabilities," we have accrued certain legal and settlement costs related to the Vehicle IP matter. The accrued settlement costs related to this matter do not reflect the final amounts we actually may pay, if any.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(18) Legal Proceedings and Other Matters
On May 30, 2017,
Other Matters
In the ordinary course of business, we received positive newsinclude indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that the District Court issued a supplemental claim construction order in our favor. As a result, the plaintiff agreed to file a joint status report to the District Court that requested that the District Court cancel the trial date (which was scheduled for July 2017). On July 28, 2017, the parties entered into a stipulation that the defendants’ accused products911 calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not infringe Vehicle IP’s patent under the District Court’s current revised construction of the disputed patent claim termalways agree with customers that they are entitled to indemnification and requested that the District Court therefore enter a judgment of noninfringement. On August 18, 2017, the court enteredin such a judgment of noninfringment. As expected, following the judgment, Vehicle IP filed a notice of appeal on August 29, 2017. Vehicle IP's opening brief on appeal of the District Court's claim construction was submitted in October 2017. TCS’s brief in response was filed on January 19, 2018. An appellate ruling may take a year or so to be issued. If the District Court's current claim construction is ultimately upheld at the appellate level, it is possiblecases reject their claims. Despite maintaining that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not havedisclaim coverage as to gosuch claims. Accordingly, pending or future claims asserted against us by a party that we are obligated to trial or pay any monetary damages.
Ongoingindemnify could result in legal expenses associated with defending this mattercosts and its ultimate resolutiondamages that could vary and have a material adverse effect on our consolidated results of operations and financial position or cash flows in future periods.condition.
Other Matters
In October 2014, we disclosed to the U.S. Department of the Treasury, Office of Foreign Assets Control ("OFAC") that we learned during a self-assessment of our export transactions that a shipment of modems sent to a Canadian customer by Comtech EF Data Corp. was incorporated into a communication system, the ultimate end user of which was the Sudan Civil Aviation Authority. The sales value of this equipment was approximately $288,000. At the time of shipment, OFAC regulations prohibited U.S. persons from doing business directly or indirectly with Sudan. In late 2015, OFAC issued an administrative subpoena seeking further information about the disclosed transaction. We have responded to the subpoena, including alerting OFAC to Comtech’s repair of three modems for a customer in Lebanon who may have rerouted the modems from Lebanon to Sudan without the required U.S. licensing authorization. Subsequently, in October 2017, U.S. sanctions with respect to Sudan were revoked. Consistent with the revocation of the Sudan Sanction Regulations ("SSR"), shipments to the Sudan Civil Aviation Authority by U.S. persons are now permissible.
We are not able to predict when OFAC will complete its review, nor whether it will take any enforcement action against us in light of the recent revocation of the SSR. If OFAC determines that we have violated U.S. trade sanctions, civil and criminal penalties could apply, and we may suffer reputational harm. Even though we take precautions to avoid engaging in transactions that may violate U.S. trade sanctions, those measures may not be effective in every instance.
There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations.
Employment Change of Control and Indemnification Agreements
On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and CEO, and the Company entered an employment agreement with Mr. Peterman generally providing for an annual salary, bonus award, sign-on bonus, equity incentive awards and, under certain terminations of employment, severance payment.
We have also entered into change of control agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or termination of the employee.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| |
ITEM 2. | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
AND RESULTS OF OPERATIONS |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements including but not limitedcan be identified by words such as: "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "plan," "potential," "predict," "project," "seek," "should," "strategy," "target," "will," "would," and similar references to information relating tofuture periods. Examples of forward-looking statements include, among others, statements we make regarding our future performance and financial condition, plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives of our management to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, among other things: the possibility that the expected synergies and benefits from acquisitions will not be fully realized, or will not be realized within the anticipated time periods; the risk that Comtechthe acquired businesses will not be integrated successfully; the possibility of disruption from acquisitions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that we will be unsuccessful in implementing our "One Comtech" transformation and integration of individual businesses into two segments; the risk that we will be unsuccessful in implementing a tactical shift in its Government Solutionsour Satellite and Space Communications segment away from bidding on large commodity service contracts and toward pursuing contracts for itsour niche products and solutions with higher margins; the nature and timing of our receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements, including the risks associated with Comtech's recent launch of HeightsTM Dynamic Network Access Technology ("HEIGHTS" or "HDNA");enhancements; changing customer demands;demands and or procurement strategies; changes in prevailing economic and political conditions;conditions, including as a result of Russia's military incursion into Ukraine; changes in the price of oil in global markets; changes in prevailing interest rates and foreign currency exchange rates; risks associated with Comtech's and TeleCommunication Systems, Inc.'s ("TCS") legacyour legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our Secured Credit Facility, as amended;credit facility; risks associated with our large contracts; risks associated with the impact of H.R.1, also known as the Tax CutsCOVID-19 pandemic and Jobs Act ("Tax Reform"), which was recently enacted in the U.S.;related supply chain disruptions; and other factors described in this and our other filings with the Securities and Exchange Commission ("SEC").
OVERVIEW
We are a leading global provider of advancednext-generation 911 emergency systems ("NG-911") and secure wireless and satellite communications solutions for both commercialtechnologies. This includes the critical communications infrastructure that people, businesses, and government customers worldwide.governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air – and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions fulfill our customers’ needs for secure wireless communications in some of the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial. We anticipate future growth in our business due to increasing demand for global voice, video and data usage in recent years. We provide our solutions to both commercial and governmental customers.
In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and services. Our businesses have been re-organized into two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” All current and prior periods reflected in this Form 10-Q have been presented according to these two segments, unless otherwise noted. For more information and for financial information about our business segments, including net sales, operating income, Adjusted EBITDA (a non-GAAP financial measure), total assets, and our operations outside the United States, refer to "Notes to Consolidated Financial Statements - Note (13) Segment Information" included in "Part I - Item 1 - Notes to Condensed Consolidated Financial Statements (Unaudited)."
We manage our business through two reportable operating segments:
Commercial Solutions•Satellite and Space Communications - serves commercial customersis organized into four technology areas: satellite modem technologies and smaller government customers, such as stateamplifier technologies, troposcatter and local governments, that require advanced communication technologies to meet their needs.SATCOM solutions, space components and antennas, and high-power amplifiers and switches technologies. This segment also serves certain large government customers (includingoffers customers: satellite ground station technologies, services and system integration that facilitate the U.S. government) that have requirements for off-the-shelf commercial equipment. We believe this segment is a leading providertransmission of voice, video and data over GEO, MEO and LEO satellite communications (such as satellite earth station modemsconstellations, including solid-state and traveling wave tube power amplifiers, ("TWTA")), public safetymodems, VSAT platforms and frequency converters; satellite communications and tracking antenna systems, (such asincluding high precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; over-the-horizon microwave equipment that can transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET™; solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and procurement and supply chain management of high reliability EEE parts for satellite, launch vehicle and manned space applications.
•Terrestrial and Wireless Networks - is organized into four service areas: next generation 911 ("NG911") technologies) and enterprise application technologies (such ascall delivery, Solacom call handling solutions, trusted location and messaging solutions, and trustedcyber security training and services. This segment offers customers SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points; next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for Public Safety Answering Points; wireless emergency alerts solutions for network operators; software and equipment for location-based technologies).
and text messaging services for various applications, including for public safety, commercial and government services, and cybersecurity training, skills labs, and competency assessments for both technical and non-technical applications.
Government Solutions - serves large government end-users (including those of foreign countries) that require mission critical technologies and systems. We believe this segment is a leading provider of 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 telecom expense management, 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 amplifiers, and amplifiers used in the counteraction of improvised explosive devices).
Our Quarterly Financial Information
Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for under the percentage-of-completion method.over time.
OurIn particular, our contracts with the U.S. government can be terminated for convenience by it at any time and orders are subject to unpredictable funding, deployment and technology decisions by the U.S. government. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period.period-to-period due to these factors. As such, comparisons between periods and our current results may not be indicative of a trend or future performance.
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies to be critical due to the estimation process involved in each.
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 earnrecognize revenue fromusing the saleover time method when there is a continuous transfer of advanced communication solutionscontrol to customers around the world. Salescustomer over the contractual period of advanced communication solutions can consist of any one orperformance. This generally occurs when we enter into a combination of items required by our customer including hardware, technology platforms and related support. A large portion of our revenue from advanced communication solutions is derived from contractslong-term contract relating to the design, development or manufacture of complex electronic equipment or technology platforms to a buyer’s specification or(or to provide services relatingrelated to the performance of such contractscontracts). 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 recognized in accordance with FASB ASC 605-35. For these contracts, we primarily apply the percentage-of-completion accounting method and generally recognize revenue based on the relationshipextent of totalprogress 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 projectedestimated costs at completion, including warranty costs. Revenues, including estimated fees or alternatively,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 Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Terrestrial and Wireless Networks 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 output measures,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 units delivereda new contract because the pricing for these additional quantities or produced. Profits expected to be realized on such contractsservices are based on total estimated salesstandalone selling prices.
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 contract comparedrequirements 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 total estimated costs, including warranty costs, at completiondelivery, customers cannot direct the use of the contract.
Direct costs which include materials, laborasset, sell or exchange the equipment, etc.); and, overhead are charged to work-in-progress (includingalthough many of our contracts-in-progress) inventory or cost of sales. Indirect costs relating to long-term contracts, which include expenses such as general and administrative, are charged to expense as incurred and are not included in our work-in-process (including our contracts-in-progress) inventory or cost of sales. Total estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become evident. Long-term U.S. government cost-reimbursable type contracts are also specifically covered by FASB ASC 605-35.
We have been engaged in the production and delivery of goods and services on a continual basis under contractual arrangements for many years. Historically, we have demonstrated an ability to accurately estimate total revenues and total expenses relating to our long-term contracts. However, there exist inherent risks and uncertainties in estimating revenues, expenses and progress toward completion, particularly on larger or longer-term contracts. If we do not accurately estimate the total sales, related costs and progress towards completion on such contracts, the estimated gross margins may be significantly impacted or losses may need to be recognized in future periods. Any such resulting changes in margins or contract losses could be material to our results of operations and financial condition.
In addition, most government 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.
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 right to terminaterevenue is deferred and recognized ratably over the contract at any time. Such terminations could impact the assumptions regarding total contract revenuesextended warranty period. Our contracts, from time-to-time, may also include options for additional goods and expenses utilized in recognizing profit under the percentage-of-completion method of accounting. Changes toservices. To date, these assumptions could materially impact our results of operations and financial condition. Historically, weoptions have not experiencedrepresented material terminations of our long-term contracts. We also addressrights to the customer acceptance provisions in assessing our abilityas the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to perform our contractualbe performance obligations under long-term contracts. Our inability to perform on our long-term contracts could materially impact our results of operations and financial condition. Historically,for which we have been able to perform on our long-term contracts.
We also derivemust allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our revenuesproducts for advanced communication solutionsa 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 and purchase orders where revenue is recorded on delivery of products orwith multiple performance of services. Such revenues are recognized in accordance withobligations, we allocate the authoritative guidance contained in FASB ASC 605-25 "Revenue Recognition - Multiple Deliverable Revenue Arrangements" ("FASB ASC 605-25") and, as applicable, FASB ASC 605-20 "Revenue Recognition - Services" ("FASB ASC 605-20") and Accounting Standards Update ("ASU") 2009-14 (FASB ASC Topic 985) "Certain Revenue Arrangements That Include Software Elements." Revenue recognition for multiple-element arrangements requires judgmentcontract’s transaction price to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each performance obligation using our best estimate of the elements. In summary, we recognize revenue for each separate unit of accounting when the applicable revenue recognition criteria for each element have been met. We allocate revenue to each separate unit of accounting in a multi-element arrangement based on the relative fair valuestandalone selling price of each element, using vendor-specific objective evidence ("VSOE") of their fair values, if available. VSOE is generally determineddistinct good or service in the contract. We determine standalone selling price based on the price charged when an elementat 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.
Most 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 the absencealmost all of VSOE of fair value, the fee is allocated among each element based on third-party evidence ("TPE") of fair value, which is determined based on competitor pricing for similar deliverables when sold separately. Whenour contracts with customers, we are unable to establish fair value using VSOE or TPE, we use estimated selling price ("ESP") to allocate value to each element. The objective of ESP is to determine the price at which we would transactprincipal in the arrangement and report revenue on a sale if the product or service were sold separately. We determine ESP for deliverables by considering multiple factors including, but not limited to,gross basis. Transaction prices we charge for similar offerings, market conditions, competitive landscape, and pricing practices. For multiple element arrangements that contain only software and software-related elements, we allocate the fees to each element based on the VSOE of fair value of each element. Due to the nature of some of the agreements it may be difficult to establish VSOE of separate elements of an agreement; in these circumstances the appropriate recognition of revenue may require the use of judgment based on the particular facts and circumstances.
Adoption of New Revenue Standard
On August 1, 2018 (our first quarter of fiscal 2019), we are required to adopt FASB ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)," which replaces numerous requirements in U.S. GAAP, including industry specific requirements, and provides a single revenue recognition model for contracts with customers. The core principleU.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the new standard is that a company should record revenue to depictU.S. government, sometimes based on estimated or actual costs of providing the transfer of promised goods or services in accordance with applicable regulations.
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 an amountthe event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. On large long-term contracts, and for contracts with international customers that reflects the considerationdo 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 which the company expectsdate results in a contract liability. These contract liabilities are not considered to be entitled in exchange for those goods or services. In August 2015, FASB ASU No. 2015-14 "Revenue from Contracts with Customers (Topic 606): Deferralrepresent a significant financing component of the Effective Date" was issuedcontract because we believe these cash advances and deposits are generally used to defermeet working capital demands which can be higher in the effective dateearlier stages of FASB ASU No. 2014-09 bya 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.
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. In March 2016, April 2016, May 2016year or less; otherwise, such costs are capitalized and February 2017, FASB ASU Nos. 2016-08 "Revenue from Contractsamortized over the estimated life of the contract.
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 Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)," 2016-10 "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligationsa customer and Licensing," 2016-12 "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvementsare expensed as incurred in selling, general and Practical Expedients" and 2017-05 "Other Income - Gains and Losses from the Derecognitionadministrative expenses on our Condensed Consolidated Statements of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and AccountingOperations. As for Partial Sales of Nonfinancial Assets" were issued, respectively,commissions payable to clarify certain implementation mattersour third-party sales representatives related to 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 new revenue standard. The effective datestransaction price of firm orders for these ASUs coincide with the effective date of FASB ASU 2014-09. FASB ASU No. 2014-09 can be adopted either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustmentwhich work has not been performed as of the dateend of adoption.a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under IDIQ contracts.
BecauseImpairment of the broad scope of FASB ASU No. 2014-09, it could impact the reporting of the amount and/or timing of our net sales and operating income across our two operating segments, as well as related business processes and IT systems. We have formed a project team to perform a detailed evaluation of the operational impact of this new standard, which transition approach to use and the overall adoption impact of FASB ASU No. 2014-09 on our consolidated financial statements and disclosures. We expect our evaluation to be completed shortly before our first quarter of fiscal 2019.
Goodwill and Other Intangible Assets. As of January 31, 2018,2023, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $290.6$347.7 million (of which $231.4$173.6 million relates to our Commercial SolutionsSatellite and Space Communications segment and $59.2$174.1 million relates to our Government SolutionsTerrestrial and Wireless Networks segment). Additionally, as of January 31, 2018,2023, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $251.3$236.6 million (of which $207.9$68.7 million relates to our Commercial SolutionsSatellite and Space Communications segment and $43.4$167.9 million relates to our Government SolutionsTerrestrial and Wireless Networks segment). Each of our two operating segments constitutes a reporting unit and we must make various assumptions in determining their estimated fair values.
For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Satellite and Space Communications and Terrestrial and Wireless Networks segments each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. Reporting units are defined by how our Chief Executive Officer ("CEO") manages the business, which includes resource allocation decisions. We may, in the future, change our management approach which in turn may change the way we define our reporting units, as such term is defined by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other." A change to our management approach may require us to perform an interim goodwill impairment test and possibly record impairment charges in a future period.
In accordance with FASB ASC 350, "Intangibles - Goodwill and Other," we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), pursuant to our adoption of FASB ASU No. 2017-04 in fiscal 2017, we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
As a result of our segment restructuring in the fourth quarter of fiscal 2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed an interim quantitative assessment as of July 29, 2022 and estimated the fair value of each of our reporting units, both before and after the change, using a combination of the income and market approaches.
On August 1, 2017 (the first day of our fiscal 2018), weWe performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions.
In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, and reflectedwhich reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our August 1, 2017 total public market capitalization and assessed implied control premiums based on our common stock price of $18.47$11.62 as of August 1, 2017.the date of testing.
BasedUltimately, based on our quantitative evaluation,assessments, we determined that our Commercial SolutionsSatellite and Government SolutionsSpace Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 17.8% and 52.9%18.4% and 11.6%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. However, in orderAlso, given its proximity to sensitizeour next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim quantitative assessment to conclude that our goodwill impairment test, we performed a second analysis using only the income approachwas not impaired and concluded that neither of our two reporting units' goodwillunits was impaired or at risk of failing the quantitative assessment. assessment as of August 1, 2022. Additionally, the carrying value of goodwill was reallocated to our new reporting units based on their respective estimated relative fair value.
It is possible that, during the remainder of fiscal 20182023 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could decline. fluctuate.
A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 20182023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial SolutionsSatellite and Government SolutionsSpace Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired.
In any event, we are required to perform theour next annual goodwill impairment analysis on August 1, 20182023 (the start of our fiscal 2019)2024). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. In addition to our impairment analysis of goodwill, we also review net intangible assets with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangible assets were recoverable as of January 31, 2018.2023. Any impairment charges that we may record in the future could be material to our results of operationoperations and financial condition.
Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition.
Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences are expected to reverse. Our provision for income taxes is based on domestic (including federal and state) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. The U.S. federal government is our most significant income tax jurisdiction.
Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as more"more likely than notnot" to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The development of valuation allowances for deferred tax assets and reserves for income tax positions requires consideration of timing and judgments about future taxable income, tax issues and potential outcomes, and are subjective critical estimates. Valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount "more likely than not" expected to be realized. A portion of our deferred tax assets consist of federal net operating losses and federal research and experimentation tax credit carryforwards, mostsome of which was acquired in connection with our acquisition of TCS.prior acquisitions. No valuation allowance has been established on these deferred tax assets based on our evaluation that our ability to realize such assets has met the criteria of "more likely than not." We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition.
On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Reform") was enacted in theOur U.S. Tax Reform significantly lowered the amount of our current and futurefederal 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. Inreturns for fiscal 2019 and beyond, Tax Reform will result in the loss of our abilitythrough 2021 are subject to take the domestic production activities deduction, which has been repealed, and is likely to result in lower tax deductions for certain executive compensation expenses.
In connection with Tax Reform, during the three months ended January 31, 2018, we recorded an estimated net discrete tax benefit of $14.0 million, 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 the reporting date. As such, we expect to finalize this net discrete tax benefit during the second half of fiscal 2018. In addition, it is possible that thepotential future 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.
In November 2017, we received notification from the IRS that it will audit our federal income tax return for fiscal 2016. Our federal income tax return for fiscal 2015 is also subject to potential future IRS audit. None of our state income tax returns prior to fiscal 20132018 are subject to audit. TCS’s federal income tax returns for tax years 2014 and 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential IRS audit. None of TCS’s state income tax returns prior to calendar year 2013 are subject to audit. The results of the IRS tax audit for fiscal 2016, futureFuture tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Research and Development Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, we have not capitalized any of our internally developed software costs.costs were not material.
Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and futureprojected usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition.
Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers.
We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our strong cash position and the nominal amount of interest we are earning on our cash and cash equivalents, we have, on a limited basis, approved certain customer requests.
We continue to monitor our accounts receivable credit portfolio. OurTo-date, there has been no material changes in our credit portfolio as a result of the COVID-19 pandemic on worldwide business activities.
Although our overall credit losses have historically been within our expectations of the allowances established; however,we established, we cannot guarantee that we will continue to experience the sameaccurately predict our future credit loss rates that we have inexperience, given the past.current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. ChangesFuture changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition.
Fiscal 2023: Second Quarter Highlights and Business Outlook for Fiscal 2018
Our resultsFinancial highlights for the second quarter exceededof fiscal 2023 include:
•Consolidated net sales were $133.7 million, up 2.0% sequentially from the first quarter of fiscal 2023 and up 11.0% from the second quarter of fiscal 2022;
•Gross margin was 34.3%, compared to 35.7% in our expectationsfirst quarter of fiscal 2023 and we generated consolidated:38.1% in our second quarter of fiscal 2022;
Net sales•GAAP net loss attributable to common stockholders was $6.5 million, and included $1.5 million of $133.7 million;restructuring costs and $0.7 million of strategic emerging technology costs for next-generation satellite technology;
Operating
•GAAP EPS loss of $0.23 and Non-GAAP EPS income of $4.9 million;$0.09;
Net income of $15.8 million;
Cash flows from operating activities of $2.7 million; and
•Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $14.5 million.
During$11.3 million, or 8.5% of consolidated net sales, a sequential increase from the three months ended January 31, 2018, our Commercial Solutions segment was awarded a large multi-year strategic contract valued at $134.0$10.7 million, to provide oneor 8.2% of consolidated net sales for the largest wireless carriers in the U.S. with enhanced 911 ("E911") services. Under this competitively awarded contract, this U.S. wireless carrier is expected to migrate existing and planned new cell sites from a competitive solution to Comtech's more advanced, secure and reliable 911 call routing technologies. As a result, more than 150 million U.S. mobile cell phone users will benefit from more reliable 911 call routing solutions. This contract award comes on the heels of Comtech receiving $96.2 million of contracts from AT&T during our first quarter of fiscal 2018, which provide for2023;
•New bookings (also referred to as orders) of $167.5 million, representing a variety of safety and security technology and enterprise technology solutions including Next Generation 911 ("NG911") public safety Call Handling and Emergency Services IP Network ("ESInet") and E911 solutions. In our view, these contract awards validate that our enterprise technology solutions and safety and security technology solutions are more advanced, secure and reliable than any existing competitive technology.
Our Government Solutions segment is also showing positive business momentum. During62.7% increase from the second quarter of fiscal 2018, we were awarded2022 and a three-year $123.6 million contract from the U.S. Army to provide ongoing sustainment support services for the AN/TSC-198A SNAP (Secret Internet Protocol Router (“SIPR”) and Non-classified Internet Protocol Router (“NIPR”) Access Point), Very Small Aperture Terminals (“VSATs”). SNAP terminals provide quick and mobile satellite communications capability to personnel in the field. Comtech was the incumbent and will continue to be the sole providerquarterly book-to-bill ratio of these critical sustainment services. Importantly, we were also awarded an initial $11.7 million order to provide several thousand of our next generation MT-2025 mobile satellite transceivers to support the Blue Force Tracking-2 ("BFT-2") system. The BFT-2 system, which is part of the U.S. Army's Joint Battle Command-Platform ("JBC-P") program, provides global real-time situational awareness and networking capabilities for U.S. warfighters and is the successor to the Blue Force Tracking-1 ("BFT-1") system. We have continued to provide support for the BFT-1 system since its inception more than fifteen years ago. In fiscal 2010, a competitor was selected by the U.S. Army to develop the next-generation BFT-2 system. Although we were disappointed in that decision and believed that our technology was superior when compared to the competitor’s, we worked cooperatively with the U.S. Army and informed them that we would stand committed to assist in any way possible. We are pleased that our efforts over the years have resulted in the U.S. Army now selecting our MT-2025 transceiver to meet their immediate operational needs. The MT-2025, which is also known as the Blue Force Tracker-2 High Capacity ("BFT-2-HC") Satellite Transceiver, meets BFT-2 protocols, provides best-in-class reliability and is fully backward compatible with the BFT-1 system. Comtech currently provides sustaining support for the BFT-1 system and previously shipped over 100,000 BFT-1 mobile satellite transceivers. Initial shipments of MT-2025 transceivers are expected to start during our fourth quarter of fiscal 2018 and additional orders for our MT-2025 are ultimately expected.
Overall, we experienced strong order flow across many of our product lines, achieved a consolidated book-to-bill ratio1.25x (a measure defined as bookings divided by net sales);
•Backlog of 1.57 with both of our segments exceeding 1.00 for the most recent quarter. As$702.0 million as of January 31, 2018,2023, compared to $668.2 million as of October 31, 2022 and $611.1 million as of January 31, 2022;
•Revenue visibility of approximately $1.1 billion. We measure this revenue visibility as the sum of our consolidated$702.0 million of backlog, was $567.3 million, which is close to our record high. Our backlog, as more fully defined in our most recent Annual Report on Form 10-K filed with the SEC, only consists of funded and firm contract orders. Our backlog does not include the unfunded portions of multi-year contracts. As such,plus the total unfunded value of certain multi-year contracts that we have received is substantially higher. Our pipelineand from which we expect future orders; and
•Cash flows used in operating activities of opportunities remains strong and overall business activity is at the highest level it has been in several years.$10.6 million.
Given our year-to-date performance, we enter the second half of fiscal 2018 with strong positive business momentum and, as a result,Non-GAAP financial measures discussed above are increasing our targeted growth rates. We believe that we can achieve fiscal 2018 revenue and Adjusted EBITDA growth of approximately 5.0% as compared to fiscal 2017, and Adjusted EBITDA, as a percentage of consolidated fiscal 2018 net sales, comparablereconciled to the 12.8% we achieved in fiscal 2017. We believe these targeted metrics demonstrate the strength of our business, particularly considering that our fiscal 2017 results include the benefit of $6.7 million of BFT-1 intellectual property license fees (which the U.S. Army is no longer obligated to pay us to support the BFT-1 system). If order flow remains strong and we are able to achieve all of our fiscal 2018 business goals, it is possible that our targeted fiscal 2018 revenue and Adjusted EBITDA growth rates could be higher.
In line with our original Business Outlook for Fiscal 2018, our fourth quarter of fiscal 2018 is expected to be the peak quarter - by far - for consolidated net sales,most directly comparable GAAP operating income and Adjusted EBITDA. We currently believe that our third quarter consolidated net sales and Adjusted EBITDA will be approximately 10.0% higher than the related amounts we achievedfinancial measures in the second quarter of fiscal 2018. GAAP operating income and Adjusted EBITDA, as a percentage of consolidated third quarter fiscal 2018 net sales, are expected to approximate 4.0% and 11.0%, respectively, with significant increases in each metrictable included in the fourth quarter of fiscal 2018.
For a definition and explanation of Adjusted EBITDA, seebelow section "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended January 31, 20182023 and 2017 -2022" and "Comparison of the Results of Operations for the Six Months Ended January 31, 2023 and 2022."
In August 2022, we announced that Ken Peterman was appointed President and CEO. Mr. Peterman’s significant experience in satellite technology and decades of experience with U.S. government contracting is expected to enhance our efforts to continually improve commercial success and shareholder value. To advance our CEO’s initiatives to further strengthen and grow our business, we continue to move forward on the operational and cultural transformation that we call "One Comtech."
In our first quarter of fiscal 2023, we enhanced our leadership team with key appointments designed to maximize our ability to compete and deliver across our global market segments.
In our second quarter of fiscal 2023, we celebrated the rebranding and launch of Comtech’s new logo, representing our commitment to delivering software-centric, cloud native communications solutions. We made progress on our capital equipment and building improvement initiatives, including entering the final stage of our migration to a new 146,000 square-foot facility in Chandler, Arizona. We were awarded several key orders, including but not limited to: a multi-million-dollar contract to deliver satellite communication technologies and terrestrial location-based services for end users of a large international satellite constellation network; multiple orders from the U.S. Army for VSAT equipment; and a contract with one of the largest mobile network operators in the U.S. to assist in moving its 5G mobile network to the Microsoft cloud. Finally, on November 30, 2022, we entered into a Second Amended and Restated Credit Agreement (the “Credit Facility”) with the existing lenders to our First Amended and Restated Credit Agreement. For additional information, see "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Credit Facility.”
Over the past several months, we have established EVOKE as Comtech’s innovation foundry, which is dedicated to creating and accelerating transformational changes in global technologies. We believe that EVOKE will not only enhance our existing technologies and service offerings (e.g., cloud-native satellite ecosystems, 5G advanced services and “as-a-service” business models), but will also allow us to pioneer entirely new ideas and opportunities with the benefit of multiple perspectives, industry backgrounds and areas of expertise. We were pleased to recently announce that Sirqul, Inc. (“Sirqul”) became our first EVOKE technology partner. Sirqul is an Internet of Things (“IoT”) platform provider with over 80 modular services and over 400 application programming interfaces (“APIs”). Together, Comtech and Sirqul are working on “Smart Operations,” where enterprises will be able to make business decisions with real time IoT data. Through our collective efforts, we are working to bring robust mobile, web, social, voice, IoT, and other technologies to a variety of global markets. We are very encouraged by this partnership with Sirqul, and may seek similar partnerships in the future.
Since being appointed President and CEO, Mr. Peterman, along with his senior leadership team, has been driving transformational changes at Comtech to, among other things, integrate our individual businesses into two segments and improve operational performance. This transformation has provided insight into opportunities to manage costs, streamline operations, improve efficiency, and accelerate decision making by eliminating management layers and other redundancies – resulting in a reduction in our workforce during the third quarter of fiscal 2023. Severance costs relating to these actions are not anticipated to be material to our results of operations.
Finally, encouraged by the progress that we have made related to our One Comtech transformation, our launch of EVOKE and our emerging growth opportunities, during the third quarter of fiscal 2023, the Board, together with management, adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend, thereby increasing our financial flexibility. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Series A Convertible Preferred Stock.
As we enter the third quarter of fiscal 2023, business conditions continue to be challenging, and the operating environment is largely unpredictable, including factors such as inflation, rising interest rates, the repercussions of the military conflict between Russia and Ukraine and a potential global recession. Order and production delays, disruptions in component availability, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs are continuing to impact our business.
Nevertheless, despite these business conditions and resulting challenges and although we anticipate some variability from time to time as we move through our One Comtech transformational change, for our third quarter of fiscal 2023, we are targeting consolidated net sales to sequentially increase approximately 1.0% to 3.0% and for our consolidated Adjusted EBITDA"EBITDA margin to range between 8.5% and 10.0%.
We do not provide forward-looking guidance on a GAAP basis because we are unable to predict certain items contained in the GAAP measure without unreasonable efforts. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast. Please refer to the discussion below under "Adjusted EBITDA" for more information.
Additional information related to our Business Outlook for fiscal 2023 and a definition and explanation of Adjusted EBITDA is included in the below section "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Six Months Ended January 31, 2018 and 2017 - Adjusted EBITDA."
On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Reform") was enacted. As a result, our effective tax rate in fiscal 2018, excluding discrete items, is now expected to approximate 27.75% as compared to our prior estimate of 34.5%. The reduction in our fiscal 2018 estimate is attributable to the benefit related to the reduction of the statutory income tax rate from 35.0% to 21.0%, or a blended income tax rate of approximately 27.0%. In addition to the benefit of a lower effective tax rate, fiscal 2018 will also benefit from an estimated net discrete tax benefit of $14.0 million, primarily related to the remeasurement of deferred tax liabilities associated with non-deductible amortization related to intangible assets. In fiscal 2019 and beyond, we expect to fully benefit from the lower statutory income tax rate. As such, and based on an initial analysis, we estimate that our fiscal 2019 effective tax rate, before any discrete items, will range from 24.5% to 26.0%. If the Internal Revenue Service ("IRS") issues clarifying or interpretive guidance, and/or new information becomes available, our estimated effective tax rates may change.
On March 7, 2018, our Board of Directors declared a dividend of $0.10 per common share, payable on May 18, 2018 to stockholders of record at the close of business on April 18, 2018. Future dividends remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.
Our Business Outlook for Fiscal 2018 depends, in large part, on timely deliveries and the receipt of and performance on orders from our customers and could be adversely impacted if deliveries are delayed, business conditions deteriorate or our current or prospective customers materially postpone, reduce or even forgo purchases of our products and services. Additional information related to our Business Outlook for Fiscal 2018 is included in the below section entitled "Comparison of the Results of Operations for the Three Months Ended January 31, 20182023 and January 31, 2017" 2022"and "Comparison "Comparison of the Results of Operations for the Six Months Ended January 31, 20182023 and January 31, 2017.2022."
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 20182023 AND 20172022
Net Sales. Consolidated net sales were $133.7 million and $139.0$120.4 million for the three months ended January 31, 20182023 and 2017,2022, respectively, representing a decreasean increase of $5.3$13.3 million, or 3.8%11.0%. The period-over-period decreaseincrease in net sales was due primarily to lower net sales in our Government Solutions segment, partially offset byreflects higher net sales in both of our Commercial Solutions segment. Net sales by operating segment aresegments, as further discussed below.
Commercial SolutionsSatellite and Space Communications
Net sales in our Commercial SolutionsSatellite and Space Communications segment were $85.8$80.4 million for the three months ended January 31, 2018,2023 as compared to $82.1$69.2 million for the three months ended January 31, 2017,2022, an increase of $3.7$11.2 million or 4.5%16.2%. Net sales for the three months ended January 31, 2023 primarily reflect increased sales of our troposcatter and SATCOM solutions and satellite ground station technologies, offset in part by lower sales of our high reliability Electrical, Electronic and Electromechanical ("EEE") satellite-based space components. Our Commercial SolutionsSatellite and Space Communications segment represented 64.2%60.1% of consolidated net sales for the three months ended January 31, 20182023 as compared to 59.1%57.5% for the three months ended January 31, 2017.
Bookings during the most recent fiscal quarter were strong and reflect continued strength in almost all of our Commercial Solutions product lines.2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended January 31, 20182023 was 1.81. As further discussed below, we have a growing pipeline of opportunities and expect that the book-to-bill ratio in this segment will exceed 1.00 for fiscal 2018.1.71x.
Net sales of our satellite earth station products (which include satellite modems and solid-state power amplifiers ("SSPAs")) during the three months ended January 31, 2018 were higher than the three months ended January 31, 2017. Market conditions overall for this product line continue to improve. In fact, both bookings and sales for this quarter increased as compared to the respective amounts we achieved in the first quarter of fiscal 2018. We continue to see increased interest from U.S. government customers for our satellite earth station products and believe sales to U.S. government customers will noticeably improve in fiscal 2018 as compared to fiscal 2017. For example, during the most recent fiscal quarter, we received a multi-year follow-on contract with a potential value of up to $19.1 million to provide Space and Naval Warfare Systems Command ("SPAWAR") with Advanced Time Division Multiple Access ("TDMA") Interface Processor ("ATIP") production terminals.
Looking forward, we expect to receive another large contract from SPAWAR, which publicly announced its intention to sole-source a five year, indefinite delivery/indefinite quantity ("IDIQ") contract to procure our SLM-5650B satellite modems and upgrade kits. There are over eight hundred older generation modems currently utilized by multiple U.S. Navy programs and our new modems and related upgrade kits will meet critical Navy requirements. We believe no other competitor responded to the Navy’s Request for Proposal ("RFP"), and we have entered into contract negotiations with the related program office. We believe the customer has a pressing need for this equipment and during the second quarter of fiscal 2018, SPAWAR awarded us a $2.3 million order to provide SLM-5650B satellite modems and upgrade kits. Although predicting the timing of large contract awards is always difficult, we expect a large contract to be awarded to us during the second half of our fiscal 2018, with some shipments starting in the fourth quarter of fiscal 2018.
Net sales of our satellite earth station products are expected to benefit in fiscal 2018 from anticipated orders for our HeightsTM Dynamic Network Access Technology ("HEIGHTS" or "HDNA"). We believe HEIGHTS is a revolutionary technology that is designed to deliver the highest Internet Protocol bits per Hertz in its class, as well as robust reliability. HEIGHTS has been and will continue to be a cornerstone of our future research and development efforts. As evidence of our commitment to this technology, we recently expanded our HEIGHTS offerings to include new and innovative remote gateways which allow the end customer the flexibility to choose between VSAT connectivity and true Single Channel Per Carrier ("SCPC") mode. Although the sales cycle for this product line is longer than our historical satellite earth station product line sales cycle, to-date, we have announced several important customer wins for this product line and our pipeline of opportunities continues to grow. In addition to the benefit of incrementally higher sales of HEIGHTS solutions, fiscal 2018 sales are expected to benefit from strong sales of our SSPAs used in airborne, in-flight connectivity applications.
Net sales during the three months ended January 31, 2018 of both enterprise technology solutions (such as our location and messaging platforms) and safety and security technology solutions (such as our wireless and next generation 911 ("NG911") platforms) were higher as compared to the net sales we achieved during the three months ended January 31, 2017. During our second quarter of fiscal 2018, we were awarded a large multi-year strategic contract valued at $134.0 million to provide safety and security technology solutions to one of the largest wireless carriers in the U.S. As a result of this new contract, we will become the leading provider to this wireless carrier for E911 services for its nationwide 3G, 4G and 5G networks. Our advanced solutions provided to this carrier will support both current 911 infrastructure and NG911 networks which enable text messaging, image, data and video processing. This new contract, which was issued in the form of an amendment to an existing contract and previously received orders, resulted in a significant increase to our backlog. We believe that our enterprise technology solutions continue to gain traction, particularly in international markets. During the second quarter of fiscal 2018, we received $3.8 million of orders from a major Middle East service provider for a complete suite of our location based services that will be used to support multiple application deployments, including mobile devices and Internet of Things. In our view, these contract awards validate that our enterprise technology solutions and safety and security technology solutions are more advanced, secure and reliable than any existing competitive technology. Overall market conditions remain favorable and we expect that aggregate net sales of these solutions in fiscal 2018 will be higher than in fiscal 2017.
Overall, we expect fiscal 2018 net sales in our Commercial Solutions segment to be higher than fiscal 2017. Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Government Solutions
Net sales in our Government Solutions segment were $47.9 million for the three months ended January 31, 2018 as compared to $56.9 million for the three months ended January 31, 2017, a decrease of $9.0 million, or 15.8%. Our Government Solutions segment represented 35.8% of consolidated net sales for the three months ended January 31, 2018, as compared to 40.9% for the three months ended January 31, 2017.
The expected period-over-period decrease in net sales primarily reflects: (i) significantly lower net sales of over-the-horizon microwave systems products; (ii) the impact of our tactical shift in strategy away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions with higher margins; and (iii) the absence of $2.5 million of BFT-1 intellectual property license fees during the most recent fiscal quarter. Such decreases were offset, in part, by an increase in sales of our solid state high-power broadband amplifiers. The period-over-period sales decline of over-the-horizon microwave systems products resulted from the prior completion of performance related to previously awarded large contracts and a lengthy sales cycle for new potential orders. Despite the period-over-period decrease in net sales, bookings for this segment were strong and our book-to-bill ratio for the three months ended January 31, 2018 was 1.15. This was the fourth consecutive quarter in which the book-to-bill ratio exceeded 1.00 and backlog for this segment is at the highest level since our acquisition of TCS in February 2016.
Business activity in our over-the-horizon microwave systems product line is starting to pick-up. During the second quarter of fiscal 2018, we received multi-million dollar contract awards from two international customers. As such, we expect that sales of our over-the-horizon microwave systems products during each of the next two fiscal quarters will significantly increase from the amount we achieved in our most recent fiscal quarter. Although we are involved in discussions and negotiations related to large international and U.S. military over-the-horizon microwave systems opportunities, our Business Outlook for Fiscal 2018 includes only a nominal amount of revenues from these large potential awards.
We believe the types of orders we are winning recently validate our tactical shift in strategy in this segment to focus on niche products with higher margins. Importantly, during the second quarter of fiscal 2018, we were awarded an initial $11.7 million order to provide several thousand of our next generation MT-2025 mobile satellite transceivers to support the BFT-2 system. The BFT-2 system, which is part of the U.S. Army's JBC-P program, provides global real-time situational awareness and networking capabilities for U.S. warfighters and is the successor to the BFT-1 system. Initial shipments of transceivers are expected to start during our fourth quarter of fiscal 2018. Additional orders for our MT-2025 are expected.
During the second quarter of fiscal 2018, we were also awarded a three-year $123.6 million contract from the U.S. Army to provide ongoing sustainment support services for the AN/TSC-198A SNAP (Secret Internet Protocol Router (“SIPR”) and Non-classified Internet Protocol Router (“NIPR”) Access Point), Very Small Aperture Terminals (“VSATs”). SNAP terminals provide quick and mobile satellite communications capability to personnel in the field and Comtech will be the sole provider of these sustainment services. This contract is expected to be fully funded over the performance period. This was an important contract as we believe it will provide a base of relatively stable business in this segment for the next three years.
Although the timing of large contract awards makes it difficult to predict our book-to-bill ratio in any given period, we have a growing pipeline of opportunities and expect the book-to-bill ratio in this segment for fiscal 2018 to exceed 1.00. Given year-to-date order flow and expected new orders, we now anticipate that fiscal 2018 net sales for our Government Solutions segment will be slightly higher than the amount we achieved in fiscal 2017, as compared to our prior estimate in which we estimated net sales to be lower.
Bookings, sales and profitability in our Government SolutionsSatellite and Space Communications segment can fluctuate dramaticallysubstantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Terrestrial and Wireless Networks
Net sales in our Terrestrial and Wireless Networks segment were $53.3 million for the three months ended January 31, 2023, as compared to $51.2 million for the three months ended January 31, 2022, an increase of $2.1 million, or 4.1%. Net sales in the three months ended January 31, 2023 reflect higher sales of our NG-911 solutions and services, offset in part by lower sales of our trusted location and messaging solutions. Our Terrestrial and Wireless Networks segment represented 39.9% of consolidated net sales for the three months ended January 31, 2023 as compared to 42.5% for the three months ended January 31, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended January 31, 2023 was 0.56x.
Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Geography and Customer Type
Sales by geography and customer type, as a percentage of related sales, for the three months ended January 31, 20182023 and 20172022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Consolidated |
U.S. government | | 48.4 | % | | 45.1 | % | | 1.8 | % | | 2.7 | % | | 29.8 | % | | 27.1 | % |
Domestic | | 18.0 | % | | 17.7 | % | | 90.0 | % | | 88.0 | % | | 46.7 | % | | 47.6 | % |
Total U.S. | | 66.4 | % | | 62.8 | % | | 91.8 | % | | 90.7 | % | | 76.5 | % | | 74.7 | % |
| | | | | | | | | | | | |
International | | 33.6 | % | | 37.2 | % | | 8.2 | % | | 9.3 | % | | 23.5 | % | | 25.3 | % |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| | Commercial Solutions | | Government Solutions | | Consolidated |
U.S. government | | 14.7 | % | | 11.2 | % | | 61.7 | % | | 62.2 | % | | 31.5 | % | | 32.1 | % |
Domestic | | 55.6 | % | | 51.2 | % | | 17.7 | % | | 13.6 | % | | 42.0 | % | | 35.8 | % |
Total U.S. | | 70.3 | % | | 62.4 | % | | 79.4 | % | | 75.8 | % | | 73.5 | % | | 67.9 | % |
| | | | | | | | | | | | |
International | | 29.7 | % | | 37.6 | % | | 20.6 | % | | 24.2 | % | | 26.5 | % | | 32.1 | % |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
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"), which represented 10.5%accounted for 11.3% and 11.1% of consolidated net sales for the three months ended January 31, 2018. Sales to Verizon were less than 10.0% of consolidated net sales for the comparable prior year period.2023 and 2022, respectively.
International sales for the three months ended January 31, 20182023 and 20172022 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $35.4$31.4 million and $44.6$30.5 million, respectively. 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 10.0%10% of consolidated net sales for the three months ended January 31, 20182023 and 2017.2022.
Gross Profit.Gross profit was $50.8$45.9 million for both the three months ended January 31, 2018 as compared to $53.2 million for the three months ended January 31, 2017, a decrease of $2.4 million. This decrease in gross profit dollars was largely driven by lower net sales in our Government Solutions segment, including the absence of $2.5 million of BFT-1 intellectual property license fees, both of which are discussed above.2023 and 2022. Gross profit, as a percentage of consolidated net sales, was 38.0% for the three months ended January 31, 2018 as compared to 38.3% for the three months ended January 31, 2017. Excluding the $2.5 million of intellectual property license fees that we earned supporting the U.S. Army’s BFT-1 system, gross profit, as a percentage of consolidated net sales, for the three months ended January 31, 2017 would have been 37.1%. The2023 was 34.3% as compared to 38.1% for the three months ended January 31, 2022. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects an increase from 37.1% to 38.0% in fiscal 2018 was primarily driven by favorablenet sales and overall product mix changes, includingas discussed above. In addition, during the three months ended January 31, 2023 and 2022, respectively, we recorded a greater percentage$1.5 million and $2.5 million benefit to cost of sales as we reduced a warranty accrual due to lower than expected warranty claims in our NG-911 product line. Our gross profit in both periods also reflects start-up costs associated with the opening of our consolidated net sales duringnew high-volume technology manufacturing centers, as well as increased costs resulting from the second quarterongoing impacts of fiscal 2018 occurring in our Commercial Solutions segment. Our Commercial Solutions segment historically achieves higher gross margins than our Government Solutions segment.the COVID-19 pandemic and inflationary pressures. Gross profit, as a percentage of related segment net sales, is further discussed below.
Our Commercial SolutionsSatellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the three months ended January 31, 20182023 was higher thancomparable with the comparable prior year period. The increase was primarilythree months ended January 31, 2022 and reflects changes in product and services mix, as discussed above. Also, during the three months ended January 31, 2022, we incurred $0.4 million of incremental operating costs related to our antenna facility located in the United Kingdom due to higher net sales and overall favorable product mix changes during the most recent fiscal quarter. We expect gross profitimpact of the COVID-19 pandemic. Similar operating costs were not incurred in this segment, as a percentage of related fiscal 2018 net sales, to be comparable to the percentage achieved in fiscal 2017.three months ended January 31, 2023.
Our Government SolutionsTerrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for the three months ended January 31, 2018 was lower than2023 decreased in comparison to the comparable prior year period.three months ended January 31, 2022. The decrease was primarily driven by lower net sales, particularly significantly lower net sales of over-the-horizon microwave systems products. In addition, our gross profit during ourpercentage in the most recent quarter primarily reflects an absence of $2.5 million of BFT-1 intellectual property license fees,changes in products and services mix and lower than expected warranty claims, as discussed above. Given the absence of BFT-1 intellectual property license fees in fiscal 2018, we expect gross profit in this segment, both in dollars and as a percentage of related net sales, to be lower than the respective metrics achieved in fiscal 2017. However, over-time, we believe the implementation of our strategy of shifting our Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions will result in higher gross margins in this segment.
Included in consolidated cost of sales for the three months ended January 31, 20182023 and 20172022 are provisions for excess and obsolete inventory of $1.7$0.4 million and $0.4$1.1 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory,"we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage assumptions.trends.
Because ourOur consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each individual segment, itand therefore is inherently difficult to forecast. Nevertheless, based on expected bookings, the anticipated timing of our performance on orders and the absence of the BFT-1 intellectual property license fees, we currently expect our consolidated gross profit, as a percentage of consolidated net sales, for fiscal 2018 to be slightly lower than the percentage we achieved in fiscal 2017.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were$27.2 $28.9 million and $31.0$29.8 million for the three months ended January 31, 20182023 and 2017, respectively, representing a decrease of $3.8 million.2022, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 20.3%21.6% and 22.3%24.8% for the three months ended January 31, 20182023 and 2017,2022, respectively.
During the three months ended January 31, 2023 and 2022, we incurred $1.5 million and $1.7 million, respectively, of restructuring costs primarily to streamline our operations, including costs related to the ongoing relocation of certain of our satellite earth station production facilities to a new 146,000 square foot facility in Chandler, Arizona. Excluding restructuring costs, selling, general and administrative expenses for the three months ended January 31, 2023 and 2022 would have been $27.4 million, or 20.5%, and $28.1 million, or 23.3%, respectively, of consolidated net sales. The decrease in spending, both in dollarsour selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily attributabledue to lowerhigher consolidated net sales, as discussed above,above. Our selling, general and administrative expenses in the benefitmost recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals. Such spending is expected to continue throughout the remainder of cost reduction actions previously initiated.fiscal 2023.
Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $1.0 million in the three months ended January 31, 2023 as compared to $1.8 million in the three months ended January 31, 2022. Such amortization for the prior year period includes $0.8 million related to the retirement, in December 2021, of three long-standing members of the Board of Directors. Amortization of stock-based compensation is not allocated to our two reportable operating segments.
Research and $0.9Development Expenses.Research and development expenses were $12.4 million and $12.6 million for the three months ended January 31, 20182023 and 2017,2022, respectively.
Based on our current spending plans, we expect fiscal 2018 selling, general and administrative expenses, as a percentage of consolidated net sales, to be comparable to fiscal 2017.
Research and Development Expenses.Research and development expenses were $13.4 million and $13.3 million for the three months ended January 31, 2018 and 2017, respectively, representing an increase of $0.1 million, or 0.8%. As a percentage of consolidated net sales, research and development expenses were 10.0%9.3% and 9.6%10.5% for the three months ended January 31, 20182023 and 2017,2022, respectively. The increase, as a percentage of consolidated net sales, was due primarily to the lower net sales during the most recent fiscal quarter, as discussed above.
For the three months ended January 31, 20182023 and 2017,2022, research and development expenses of $11.4$5.6 million and $11.0$6.4 million, respectively, related to our Commercial SolutionsSatellite and Space Communications segment, and $2.0$6.7 million and $2.2$6.1 million, respectively, related to our Government SolutionsTerrestrial and Wireless Networks segment. The remaining research and development expenses of$0.1 $0.1 million forin both the three months ended January 31, 20182023 and 2017, respectively,2022 related to the amortization of stock-based compensation expense.
During the three months ended January 31, 2023, we incurred $0.7 million of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future. There were no similar costs in the comparable period of the prior year.
Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended January 31, 20182023 and 2017,2022, customers reimbursed us$3.9 $3.4 million and $7.8$2.7 million, respectively, which is not reflected in the reported research and development expenses but is included in consolidated net sales with the related costs included in cost of sales.
Despite the period-to-period decrease in net sales, we continue to invest in enhancements to existing products as well as in new products across almost all of our product lines. Based on our current spending plans, we expect fiscal 2018 research and development expenses, as a percentage of consolidated net sales, to be comparable to fiscal 2017.
Amortization of Intangibles. Amortization relating to intangible assets with finite lives for both the three months ended January 31, 2023 and 2022 was $5.3 million (of which$4.4 $1.8 million was for the Commercial SolutionsSatellite and Space Communications segment and $0.8$3.5 million was for the Government SolutionsTerrestrial and Wireless Networks segment).
Proxy Solicitation Costs. During the three months ended January 31, 2022, we incurred $9.1 million of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) in our Unallocated segment as a result of a now-settled proxy contest initiated by a shareholder. During our first quarter of fiscal 2022, we also entered into a Cooperation Agreement with such shareholder. There were no similar costs during the three months ended January 31, 2023.
CEO Transition Costs. In the second quarter of fiscal 2022, we incurred CEO transition costs related to Fred Kornberg of $13.6 million, all of which were expensed in our Unallocated segment. Of such amount, $10.3 million related to our former CEO's severance payments and benefits upon termination of his employment; the remainder related to our former CEO agreeing to serve as a Senior Technology Advisor for a minimum of two years. There were no similar costs in the three months ended January 31, 2023.
Operating Income (Loss). Operating loss for the three months ended January 31, 20182023 and $6.02022 was $0.8 and $24.6 million, (of which $4.4 million was for the Commercial Solutions segment and $1.6 million was for the Government Solutions segment) for the three months ended January 31, 2017. The decrease is a result of certain intangibles that became fully amortized in fiscal 2017. As such, we anticipate amortization of intangibles in fiscal 2018, in dollars, to be lower than in fiscal 2017.
Settlement of Intellectual Property Litigation. During the three months ended January 31, 2017, we recorded a favorable adjustment to operating income of $10.0 million, net of estimated legal fees, to reflect a lower loss than originally estimated for a TCS intellectual property matter which was settled during that period. There was no comparable adjustment in the three months ended January 31, 2018.
Operating Income. Operating income for the three months ended January 31, 2018 was$4.9 million as compared to $12.8 million for the three months ended January 31, 2017.respectively. Operating income (loss) by reportable segment is shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
Operating income (loss) | | $ | 3.3 | | | (2.5) | | | 3.3 | | | 6.9 | | | (7.4) | | | (28.9) | | | $ | (0.8) | | | (24.6) | |
Percentage of related net sales | | 4.1 | % | | NA | | 6.2 | % | | 13.5 | % | | NA | | NA | | NA | | NA |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
Operating income (loss) | | $ | 8.9 |
| | 5.9 |
| | (0.3 | ) | | 2.3 |
| | (3.7 | ) | | 4.6 |
| | $ | 4.9 |
| | 12.8 |
|
Percentage of related net sales | | 10.4 | % | | 7.2 | % | | (0.6 | )% | | 4.0 | % | | NA |
| | NA |
| | 3.7 | % | | 9.2 | % |
Our GAAP operating loss of $0.8 million for the three months ended January 31, 2023 reflects: (i) $5.3 million of amortization of intangibles; (ii) $1.5 million of restructuring costs (of which $1.1 million and $0.5 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $1.3 million of amortization of stock-based compensation; (iv) $0.7 million of strategic emerging technology costs; and (v) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended January 31, 2023 would have been $8.4 million. Our GAAP operating loss of $24.6 million for the three months ended January 31, 2022 reflects: (i) $13.6 million of CEO transition costs; (ii) $9.1 million of proxy solicitation costs; (iii) $5.3 million of amortization of intangibles; (iv) $2.0 of amortization of stock-based compensation; (v) $1.7 million of restructuring costs (all of which related to our Satellite and Space Communications segment); and (vi) $0.4 million of incremental operating costs due to the impact of COVID-19, as discussed above. Excluding such items, our consolidated operating income for the three months ended January 31, 2022 would have been $7.5 million. The increase in operating income excluding the above items from $7.5 million to $8.4 million in the most recent quarter was primarily due to higher consolidated net sales, offset in part by a lower gross profit percentage, as discussed above. Operating income (loss) by reportable segment is further discussed below.
The increase during the most recent fiscal quarter in our Commercial Solutions segment’sSatellite and Space Communications segment operating income, both in dollars and as a percentage of related segment net sales, for the three months ended January 31, 2023 was driven primarily due to higherby an increase in related segment net sales overall favorable product mix changes and the benefit of cost reduction actions previously initiated,lower selling, general and administrative and research and development expenses, as discussed above. We expect fiscal 2018
The decrease in our Terrestrial and Wireless Networks segment operating income, in our Commercial Solutions segment,both in dollars and as a percentage of related segment net sales, to increase as compared to fiscal 2017.
The expected operating loss in our Government Solutions segment during the three months ended January 31, 2018 was driven by lower net sales, most notably significantly lower over-the-horizon microwave systems sales and the absence of $2.5 million of BFT-1 intellectual property license fees, as discussed above. Given our expectations that sales of over-the-horizon microwave systems will increase during the third and fourth fiscal quarters, we anticipate achieving positive operating income in this segment in each of those quarters, with the fourth quarter expected to be the peak quarter. In addition, we have made, and continue to make, cost reductions in this segment. As such, operating income for this segment, in dollars and as a percentage of related segment net sales, is expected to be higher in fiscal 2018 than in fiscal 2017.
Unallocated operating expenses for the three months ended January 31, 2018 were $3.72023 was driven primarily by a lower gross profit percentage on higher related segment net sales and higher research and development expenses, as discussed above.
Excluding the impact of CEO transition costs, proxy solicitation costs and its respective portion of restructuring charges, Unallocated expenses for the second quarter of fiscal 2022 would have been $6.2 million, as compared to operating income$6.9 million for the second quarter of $4.6fiscal 2023. The increase in Unallocated expenses, excluding such items, was primarily due our increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals, offset in part by lower amortization of stock-based compensation, as discussed above.
Interest Expense and Other. Interest expense was $3.8 million and $1.0 million for the three months ended January 31, 2017 (which includes a favorable adjustment of $10.0 million, as discussed above). Excluding the $10.0 million adjustment, unallocated operating expenses would have been $5.4 million for the three months ended January 31, 2017. The decrease from $5.4 million to $3.7 million primarily reflects the benefit of cost reduction actions previously initiated.
Unallocated expenses for the three months ended January 31, 20182023 and 2017 include amortization of stock-based compensation of $1.1 million and $1.0 million, respectively. Amortization of stock-based compensation expense can fluctuate from period-to-period based on the type and timing of stock-based awards. Based on the type of awards currently outstanding and awards expected to be issued in future periods, amortization of stock-based compensation is expected to be higher in fiscal 2018 than in fiscal 2017.
Looking forward, our unallocated operating expenses in fiscal 2018 are expected to significantly increase as compared to the $5.6 million of unallocated operating expenses for fiscal 2017. During fiscal 2017, unallocated operating expenses were offset by a number of favorable adjustments throughout the fiscal year, which aggregated $18.8 million and which are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017, as filed with the SEC. Excluding the $18.8 million of favorable adjustments, unallocated operating expenses in fiscal 2017 would have been $24.4 million. Given our expected sales growth on a consolidated basis in fiscal 2018 and current spending plans, our unallocated operating expenses in fiscal 2018 are expected to be comparable to fiscal 2017 unallocated operating expenses of $24.4 million, prior to the favorable adjustments discussed above.
On a consolidated basis, we are targeting to achieve operating income, as a percentage of net sales, of approximately 5.0% in fiscal 2018, which compares favorably with the 3.3% of consolidated net sales we achieved in fiscal 2017 (excluding the $18.8 million of favorable adjustments to operating income discussed above). Consolidated operating income, as a percentage of expected consolidated third quarter fiscal 2018 net sales, is expected to approximate 4.0% and increase significantly in the fourth quarter of fiscal 2018.
Interest Expense. Interest expense was $2.5 million and $2.9 million for the three months ended January 31, 2018 and 2017,2022, respectively. The decline inincrease is due to a higher average debt balance outstanding during the most recent quarter, as well as higher interest expense primarily reflects lower total indebtedness, which declined from $253.8 million as of January 31, 2017 to $198.3 million as of January 31, 2018. Interest expense for both periods primarily reflects interest onrates under our Secured Credit Facility as amended. Based on the type, terms, amount of outstanding debt (including capital leases) and current interest rates,that we estimate that ourentered into in November 2022. Our effective interest rate (including amortization of deferred financing costs) will approximate 5.3% in fiscal 2018.the three months ended January 31, 2023 was approximately 8.8%, as compared to 3.4% in the prior year period. Our actualcurrent cash borrowing rate (which excludes the amortization of deferred financing costs) currentlyunder our Credit Facility approximates 4.0%.8.4%, as compared to 1.9% in the prior year period.
Interest (Income) and Other. Interest (income) and other for both the three months ended January 31, 20182023 and 20172022 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.
Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During the three months ended January 31, 2022, we recorded a blended annual interest rate of approximately 0.63%.
(Benefit From) Provision For Income Taxes. Our$0.4 million non-cash benefit from income taxesthe remeasurement of the convertible preferred stock purchase option liability. There was no similar adjustment during the three months ended January 31, 2018 was $13.3 million. During the second quarter of fiscal 2018, we recorded an estimated net discrete tax benefit of $14.0 million, resulting2023. See "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" for more information.
Benefit from the passage of Tax Reform which required us to remeasure our deferred tax assets and liabilities (including liabilities associated with the non-deductible amortization related to our intangible assets). Excluding this net discrete tax benefit, our effective tax rate in fiscal 2018 is estimated to be 27.75% as compared to our prior estimate of 34.5%. The reduction in our fiscal 2018 estimate is attributable to the benefit related to the reduction of the statutory income tax rate from 35.0% to 21.0%, or a blended income tax rate of approximately 27.0%.Income Taxes. For the three months ended January 31, 2017,2023 and 2022, we recorded a provision for income taxestax benefit of $3.5$0.2 million which reflected anand $3.3 million, respectively. Our effective tax rate (excluding discrete tax items) for the three months ended January 31, 2023 and 2022 was 11.00% and 19.75%, respectively. The decrease in the rate is primarily due to expected product and geographical mix changes reflected in our fiscal 2023 outlook.
For purposes of 34.6%.determining our 11.00% estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate.
Net Income. During the three months ended January 31, 2023, we recorded a net discrete tax expense of $0.1 million, primarily related to the settlement of stock-based awards, partially offset by the finalization of certain tax accounts in connection with the filing of our fiscal 2022 Canadian income tax returns. During the three months ended January 31, 2022, we recorded a net discrete tax benefit of $3.3 million, primarily related to proxy solicitation costs and the deductible portion of CEO transition costs.
Our U.S. federal income tax returns for fiscal 2019 through 2021 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Net Loss Attributable to Common Stockholders. During the three months ended January 31, 2023, consolidated net incomeloss attributable to common stockholders was $15.8$6.5 million as compared to $6.6a net loss attributable to common stockholders of $23.5 million during the three months ended January 31, 2017.2022.
Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended January 31, 20182023 and 20172022 are shown in the table below with a reconciliation to net income (numbers in the table may not foot due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
Net income (loss) | | $ | 3.1 | | | (2.5) | | | 3.6 | | | 7.0 | | | (11.5) | | | (26.3) | | | $ | (4.8) | | | (21.9) | |
(Benefit from) provision for income taxes | | (0.4) | | | 0.1 | | | (0.1) | | | (0.2) | | | 0.3 | | | (3.1) | | | (0.2) | | | (3.3) | |
Interest expense | | — | | | — | | | — | | | — | | | 3.8 | | | 1.0 | | | 3.8 | | | 1.0 | |
Interest (income) and other | | 0.6 | | | (0.1) | | | (0.1) | | | 0.1 | | | — | | | (0.1) | | | 0.5 | | | — | |
Change in fair value of convertible preferred stock purchase option liability | | — | | | — | | | — | | | — | | | — | | | (0.4) | | | — | | | (0.4) | |
Amortization of stock-based compensation | | — | | | — | | | — | | | — | | | 1.3 | | | 2.0 | | | 1.3 | | | 2.0 | |
Amortization of intangibles | | 1.8 | | | 1.8 | | | 3.5 | | | 3.5 | | | — | | | — | | | 5.3 | | | 5.3 | |
Depreciation | | 1.0 | | | 0.8 | | | 1.9 | | | 1.5 | | | — | | | 0.1 | | | 3.0 | | | 2.3 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Amortization of cost to fulfill assets | | 0.2 | | | — | | | — | | | — | | | — | | | — | | | 0.2 | | | — | |
Restructuring costs | | 1.1 | | | 1.7 | | | — | | | — | | | 0.5 | | | — | | | 1.5 | | | 1.7 | |
COVID-19 related costs | | — | | | 0.4 | | | — | | | — | | | — | | | — | | | — | | | 0.4 | |
Strategic emerging technology costs | | 0.7 | | | — | | | — | | | — | | | — | | | — | | | 0.7 | | | — | |
CEO transition costs | | — | | | — | | | — | | | — | | | — | | | 13.6 | | | — | | | 13.6 | |
Proxy solicitation costs | | — | | | — | | | — | | | — | | | — | | | 9.1 | | | — | | | 9.1 | |
Adjusted EBITDA | | $ | 8.2 | | | 2.2 | | | 8.8 | | | 11.9 | | | (5.7) | | | (4.3) | | | $ | 11.3 | | | 9.8 | |
Percentage of related net sales | | 10.2 | % | | 3.2 | % | | 16.5 | % | | 23.2 | % | | NA | | NA | | 8.5 | % | | 8.1 | % |
The increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the three months ended January 31, 2023 as compared to the three months ended January 31, 2022 is primarily attributable to higher consolidated net sales, offset in part by a lower gross profit percentage, as discussed above.
The increase in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to higher related segment net sales and lower selling, general and administrative and research and development expenses, as discussed above.
The decrease in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to a lower gross profit percentage on higher related segment net sales and higher research and development expenses, as discussed above.
Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast.
A reconciliation of our fiscal 2022 GAAP Net Loss to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding):
| | | | | | | | |
($ in millions) | | Fiscal Year 2022 |
Reconciliation of GAAP Net Loss to Adjusted EBITDA: | | |
Net loss | | $ | (33.1) | |
Benefit from income taxes | | (4.0) | |
Interest (income) and other | | (0.7) | |
Change in fair value of convertible preferred stock purchase option liability | | (1.0) | |
Interest expense | | 5.0 | |
Amortization of stock-based compensation | | 7.8 | |
Amortization of intangibles | | 21.4 | |
Depreciation | | 10.3 | |
Amortization of cost to fulfill assets | | 0.5 | |
CEO transition costs | | 13.6 | |
Proxy solicitation costs | | 11.2 | |
Restructuring costs | | 6.0 | |
COVID-19 related costs | | 1.1 | |
Strategic emerging technology costs | | 1.2 | |
Adjusted EBITDA | | $ | 39.3 | |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
Net income (loss) | | $ | 9.0 |
| | 5.7 |
| | (0.3 | ) | | 2.4 |
| | 7.1 |
| | (1.5 | ) | | $ | 15.8 |
| | 6.6 |
|
Provision for (benefit from) income taxes | | — |
| | 0.1 |
| | — |
| | — |
| | (13.3 | ) | | 3.4 |
| | (13.3 | ) | | 3.5 |
|
Interest (income) and other expenses | | (0.1 | ) | | (0.1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) |
Interest expense | | — |
| | 0.1 |
| | — |
| | — |
| | 2.5 |
| | 2.8 |
| | 2.5 |
| | 2.9 |
|
Amortization of stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 1.1 |
| | 1.0 |
| | 1.1 |
| | 1.0 |
|
Amortization of intangibles | | 4.4 |
| | 4.4 |
| | 0.8 |
| | 1.6 |
| | — |
| | — |
| | 5.3 |
| | 6.0 |
|
Depreciation | | 2.5 |
| | 2.4 |
| | 0.6 |
| | 0.8 |
| | 0.3 |
| | 0.4 |
| | 3.3 |
| | 3.6 |
|
Settlement of intellectual property litigation | | — |
| | — |
| | — |
| | — |
| | — |
| | (10.0 | ) | | — |
| | (10.0 | ) |
Adjusted EBITDA | | $ | 15.8 |
| | 12.7 |
| | 1.1 |
| | 4.7 |
| | (2.4 | ) | | (3.9 | ) | | $ | 14.5 |
| | 13.5 |
|
Percentage of related net sales | | 18.4 | % | | 15.5 | % | | 2.4 | % | | 8.3 | % | | NA |
| | NA |
| | 10.9 | % | | 9.7 | % |
The increase in consolidated Adjusted EBITDA during the three months ended January 31, 2018 as compared to the three months ended January 31, 2017 was primarily attributable to overall product mix changes (including a higher percentage of consolidated net sales occurring in the Commercial Solutions segment as compared to the prior year period) and lower unallocated expenses, all of which are discussed above.
The increase in our Commercial Solutions segment's Adjusted EBITDA, in dollars and as a percentage of related segment net sales, during the most recent fiscal quarter was primarily due to higher net sales, overall favorable product mix changes and the benefit of cost reduction actions previously initiated, as discussed above.
The decrease in our Government Solutions segment's Adjusted EBITDA, in dollars and as a percentage of related segment net sales, during the most recent fiscal quarter was primarily driven by lower net sales, most notably significantly lower sales of over-the-horizon microwave systems products and the absence of $2.5 million of BFT-1 intellectual property license fees, as discussed above. An anticipated increase in this segment’s sales during each of the third and fourth quarters of fiscal 2018 is expected to drive an increase in Adjusted EBITDA, in both dollars and as a percentage of related segment net sales, from the level we achieved in our most recent quarter.
Looking forward, we anticipate Adjusted EBITDA for the third quarter of fiscal 2018, as a percentage of consolidated net sales, to approximate 11.0% and increase significantly in the fourth quarter. Given our year-to-date performance, we are increasing our targeted fiscal 2018 Adjusted EBITDA to grow by approximately 5.0% over the $70.7 million we achieved in fiscal 2017. In addition, despite the absence of $6.7 million of BFT-1 intellectual property license fees (which we no longer earn given the expiration of such contract in March 2017), we expect Adjusted EBITDA, as a percentage of fiscal 2018 consolidated net sales, to be comparable to the 12.8% we achieved in fiscal 2017. We believe these targeted financial metrics demonstrate the strength of our business. If order flow remains strong and we are able to achieve all of our fiscal 2018 business goals, it is possible that our targeted fiscal 2018 Adjusted EBITDA financial metrics could be higher.
A reconciliation of our fiscal 2017 GAAP Net Income to Adjusted EBITDA of $70.7 million is shown in the table below:
|
| | | |
($ in millions) | Fiscal Year 2017 |
Reconciliation of GAAP Net Income to Adjusted EBITDA: | |
Net income | $ | 15.8 |
|
Income taxes | 9.7 |
|
Interest (income) and other expense | (0.1 | ) |
Interest expense | 11.6 |
|
Amortization of stock-based compensation | 8.5 |
|
Amortization of intangibles | 22.8 |
|
Depreciation | 14.4 |
|
Settlement of intellectual property litigation | (12.0 | ) |
Adjusted EBITDA | $ | 70.7 |
|
Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest, (income) and other expense, interest expense,change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, settlementamortization of intellectual property litigation,cost to fulfill assets, acquisition plan expenses, orrestructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA 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. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock. During the first quarter of fiscal 2023, we changed the computation of our Non-GAAP measures of operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share to adjust for amortization of intangibles (including cost to fulfill assets) and stock-based compensation. This change was made to improve the comparability of our results with our peers. Prior period Non-GAAP results have been restated in the tables below to reflect this change.
These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the above table,tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our third quarter fiscal 20182023 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.
Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the three months ended January 31, 2023 and 2022 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and non-GAAP net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net (loss) income per diluted common share for the three months ended January 31, 2023 and 2022 was computed using weighted average diluted shares outstanding of 28,361,000 and 27,087,000, respectively, during the period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended January 31, 2023 |
($ in millions, except for per share amount) | | Operating (Loss) Income | | Net (Loss) Income Attributable to Common Stockholders | | Net (Loss) Income per Diluted Common Share |
Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
GAAP measures, as reported | | $ | (0.8) | | | $ | (6.5) | | | $ | (0.23) | |
Adjustments to reflect redemption value of convertible preferred stock | | | — | | | | 1.7 | | | | 0.06 | |
Amortization of intangibles | | | 5.3 | | | | 4.1 | | | | 0.15 | |
Restructuring costs | | | 1.5 | | | | 1.2 | | | | 0.04 | |
Amortization of stock-based compensation | | | 1.3 | | | | 1.0 | | | | 0.03 | |
Strategic emerging technology costs | | | 0.7 | | | | 0.7 | | | | 0.02 | |
Amortization of costs to fulfill assets | | | 0.2 | | | | 0.2 | | | | 0.01 | |
Net discrete tax expense | | | — | | | | 0.1 | | | | — | |
Non-GAAP measures | | $ | 8.4 | | | $ | 2.5 | | | $ | 0.09 | |
| | | | | | | | | |
| | Three months ended January 31, 2022 |
($ in millions, except for per share amount) | | Operating (Loss) Income | | Net (Loss) Income Attributable to Common Stockholders | | Net (Loss) Income per Diluted Common Share |
Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
GAAP measures, as reported | | $ | (24.6) | | | $ | (23.5) | | | $ | (0.89) | |
Adjustments to reflect redemption value of convertible preferred stock | | | — | | | | 1.6 | | | | 0.06 | |
CEO transition costs | | | 13.6 | | | | 13.0 | | | | 0.49 | |
Proxy solicitation costs | | | 9.1 | | | | 7.0 | | | | 0.27 | |
Amortization of intangibles | | | 5.3 | | | | 4.1 | | | | 0.15 | |
Amortization of stock-based compensation | | | 2.0 | | | | 1.5 | | | | 0.06 | |
Restructuring costs | | | 1.7 | | | | 1.4 | | | | 0.05 | |
COVID-19 related costs | | | 0.4 | | | | 0.3 | | | | 0.01 | |
Change in fair value of convertible preferred stock purchase option liability | | | — | | | | (0.4) | | | | (0.02) | |
Net discrete tax benefit | | | — | | | | (0.1) | | | | (0.01) | |
Non-GAAP measures | | $ | 7.5 | | | $ | 4.9 | | | $ | 0.18 | |
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 20182023 AND JANUARY 31, 20172022
Net Sales. Consolidated net sales were $255.3$264.9 million and $274.8$237.1 million for the six months ended January 31, 20182023 and 2017,2022, respectively, representing a decreasean increase of $19.5$27.8 million, or 7.1%11.7%. The period-over-period decreaseincrease in consolidated net sales was due primarily to lower net sales in our Government Solutions segment, partially offset byreflects higher net sales in our Commercial Solutions segment. Net sales by operatingSatellite and Space Communications segment, areas further discussed below.
Satellite and Space Communications
Net sales in our Commercial SolutionsSatellite and Space Communications segment were $161.9$161.3 million for the six months ended January 31, 2018,2023 as compared to $158.3$133.7 million for the six months ended January 31, 2017,2022, an increase of $3.6$27.6 million or 2.3%20.6%. Related segment net sales for the six months ended January 31, 2023 primarily reflect increased sales of our troposcatter and SATCOM solutions and satellite ground station technologies, offset in part by lower sales of our high reliability Electrical, Electronic and Electromechanical ("EEE") satellite-based space components. Our Commercial SolutionsSatellite and Space Communications segment represented 63.4%60.9% of consolidated net sales for the six months ended January 31, 20182023 as compared to 57.6%56.4% for the six months ended January 31, 2017.
Bookings during the six month period in fiscal 2018 were strong and reflect strength in almost all of our Commercial Solutions product lines.2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the six months ended January 31, 20182023 was 1.66. As further discussed below, we have a growing pipeline of opportunities and expect that the book-to-bill ratio in this segment will exceed 1.00 for fiscal 2018.1.69x.
Net sales of our satellite earth station products (which include satellite modems and solid-state power amplifiers ("SSPAs")) during the six months ended January 31, 2018 were higher than the six months ended January 31, 2017. Market conditions overall for this product line continue to improve. We continue to see increased interest from U.S. government customers for our satellite earth station products and believe sales to U.S. government customers will noticeably improve in fiscal 2018 as compared to fiscal 2017. For example, during the six months ended January 31, 2018, we received a multi-year follow-on contract with a potential value of up to $19.1 million to provide Space and Naval Warfare Systems Command ("SPAWAR") with Advanced Time Division Multiple Access ("TDMA") Interface Processor ("ATIP") production terminals.
Looking forward, we expect to receive another large contract from SPAWAR, which publicly announced its intention to sole-source a five year, indefinite delivery/indefinite quantity ("IDIQ") contract to procure our SLM-5650B satellite modems and upgrade kits. There are over eight hundred older generation modems currently utilized by multiple U.S. Navy programs and our new modems and related upgrade kits will meet critical Navy requirements. We believe no other competitor responded to the Navy’s Request for Proposal ("RFP"), and we have entered into contract negotiations with the related program office. We believe the customer has a pressing need for this equipment and during the six months ended January 31, 2018, SPAWAR awarded us a $2.3 million order to provide SLM-5650B satellite modems and upgrade kits. Although predicting the timing of large contract awards is always difficult, we expect a large contract to be awarded to us during the second half of our fiscal 2018, with some shipments starting in the fourth quarter of fiscal 2018.
Net sales of our satellite earth station products are expected to benefit in fiscal 2018 from anticipated orders for our HeightsTM Dynamic Network Access Technology ("HEIGHTS" or "HDNA"). We believe HEIGHTS is a revolutionary technology that is designed to deliver the highest Internet Protocol bits per Hertz in its class, as well as robust reliability. HEIGHTS has been and will continue to be a cornerstone of our future research and development efforts. As evidence of our commitment to this technology, we recently expanded our HEIGHTS offerings to include new and innovative remote gateways which allow the end customer the flexibility to choose between VSAT connectivity and true Single Channel Per Carrier (“SCPC”) mode. Although the sales cycle for this product line is longer than our historical satellite earth station product line sales cycle, to-date, we have announced several important customer wins for this product line and our pipeline of opportunities continues to grow. In addition to the benefit of incrementally higher sales of HEIGHTS solutions, fiscal 2018 sales are expected to benefit from strong sales of our SSPAs used in airborne, in-flight connectivity applications.
Net sales during the six months ended January 31, 2018 of both enterprise technology solutions (such as our location and messaging platforms) and safety and security technology solutions (such as our wireless and next generation 911 ("NG911") platforms) were higher as compared to the net sales we achieved during the six months ended January 31, 2017. During the first six months of fiscal 2018, we were awarded a large multi-year strategic contract valued at $134.0 million to provide safety and security technology solutions to one of the largest wireless carriers in the U.S. As a result of this new contract, we will become the leading provider to this wireless carrier for E911 services for its nationwide 3G, 4G and 5G networks. Our advanced solutions provided to this carrier will support both current 911 infrastructure and NG911 networks which enable text messaging, image, data and video processing. This new contract, which was issued in the form of an amendment to an existing contract and previously received orders, resulted in a significant increase to our backlog. During the six months ended January 31, 2018, we also received an aggregate of $96.2 million of contracts from AT&T, which provide for a variety of safety and security technology and enterprise technology solutions including NG911 public safety Call Handling and Emergency Services IP Network ("ESInet") and E911 solutions. In addition, during the six months ended January 31, 2018, our enterprise technology solutions continue to gain traction, particularly in international markets. During the six months ended January 31, 2018, we received $3.8 million of orders from a major Middle East service provider for a complete suite of our location based services that will be used to support multiple application deployments, including mobile devices and Internet of Things. In our view, these contract awards validate that our enterprise technology solutions and safety and security technology solutions are more advanced, secure and reliable than any existing competitive technology. Overall market conditions remain favorable and we expect that aggregate net sales of these solutions in fiscal 2018 will be higher than in fiscal 2017.
Overall, we expect fiscal 2018 net sales in our Commercial Solutions segment to be higher than fiscal 2017. Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Government Solutions
Net sales in our Government Solutions segment were $93.4 million for the six months ended January 31, 2018 as compared to $116.5 million for the six months ended January 31, 2017, a decrease of $23.1 million, or 19.8%. Our Government Solutions segment represented 36.6% of consolidated net sales for the six months ended January 31, 2018, as compared to 42.4% for the six months ended January 31, 2017.
The expected period-over-period decrease in net sales primarily reflects: (i) significantly lower net sales of over-the-horizon microwave systems products; (ii) the impact of our tactical shift in strategy away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions with higher margins; and (iii) the absence of $5.0 million of BFT-1 intellectual property license fees during the most recent six month period. Such decreases were offset, in part, by an increase in sales of our solid state high-power broadband amplifiers. The period-over-period sales decline of over-the-horizon microwave systems products resulted from the prior completion of performance related to previously awarded large contracts and a lengthy sales cycle for new potential orders. Despite the period-over-period decrease in net sales, bookings for this segment were strong and our book-to-bill ratio for the six months ended January 31, 2018 was 1.16. Backlog for this segment is at the highest level since our acquisition of TCS in February 2016.
Business activity in our over-the-horizon microwave systems product line is starting to pick-up. During the six months ended January 31, 2018, we received multi-million dollar contract awards from two international customers. As such, we expect sales of our over-the-horizon microwave systems products during each of the next two fiscal quarters will significantly increase as compared to the level we achieved in the first half of fiscal 2018. Although we are involved in discussions and negotiations related to large international and U.S. military over-the-horizon microwave systems opportunities, our Business Outlook for Fiscal 2018 includes only a nominal amount of revenues from these large potential awards.
We believe the types of orders we are winning recently validate our tactical shift in strategy in this segment to focus on niche products with higher margins. Importantly, during the six months ended January 31, 2018, we were awarded an initial $11.7 million order to provide several thousand of our next generation MT-2025 mobile satellite transceivers to support the BFT-2 system. The BFT-2 system, which is part of the U.S. Army's JBC-P program, provides global real-time situational awareness and networking capabilities for U.S. warfighters and is the successor to the BFT-1 system. Initial shipments of transceivers are expected to start during our fourth quarter of fiscal 2018. Additional orders for our MT-2025 are expected.
During the six months ended January 31, 2018, we were also awarded a three-year $123.6 million contract from the U.S. Army to provide ongoing sustainment support services for the AN/TSC-198A SNAP (Secret Internet Protocol Router (“SIPR”) and Non-classified Internet Protocol Router (“NIPR”) Access Point), Very Small Aperture Terminals (“VSATs”). SNAP terminals provide quick and mobile satellite communications capability to personnel in the field and Comtech will be the sole provider of these sustainment services. This contract is expected to be fully funded over the performance period. This was an important contract as we believe it will provide a base of relatively stable business in this segment for the next three years.
Although the timing of large contract awards makes it difficult to predict our book-to-bill ratio in any given period, we have a growing pipeline of opportunities and expect the book-to-bill ratio in this segment for fiscal 2018 to exceed 1.00. Given year-to-date order flow and expected new orders, we now anticipate that fiscal 2018 net sales for our Government Solutions segment will be slightly higher than the amount we achieved in fiscal 2017, as compared to our prior estimate in which we estimated net sales to be lower.
Bookings, sales and profitability in our Government SolutionsSatellite and Space Communications segment can fluctuate dramaticallysubstantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Terrestrial and Wireless Networks
Net sales in our Terrestrial and Wireless Networks segment were $103.6 million for the six months ended January 31, 2023, as compared to $103.4 million for the six months ended January 31, 2022, a slight increase of $0.2 million, or 0.2%. Related segment net sales for the six months ended January 31, 2023 primarily reflect higher sales of our NG-911 solutions and services, offset in part by lower sales of our trusted location and messaging solutions and cyber security training services. Our Terrestrial and Wireless Networks segment represented 39.1% of consolidated net sales for the six months ended January 31, 2023 as compared to 43.6% for the six months ended January 31, 2022. Our book-to-bill ratio in this segment for the six months ended January 31, 2023 was 0.73x.
Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.
Geography and Customer Type
Sales by geography and customer type, as a percentage of related sales, for the six months ended January 31, 20182023 and 20172022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Consolidated |
U.S. government | | 49.6 | % | | 48.7 | % | | 1.9 | % | | 2.6 | % | | 30.9 | % | | 28.6 | % |
Domestic | | 18.4 | % | | 17.2 | % | | 90.8 | % | | 87.8 | % | | 46.7 | % | | 48.0 | % |
Total U.S. | | 68.0 | % | | 65.9 | % | | 92.7 | % | | 90.4 | % | | 77.6 | % | | 76.6 | % |
| | | | | | | | | | | | |
International | | 32.0 | % | | 34.1 | % | | 7.3 | % | | 9.6 | % | | 22.4 | % | | 23.4 | % |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| | Commercial Solutions | | Government Solutions | | Consolidated |
U.S. government | | 15.2 | % | | 12.4 | % | | 61.1 | % | | 62.5 | % | | 32.0 | % | | 33.7 | % |
Domestic | | 56.7 | % | | 53.7 | % | | 19.3 | % | | 12.7 | % | | 43.1 | % | | 36.3 | % |
Total U.S. | | 71.9 | % | | 66.1 | % | | 80.4 | % | | 75.2 | % | | 75.1 | % | | 70.0 | % |
| | | | | | | | | | | | |
International | | 28.1 | % | | 33.9 | % | | 19.6 | % | | 24.8 | % | | 24.9 | % | | 30.0 | % |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"),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"), which represented 11.1%accounted for 11.9% and 11.4% of consolidated net sales for the six months ended January 31, 2018. Sales to Verizon were less than 10.0% of consolidated net sales for the six months ended January 31, 2017.2023 and 2022, respectively.
International sales for the six months ended January 31, 20182023 and 20172022 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $63.7$59.3 million and $82.5$55.5 million, respectively. 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 10.0%10% of consolidated net sales for the six months ended January 31, 20182023 and 2017.2022.
Gross Profit.Gross profit was $98.5$92.7 million and $105.3$87.6 million for the six months ended January 31, 20182023 and 2017, respectively. The decrease2022, respectively, an increase of $6.8 million in gross profit dollars was largely driven by lower net sales in our Government Solutions segment, including the absence of $5.0 million of BFT-1 intellectual property license fees, both of which are discussed above.$5.1 million. Gross profit, as a percentage of consolidated net sales, increased from 38.3% for the six months ended January 31, 20172023 was 35.0% as compared to 38.6%36.9% for the six months ended January 31, 2018. The2022. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects an increase in gross profit percentage is largely attributable to a greater percentage of our consolidated net sales and overall product mix changes, as discussed above. In addition, during the six months ended January 31, 2018 occurring in our Commercial Solutions segment, which historically achieves higher gross margins than our Government Solutions segment, as well as2023 and 2022, respectively, we recorded a favorable warranty settlement during the six months ended January 31, 2018 that resulted in a $0.7$1.5 million reductionand $2.5 million benefit to cost of sales (which is reflectedas we reduced a warranty accrual due to lower than expected warranty claims in our unallocated segment).NG-911 product line. Our gross profit in both periods reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of the COVID-19 pandemic and inflationary pressures. Gross profit, as a percentage of related segment net sales, is further discussed below.
Our Commercial SolutionsSatellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the six months ended January 31, 2018 was higher than2023 increased in comparison to the comparable prior year period. The increase was primarilysix months ended January 31, 2022 and reflects changes in products and services mix, as discussed above. Also, during the six months ended January 31, 2022, we incurred $1.0 million of incremental operating costs related to our antenna facility located in the United Kingdom due to higher net sales and overall favorable product mix changes during the most recentimpact of the COVID-19 pandemic. Similar operating costs were not incurred in the six month period. We expect gross profit in this segment, as a percentage of related segment net sales, for fiscal 2018 to be comparable to the percentage achieved in fiscal 2017.months ended January 31, 2023.
Our Government SolutionsTerrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for the six months ended January 31, 2018 was lower as compared2023 decreased in comparison to the six months ended January 31, 2017.2022. The decrease was primarily driven by lower net sales in this segment, particularly significantly lower net sales of over-the-horizon microwave systems products. In addition, our gross profit duringpercentage in the six months ended January 31, 2018most recent six-month period primarily reflects an absence of $5.0 million of BFT-1 intellectual property license fees,changes in products and services mix and lower than expected warranty claims, as discussed above. Given the absence of BFT-1 intellectual property license fees in fiscal 2018, we expect gross profit, both in dollars and as a percentage of related net sales, to be lower than the respective metrics achieved in fiscal 2017. However, over-time, we believe the implementation of our strategy of shifting our Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche solutions will result in higher gross margins in this segment.
Included in consolidated cost of sales for the six months ended January 31, 20182023 and 20172022 are provisions for excess and obsolete inventory of $2.4$1.3 million and $1.1$2.2 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory,"we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage assumptions.trends.
Because ourOur consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each individual segment, itand therefore is inherently difficult to forecast. Nevertheless, based on expected bookings, the anticipated timing of our performance on orders and the absence of the BFT-1 intellectual property license fees, we currently expect our consolidated gross profit, as a percentage of consolidated net sales, for fiscal 2018 to be slightly lower than the percentage we achieved in fiscal 2017.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $55.7$58.3 million and $63.7$58.1 million for the six months ended January 31, 20182023 and 2017, respectively, representing a decrease of $8.0 million.2022, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 21.8%22.0% and 23.2%24.5% for the six months ended January 31, 20182023 and 2017,2022, respectively.
During the six months ended January 31, 2023 and 2022, we incurred $2.9 million and $2.4 million, respectively, of restructuring costs primarily to streamline our operations, including costs related to the ongoing relocation of certain of our satellite earth station production facilities to a new 146,000 square foot facility in Chandler, Arizona. Excluding restructuring costs, selling, general and administrative expenses for the six months ended January 31, 2023 and 2022 would have been $55.4 million or 20.9% and $55.7 million or 23.5%, respectively, of consolidated net sales. The decrease in spending, both in dollarsour selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily attributabledue to lowerhigher consolidated net sales, as discussed above,above. Our selling, general and administrative expenses in the benefitmost recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities and other investments we are making to achieve our long-term business goals. Such spending is expected to continue throughout the remainder of cost reduction actions previously initiated.fiscal 2023.
Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $1.6$1.7 million in the six months ended January 31, 2023 as compared to $2.6 million in the six months ended January 31, 2022. Such amortization for the prior year period includes $0.8 million related to the retirement, in December 2021, of three long-standing members of the Board of Directors. Amortization of stock-based compensation is not allocated to our two reportable operating segments.
Research and Development Expenses. Research and development expenses were $25.2 million and $1.7$25.1 million for the six months ended January 31, 20182023 and 2017, respectively. The most recent six month period includes a $0.4 million reversal of stock-based compensation expense related to certain performance shares previously expected to be earned.
Based on our current spending plans, we expect fiscal 2018 selling, general and administrative expenses, as a percentage of consolidated net sales, to be comparable to fiscal 2017.
Research and Development Expenses.Research and development expenses were $27.2 million and $27.4 million for the six months ended January 31, 2018 and 2017,2022, respectively, representing a decreaseslight increase of $0.2$0.1 million or 0.7%0.4%. As a percentage of consolidated net sales, research and development expenses were 10.7%9.5% and 10.0%10.6% for the six months ended January 31, 20182023 and 2017,2022, respectively. The increase, as a percentage of consolidated net sales, was due primarily to the lower net sales during the most recent six month period, as discussed above.
For the six months ended January 31, 20182023 and 2017,2022, research and development expenses of $23.2$12.0 million and $22.7$13.3 million, respectively, related to our Commercial SolutionsSatellite and Space Communications segment and $3.8$13.0 million and $4.5$11.7 million, respectively, related to our Government SolutionsTerrestrial and Wireless Networks segment. The remaining research and development expenses of $0.1$0.2 million and $0.2$0.1 million for the six months ended January 31, 20182023 and 2017,2022, respectively, related to the amortization of stock-based compensation expense.
During the six months ended January 31, 2023, we incurred $1.5 million of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations, all of which was incurred in our Satellite and Space Communications segment. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future. There were no similar costs in the comparable period of the prior year.
Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the six months ended January 31, 20182023 and 2017,2022, customers reimbursed us $8.2$5.6 million and $16.0$5.3 million, respectively, which is not reflected in the reported research and development expenses but is included in consolidated net sales with the related costs included in cost of sales.
Despite the period-to-period decrease in consolidated net sales, we continue to invest in enhancements to existing products as well as in new products across almost all of our product lines. Based on our current spending plans, we expect fiscal 2018 research and development expenses, as a percentage of consolidated net sales, to be comparable to fiscal 2017.
Amortization of Intangibles. Intangibles. Amortization relating to intangible assets with finite lives was $10.5 million (of which $8.8 million was for the Commercial Solutions segment and $1.7 million was for the Government Solutions segment) forboth the six months ended January 31, 20182023 and $12.12022 was $10.7 million (of which $8.8$3.7 million was for the Commercial SolutionsSatellite and Space Communications segment and $3.2$7.0 million was for the Government SolutionsTerrestrial and Wireless Networks segment) for the six months ended January 31, 2017. The decrease is a result of certain intangibles that became fully amortized in fiscal 2017. As such, we anticipate amortization of intangibles in fiscal 2018, in dollars, to be lower than in fiscal 2017..
Settlement of Intellectual Property Litigation.Proxy Solicitation Costs. During the six months ended January 31, 2017,2022, we recordedincurred $11.2 million of proxy solicitation costs (including legal and advisory fees and costs associated with a favorable adjustment to operating incomerelated lawsuit) in our Unallocated segment as a result of $10.0 million, neta now settled proxy contest initiated by a shareholder. During our first quarter of estimated legal fees, to reflectfiscal 2022, we also entered into a lower loss than originally estimated for a TCS intellectual property matter which was settledCooperation Agreement with such shareholder. There were no similar costs during that period. There was no comparable adjustment in the six months ended January 31, 2018.2023.
Operating Income. Operating income for the six months ended January 31, 2018 was $5.1 million as compared to $12.1CEO Transition Costs. CEO transition costs were $9.1 million for the six months ended January 31, 2017.2023. On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Mr. Peterman, as President and CEO. Transition costs related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, were $7.4 million, of which $3.8 million related to the acceleration of unamortized stock-based compensation, with the remaining $3.6 million related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3.6 million was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $1.0 million expense related to a cash sign-on bonus, which was paid in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment.
CEO transition costs were $13.6 million for the six months ended January 31, 2022 and related to our former CEO, Fred Kornberg. Of such amount, $10.3 million related to Mr. Kornberg's severance payments and benefits upon termination of his employment; the remainder related to him agreeing to serve as a Senior Technology Advisor for a minimum of two years. CEO transition costs related to Mr. Kornberg were expensed in our Unallocated segment.
Operating Income (Loss). Operating loss for the six months ended January 31, 2023 and 2022 was $10.5 million and $31.1 million, respectively. Operating income (loss) by reportable segment is shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
Operating income (loss) | | $ | 8.3 | | | (7.8) | | | 4.1 | | | 13.0 | | | (22.9) | | | (36.3) | | | $ | (10.5) | | | (31.1) | |
Percentage of related net sales | | 5.1 | % | | NA | | 4.0 | % | | 12.6 | % | | NA | | NA | | NA | | NA |
Our GAAP operating loss of $10.5 million for the six months ended January 31, 2023 reflects: (i) $10.7 million of amortization of intangibles; (ii) $9.1 million of CEO transition costs; (iii) $2.9 million of restructuring costs (of which $2.2 million and $0.7 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iv) $2.2 million of amortization of stock-based compensation; (v) $1.5 million of strategic emerging technology costs; and (vi) $0.5 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the six
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
Operating income (loss) | | $ | 13.7 |
| | 9.0 |
| | (0.9 | ) | | 4.8 |
| | (7.7 | ) | | (1.7 | ) | | $ | 5.1 |
| | 12.1 |
|
Percentage of related net sales | | 8.5 | % | | 5.7 | % | | (1.0 | )% | | 4.1 | % | | NA |
| | NA |
| | 2.0 | % | | 4.4 | % |
months ended January 31, 2023 would have been $16.3 million, or 6.1% of consolidated net sales. Our GAAP operating loss of $31.1 million for the six months ended January 31, 2022 reflects: (i) $13.6 million of CEO transition costs; (ii) $11.2 million of proxy solicitation costs; (iii) $10.7 million of amortization of intangibles; (iv) $2.9 million of amortization of stock-based compensation; (v) $2.4 million of restructuring costs (all of which related to our Satellite and Space Communications segment); and (vi) $1.0 million of incremental operating costs due to the impact of COVID-19, as discussed above. Excluding such items, our consolidated operating income for the six months ended January 31, 2022 would have been $10.8 million, or 4.5% of consolidated net sales. The increase in operating income excluding the above items from $10.8 million to $16.3 million for the more recent period was primarily due to higher consolidated net sales, as discussed above. Operating income (loss) by reportable segment is further discussed below.
The increase during the most recent six month period in our Commercial Solutions segment’sSatellite and Space Communications segment operating income, both in dollars and as a percentage of the related segment net sales, for the six months ended January 31, 2023 was driven primarily due to higherby an increase in related segment net sales overall favorable product mix changes and the benefit of cost reduction actions previously initiated,gross profit percentage and lower selling, general and administrative and research and development expenses, as discussed above. We expect fiscal 2018
The decrease in our Terrestrial and Wireless Networks segment operating income, in our Commercial Solutions segment,both in dollars and as a percentage of the related segment net sales, to increase as compared to fiscal 2017.
The expected operating loss in our Government Solutions segment during the six months ended January 31, 2018 was driven by lower net sales, most notably significantly lower over-the-horizon microwave systems sales and the absence of $5.0 million of BFT-1 intellectual property license fees, as discussed above. Given our expectations that sales of over-the-horizon microwave systems will increase during the third and fourth fiscal quarters, we anticipate achieving positive operating income in this segment in each of those quarters, with the fourth quarter expected to be the peak quarter. In addition, we have made, and continue to make, cost reductions in this segment. As such, operating income for this segment, in dollars and as a percentage of related segment net sales, is expected to be higher in fiscal 2018 when compared to fiscal 2017.
Unallocated operating expenses for the six months ended January 31, 20182023 was driven primarily by changes in products and 2017 were $7.7 millionservices mix and $1.7 million, respectively. Excluding a $0.7 million favorable warranty settlementhigher research and a $10.0 million adjustment (bothdevelopment expenses, as discussed above), unallocated operating expenses forabove.
Excluding the six months ended January 31, 2018impact of CEO transition costs, proxy solicitation costs and 2017 would have been $8.4 million and $11.7 million, respectively. The lower unallocated operating expenses during the most recent six month period primarily reflects cost reduction actions previously initiated.
its respective portion of restructuring charges, Unallocated expenses for the six months ended January 31, 2018 and 2017 include amortization of stock-based compensation of $1.82022 would have been $11.5 million, and $2.0 million, respectively. The decrease was primarily due to the reversal of $0.4 million of stock-based compensation expense related to certain performance shares that were previously expected to be earned. Amortization of stock-based compensation expense can fluctuate from period-to-period based on the type and timing of stock-based awards. Based on the type of awards currently outstanding and awards expected to be issued in future periods, total amortization of stock-based compensation is expected to be higher in fiscal 2018 than in fiscal 2017.
Looking forward, our unallocated operating expenses in fiscal 2018 are expected to significantly increase as compared to the $5.6 million of unallocated operating expenses for fiscal 2017. During fiscal 2017, unallocated operating expenses were offset by a number of favorable adjustments throughout the fiscal year, which aggregated $18.8 million and which are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017, as filed with the SEC. Excluding the $18.8 million of favorable adjustments, unallocated operating expenses in fiscal 2017 would have been $24.4 million. Given our expected sales growth on a consolidated basis in fiscal 2018 and current spending plans, our unallocated operating expenses in fiscal 2018 are expected to be comparable to fiscal 2017 unallocated operating expenses of $24.4 million, prior to the favorable adjustments discussed above.
We are targeting to achieve operating income, as a percentage of consolidated net sales, of approximately 5.0% in fiscal 2018, which compares favorably with the 3.3% of consolidated net sales we achieved in fiscal 2017 (excluding the $18.8 million of favorable adjustments to operating income discussed above). Consolidated operating income, as a percentage of expected consolidated third quarter fiscal 2018 net sales, is expected to approximate 4.0% and increase significantly in the fourth quarter of fiscal 2018.
Interest Expense. Interest expense was $5.1 million and $6.2$13.1 million for the six months ended January 31, 20182023. The increase in Unallocated expenses excluding such items was primarily due our increased investments in marketing, including new social media activities, and 2017,other investments we are making to achieve our long-term business goals, offset in part by lower amortization of stock-based compensation, as discussed above.
Interest Expense and Other. Interest expense was $6.0 million and $2.6 million for the six months ended January 31, 2023 and 2022, respectively. The decline inincrease is due to a higher average debt balance outstanding during the most recent period, as well as higher interest expense primarily reflects lower total indebtedness, which declined from $253.8 million as of January 31, 2017 to $198.3 million as of January 31, 2018. Interest expense for both periods primarily reflects interest onrates under our Secured Credit Facility as amended. Based on the type, terms, amount of outstanding debt (including capital leases) and current interest rates,that we estimate that ourentered into in November 2022. Our effective interest rate (including amortization of deferred financing costs) will approximate 5.3% in fiscal 2018.the six months ended January 31, 2023 was approximately 7.4%, as compared to 3.1% in the prior year period. Our actualcurrent cash borrowing rate (which excludes the amortization of deferred financing costs) currentlyunder our existing Credit Facility approximates 4.0%.8.4%, as compared to 1.9% in the prior year period.
Interest (Income) and Other. Interest (income) and other for both the six months ended January 31, 20182023 and 20172022 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.
Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During the six months ended January 31, 2022, we recorded a blended annual interest rate of approximately 0.63%.
(Benefit From) Provision For Income Taxes. Our$0.7 million non-cash benefit from income taxesthe remeasurement of the convertible preferred stock purchase option liability. There was no similar adjustment during the six months ended January 31, 20182023. See "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" for more information.
Benefit from Income Taxes. For the six months ended January 31, 2023 and 2022, we recorded a tax benefit of $0.8 million and $5.3 million, respectively. Our effective tax rate (excluding discrete tax items) for the six months ended January 31, 2023 and 2022 was $14.1 million. 11.00% and 19.75%, respectively. The decrease in the rate is primarily due to expected product and geographical mix changes reflected in our fiscal 2023 business outlook.
For purposes of determining our 11.00% estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate.
During the six months ended January 31, 2018,2023, we recorded an estimateda nominal, net discrete tax benefit of $14.0 million, resulting from the passage of Tax Reform which required us to remeasure our deferred tax assets and liabilities (including liabilities associated with the non-deductible amortization related to our intangible assets). Excluding this net discrete tax benefit, our effective tax rate in fiscal 2018 is estimated to be 27.75% as compared to our prior estimate of 34.5%. The reduction in our fiscal 2018 estimate is attributable to the benefitexpense primarily related to the reductionsettlement of stock-based awards, partially offset by the statutory income tax rate from 35.0% to 21.0%, or a blended income tax ratedeductible portion of approximately 27.0%. For the six months ended January 31, 2017, we recorded a provision for income taxes of $1.9 million, which reflected an effective tax rate of 32.0%.
Net Income. CEO transition costs. During the six months ended January 31, 2022, we recorded a net discrete tax benefit of $3.7 million, primarily related to proxy solicitation costs and deductible portion of CEO transition costs.
Our U.S. federal income tax returns for fiscal 2019 through 2021 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated net income was $14.1 million as compared $4.1 million duringresults of operations and financial condition.
Net Loss Attributable to Common Stockholders. During the six months ended January 31, 2017.2023 and 2022, consolidated net loss attributable to common stockholders was $19.3 million and $34.7 million, respectively.
Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the six months ended January 31, 20182023 and 20172022 are shown in the table below (numbers in the table may not foot due to rounding):
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| | Six months ended January 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
($ in millions) | | Satellite and Space Communications | | Terrestrial and Wireless Networks | | Unallocated | | Consolidated |
Net income (loss) | | $ | 8.9 | | (7.6) | | 4.2 | | 12.9 | | (29.0) | | (33.2) | | $ | (15.9) | | (27.9) |
(Benefit from) provision for income taxes | | (0.6) | | (0.5) | | (0.3) | | (0.1) | | 0.1 | | (4.7) | | (0.8) | | (5.3) |
Interest expense | | — | | 0.1 | | — | | — | | 6.0 | | 2.5 | | 6.0 | | 2.6 |
Interest (income) and other | | — | | 0.2 | | 0.2 | | 0.1 | | — | | (0.1) | | 0.2 | | 0.2 |
Change in fair value of convertible preferred stock purchase option liability | | — | | — | | — | | — | | — | | (0.7) | | — | | (0.7) |
Amortization of stock-based compensation | | — | | — | | — | | — | | 2.2 | | 2.9 | | 2.2 | | 2.9 |
Depreciation | | 2.0 | | 1.6 | | 3.7 | | 2.9 | | 0.1 | | 0.1 | | 5.8 | | 4.6 |
Amortization of intangibles | | 3.7 | | 3.7 | | 7.0 | | 7.0 | | — | | — | | 10.7 | | 10.7 |
Amortization of cost to fulfill assets | | 0.5 | | — | | — | | — | | — | | — | | 0.5 | | — |
Restructuring costs | | 2.1 | | 2.4 | | — | | — | | 0.7 | | — | | 2.9 | | 2.4 |
COVID-19 related costs | | — | | 1.0 | | — | | — | | — | | — | | — | | 1.0 |
Strategic emerging technology costs | | 1.5 | | — | | — | | — | | — | | — | | 1.5 | | — |
CEO transition costs | | — | | — | | — | | — | | 9.1 | | 13.6 | | 9.1 | | 13.6 |
Proxy solicitation costs | | — | | — | | — | | — | | — | | 11.2 | | — | | 11.2 |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 18.1 | | 0.9 | | 14.8 | | 22.9 | | (10.8) | | (8.4) | | $ | 22.1 | | 15.3 |
Percentage of related net sales | | 11.2 | % | | 0.7 | % | | 14.3 | % | | 22.1 | % | | NA | | NA | | 8.3 | % | | 6.5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
($ in millions) | | Commercial Solutions | | Government Solutions | | Unallocated | | Consolidated |
Net income (loss) | | $ | 13.7 |
| | 8.7 |
| | (1.0 | ) | | 4.9 |
| | 1.4 |
| | (9.5 | ) | | $ | 14.1 |
| | 4.1 |
|
(Benefit from) provision for income taxes | | — |
| | 0.2 |
| | — |
| | — |
| | (14.1 | ) | | 1.8 |
| | (14.1 | ) | | 1.9 |
|
Interest (income) and other expenses | | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) |
Interest expense | | 0.1 |
| | 0.1 |
| | — |
| | — |
| | 5.0 |
| | 6.1 |
| | 5.1 |
| | 6.2 |
|
Amortization of stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 1.8 |
| | 2.0 |
| | 1.8 |
| | 2.0 |
|
Amortization of intangibles | | 8.8 |
| | 8.8 |
| | 1.7 |
| | 3.2 |
| | — |
| | — |
| | 10.5 |
| | 12.1 |
|
Depreciation | | 4.9 |
| | 5.0 |
| | 1.2 |
| | 1.5 |
| | 0.6 |
| | 0.8 |
| | 6.7 |
| | 7.3 |
|
Settlement of intellectual property litigation | | — |
| | — |
| | — |
| | — |
| | — |
| | (10.0 | ) | | — |
| | (10.0 | ) |
Adjusted EBITDA | | $ | 27.5 |
| | 22.8 |
| | 2.0 |
| | 9.6 |
| | (5.3 | ) | | (8.9 | ) | | $ | 24.1 |
| | 23.5 |
|
Percentage of related net sales | | 17.0 | % | | 14.4 | % | | 2.1 | % | | 8.2 | % | | NA |
| | NA |
| | 9.5 | % | | 8.6 | % |
The increase in consolidated Adjusted EBITDA, duringboth in dollars and as a percentage of consolidated net sales, for the six months ended January 31, 20182023 as compared to the six months ended January 31, 2017 was2022 is primarily attributable to overall favorable product mix changes (including a higher percentage of consolidated net sales, occurring in the Commercial Solutions segment as compared to the prior year period) and lower unallocated expenses, all of which are discussed above.
The increase in our Commercial SolutionsSatellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, during the most recent six month period, wasis primarily attributabledue to higheran increase in related segment net sales overall favorable product mix changes and the benefit of cost reduction actions previously initiated,gross profit percentage and lower selling, general and administrative and research and development expenses, as discussed above.
The decrease in our Government SolutionsTerrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, during the most recent six month period wasis primarily driven by lower net sales, most notably significantly lower sales of over-the-horizon microwave systemsdue changes in products and the absence of $5.0 million of BFT-1 intellectual property license fees,services mix and higher research and development expenses, as discussed above. An anticipated increase in this segment’s sales during each of the third and fourth quarters of fiscal 2018 is expected to drive an increase in Adjusted EBITDA, in both dollars and as a percentage of related net sales, from the level we achieved in our most recent quarter.
Looking forward, we anticipate Adjusted EBITDA for the third quarter of fiscal 2018, as a percentage of consolidated net sales, to approximate 11.0% and increase significantly in the fourth quarter. Given our year-to-date performance, we are increasing our targeted fiscal 2018 Adjusted EBITDA to grow by approximately 5.0% over the $70.7 million we achieved in fiscal 2017. In addition, despite the absence of $6.7 million of BFT-1 intellectual property license fees (which we no longer earn given the expiration of such contract in March 2017), we expect Adjusted EBITDA, as a percentage of fiscal 2018 consolidated net sales, to be comparable to the 12.8% we achieved in fiscal 2017. We believe these targeted financial metrics demonstrate the strength of our business. If order flow remains strong and we are able to achieve all of our fiscal 2018 business goals, it is possible that our targeted fiscal 2018 Adjusted EBITDA financial metrics could be higher.52
A reconciliation of our fiscal 20172022 GAAP Net Incomenet loss to Adjusted EBITDA of $70.7 million is shown in the table below:below (numbers in the table may not foot due to rounding):
|
| | | |
($ in millions) | Fiscal Year 2017 |
Reconciliation of GAAP Net Income to Adjusted EBITDA: | |
Net income | $ | 15.8 |
|
Income taxes | 9.7 |
|
Interest (income) and other expense | (0.1 | ) |
Interest expense | 11.6 |
|
Amortization of stock-based compensation | 8.5 |
|
Amortization of intangibles | 22.8 |
|
Depreciation | 14.4 |
|
Settlement of intellectual property litigation | (12.0 | ) |
Adjusted EBITDA | $ | 70.7 |
|
| | | | | | | | | |
($ in millions) | | Fiscal Year 2022 | |
Reconciliation of GAAP Net Loss to Adjusted EBITDA: | | | |
Net loss | | $ | (33.1) | | |
Benefit from income taxes | | (4.0) | | |
Interest (income) and other | | (0.7) | | |
Change in fair value of convertible preferred stock purchase option liability | | (1.0) | | |
Interest expense | | 5.0 | | |
Amortization of stock-based compensation | | 7.8 | | |
Amortization of intangibles | | 21.4 | | |
Depreciation | | 10.3 | | |
Amortization of cost to fulfill assets | | 0.5 | | |
CEO transition costs | | 13.6 | | |
Proxy solicitation costs | | 11.2 | | |
Restructuring costs | | 6.0 | | |
COVID-19 related costs | | 1.1 | | |
Strategic emerging technology costs | | 1.2 | | |
Adjusted EBITDA | | $ | 39.3 | | |
| | | |
Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest, (income) and other expense, interest expense,change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, settlementamortization of intellectual property litigation,cost to fulfill assets, acquisition plan expenses, orrestructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA 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. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock. During the first quarter of fiscal 2023, we changed the computation of our Non-GAAP measures of operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share to adjust for amortization of intangibles (including cost to fulfill assets) and stock-based compensation. This change was made to improve the comparability of our results with our peers. Prior period Non-GAAP results have been restated in the tables below to reflect this change.
These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the above table,tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our third quarter fiscal 20182023 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.
Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the six months ended January 31, 2023 and 2022 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and non-GAAP net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net (loss) income per diluted common share for the six months ended January 31, 2023 and 2022 was computed using weighted average diluted shares outstanding of 28,262,000 and 27,004,000, respectively, during the period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended January 31, 2023 |
($ in millions, except for per share amount) | | Operating (Loss) Income | | Net (Loss) Income Attributable to Common Stockholders | | Net (Loss) Income per Diluted Common Share |
Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
GAAP measures, as reported | | $ | (10.5) | | | $ | (19.3) | | | $ | (0.69) | |
Adjustments to reflect redemption value of convertible preferred stock | | | — | | | | 3.4 | | | | 0.12 | |
Amortization of intangibles | | | 10.7 | | | | 8.3 | | | | 0.30 | |
CEO transition costs | | | 9.1 | | | | 8.6 | | | | 0.31 | |
Restructuring costs | | | 2.9 | | | | 2.2 | | | | 0.08 | |
Amortization of stock-based compensation | | | 2.2 | | | | 1.7 | | | | 0.06 | |
| | | | | | | | | |
Strategic emerging technology costs | | | 1.5 | | | | 1.3 | | | | 0.05 | |
Amortization of cost to fulfill assets | | | 0.5 | | | | 0.5 | | | | 0.02 | |
| | | | | | | | | |
| | | | | | | | | |
Net discrete tax expense | | | — | | | | 0.5 | | | | 0.02 | |
Non-GAAP measures | | $ | 16.3 | | | $ | 7.1 | | | $ | 0.25 | |
| | | | | | | | | |
| | Six months ended January 31, 2022 |
($ in millions, except for per share amount) | | Operating (Loss) Income | | Net (Loss) Income Attributable to Common Stockholders | | Net (Loss) Income per Diluted Common Share |
Reconciliation of GAAP to Non-GAAP Earnings: | | | | | | | | | |
GAAP measures, as reported | | $ | (31.1) | | | $ | (34.7) | | | $ | (1.31) | |
Adjustment to reflect redemption value of convertible preferred stock | | | — | | | | 6.9 | | | | 0.26 | |
CEO transition costs | | | 13.6 | | | | 13.0 | | | | 0.49 | |
Proxy solicitation costs | | | 11.2 | | | | 8.7 | | | | 0.33 | |
Amortization of intangibles | | | 10.7 | | | | 8.2 | | | | 0.31 | |
Amortization of stock-based compensation | | | 2.9 | | | | 2.3 | | | | 0.09 | |
Restructuring costs | | | 2.4 | | | | 2.0 | | | | 0.07 | |
COVID-19 related costs | | | 1.0 | | | | 0.8 | | | | 0.03 | |
Change in fair value of convertible preferred stock purchase option liability | | | — | | | | (0.7) | | | | (0.03) | |
Net discrete tax benefit | | | — | | | | (0.5) | | | | (0.02) | |
Non-GAAP measures | | $ | 10.8 | | | $ | 5.8 | | | $ | 0.21 | |
| | | | | | | | | |
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased to $40.5were $21.5 million and $21.7 million at January 31, 2018 from $41.8 million at2023 and July 31, 2017, a decrease of $1.4 million and our total indebtedness was $198.3 million as of January 31, 2018 as compared to $253.8 million as of January 31, 2017. The decrease in cash and cash equivalents during2022, respectively. For the six months ended January 31, 2018 was driven by2023, our cash flows reflect the following:
•Net cash provided byused in operating activities was $9.2$16.8 million for the six months ended January 31, 20182023 as compared to $25.6net cash provided by operating activities of $9.6 million for the six months ended January 31, 2017.2022. During the six months ended January 31, 2023, we paid $5.6 million in total CEO transition costs. Excluding such payments, net cash used in operating activities would have been $11.2 million. The period-over-period decrease in cash flow from operating activities is attributable to(which excludes the payments of CEO transition costs) reflects overall changes in net working capital requirements, principally the timing of shipments, billings and payments.
•Net cash used in investing activities for the six months ended January 31, 20182023 and 2022 was $2.8$9.9 million as comparedand $8.8 million, respectively. Net cash used in investing activities for the six months ended January 31, 2023 primarily reflects capital expenditures to $4.1build-out cloud-based computer networks to support our previously announced NG-911 contract wins and capital investments and building improvements in connection with the opening of our new high-volume technology manufacturing centers. Net cash used in both periods also relates to expenditures for property, plant and equipment upgrades and enhancements.
•Net cash provided by financing activities was $26.6 million for the six months ended January 31, 2017. Both2023 compared to $0.7 million of these amounts primarily represent expenditures relating to ongoing equipment upgrades and enhancements.
Netnet cash used in financing activities was $7.7 million for the six months ended January 31, 2018 as compared to $25.1 million for the six months ended January 31, 2017.2022. During the six months ended January 31, 2018,2023, we received $9.4 million fromhad net borrowings under our Revolving LoanCredit Facility and made $11.7of $38.4 million, as compared to net payments under our Credit Facility of principal repayments related to our Term Loan Facility and capital lease obligations.$86.5 million during the six months ended January 31, 2022. During the six months ended January 31, 2017,2022, we made $4.1received an aggregate of $100.0 million of net repayments under our Revolving Loan Facility and made $6.3 million of principal repaymentsin proceeds related to our Term Loan Facility and capital lease obligations.the issuance of a new series of Convertible Preferred Stock to certain investors. During the six months ended January 31, 2018 and 2017,2023, we paid $4.8deferred financing costs of $3.6 million in connection with the amendment of our Credit Facility. During the six months ended January 31, 2023 and 2022, we paid $5.9 million and $14.2$5.8 million, respectively, in cash dividends to our shareholders.common stockholders. We also made $1.0$2.5 million and $0.2$4.7 million respectively, of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the six months ended January 31, 20182023 and 2017.2022, respectively.
The Credit Facility is discussed below and in "Notes to Condensed Consolidated Financial Statements – Note (9) – Credit Facility."
The Convertible Preferred Stock is discussed below and in "Notes to Condensed Consolidated Financial Statements – Note (16) – Convertible Preferred Stock."
Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest our cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits and U.S. Treasury securities. Many of our money market mutual funds invest in direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.
The Secured Credit Facility, as amended, is discussed below and in "Notes to Condensed Consolidated Financial Statements - Note (9) - Secured Credit Facility."
As of January 31, 2018, our material short-term cash requirements primarily consist of: (i) remaining fiscal 2018 mandatory principal repayments of $8.6 million associated with the Term Loan Facility and related interest payments of approximately $2.4 million, (ii) estimated interest payments for fiscal 2018 under our Revolving Loan Facility, (iii) capital lease obligations and operating lease commitments, (iv) our ongoing working capital needs, including income tax payments, and (v) accrued quarterly dividends.
In June 2016,addition to making capital investments for our new high-volume manufacturing centers, we sold 7.1have been making significant capital expenditures and building out cloud-based computer networks to support our previously announced NG-911 contract wins for the states of Pennsylvania, South Carolina and Arizona. We expect capital investments for these and other initiatives to continue for the remainder of fiscal 2023 as we look to complete such projects.
On July 13, 2022, we filed a $200.0 million shares of our common stock in a public offering at a price of $14.00 per share, resulting in proceeds to us of $95.0 million, net of underwriting discounts and commissions. As of January 31, 2018 and March 7, 2018, an aggregate registered amount of $75.0 million under our existing Shelf Registration Statement filedshelf registration statement with the SEC remains available for the sale of various types of securities, including debt.debt securities. This new shelf registration statement was declared effective by the SEC as of July 25, 2022.
AsOn September 29, 2020, our Board of January 31, 2018 and March 7, 2018, we wereDirectors authorized to repurchase up to an additional $8.7 million of our common stock, pursuant to our currenta new $100.0 million stock repurchase program, which replaced our prior program. OurThe new $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, and may be made pursuant to SEC Rule 10b5-1 trading plans.or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the six months ended January 31, 20182023 and 2017.2022.
On September 27, 201729, 2022 and December 6, 2017,8, 2022, our Board of Directors declared a dividend of $0.10 per common share, which werewas paid on November 17, 201718, 2022 and February 16, 2018,17, 2023, respectively. On March 7, 2018,Encouraged by the progress that we have made related to our One Comtech transformation, our launch of EVOKE and our emerging growth opportunities, during the third quarter of fiscal 2023, the Board, of Directors declaredtogether with management, adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend, of $0.10 perthereby increasing our financial flexibility. Future common share, payable on May 18, 2018 to stockholders of record at the close of business on April 18, 2018. Futurestock dividends, if any, remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.approval and certain voting rights of holders of our Series A Convertible Preferred Stock.
Our material long-term cash requirements primarily consist of: (i) mandatory interestare for working capital, capital expenditures, income tax payments, debt service (including interest), facilities lease payments and principal repayments pursuant to our Secured Credit Facility, as amended; (ii) payments relating to our capital lease obligations and operating lease commitments; and (iii) cash payments of approximately $1.3 milliondividends related to our 2009 Radyne-related restructuring plan, including accreted interest as discussedConvertible Preferred Stock, which are payable in "Notes to Condensed Consolidated Financial Statements - Note (8) - Acquisition-Related Restructuring Plan." kind or in cash at our election.
We continue to receive (and approve on a limited basis) requests from our customers for higher credit limits and longer payment terms. We also continue to monitor our accounts receivable credit portfolio and have not had material negative customer credit experiences historically.
We have historically met both our short-term and long-term cash requirements with funds provided by a combination of cash and cash equivalent balances, cash generated from operating activities and cash generated from equity and debt financing transactions. In our first quarter of fiscal 2022, we secured a $100.0 million strategic growth investment to enhance our financial flexibility and strengthen our ability to capitalize on recent large contract awards and growing customer demand by making crucial investments in our satellite and space communications and terrestrial and wireless networks solutions. Based on our anticipated level of future sales and operating income,current revenue visibility, we believe that our existing cash and cash equivalent balances, our cash generated from operating activities and amounts potentially available under the Revolving Loan Facility under our Secured Credit Facility as amended, will be sufficient to meet both our currently anticipated short-termcash requirements in the next twelve months and long-term operatingbeyond.
Our material cash requirements.
requirements could increase beyond our current expectations due to factors such as general economic conditions, a change in government spending priorities, or larger than usual customer orders. Also, in light of our CEO's initiatives to grow the Company, we continue to review and evaluate our capital allocation plans. Furthermore, we may choose to raise additional funds through equity and debt financing transactions to provide additional flexibility or to pursue acquisitions. Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, should our short-term or long-term cash requirements increase beyond our current expectations, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.
Secured Credit Facility
On February 23, 2016, in connection with our acquisition of TCS,October 31, 2018, we entered into a $400.0 million secured credit facilityFirst Amended and Restated Credit Agreement (the "Secured Credit"Credit Facility") with a syndicate of lenders. The SecuredOn November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as amended June 6, 2017 (the "June 2017 Amendment"), comprises a senior secured term loan A facility of $250.0 million (the "Term Loanthe "Credit Facility") with the existing lenders. See "Notes to Condensed Consolidated Financial Statements – Note (9) – Credit Facility" for further information. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which have been documented and a secured revolving loan facilityfiled with the SEC.
As of up to $150.0January 31, 2023, the amount outstanding under our Credit Facility was $168.4 million, including a $25.0comprised of $119.0 million letterunder the Revolving Loan Facility and $49.4 million under the Term Loan. At January 31, 2023, we had $0.3 million of standby letters of credit sublimit (the "Revolving Loan Facility"),outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts and together, with the Term Loan Facility, matures on February 23, 2021. The proceedsno outstanding commercial letters of these borrowings were primarily used to finance our acquisition of TCS, including the repayment of certain existing indebtedness of TCS. The Term Loan Facility requires mandatory quarterly repayments.credit. During the six months ended January 31, 2018 and 2017, we repaid $10.4 million and $4.4 million, respectively, principal amount of borrowings under the Term Loan Facility. Under the Revolving Loan Facility,2023, we had outstanding balances under the Credit Facility ranging from $41.9$130.0 million to $66.8 million during six months ended January 31, 2018.$181.0 million.
The Revolving Loan Facility is primarily used for working capital and other general corporate purposes of the Company and its subsidiaries, including the issuance of letters of credit. Borrowings under the Secured Credit Facility, pursuant to terms defined in the Secured Credit Facility, shall be either (i) Alternate Base Rate ("ABR") borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% per annum and (c) the Adjusted LIBO Rate on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%), plus (y) the Applicable Rate, 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 (provided that if the LIBO Rate is less than 1.00%, then the LIBO Rate shall be deemed to be 1.00%) plus (y) the Applicable Rate. The Applicable Rate is determined based on a pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. The Secured Credit Facility contains customary representations, warranties and affirmative covenants and customary negative covenants, subject to negotiated exceptions, on (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 Secured 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.
The June 2017 Amendment is expected to result in increased operating and acquisition flexibility and simplify the calculations of our financial covenants. The June 2017 Amendment resulted in, among other things, that the:
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(i) | Consolidated EBITDA definition more closely aligns with our Adjusted EBITDA metric by eliminating favorable adjustments to operating income related to settlements of TCS intellectual property matters; |
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(ii) | Leverage Ratio is calculated on a "gross" basis using the quotient of Total Indebtedness (excluding unamortized deferred financing costs) divided by our TTM Consolidated EBITDA. The prior Leverage Ratio was calculated on a "net" basis but did not include a reduction for any cash or cash equivalents above $50.0 million; |
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(iii) | Fixed Charge Coverage Ratio includes a deduction for all cash dividends, regardless of the amount of our cash and cash equivalents and the related allowable Quarterly Dividend Amount, as defined, will now align with our current quarterly dividend target of $0.10 per common share; |
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(iv) | Balloon or final payment of the Term Loan Facility (which is not due until February 23, 2021) was reduced by $22.5 million through increased borrowings from the Revolving Loan Facility (which does not expire until February 23, 2021); and |
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(v) | Leverage Ratios will be adjusted, in certain conditions, to provide for additional flexibility for us to make acquisitions. |
In connection with the June 2017 Amendment, there were no changes to: (i) the committed borrowing capacity; (ii) the maturity date; or (iii) interest rates payable (except that the interest rate pricing grid will now be based on the new Leverage Ratio). Also, the June 2017 Amendment did not result in an extinguishment for accounting purposes (as such term is defined in ASC 470 "Debt"); instead, the June 2017 Amendment was accounted for as a debt modification. As a result, deferred financing costs (including incremental fees for the June 2017 Amendment) will continue to be amortized over the remaining maturity term of the Secured Credit Facility.
As of January 31, 2018,2023, our Secured Leverage Ratio was 2.78x TTM Consolidated EBITDA3.81x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") compared to the maximum allowable Secured Leverage Ratio of 3.35x4.25x TTM ConsolidatedAdjusted EBITDA. During the second half of fiscal 2018, the maximum allowable Leverage Ratio will decrease each quarter until reaching 3.00x TTM Consolidated EBITDA in the fourth quarter of fiscal 2018, with no further reductions thereafter. Our Fixed ChargeInterest Expense Coverage Ratio as of January 31, 20182023 was 2.09x5.98x TTM Adjusted EBITDA compared to the minimum required Fixed ChargeMinimum Interest Expense Coverage Ratio of 1.25x. The Fixed Charge Coverage Ratio will not change for3.25x TTM Adjusted EBITDA. Our Minimum Liquidity was $40.5 million compared to the remaining termMinimum Liquidity requirement of the Secured Credit Facility, as amended. $25.0 million.
Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Secured Credit Facility as amended, for the foreseeable future.future, however there can be no assurance that we will be able to satisfy these covenants.
Convertible Preferred Stock
As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock," on October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the Secured Credit Facility, as amended, are guaranteed by certain“Investors”), relating to the issuance and sale of our domestic subsidiaries (the "Subsidiary Guarantors"). As collateral security for amounts outstanding under our Secured Credit Facility, as amended, and the guarantees thereof, we and our Subsidiary Guarantors have grantedup to an administrative agent, for the benefit125,000 shares of a new series of the lenders, a lien on, and first priority security interest in, substantially allCompany's Series A Convertible Preferred Stock, par value $0.10 per share (the "Convertible Preferred Stock"), for an aggregate purchase price of our tangible and intangible assets.
Capitalizedup to $125.0 million, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms used but not defined herein have the meanings set forth for such terms in the Secured Credit Facility, dated as of February 23, 2016, and the First Amendment of the Secured Credit Facility, dated asSubscription Agreement, the Investors purchased an aggregate of June 6, 2017, both100,000 shares of which have been documented and filed with the SEC.Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100.0 million.
OFF-BALANCE SHEET ARRANGEMENTS
As of January 31, 2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
COMMITMENTS
Commitments
In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of January 31, 2018,2023, will materially adversely affect our liquidity.
At January 31, 2018,2023, cash payments due under long-termcontractual obligations (including estimated interest expense on our Secured Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows:
| | | | | | | | | | | | | | |
| | | | |
| | Total | | Due Within 1 Year |
Credit Facility - principal payments | | $ | 168,375 | | | 3,125 | |
Credit Facility - interest payments | | 24,929 | | | 14,240 | |
Operating lease obligations | | 61,167 | | | 9,496 | |
Dividends payable | | 2,775 | | | 2,775 | |
Contractual cash obligations | | $ | 257,246 | | | 29,636 | |
|
| | | | | | | | | | | | | | | |
| Obligations Due by Fiscal Years or Maturity Date (in thousands) |
| Total | | Remainder of 2018 | | 2019 and 2020 | | 2021 and 2022 | | After 2022 |
Secured Credit Facility - principal payments | $ | 195,530 |
| | 8,605 |
| | 34,422 |
| | 152,503 |
| | — |
|
Secured Credit Facility - interest payments | 18,876 |
| | 3,515 |
| | 12,350 |
| | 3,011 |
| | — |
|
Operating lease commitments | 43,424 |
| | 6,237 |
| | 18,290 |
| | 10,603 |
| | 8,294 |
|
Capital lease obligations | 2,871 |
| | 1,061 |
| | 1,810 |
| | — |
| | — |
|
Net contractual cash obligations | $ | 260,701 |
| | 19,418 |
| | 66,872 |
| | 166,117 |
| | 8,294 |
|
The commitments under our Credit Facility are described in detail above.
As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (9)(16) - Secured Credit Facility,Convertible Preferred Stock," on June 6, 2017, we entered into the June 2017 Amendment to our Secured Credit Facility. In connection with this amendment, the balloon or final paymentholders of the Term Loan Facility, which isConvertible Preferred Stock have the option to redeem such shares for cash commencing in October 2026. As the Convertible Preferred Stock are not due until February 23, 2021, was reduced by $22.5 million through increased borrowings frommandatorily redeemable for cash, the Revolving Loan Facility which isredemption value of such shares are not required to be repaidpresented in full until February 23, 2021.the table above.
As discussed furtherabove and in "Notes"Notes to Condensed Consolidated Financial Statements - Note (17) - Stockholders’ Equity," on March 7, 2018,December 8, 2022, our Board of Directors declared a dividend of $0.10 per common share, payablewhich was paid on May 18, 2018February 17, 2023. Encouraged by the progress that we have made related to stockholdersour One Comtech transformation, our launch of record atEVOKE and our emerging growth opportunities, during the closethird quarter of business on April 18, 2018.fiscal 2023, the Board, together with management, adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend, thereby increasing our financial flexibility. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Secured Credit Facility, as amended, as well as Board approval.approval and certain voting rights of holders of our Series A Convertible Preferred Stock.
At January 31, 2018, we had $2.7 million of standby letters of credit outstanding under our Secured Credit Facility, as amended, related to our guarantees of future performance on certain customer contracts. Such amounts are not included in the above table.
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 a small product line that we refer to as the TCS 911 call handling software solution. AT&T had previously informed us that they did not believe we met certain contractual specifications related to performance and usability and had requested a refund of certain payments made by them. As discussed in "Notes to Condensed Consolidated Financial Statements - Note (7) - Accrued Expenses and Other Current Liabilities," in addition to this settlement, we agreed to issue thirty-six credits to AT&T of $0.2 million 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, 2018, the total present value of these monthly credits is $4.4 million, of which $1.5 million is included in accrued expenses and other current liabilities and $2.8 million is reflected in other liabilities (non-current) on our Condensed Consolidated Balance Sheet. These amounts are not shown in the above commitment table.
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims in the Comtech legacy business and the unique facts and circumstances involved in each particular agreement.
As discussed further in "Notes toCondensed Consolidated Financial Statements - Note (18) - Legal Proceedings and Other Matters," TCS iswe are subject to a party to onenumber of indemnification matterdemands and we are incurring ongoing legal expenses in connection with this matter.these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we may agree or have agreed to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.
We have change inof control agreements, severance agreements and indemnification agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or an involuntarya termination of employment without cause.the employee.
Our Condensed Consolidated Balance Sheet as ofat January 31, 20182023 includes total liabilities of $9.0$10.4 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities.
RECENT ACCOUNTING PRONOUNCEMENTS
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 is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs").
As further discussed in "Notes to Condensed Consolidated Financial Statements -– Note (2) - Adoption of Accounting Standards and Updates," during the six months ended ASUs issued, but not effective until after January 31, 2018, we adopted FASB ASU No. 2016-09, which amends several aspects of the accounting for and reporting of share-based payment transactions. Our adoption of this ASU, on August 1, 2017, did2023, are not expected to have a material impact on our condensed consolidated financial statements. See "Notes to Condensed Consolidated Financial Statement - Note (12) - Stock-Based Compensation" for further information regarding our adoption of this ASU.statements or disclosures.
In addition, the following FASB ASUs have been issued and incorporated into the FASB ASC and have not yet been adopted by us as of January 31, 2018:
FASB ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)," issued in May 2014, which replaces numerous requirements in U.S. GAAP, including industry specific requirements, and provides a single revenue recognition model for contracts with customers. The core principle of the new standard is that a company should record revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, FASB ASU No. 2015-14 "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" was issued to defer the effective date of FASB ASU No. 2014-09 by one year. As a result, FASB ASU No. 2014-09 is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), including interim reporting periods within those fiscal years and can be adopted either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted only as of fiscal years beginning after December 15, 2016 (our fiscal year beginning on August 1, 2017), including interim reporting periods within those fiscal years. In March 2016, April 2016, May 2016 and February 2017, FASB ASU 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)," 2016-10 "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," 2016-12 "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" and 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets" were issued, respectively, to clarify certain implementation matters related to the new revenue standard. The effective dates for these ASUs coincide with the effective date of FASB ASU 2014-09.
Because of the broad scope of FASB ASU No. 2014-09, it could impact the reporting of the amount and/or timing of our net sales and operating income across our two operating segments, as well as related business processes and IT systems. We have formed a project team to perform a detailed evaluation of the operational impact of this new standard, which transition approach to use and the overall adoption impact of FASB ASU No. 2014-09 on our consolidated financial statements and disclosures. We expect our evaluation to be completed shortly before our first quarter of fiscal 2019.
FASB ASU No. 2016-01, issued in January 2016, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments, such as: amending the initial and subsequent measurement requirements for certain equity investments; eliminating the disclosure requirements related to the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet; requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset or liability on the balance sheet or the accompanying notes to the financial statements. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), including interim periods within those fiscal years and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for the provisions related to equity securities without readily determinable fair values which are to be adopted prospectively. Under certain circumstances, early adoption is permitted. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements and disclosures.
FASB ASU No. 2016-02, issued in February 2016, which requires lessees to recognize the following for all leases (with the exception of short-term leases): (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, initially measured at the present value of the lease payments; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. This ASU is effective for fiscal years beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019), including interim periods within those fiscal years and should be applied with a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2016-13, issued in June 2016, which requires the measurement of expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions and reasonable and supportable forecasts. This ASU is effective for fiscal years beginning after December 15, 2019 (our fiscal year beginning on August 1, 2020), including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Except for a prospective transition approach required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, an entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, on a modified-retrospective approach). We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
FASB ASU No. 2016-15, issued in August 2016, which amends the guidance on the following cash flow related issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon and similar type debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims (including those related to certain life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and cash receipts or payments with more than one class of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), and interim periods within those fiscal years and shall be applied using the retrospective transition method to each period presented. Early adoption is permitted; however, all of the amendments must be adopted in the same period. We adopted this ASU on February 1, 2018. The adoption of this ASU did not have any impact on our condensed consolidated financial statements.
FASB ASU No. 2016-16, issued in October 2016, 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. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018), and interim periods within those fiscal years and shall be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements and disclosures.
FASB ASU No. 2017-09, issued in May 2017, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. An entity would not be required to account for changes to the terms or conditions of a share-based payment award as a modification if there were no changes to the award’s fair value, vesting conditions and classification. This ASU is effective for fiscal years beginning after December 15, 2017 (our fiscal year beginning on August 1, 2018) and early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. This ASU should be applied prospectively to an award modified on or after the adoption date of this ASU. We adopted this ASU on February 1, 2018. The adoption of this ASU did not have any impact on our condensed consolidated financial statements.
FASB ASU No. 2017-11, issued in July 2017, which provides guidance on the accounting for certain financial instruments with embedded features that result in the strike price of the instrument or embedded conversion option being reduced on the basis of the pricing of future equity offerings (commonly referred to as "down round" features). This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019) and early adoption is permitted, including adoption in an interim period. This ASU should be applied retrospectively in accordance with the provisions of the ASU. We are evaluating the impact of this ASU on our consolidated financial statements and disclosures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from borrowings under our Secured Credit Facility, as amended.Facility. Based on the amount of outstanding debt under our Secured Credit Facility, as amended, a hypothetical change in interest rates by 10% would change interest expense by $0.8approximately $1.4 million over a one-year period. Although we do not currently use interest rate derivative instruments to manage exposure to interest rate changes, we may choose to do so in the future in connection with our Secured Credit Facility, as amended.Facility.
Our earnings and cash flows are also subject to fluctuations due to changes in interest rates on our investment of available cash balances. As of January 31, 2018,2023, we had cash and cash equivalents of $40.5$21.5 million, which consisted of cash and highly-liquid money market deposit accounts. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of January 31, 2018,2023, a hypothetical change in interest rates of 10% would have a nominal impact on interest income over a one-year period. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e)13a-15(f) and 15d-15(e)15d-15(f) of the Securities Exchange Act of 1934), was carried out by us under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chairman and Chief Financial Officer. Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
There have been no changes in our internal controlscontrol over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.
The certifications of our President and Chief Executive Officer and Chairman and Chief Financial Officer, that are Exhibits 31.1 and 31.2, respectively, should be read in conjunction with the foregoing information for a more complete understanding of the references in those Exhibits to disclosure controls and procedures and internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See "Notes to Condensed Consolidated Financial Statements - –Note (18) -– Legal Proceedings and Other Matters" of this Form 10-Q for information regarding legal proceedings and other matters.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our Form 10-K for the fiscal year ended July 31, 2017 or Form 10-Q for the three months ended October 31, 2017.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 6. Exhibits
Exhibit 101.INS - XBRL Instance DocumentThe following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2023, formatted in inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity, (iv) Condensed Consolidated Statement of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements
Exhibit 101.SCH - Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL - Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB - Inline XBRL Taxonomy Extension Labels Linkbase Document
Exhibit 101.PRE - Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF - Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 104 - Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
(Registrant)
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Date: | March 7, 20189, 2023 | By: /s/ Fred KornbergKen Peterman |
| (Date) | Fred KornbergKen Peterman |
| | Chairman of the Board |
| | President and Chief Executive Officer and President |
| | (Principal Executive Officer) |
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Date: | | |
Date: | March 7, 20189, 2023 | By: /s/ Michael D. PorcelainA. Bondi |
| (Date) | Michael D. PorcelainA. Bondi |
| | Senior Vice President and |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |