Document
Index

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 30, 2020
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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
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(Exact name of registrant as specified in its charter)
Delaware
 
11-2139466
(State or other jurisdiction of incorporation /organization)
 
(I.R.S. Employer Identification Number)
 
 
 
68 South Service Road, Suite 230,
Melville, NY
 
 
11747
(Address of principal executive offices)
 
(Zip Code)
(631) 962-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, par value $0.10 per share
CMTL
NASDAQ Stock Market LLC
Series A Junior Participating Cumulative Preferred Stock, par value $0.10 per share

 
 
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.
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Indicate by check mark whether the registrant has submitted electronically, every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Emerging growth company
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Non-accelerated filer
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Smaller reporting company
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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. https://cdn.kscope.io/8fab75eb9114a5a1d3ac73789328e8cd-blankboxa27.jpg

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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As of May 29, 2020, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 24,731,940 shares.


Index

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



1

Index

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
April 30, 2020
 
July 31, 2019
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
50,634,000

 
45,576,000

Accounts receivable, net
 
137,887,000

 
145,032,000

Inventories, net
 
79,423,000

 
74,839,000

Prepaid expenses and other current assets
 
22,691,000

 
14,867,000

Total current assets
 
290,635,000

 
280,314,000

Property, plant and equipment, net
 
27,149,000

 
28,026,000

Operating lease right-of-use assets, net
 
31,942,000

 

Goodwill
 
335,477,000

 
310,489,000

Intangibles with finite lives, net
 
260,162,000

 
261,890,000

Deferred financing costs, net
 
2,575,000

 
3,128,000

Other assets, net
 
3,792,000

 
3,864,000

Total assets
 
$
951,732,000

 
887,711,000

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
32,942,000

 
24,330,000

Accrued expenses and other current liabilities
 
83,561,000

 
78,584,000

Operating lease liabilities, current
 
8,480,000

 

Finance lease and other obligations, current
 

 
757,000

Dividends payable
 
2,466,000

 
2,406,000

Contract liabilities
 
46,070,000

 
38,682,000

Interest payable
 
253,000

 
588,000

Total current liabilities
 
173,772,000

 
145,347,000

Non-current portion of long-term debt
 
159,400,000

 
165,000,000

Operating lease liabilities, non-current
 
25,864,000

 

Income taxes payable
 
2,316,000

 
325,000

Deferred tax liability, net
 
16,676,000

 
12,481,000

Long-term contract liabilities
 
11,151,000

 
10,654,000

Other liabilities
 
16,728,000

 
18,822,000

Total liabilities
 
405,907,000

 
352,629,000

Commitments and contingencies (See Note 19)
 


 


Stockholders’ equity:
 
 

 
 

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

 

Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 39,765,257 shares and 39,276,161 shares at April 30, 2020 and July 31, 2019, respectively
 
3,977,000

 
3,928,000

Additional paid-in capital
 
564,965,000

 
552,670,000

Retained earnings
 
418,732,000

 
420,333,000

 
 
987,674,000

 
976,931,000

Less:
 
 

 
 

       Treasury stock, at cost (15,033,317 shares at April 30, 2020 and July 31, 2019)
 
(441,849,000
)
 
(441,849,000
)
Total stockholders’ equity
 
545,825,000

 
535,082,000

Total liabilities and stockholders’ equity
 
$
951,732,000

 
887,711,000


See accompanying notes to condensed consolidated financial statements.

2


Index

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

 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
 
 
 
2020
 
2019
 
2020
 
2019
Net sales
 
$
135,121,000

 
170,448,000

 
$
467,042,000

 
495,425,000

Cost of sales
 
82,120,000

 
106,032,000

 
289,872,000

 
311,995,000

Gross profit
 
53,001,000

 
64,416,000

 
177,170,000

 
183,430,000

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Selling, general and administrative
 
32,313,000

 
33,409,000

 
93,538,000

 
97,243,000

Research and development
 
12,324,000

 
13,471,000

 
40,925,000

 
40,664,000

Amortization of intangibles
 
5,517,000

 
4,536,000

 
15,952,000

 
13,113,000

Settlement of intellectual property litigation
 

 

 

 
(3,204,000
)
Acquisition plan expenses
 
5,983,000

 
1,704,000

 
14,397,000

 
4,612,000

 
 
56,137,000

 
53,120,000

 
164,812,000

 
152,428,000

 
 
 
 
 
 
 
 
 
Operating (loss) income
 
(3,136,000
)
 
11,296,000

 
12,358,000

 
31,002,000

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Interest expense
 
1,504,000

 
2,159,000

 
4,924,000

 
7,095,000

Write-off of deferred financing costs
 

 

 

 
3,217,000

Interest (income) and other
 
108,000

 
(22,000
)
 
37,000

 
(7,000
)
 
 
 
 
 
 
 
 
 
(Loss) income before (benefit from) provision for income taxes
 
(4,748,000
)
 
9,159,000

 
7,397,000

 
20,697,000

(Benefit from) provision for income taxes
 
(759,000
)
 
1,547,000

 
1,503,000

 
1,791,000

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(3,989,000
)
 
7,612,000

 
$
5,894,000

 
18,906,000

Net (loss) income per share (See Note 6):
 
 

 
 

 
 

 
 

Basic
 
$
(0.16
)
 
0.31

 
$
0.24

 
0.79

Diluted
 
$
(0.16
)
 
0.31

 
$
0.24

 
0.78

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
 
24,982,000

 
24,192,000

 
24,730,000

 
24,074,000

 
 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding – diluted
 
24,982,000

 
24,330,000

 
24,892,000

 
24,263,000

 
See accompanying notes to condensed consolidated financial statements.

3


Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
 
Three months ended April 30, 2020 and 2019
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Stockholders'
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Balance as of January 31, 2019
 
38,950,547

 
$
3,895,000

 
$
539,273,000

 
$
411,558,000

 
15,033,317

 
$
(441,849,000
)
 
$
512,877,000

Equity-classified stock award compensation
 

 

 
1,119,000

 

 

 

 
1,119,000

Proceeds from issuance of employee stock purchase plan shares
 
11,837

 
1,000

 
232,000

 

 

 

 
233,000

Net settlement of stock-based awards
 
146

 

 
(11,000
)
 

 

 

 
(11,000
)
Common stock issued for acquisition of Solacom Technologies Inc. ("Solacom")
 
208,669

 
21,000

 
5,585,000

 

 

 

 
5,606,000

Cash dividends declared, net ($0.10 per share)
 

 

 

 
(2,405,000
)
 

 

 
(2,405,000
)
Accrual of dividend equivalents, net of reversal ($0.10 per share)
 

 

 

 
(82,000
)
 

 

 
(82,000
)
Net income
 

 

 

 
7,612,000

 

 

 
7,612,000

Balance as of April 30, 2019
 
39,171,199

 
$
3,917,000

 
$
546,198,000

 
$
416,683,000

 
15,033,317

 
$
(441,849,000
)
 
$
524,949,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 31, 2020
 
39,752,559

 
$
3,975,000

 
$
563,834,000

 
$
425,243,000

 
15,033,317

 
$
(441,849,000
)
 
$
551,203,000

Equity-classified stock award compensation
 

 

 
981,000

 

 

 

 
981,000

Proceeds from issuance of employee stock purchase plan shares
 
16,158

 
2,000

 
178,000

 

 

 

 
180,000

Forfeiture of restricted stock
 
(5,539
)
 
(1,000
)
 
1,000

 

 

 

 

Net settlement of stock-based awards
 
2,079

 
1,000

 
(29,000
)
 

 

 

 
(28,000
)
Cash dividends declared ($0.10 per share)
 

 

 

 
(2,466,000
)
 

 

 
(2,466,000
)
Accrual of dividend equivalents, net
    ($0.10 per share)
 

 

 

 
(56,000
)
 

 

 
(56,000
)
Net loss
 

 

 

 
(3,989,000
)
 

 

 
(3,989,000
)
Balance as of April 30, 2020
 
39,765,257

 
$
3,977,000

 
$
564,965,000

 
$
418,732,000

 
15,033,317

 
$
(441,849,000
)
 
$
545,825,000


See accompanying notes to condensed consolidated financial statements.

4


Index


COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
 
Nine months ended April 30, 2020 and 2019
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury Stock
 
Stockholders'
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Balance as of July 31, 2018
 
38,860,571

 
$
3,886,000

 
$
538,453,000

 
$
405,194,000

 
15,033,317

 
$
(441,849,000
)
 
$
505,684,000

Equity-classified stock award compensation
 

 

 
3,356,000

 

 

 

 
3,356,000

Proceeds from exercises of stock options
 
6,100

 
1,000

 
173,000

 

 

 

 
174,000

Proceeds from issuance of employee stock purchase plan shares
 
32,035

 
3,000

 
706,000

 

 

 

 
709,000

Issuance of restricted stock
 
10,386

 
1,000

 
(1,000
)
 

 

 

 

Net settlement of stock-based awards
 
53,438

 
5,000

 
(2,074,000
)
 

 

 

 
(2,069,000
)
Common stock issued for acquisition of Solacom
 
208,669

 
21,000

 
5,585,000

 

 

 

 
5,606,000

Cash dividends declared, net ($0.30 per share)
 

 

 

 
(7,169,000
)
 

 

 
(7,169,000
)
Accrual of dividend equivalents, net of reversal ($0.30 per share)
 

 

 

 
(248,000
)
 

 

 
(248,000
)
Net income
 

 

 

 
18,906,000

 

 

 
18,906,000

Balance as of April 30, 2019
 
39,171,199

 
$
3,917,000

 
$
546,198,000

 
$
416,683,000

 
15,033,317

 
$
(441,849,000
)
 
$
524,949,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of July 31, 2019
 
39,276,161

 
$
3,928,000

 
$
552,670,000

 
$
420,333,000

 
15,033,317

 
$
(441,849,000
)
 
$
535,082,000

Equity-classified stock award compensation
 

 

 
3,098,000

 

 

 

 
3,098,000

Proceeds from exercises of stock options
 
16,700

 
2,000

 
466,000

 

 

 

 
468,000

Proceeds from issuance of employee stock purchase plan shares
 
36,168

 
4,000

 
686,000

 

 

 

 
690,000

Issuance of restricted stock, net
 
3,319

 

 

 

 

 

 

Net settlement of stock-based awards
 
109,405

 
11,000

 
(3,498,000
)
 

 

 

 
(3,487,000
)
Common stock issued for acquisition of CGC Technology Limited ("CGC")
 
323,504

 
32,000

 
11,543,000

 

 

 

 
11,575,000

Cash dividends declared ($0.30 per share)
 

 

 

 
(7,326,000
)
 

 

 
(7,326,000
)
Accrual of dividend equivalents, net ($0.30 per share)
 

 

 

 
(169,000
)
 

 

 
(169,000
)
Net income
 

 

 

 
5,894,000

 

 

 
5,894,000

Balance as of April 30, 2020
 
39,765,257

 
$
3,977,000

 
$
564,965,000

 
$
418,732,000

 
15,033,317

 
$
(441,849,000
)
 
$
545,825,000


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

5


Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended April 30,
 
 
2020
 
2019
Cash flows from operating activities:
 
 
 
 
Net income
 
$
5,894,000

 
18,906,000

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of property, plant and equipment
 
8,022,000

 
8,618,000

Amortization of intangible assets with finite lives
 
15,952,000

 
13,113,000

Amortization of stock-based compensation
 
3,098,000

 
3,356,000

Amortization of deferred financing costs
 
553,000

 
916,000

Estimated contract settlement costs
 
444,000

 
6,351,000

Write-off of deferred financing costs
 

 
3,217,000

Settlement of intellectual property litigation
 

 
(3,204,000
)
Change in other liabilities
 
(3,100,000
)
 
(23,000
)
Loss on disposal of property, plant and equipment
 
3,000

 
40,000

(Benefit from) provision for allowance for doubtful accounts
 
(364,000
)
 
854,000

Provision for excess and obsolete inventory
 
1,238,000

 
2,450,000

Deferred income tax expense
 
1,374,000

 
3,885,000

Changes in assets and liabilities, net of effects of business acquisitions:
 
 
 
 
Accounts receivable
 
10,129,000

 
10,970,000

Inventories
 
(5,689,000
)
 
(9,136,000
)
Prepaid expenses and other current assets
 
(4,080,000
)
 
(1,569,000
)
Other assets
 
(20,000
)
 
(34,000
)
Accounts payable
 
6,748,000

 
(8,611,000
)
Accrued expenses and other current liabilities
 
(78,000
)
 
5,722,000

Contract liabilities
 
1,063,000

 
1,333,000

Other liabilities, non-current
 
303,000

 
377,000

Interest payable
 
(307,000
)
 
69,000

Income taxes payable
 
(2,176,000
)
 
(3,757,000
)
Net cash provided by operating activities
 
39,007,000

 
53,843,000

Cash flows from investing activities:
 
 

 
 

Payment for acquisition of CGC, net of cash acquired
 
(11,165,000
)
 

Payment for acquisition of Solacom, net of cash acquired
 

 
(25,883,000
)
Payment for acquisition of the GD NG-911 business
 

 
(10,000,000
)
Payment for acquisition of NG-911 Inc.
 
(781,000
)
 

Purchases of property, plant and equipment
 
(4,420,000
)
 
(6,388,000
)
Net cash used in investing activities
 
(16,366,000
)
 
(42,271,000
)
Cash flows from financing activities:
 
 

 
 

Net (payments) borrowings of long-term debt under Credit Facility
 
(5,600,000
)
 
173,500,000

Net payments under Revolving Loan portion of Prior Credit Facility
 

 
(48,603,000
)
Repayment of debt under Term Loan portion of Prior Credit Facility
 

 
(120,121,000
)
Remittance of employees' statutory tax withholdings for stock awards
 
(5,274,000
)
 
(5,032,000
)
Cash dividends paid
 
(7,553,000
)
 
(7,381,000
)
Payment of deferred financing costs
 

 
(1,813,000
)
Repayment of principal amounts under finance lease and other obligations
 
(314,000
)
 
(1,189,000
)
Proceeds from issuance of employee stock purchase plan shares
 
690,000

 
709,000

Payment of shelf registration costs
 

 
(148,000
)
Proceeds from exercises of stock options
 
468,000

 
174,000

     Net cash used in financing activities
 
(17,583,000
)
 
(9,904,000
)
Net increase in cash and cash equivalents
 
5,058,000

 
1,668,000

Cash and cash equivalents at beginning of period
 
45,576,000

 
43,484,000

Cash and cash equivalents at end of period
 
$
50,634,000

 
45,152,000

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

6


Index

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

 
 
Nine months ended April 30,
 
 
2020
 
2019
Supplemental cash flow disclosures:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
4,546,000

 
5,853,000

Income taxes, net
 
$
2,330,000

 
1,582,000

 
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
Reclass of finance lease right-of-use assets to property, plant and equipment
 
$
698,000

 

Cash dividends declared but unpaid (including dividend equivalents)
 
$
2,635,000

 
2,653,000

Accrued additions to property, plant and equipment
 
$
1,201,000

 
1,248,000

Common stock issued for acquisitions
 
$
11,575,000

 
5,606,000

Accruals related to acquisitions
 
$
4,020,000

 


See accompanying notes to condensed consolidated financial statements.


7


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


(1)    General

The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, 2020 and 2019 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, 2019 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

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

Impact of Coronavirus Disease 2019 ("COVID-19") on Our Business

Our third quarter of fiscal 2020, running from February 1 through April 30, 2020, corresponded precisely with the period in which worldwide restrictions on business activities were in force due to COVID-19, which was declared a pandemic by the World Health Organization in March 2020 and a national emergency by the U.S. government. As a result, we experienced significant order delays and lower net sales. In response, we implemented a variety of cost saving measures, including reducing global headcount by approximately 10%, reducing salaries, suspending merit increases and eliminating certain discretionary expenses. Severance costs relating to these actions were not material and cost reduction efforts continue.

Although we are deemed an essential business by the U.S. government, for the safety of our employees, customers, partners and suppliers, we have implemented remote working arrangements, curtailed most business travel, and established social distancing safeguards at our facilities. We expect that such precautions will remain in effect for as long as government advisories recommend.

Although the COVID-19 pandemic is by no means over and a second wave of COVID-19 could again alter the business landscape, we believe that the pandemic’s worst impact on our business is largely behind us. Our long-term fundamentals remain strong, as we believe we are well-positioned for growth as business conditions meaningfully improve.

(2)    Acquisitions
    
Solacom Technologies Inc.

On February 28, 2019, we completed our acquisition of Solacom Technologies Inc. ("Solacom"), pursuant to the Arrangement Agreement, dated as of January 7, 2019, by and among Solacom, Comtech and Solar Acquisition Corp., a Canadian corporation and a direct, wholly-owned subsidiary of Comtech. Solacom is a leading provider of Next Generation 911 ("NG-911") solutions for public safety agencies. The acquisition of Solacom was a significant step in our strategy of enhancing our public safety and location technologies.


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


The acquisition had an aggregate purchase price for accounting purposes of $32,934,000, of which $27,328,000 was settled in cash and $5,606,000 was settled with the issuance of 208,669 shares of Comtech’s common stock. The fair value of consideration transferred in connection with this acquisition was $31,489,000, which was net of $1,445,000 of cash acquired. The cash portion of the purchase price was funded principally through borrowings under our Credit Facility. We accounted for the acquisition of Solacom under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations" ("ASC 805"). The purchase price was allocated to the assets acquired and liabilities assumed, based on their fair value as of February 28, 2019, pursuant to the business combination accounting rules and was finalized as of January 31, 2020. Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. Pro forma financial information was not disclosed, as the acquisition was not material.

GD NG-911 Business

On April 29, 2019, we completed the acquisition of a state and local government NG-911 business pursuant to the Asset Purchase Agreement, dated as of April 29, 2019, by and among General Dynamics Information Technology, Inc., Comtech and Comtech NextGen LLC, a Delaware limited liability company and indirect, wholly-owned subsidiary of Comtech. The acquisition of this NG-911 business (the "GD NG-911 business") had a final cash purchase price of $11,013,000. In connection with this acquisition, we also announced an award of a five-year contract to develop, implement and operate a NG-911 emergency communications system for a Northeastern state. Immediately after our announcement of this acquisition, we hired approximately sixty GD NG-911 employees and completed the integration of this business into our Commercial Solutions segment’s public safety and location technologies product line. The acquisition, contract award and hiring of talented employees are expected to strengthen Comtech’s position in the growing NG-911 solutions market. We accounted for the acquisition of this business under the acquisition method of accounting in accordance with FASB ASC 805. The purchase price was allocated to the assets acquired and liabilities assumed, based on their fair value as of April 29, 2019, pursuant to the business combination accounting rules and was finalized as of April 29, 2020. Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. Pro forma financial information is not disclosed, as the acquisition is not material.

CGC Technology Limited

On January 27, 2020, we completed the acquisition of CGC Technology Limited ("CGC"), a privately held company located in the United Kingdom, pursuant to the Share Purchase Agreement, dated as of January 27, 2020. CGC is a leading provider of high precision full motion fixed and mobile X/Y satellite tracking antennas, reflectors, radomes and other ground station equipment around the world. The acquisition of CGC brought established relationships with several top-tier European aerospace companies and other government entities, and we expect CGC to participate in the anticipated growth in the number of low Earth orbit ("LEO") and medium Earth orbit ("MEO") satellite constellations.
 
The acquisition has a preliminary purchase price for accounting purposes of $23,650,000, of which $12,075,000 was payable in cash and $11,575,000 was payable by the issuance of 323,504 shares of Comtech’s common stock at a volume weighted average stock price of $35.78. The fair value of consideration transferred in connection with this acquisition was $22,740,000, which was net of $160,000 of cash acquired and $750,000 payable by us upon the first anniversary of the closing of the transaction, subject to certain conditions. The preliminary purchase price for accounting purposes is subject to finalization.

We are accounting for the acquisition of CGC under the acquisition method of accounting in accordance with FASB ASC 805. The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of January 27, 2020, pursuant to the business combination accounting rules. Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. Our condensed consolidated statements of operations for the three and nine months ended April 30, 2020 include a nominal amount of revenue contribution from CGC. Pro forma financial information is not disclosed, as the acquisition is not material.


9


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


The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the CGC acquisition:
 
Purchase Price Allocation (1)
 
Measurement Period Adjustments
 
Purchase Price Allocation (as adjusted)
 
 
Payable in cash
$
12,075,000

 

 
$
12,075,000

 
 
Payable in common stock issued by Comtech
11,575,000

 

 
11,575,000

 
 
Preliminary purchase price at fair value
$
23,650,000

 

 
$
23,650,000

 
 
Preliminary allocation of aggregate purchase price:
 
 
 
 
 
 
 
      Cash and cash equivalents
$
160,000

 

 
$
160,000

 
 
      Current assets
3,336,000

 
1,054,000

 
4,390,000

 
 
      Property, plant and equipment
1,457,000

 

 
1,457,000

 
 
      Operating lease assets
924,000

 

 
924,000

 
 
      Deferred tax assets, non-current
588,000

 
487,000

 
1,075,000

 
 
      Contract liabilities

 
(6,890,000
)
 
(6,890,000
)
 
 
      Accrued warranty obligations

(1,000,000
)
 

 
(1,000,000
)
 
 
      Other current liabilities
(7,060,000
)
 
862,000

 
(6,198,000
)
 
 
      Non-current liabilities
(1,329,000
)
 

 
(1,329,000
)
 
 
Net tangible liabilities at preliminary fair value
$
(2,924,000
)
 
(4,487,000
)
 
$
(7,411,000
)
 
 
Identifiable intangibles, deferred taxes and goodwill:
 
 
 
 
 
 
Estimated Useful Lives
Technology
$
5,000,000

 

 
$
5,000,000

 
20 years
Customer relationships
7,000,000

 
(500,000
)
 
6,500,000

 
15 years
Trade name
800,000

 

 
800,000

 
5 years
Deferred tax liabilities
(2,176,000
)
 
85,000

 
(2,091,000
)
 
 
Goodwill
15,950,000

 
4,902,000

 
20,852,000

 
Indefinite
Preliminary allocation of aggregate purchase price
$
23,650,000

 

 
$
23,650,000

 
 

(1) As reported in the Company's Quarterly Report on Form 10-Q for the six months ended January 31, 2020.

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized over their estimated useful lives. The preliminary fair value of customer relationships (which include acquired backlog) was primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. The preliminary fair value of technology and trade name was based on the discounted capitalization of royalty expense saved because we now own the assets. Among the factors contributing to the recognition of goodwill, as a component of the preliminary purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Government Solutions segment based on specific identification and is generally not deductible for income tax purposes.

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


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


UHP Networks Inc.

In November 2019, we entered into an agreement to acquire UHP Networks Inc. and its sister company (together, "UHP"), a leading provider of innovative and disruptive satellite ground station solutions. In June 2020, we agreed with UHP to amend the terms of the agreement. Under the amended purchase agreement, the total aggregate purchase price has been reduced by approximately 24% from $50,000,000 to $38,000,000 (of which we anticipate $5,000,000 to be paid in cash with the remaining balance payable in Comtech common stock, cash, or a combination of both, as we may elect at the time of closing). We believe that our acquisition of UHP will be a significant step in enhancing our solutions offerings for the satellite ground station market. The transaction is subject to customary closing conditions, including necessary regulatory approval to allow us to purchase UHP's sister company which is headquartered in Moscow.

Gilat Satellite Networks Ltd.

On January 29, 2020, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Gilat Satellite Networks Ltd. ("Gilat"), a worldwide leader in satellite networking technology, solutions and services with market leading positions in the satellite ground station and in-flight connectivity solutions markets and deep expertise in operating large network infrastructures.

Under the terms of the Merger Agreement, Comtech will acquire Gilat by way of a merger of Comtech's newly formed subsidiary with and into Gilat, with Gilat surviving the merger as a wholly-owned subsidiary of Comtech. Pursuant to the Merger Agreement, each Gilat ordinary share will be converted into the right to receive consideration of  (i) $7.18 in cash, without interest, plus (ii) 0.08425 of a share of Comtech common stock, with cash payable in lieu of fractional shares. Based on such consideration, on January 29, 2020, the date we entered into the Merger Agreement, Gilat had an enterprise value of approximately $532,500,000.

During the twelve months ended December 31, 2019, Gilat reported revenue of $263,492,000 with GAAP operating income of $25,572,000. As of December 31, 2019, Gilat had approximately $74,778,000 of unrestricted cash and cash equivalents and debt of approximately $8,096,000. We expect to fund the cash portion of the acquisition by redeploying a portion of both our and Gilat's unrestricted cash and cash equivalents, with the remaining funds provided by a new $800,000,000 secured credit facility, which is discussed further in Note (11) - "Credit Facility."

In connection with the acquisition of Gilat, we expect to incur transaction related expenses including certain compensatory and other merger related payments, professional fees and debt related costs. We preliminarily estimate that these expenses will approximate $31,678,000, some of which were expensed as of April 30, 2020, others to be expensed upon closing, and others to be expensed over time following the closing or capitalized in accordance with purchase accounting rules. Pursuant to accounting rules, the acquisition is expected to result in a material increase in annual amortization expense related to intangibles and possible other fair value adjustments.

Our acquisition of Gilat remains subject to certain conditions to closing, including regulatory approval in Russia. In May 2020, we received notification from the Federal Antimonopoly Service of the Russian Federation that it was extending the review period for our application pending a decision under the Foreign Investment Law to determine whether approval is required from the Chairman of the Russian Government Commission for Supervising Foreign Investments.

NG-911, Inc.
 
On February 21, 2020, we completed our acquisition of NG-911, Inc. (“NG-911”), a privately-held company based in Iowa, Illinois and Missouri, pursuant to a stock purchase agreement dated December 27, 2019. NG-911 is a pioneer in providing next generation 911 solutions, including those designed by Comtech Solacom Technologies, Inc., to public safety agencies in the Midwest. Of the $1,188,000 total purchase price, $781,000 was paid in cash at closing, with the remaining $407,000 subject to an earn-out payable over a five-year period, subject to customary post-closing adjustments. The acquisition allows us to cost-effectively expand sales of our industry leading Solacom Guardian call management solutions for public safety. Pro forma financial information was not disclosed, as the acquisition was not material.


11


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


(3)    Adoption of Accounting Standards and Updates

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which is 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 nine months ended April 30, 2020, we adopted:

FASB ASU No. 2016-02 Leases (Topic 842). See Note (12) - "Leases" for further information.

FASB ASU No. 2017-11, 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). On August 1, 2019, we adopted this ASU. Our adoption did not have any impact on our condensed consolidated financial statements and disclosures, as we did not have any financial instruments with such "down round" features.

FASB ASU No. 2017-12, which expands and refines hedge accounting for both non-financial and financial risk components and simplifies and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. On August 1, 2019, we adopted this ASU. Our adoption did not have any impact on our condensed consolidated financial statements and disclosures, as we are not a party to any such hedging transactions.

FASB ASU No. 2018-07, which expands the scope of ASC 718 to include certain share-based payment transactions for acquiring goods and services from nonemployees. On August 1, 2019, we adopted this ASU. Our adoption did not have any impact on our condensed consolidated financial statements and disclosures, as we did not have any outstanding share-based awards with nonemployees that required remeasurement.

FASB ASU No. 2018-16, which expands the list of eligible U.S. benchmark interest rates permitted in the application of hedge accounting due to broad concerns about the long-term sustainability of the LIBO Rate. This ASU adds the Overnight Index Swap ("OIS") rate, based on the Secured Overnight Financing Rate ("SOFR"), as an eligible U.S. benchmark interest rate. On August 1, 2019, we adopted this ASU. Our adoption did not have any impact on our condensed consolidated financial statements and disclosures, as we are not a party to any such hedging transactions.


12


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


(4)    Revenue

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

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

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

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

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


13


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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 amplifiers in our high-performance transmission technologies product line. Point in time accounting is also applied to certain contracts in our mission-critical technologies product line. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery.

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

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

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

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

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


14


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


Almost all of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:
 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
2020
 
2019
 
2020
 
2019
United States
 
 
 
 
 
 
 
 
U.S. government
 
30.7
%
 
38.9
%
 
38.1
%
 
42.7
%
Domestic
 
45.0
%
 
34.7
%
 
38.8
%
 
32.7
%
Total United States
 
75.7
%
 
73.6
%
 
76.9
%
 
75.4
%
International
 
24.3
%
 
26.4
%
 
23.1
%
 
24.6
%
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. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during the three and nine months ended April 30, 2020 and 2019. International sales include sales to U.S. domestic companies for inclusion in products that are sold to international customers. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three and nine months ended April 30, 2020 and 2019.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our chief operating decision-maker ("CODM") for the three and nine months ended April 30, 2020 and 2019. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business:
 
 
Three months ended April 30, 2020
 
Nine months ended April 30, 2020
 
 
Commercial Solutions
 
Government Solutions
 
Total
 
Commercial Solutions
 
Government Solutions
 
Total
Geographical region and customer type
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
 
$
7,230,000

 
34,268,000

 
$
41,498,000

 
$
41,167,000

 
136,941,000

 
$
178,108,000

Domestic
 
51,499,000

 
9,314,000

 
60,813,000

 
158,856,000

 
22,588,000

 
181,444,000

Total United States
 
58,729,000

 
43,582,000

 
102,311,000

 
200,023,000

 
159,529,000

 
359,552,000

International
 
19,582,000

 
13,228,000

 
32,810,000

 
68,724,000

 
38,766,000

 
107,490,000

Total
 
$
78,311,000

 
56,810,000

 
$
135,121,000

 
$
268,747,000

 
198,295,000

 
$
467,042,000

Contract type
 
 
 
 
 
 
 
 
 
 
 
 
Firm fixed price
 
$
77,553,000

 
39,079,000

 
$
116,632,000

 
$
265,318,000

 
128,677,000

 
$
393,995,000

Cost reimbursable
 
758,000

 
17,731,000

 
18,489,000

 
3,429,000

 
69,618,000

 
73,047,000

Total
 
$
78,311,000

 
56,810,000

 
$
135,121,000

 
$
268,747,000

 
198,295,000

 
$
467,042,000

Transfer of control
 
 
 
 
 
 
 
 
 
 
 
 
Point in time
 
$
25,730,000

 
32,193,000

 
$
57,923,000

 
$
106,464,000

 
98,653,000

 
$
205,117,000

Over time
 
52,581,000

 
24,617,000

 
77,198,000

 
162,283,000

 
99,642,000

 
261,925,000

Total
 
$
78,311,000

 
56,810,000

 
$
135,121,000

 
$
268,747,000

 
198,295,000

 
$
467,042,000


15


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


 
 
Three months ended April 30, 2019
 
Nine months ended April 30, 2019
 
 
Commercial Solutions
 
Government Solutions
 
Total
 
Commercial Solutions
 
Government Solutions
 
Total
Geographical region and customer type
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
 
$
17,229,000

 
49,133,000

 
$
66,362,000

 
$
52,360,000

 
159,346,000

 
$
211,706,000

Domestic
 
48,248,000

 
10,875,000

 
59,123,000

 
134,178,000

 
27,910,000

 
162,088,000

Total United States
 
65,477,000

 
60,008,000

 
125,485,000

 
186,538,000

 
187,256,000

 
373,794,000

International
 
24,123,000

 
20,840,000

 
44,963,000

 
67,770,000

 
53,861,000

 
121,631,000

Total
 
$
89,600,000

 
80,848,000

 
$
170,448,000

 
$
254,308,000

 
241,117,000

 
$
495,425,000

Contract type
 
 
 
 
 
 
 
 
 
 
 
 
Firm fixed price
 
$
88,125,000

 
57,451,000

 
$
145,576,000

 
$
249,982,000

 
178,080,000

 
$
428,062,000

Cost reimbursable
 
1,475,000

 
23,397,000

 
24,872,000

 
4,326,000

 
63,037,000

 
67,363,000

Total
 
$
89,600,000

 
80,848,000

 
$
170,448,000

 
$
254,308,000

 
241,117,000

 
$
495,425,000

Transfer of control
 
 
 
 
 
 
 
 
 
 
 
 
Point in time
 
$
43,935,000

 
44,078,000

 
$
88,013,000

 
$
127,912,000

 
141,883,000

 
$
269,795,000

Over time
 
45,665,000

 
36,770,000

 
82,435,000

 
126,396,000

 
99,234,000

 
225,630,000

Total
 
$
89,600,000

 
80,848,000

 
$
170,448,000

 
$
254,308,000

 
241,117,000

 
$
495,425,000


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. Contract assets increased $824,000 due to business combinations discussed in Note (2) - “Acquisitions.” Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the nine months ended April 30, 2020 and 2019, 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. Contract liabilities increased $6,208,000 due to business combinations discussed in Note (2) - “Acquisitions.” Of the contract liability balance at July 31, 2019 and August 1, 2018, $31,000,000 and $30,061,000 was recognized as revenue during the nine months ended April 30, 2020 and 2019, 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. 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 large long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such 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.


16


Index
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 April 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $640,702,000 (which represents the amount of our consolidated backlog). We estimate that a substantial portion of our remaining performance obligations at April 30, 2020 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During the three and nine months ended April 30, 2020, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.

(5)    Fair Value Measurements and Financial Instruments

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

We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable, accrued expenses and the current portion of our favorable AT&T warranty settlement) approximate their fair values due to their short-term maturities. See Note (9) - "Accrued Expenses and Other Current Liabilities" for further discussion of the favorable AT&T warranty settlement.

The fair value of our Credit Facility that we entered into on October 31, 2018 approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter.

As of April 30, 2020 and July 31, 2019, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(6)    Earnings Per Share

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

There were no repurchases of our common stock during the three or nine months ended April 30, 2020 or 2019. See Note (18) - "Stockholders’ Equity" for more information.

Weighted average stock options, RSUs and restricted stock outstanding of 1,440,000 and 1,674,000 for the three months ended April 30, 2020 and 2019, respectively, and 642,000 and 1,103,000 for the nine months ended April 30, 2020 and 2019, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 203,000 and 246,000 weighted average performance shares outstanding for the three months ended April 30, 2020 and 2019, respectively, and 201,000 and 242,000 for the nine months ended April 30, 2020 and 2019, respectively, as the performance conditions have not yet been satisfied. However, net income (the numerator) for EPS calculations for each respective period, is reduced by the compensation expense related to these awards.


17


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


The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
2020
 
2019
 
2020
 
2019
Numerator:
 
 
 
 
 
 
 
 
Net (loss) income for basic calculation
 
$
(3,989,000
)
 
7,612,000

 
$
5,894,000

 
18,906,000

Numerator for diluted calculation
 
$
(3,989,000
)
 
7,612,000

 
$
5,894,000

 
18,906,000

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Denominator for basic calculation
 
24,982,000

 
24,192,000

 
24,730,000

 
24,074,000

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock-based awards
 

 
138,000

 
162,000

 
189,000

Denominator for diluted calculation
 
24,982,000

 
24,330,000

 
24,892,000

 
24,263,000

    
(7)    Accounts Receivable

Accounts receivable consist of the following at:
 
 
April 30, 2020
 
July 31, 2019
Receivables from commercial and international customers
 
$
76,909,000

 
85,556,000

Unbilled receivables from commercial and international customers
 
17,919,000

 
20,469,000

Receivables from the U.S. government and its agencies
 
40,687,000

 
38,856,000

Unbilled receivables from the U.S. government and its agencies
 
4,202,000

 
2,018,000

Total accounts receivable
 
139,717,000

 
146,899,000

Less allowance for doubtful accounts
 
1,830,000

 
1,867,000

Accounts receivable, net
 
$
137,887,000

 
145,032,000


Unbilled receivables as of April 30, 2020 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 substantially all amounts not yet billed at April 30, 2020 will be billed and collected within one year.

As of April 30, 2020, the U.S. government (and its agencies) and Verizon Communications Inc. (through various divisions and, collectively, “Verizon”) represented 32.1% and 10.2%, respectively, of total accounts receivable. As of July 31, 2019, except for the U.S. government (and its agencies), which represented 27.8%, there were no other customers which accounted for greater than 10.0% of total accounts receivable.

(8)    Inventories

Inventories consist of the following at:
 
 
April 30, 2020
 
July 31, 2019
Raw materials and components
 
$
60,203,000

 
53,959,000

Work-in-process and finished goods
 
38,070,000

 
40,576,000

Total inventories
 
98,273,000

 
94,535,000

Less reserve for excess and obsolete inventories
 
18,850,000

 
19,696,000

Inventories, net
 
$
79,423,000

 
74,839,000


As of April 30, 2020 and July 31, 2019, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $6,410,000 and $4,053,000, respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $1,606,000 and $1,513,000, respectively.

18


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



(9)    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following at:
 
 
April 30, 2020
 
July 31, 2019
Accrued wages and benefits
 
$
23,473,000

 
23,295,000

Accrued contract costs
 
12,383,000

 
15,007,000

Accrued warranty obligations
 
15,504,000

 
15,968,000

Accrued legal costs
 
2,880,000

 
2,835,000

Accrued commissions and royalties
 
4,131,000

 
5,114,000

Other
 
25,190,000

 
16,365,000

Accrued expenses and other current liabilities
 
$
83,561,000

 
78,584,000


As discussed further in Note (12) - "Leases," on August 1, 2019, we adopted Topic 842 and, as required by the new standard, reclassified $2,934,000 of accrued expenses and other current liabilities as follows: (i) $2,366,000 of short-term deferred rent liabilities related to operating leases were offset against the respective operating lease right-of-use assets; and (ii) the remaining $568,000 of estimated facility exit costs were reclassified to the current portion of operating lease liabilities.

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 April 30, 2020 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, 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 accrued warranty obligations during the nine months ended April 30, 2020 and 2019 were as follows:
 
 
Nine months ended April 30,
 
 
2020
 
2019
Balance at beginning of period
 
$
15,968,000

 
11,738,000

Reclass to contract liabilities (see below)
 

 
(1,679,000
)
Provision for warranty obligations
 
1,628,000

 
1,320,000

Additions (in connection with acquisitions)
 
1,000,000

 
6,431,000

Charges incurred
 
(3,394,000
)
 
(4,828,000
)
Warranty settlement and reclass (see below)
 
302,000

 
1,281,000

Balance at end of period
 
$
15,504,000

 
14,263,000


On August 1, 2018, in connection with our adoption of ASC 606, $1,679,000 of accrued warranty obligations presented in the above table were reclassified to contract liabilities, as they represented deferred revenue related to service-type warranty performance obligations.


19


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


Our current accrued warranty obligations at April 30, 2020 and July 31, 2019 include $2,604,000 and $3,999,000, 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 TeleCommunication Systems, Inc. ("TCS"). During the fiscal year ended July 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 April 30, 2020, the total present value of these monthly credits is $748,000, all of which is included in our current accrued warranty obligations on our Condensed Consolidated Balance Sheet.

In connection with our acquisition of Solacom, the GD NG-911 business and CGC, we assumed warranty obligations related to certain contracts acquired. See Note (2) - "Acquisitions" for further information pertaining to these acquisitions.

(10)
Prior Period Cost Reduction Actions

During the first quarter of fiscal 2019, we took steps to improve our future operating results and successfully consolidated our Government Solutions segment’s manufacturing facility located in Tampa, Florida with another facility that we maintain in Orlando, Florida. In doing so, during the nine months ended April 30, 2019, we recorded $1,373,000 of facility exit costs in selling, general and administrative expenses in our Condensed Consolidated Statements of Operations. As discussed further in Note (12) - "Leases," on August 1, 2019, we adopted Topic 842 and, as required by the new standard, reclassified $568,000 of estimated facility exit costs to the current portion of operating lease liabilities.

During the second quarter of fiscal 2019, we began an evaluation and repositioning of our public safety and location technologies solutions in order to focus on providing higher margin solution offerings. To-date, we have ceased offering certain solutions, have worked with customers to wind-down certain legacy contracts and have not renewed certain contracts. In connection with this evaluation and repositioning, we recorded estimated contract settlement costs of $2,465,000 and $6,351,000 for the three and nine months ended April 30, 2019, respectively.

(11)    Credit Facility

On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders, replacing our prior Credit Agreement dated as of February 23, 2016 (as amended by that certain First Amendment, dated as of June 6, 2017 (the "Prior Credit Facility")). In connection with the establishment of our Credit Facility, during the three months ended October 31, 2018, we wrote-off $3,217,000 of deferred financing costs primarily related to the Term Loan Facility portion of our Prior Credit Facility and capitalized deferred financing costs of $1,813,000 related to the Credit Facility.

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

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

The proceeds of the Credit Facility were used, in part, to repay in full the outstanding borrowings under the Prior Credit Facility, and additional proceeds of the Credit Facility are expected to be used by us for working capital and other general corporate purposes. As of April 30, 2020, the amount outstanding under our Credit Facility was $159,400,000, which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. At April 30, 2020, we had $2,672,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the nine months ended April 30, 2020, we had outstanding balances under the Credit Facility ranging from $137,000,000 to $174,000,000.

As of April 30, 2020, total net deferred financing costs related to the Credit Facility were $2,575,000 and are being amortized over the term of our Credit Facility through October 31, 2023.


20


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


Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended April 30, 2020 and 2019 was $1,470,000 and $2,067,000, respectively. Interest expense related to our credit facilities, including amortization of deferred financing costs, recorded during the nine months ended April 30, 2020 and 2019 was $4,795,000 and $6,780,000, respectively. The amount for the nine months ended April 30, 2019 relates to both our Prior Credit Facility and our existing Credit Facility. Our blended interest rate approximated 3.73% and 5.00%, respectively, for the three months ended April 30, 2020 and 2019, and approximated 4.24% and 5.36%, respectively, for the nine months ended April 30, 2020 and 2019.

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

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

The Credit Facility provides for, among other things: (i) no scheduled payments of principal until maturity; (ii) a maximum Secured Leverage Ratio of 3.75x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and a Maximum Total Leverage Ratio of 4.50x TTM Adjusted EBITDA, each with no step downs; and (iii) a Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA.

As of April 30, 2020, our Secured Leverage Ratio was 1.93x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, 2020 was 13.37x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future.

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

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

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

As discussed in "Note (2) - Acquisitions," in connection with the Merger Agreement with Gilat, we entered into an $800,000,000 commitment letter with major banking partners for a new secured credit facility (the "Gilat Acquisition Related Credit Facility"), the terms of which are expected to be finalized on or prior to the closing of the merger. The Gilat Acquisition Related Credit Facility is expected to replace our existing Credit Facility.


21


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


(12)    Leases

On August 1, 2019, we adopted ASU No. 2016-02 - Leases (Topic 842), which requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, operating leases were not recognized on the balance sheet. As we elected the modified retrospective adoption method, prior-period information was not restated. We also elected the transition package of practical expedients available in the standard, which permits us to not reassess under the new standard our prior conclusions about lease identification, classification and initial direct costs. As part of our adoption, however, we did not elect to use the hindsight or land easements practical expedients.

On August 1, 2019, in connection with our adoption of Topic 842, we recognized $35,825,000 of operating lease right-of-use ("ROU") assets (net of a $3,023,000 deferred rent liability that existed as of August 1, 2019 under prior applicable GAAP) and $38,848,000 of related liabilities. Except for the recording of the ROU assets and lease liabilities on our Condensed Consolidated Balance Sheet, and the expanded disclosures about our leasing activities, our adoption did not have a material impact on our condensed consolidated financial statements. Our adoption also did not result in any cumulative-effect adjustment to opening retained earnings.
    
Our leases historically relate to the leasing of facilities and equipment. We determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize an ROU asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize an 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 Topic 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 April 30, 2020, none of our leases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased.


22


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


The components of lease expense are as follows:
 
Three months ended April 30, 2020
 
Nine months ended April 30, 2020
Finance lease expense:
 
 
 
      Amortization of ROU assets
$

 
$
152,000

      Interest on lease liabilities

 
3,000

Operating lease expense
2,733,000

 
8,069,000

Short-term lease expense
798,000

 
2,539,000

Variable lease expense
1,004,000

 
3,013,000

Sublease income
(5,000
)
 
(5,000
)
Total lease expense
$
4,530,000

 
$
13,771,000


Additional information related to leases is as follows:
 
Nine months ended April 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating leases - Operating cash outflows
$
8,681,000

Finance leases - Operating cash outflows
3,000

Finance leases - Financing cash outflows
300,000

ROU assets obtained in the exchange for lease liabilities (non-cash):
 
Operating leases
$
3,096,000


The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of April 30, 2020:

 
Operating
Remaining portion of fiscal 2020
$
2,666,000

Fiscal 2021
9,116,000

Fiscal 2022
7,730,000

Fiscal 2023
6,231,000

Fiscal 2024
4,878,000

Thereafter
7,013,000

Total future undiscounted cash flows
37,634,000

Less: Present value discount
3,289,000

Lease liabilities
$
34,345,000

 
 
Weighted-average remaining lease terms (in years)
4.71

Weighted-average discount rate
4.04
%

We lease our Melville, New York production facility from a partnership controlled by our CEO and Chairman. Lease payments made during the nine months ended April 30, 2020 were $486,000. The current lease provides for our use of the premises as they exist through December 2021 with an option for an additional ten years. The annual rent of the facility for calendar year 2020 is $657,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility.

As of April 30, 2020, we do not have any rental commitments that have not commenced.

23


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



As we have not restated prior year information given our method of adopting the new standard, the following represents our future minimum lease payments for operating leases and capital leases as of July 31, 2019 under ASC Topic 840 and as reported in our Form 10-K filed with the SEC on September 24, 2019:
 
Operating
 
Capital
 
Total
Fiscal 2020
$
11,812,000

 
789,000

 
$
12,601,000

Fiscal 2021
8,723,000

 

 
8,723,000

Fiscal 2022
7,343,000

 

 
7,343,000

Fiscal 2023
5,776,000

 

 
5,776,000

Fiscal 2024
3,430,000

 

 
3,430,000

Thereafter
7,130,000

 

 
7,130,000

Total
$
44,214,000

 
789,000

 
$
45,003,000