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Index

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 31, 2021

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-7928
https://cdn.kscope.io/e7ee0425b1b745de8e73de6bde4bb15b-cmtl-20210131_g1.jpg
(Exact name of registrant as specified in its charter)
Delaware 11-2139466
(State or other jurisdiction of incorporation /organization) (I.R.S. Employer Identification Number)
68 South Service Road, Suite 230,
Melville, NY
  
11747
(Address of principal executive offices) (Zip Code)
(631)962-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s)Name of each exchange on which registered
Common Stock, par value $.10 per share CMTLNASDAQ 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.
Yes               No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes               No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
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               No
As of March 8, 2021, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 26,053,684 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)
AssetsJanuary 31, 2021July 31, 2020
Current assets:
Cash and cash equivalents$30,934,000 47,878,000 
Accounts receivable, net149,928,000 126,816,000 
Inventories, net81,630,000 82,302,000 
Prepaid expenses and other current assets19,417,000 20,101,000 
Total current assets281,909,000 277,097,000 
Property, plant and equipment, net26,136,000 27,037,000 
Operating lease right-of-use assets, net51,020,000 30,033,000 
Goodwill333,793,000 330,519,000 
Intangibles with finite lives, net247,758,000 258,019,000 
Deferred financing costs, net2,023,000 2,391,000 
Other assets, net3,956,000 4,551,000 
Total assets$946,595,000 929,647,000 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable$38,994,000 23,423,000 
Accrued expenses and other current liabilities79,185,000 85,161,000 
Operating lease liabilities, current8,771,000 8,247,000 
Dividends payable2,495,000 2,468,000 
Contract liabilities49,990,000 40,250,000 
Interest payable265,000 163,000 
Total current liabilities179,700,000 159,712,000 
Non-current portion of long-term debt, net208,000,000 149,500,000 
Operating lease liabilities, non-current45,259,000 24,109,000 
Income taxes payable2,286,000 1,963,000 
Deferred tax liability, net16,442,000 17,637,000 
Long-term contract liabilities15,066,000 9,596,000 
Other liabilities16,558,000 17,831,000 
Total liabilities483,311,000 380,348,000 
Commitments and contingencies (See Note 18)
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 40,059,977 shares and 39,924,439 shares at January 31, 2021 and July 31, 2020, respectively
4,006,000 3,992,000 
Additional paid-in capital570,891,000 569,891,000 
Retained earnings330,236,000 417,265,000 
905,133,000 991,148,000 
Less:  
Treasury stock, at cost (15,033,317 shares at January 31, 2021 and July 31, 2020)
(441,849,000)(441,849,000)
Total stockholders’ equity463,284,000 549,299,000 
Total liabilities and stockholders’ equity$946,595,000 929,647,000 
See accompanying notes to condensed consolidated financial statements.
2

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended January 31,Six months ended January 31,
 2021202020212020
Net sales$161,292,000 161,654,000 296,510,000 331,921,000 
Cost of sales105,612,000 101,052,000 190,622,000 207,752,000 
Gross profit55,680,000 60,602,000 105,888,000 124,169,000 
Expenses:  
Selling, general and administrative29,462,000 29,374,000 57,002,000 61,225,000 
Research and development12,664,000 13,740,000 24,299,000 28,601,000 
Amortization of intangibles4,795,000 5,229,000 10,361,000 10,435,000 
Acquisition plan expenses3,357,000 6,025,000 94,540,000 8,414,000 
 50,278,000 54,368,000 186,202,000 108,675,000 
Operating income (loss)5,402,000 6,234,000 (80,314,000)15,494,000 
Other expenses (income):  
Interest expense1,418,000 1,616,000 3,715,000 3,420,000 
Interest (income) and other(66,000)6,000  (71,000)
Income (loss) before (benefit from) provision for income taxes4,050,000 4,612,000 (84,029,000)12,145,000 
(Benefit from) provision for income taxes(155,000)1,117,000 (2,394,000)2,262,000 
Net income (loss)$4,205,000 3,495,000 (81,635,000)9,883,000 
Net income (loss) per share:  
Basic$0.17 0.14 (3.22)0.40 
Diluted$0.17 0.14 (3.22)0.40 
Weighted average number of common shares outstanding – basic25,337,000 24,659,000 25,321,000 24,607,000 
Weighted average number of common and common equivalent shares outstanding – diluted25,420,000 25,058,000 25,321,000 24,904,000 
 
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 January 31, 2021 and 2020
Common StockAdditional
Paid-in Capital
Retained EarningsTreasury StockStockholders'
Equity
SharesAmountSharesAmount
Balance as of October 31, 201939,402,226 $3,940,000 $551,316,000 $424,237,000 15,033,317 $(441,849,000)$537,644,000 
Equity-classified stock award compensation
— — 1,238,000 — — — 1,238,000 
Proceeds from exercises of stock options
6,100 1,000 161,000 — — — 162,000 
Proceeds from issuance of employee stock purchase plan shares
9,875 1,000 263,000 — — — 264,000 
Forfeiture of restricted stock(12,652)(1,000)1,000 — — —  
Net settlement of stock-based awards
23,506 2,000 (688,000)— — — (686,000)
Common Stock issued for acquisition of CGC Technology Limited ("CGC")323,504 32,000 11,543,000 — — — 11,575,000 
Cash dividends declared, net ($0.10 per share)
— — — (2,432,000)— — (2,432,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)
— — — (57,000)— — (57,000)
Net income
— — — 3,495,000 — — 3,495,000 
Balance as of January 31, 202039,752,559 $3,975,000 $563,834,000 $425,243,000 15,033,317 $(441,849,000)$551,203,000 
Balance as of October 31, 202040,043,753 $4,004,000 $569,422,000 $328,575,000 15,033,317 $(441,849,000)$460,152,000 
Equity-classified stock award compensation
— — 1,287,000 — — — 1,287,000 
Proceeds from issuance of employee stock purchase plan shares
15,857 2,000 185,000 — — — 187,000 
Net settlement of stock-based awards
367 — (3,000)— — — (3,000)
Cash dividends declared, net ($0.10 per share)
— — — (2,495,000)— — (2,495,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)
— — — (49,000)— — (49,000)
Net income— — — 4,205,000 — — 4,205,000 
Balance as of January 31, 202140,059,977 $4,006,000 $570,891,000 $330,236,000 15,033,317 $(441,849,000)$463,284,000 

See accompanying notes to condensed consolidated financial statements.

4

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Six months ended January 31, 2021 and 2020
Common StockAdditional
Paid-in Capital
Retained EarningsTreasury StockStockholders'
Equity
SharesAmountSharesAmount
Balance as of July 31, 201939,276,161 $3,928,000 $552,670,000 $420,333,000 15,033,317 $(441,849,000)$535,082,000 
Equity-classified stock award compensation
— — 2,117,000 — — — 2,117,000 
Proceeds from exercises of stock options
16,700 2,000 466,000 — — — 468,000 
Proceeds from issuance of employee stock purchase plan shares
20,010 2,000 508,000 — — — 510,000 
Issuance of restricted stock
8,858 1,000 (1,000)— — —  
Net settlement of stock-based awards
107,326 10,000 (3,469,000)— — — (3,459,000)
Common stock issued for acquisition of CGC323,504 32,000 11,543,000 — — — 11,575,000 
Cash dividends declared, net ($0.20 per share)
— — — (4,860,000)— — (4,860,000)
Accrual of dividend equivalents, net of reversal ($0.20 per share)
— — — (113,000)— — (113,000)
Net income
— — — 9,883,000 — — 9,883,000 
Balance as of January 31, 202039,752,559 $3,975,000 $563,834,000 $425,243,000 15,033,317 $(441,849,000)$551,203,000 
Balance as of July 31, 202039,924,439 $3,992,000 $569,891,000 $417,265,000 15,033,317 $(441,849,000)$549,299,000 
Equity-classified stock award compensation
— — 1,986,000 — — — 1,986,000 
Proceeds from issuance of employee stock purchase plan shares
31,122 3,000 366,000 — — — 369,000 
Issuance of restricted stock
35,975 4,000 (4,000)— — —  
Net settlement of stock-based awards
68,441 7,000 (1,348,000)— — — (1,341,000)
Cash dividends declared, net ($0.20 per share)
— — — (4,988,000)— — (4,988,000)
Accrual of dividend equivalents, net of reversal ($0.20 per share)
— — — (191,000)— — (191,000)
Adoption of current expected credit loss standard— — — (215,000)— — (215,000)
Net loss— — — (81,635,000)— — (81,635,000)
Balance as of January 31, 202140,059,977 $4,006,000 $570,891,000 $330,236,000 15,033,317 $(441,849,000)$463,284,000 

See accompanying notes to condensed consolidated financial statements. (Continued)
5

Index
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended January 31,
 20212020
Cash flows from operating activities:  
Net (loss) income$(81,635,000)9,883,000 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization of property, plant and equipment5,009,000 5,372,000 
Amortization of intangible assets with finite lives10,361,000 10,435,000 
Amortization of stock-based compensation1,986,000 2,117,000 
Amortization of deferred financing costs368,000 369,000 
Changes in other liabilities(3,756,000)(2,067,000)
Loss on disposal of property, plant and equipment29,000 17,000 
Provision for (benefit from) allowance for doubtful accounts204,000 (626,000)
Provision for excess and obsolete inventory2,444,000 932,000 
Deferred income tax (benefit) expense(287,000)2,912,000 
Other(225,000)(32,000)
Changes in assets and liabilities, net of effects of business acquisitions:  
Accounts receivable(23,736,000)(220,000)
Inventories(1,772,000)98,000 
Prepaid expenses and other current assets2,124,000 (2,049,000)
Other assets(115,000)(197,000)
Accounts payable14,481,000 2,270,000 
Accrued expenses and other current liabilities(6,734,000)3,418,000 
Contract liabilities15,210,000 2,119,000 
Other liabilities, non-current3,687,000 32,000 
Interest payable102,000 (245,000)
Income taxes payable(1,117,000)(3,271,000)
Net cash (used in) provided by operating activities (See Note (2))(63,372,000)31,267,000 
Cash flows from investing activities:  
Payment for acquisition of CGC, net of cash acquired(750,000)(11,165,000)
Purchases of property, plant and equipment(3,686,000)(2,508,000)
Net cash used in investing activities(4,436,000)(13,673,000)
Cash flows from financing activities:  
Net borrowings (payments) of long-term debt under Credit Facility58,500,000 (7,000,000)
Remittance of employees' statutory tax withholding for stock awards(2,740,000)(5,246,000)
Cash dividends paid(5,237,000)(5,120,000)
Repayment of principal amounts under finance lease liabilities(28,000)(311,000)
Proceeds from issuance of employee stock purchase plan shares369,000 510,000 
Proceeds from exercises of stock options 468,000 
Net cash provided by (used in) financing activities50,864,000 (16,699,000)
Net (decrease) increase in cash and cash equivalents(16,944,000)895,000 
Cash and cash equivalents at beginning of period47,878,000 45,576,000 
Cash and cash equivalents at end of period$30,934,000 46,471,000 
See accompanying notes to condensed consolidated financial statements. (Continued)


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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six months ended January 31,
20212020
Supplemental cash flow disclosures:
Cash paid (received) during the period for:
Interest$3,208,000 3,202,000 
Income taxes, net$(991,000)2,624,000 
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 accrual of dividend equivalents)$2,686,000 2,545,000 
Accrued additions to property, plant and equipment$1,132,000 787,000 
Issuance of restricted stock$4,000  
Common stock issued for acquisitions$ 11,575,000 
Accruals related to acquisitions$ 750,000 

See accompanying notes to condensed consolidated financial statements.

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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, 2021 and 2020 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, 2020 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.

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

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

Since March 2020, we have conducted most of our non-production related operations using remote working arrangements, curtailed most business travel, and have established social distancing safeguards. Additionally, we have experienced order delays, production delays, minor supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs. Although the COVID-19 pandemic is by no means over and additional waves 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 and we continue to believe both of our segments are well-positioned for growth.

(2)     Acquisitions
    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 global provider of high precision full motion fixed and mobile X/Y satellite tracking antennas, reflectors, radomes and other ground station equipment.

The acquisition has an aggregate purchase price for accounting purposes of $23,650,000, of which $12,075,000 was paid in cash and $11,575,000 was paid 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 $23,490,000, which was net of $160,000 of cash acquired.

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 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. Pro forma financial information is not disclosed, as the acquisition was not material.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the fair value of the assets acquired and liabilities assumed in connection with the CGC acquisition:
Purchase Price Allocation (1)
Measurement Period AdjustmentsPurchase Price Allocation
Paid in cash$12,075,000 — $12,075,000 
Paid in common stock11,575,000 — 11,575,000 
Purchase price at fair value$23,650,000 — $23,650,000 
Allocation of aggregate purchase price:
Cash and cash equivalents$160,000 — $160,000 
Current assets5,005,000 — 5,005,000 
Property, plant and equipment697,000 121,000 818,000 
Operating lease assets924,000 — 924,000 
Deferred tax assets, non-current470,000 47,000 517,000 
Non-current assets89,000 — 89,000 
Contract liabilities(6,890,000)— (6,890,000)
Accrued warranty obligations(1,000,000)(500,000)(1,500,000)
Other current liabilities(3,104,000)— (3,104,000)
Non-current liabilities(1,327,000)— (1,327,000)
Net tangible liabilities at fair value$(4,976,000)(332,000)$(5,308,000)
Identifiable intangibles, deferred taxes and goodwill:Estimated Useful Lives
Technology$6,700,000 300,000 $7,000,000 20 years
Customer relationships8,100,000 (300,000)7,800,000 19 years
Trade name1,000,000 100,000 1,100,000 5 years
Other intangible liabilities (2,500,000)(2,500,000)1.5 years
Deferred tax liabilities(2,984,000)426,000 (2,558,000)
Goodwill15,810,000 2,306,000 18,116,000 Indefinite
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 three months ended October 31, 2020.

The acquired identifiable intangible assets and liabilities are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets and liabilities are utilized over their estimated useful lives. The fair value of customer relationships 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 fair value of technology and trade name was based on the discounted capitalization of royalty expense saved because we now own the assets. The fair value of other intangible liabilities was based on the difference in cash flows related to remaining performance obligations under certain acquired contracts as compared to market terms for similar arrangements that a market participant would expect. Other intangible liabilities will be credited against the cost of sales over the remaining performance of the contracts.

Among the factors contributing to the recognition of goodwill, as a component of the purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Government Solutions segment based on specific identification and is generally not deductible for income tax purposes.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Subsequent Event - Acquisition of UHP Networks Inc.

On March 2, 2021, we completed our acquisition of UHP Networks Inc. ("UHP"), a leading provider of innovative and disruptive satellite ground station technology solutions pursuant to a stock purchase agreement initially entered into in November 2019 and amended in June 2020 and on March 2, 2021.

The initial up-front payment of approximately $24,000,000 was paid in shares of our common stock. An additional $5,000,000, payable at our option in cash and or shares of common stock, is subject to certain conditions that we expect will be satisfied within twelve months after the acquisition. The stock purchase agreement also provides for an earn-out payment of up to an additional $9,000,000, also payable at our option in cash and or common stock, if specified sales milestones are reached during the eighteen-month period ending September 30, 2022. We issued 1,026,567 shares of our common stock at closing, based on a volume weighted average price of approximately $28.14 per share, to satisfy initial payment and escrow arrangements under the terms of the stock purchase agreement.
Acquisition Plan Expenses

During the three and six months ended January 31, 2021 and 2020, we incurred acquisition plan expenses of $3,357,000 and $6,025,000 and $94,540,000 and $8,414,000, respectively. Of the amount recorded in the six months ended January 31, 2021, $88,343,000 related to the previously announced litigation and merger termination with Gilat Satellite Networks, Ltd. ("Gilat"), including $70,000,000 paid in cash to Gilat. The remaining costs for the three and six months ended January 31, 2021 primarily related to the acquisition of UHP and GD NG-911 acquisition-related litigation. Additionally, we recorded $1,178,000 of incremental interest expense for ticking fees related to a now terminated financing commitment letter.

Cash Flow Presentation of $70,000,000 Merger Termination Fee

Because we did not complete the Gilat acquisition, we presented the first quarter fiscal 2021 $70,000,000 payment to Gilat as a reduction to cash flows from operating activities for the period rather than as a cash outflow stemming from investing activities.

(3)     Adoption of Accounting Standards and Updates

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). During the six months ended January 31, 2021, we adopted:

FASB ASU No. 2016-13, which requires companies to utilize an impairment model (current expected credit loss ("CECL”)) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to trade receivables and contract assets. This accounting standard replaced the incurred loss model with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate those losses. On August 1, 2020, we adopted this ASU on a modified-retrospective basis and recorded a $215,000 decrease to opening retained earnings.

FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements in Topic 820. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

FASB ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FASB ASU No. 2018-17, which requires entities to consider indirect interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interest in its entirety, when determining whether a decision-making fee is a variable interest. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

FASB ASU No. 2018-18, which clarifies when certain transactions between collaborative arrangement participants should be accounted for under ASC 606 and incorporates unit-of-account guidance consistent with ASC 606 to aid in this determination. The ASU also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

FASB ASU No. 2019-08, which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured based on the grant-date fair value of the share-based payment award. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

(4)     Revenue Recognition

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

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

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

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

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.

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

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

Almost all of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:
 Three months ended January 31,Six months ended January 31,
 2021202020212020
United States  
U.S. government44.2 %41.5 %38.8 %41.2 %
Domestic33.9 %36.6 %37.6 %36.3 %
Total United States78.1 %78.1 %76.4 %77.5 %
International21.9 %21.9 %23.6 %22.5 %
Total100.0 %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 10.0% and 11.1% of consolidated net sales for the three and six months ended January 31, 2021, respectively. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during the three and six months ended January 31, 2020. 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, 2021 and 2020.

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

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, 2021 and 2020. 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, 2021Six months ended January 31, 2021
Commercial SolutionsGovernment SolutionsTotalCommercial SolutionsGovernment SolutionsTotal
Geographical region and customer type
U.S. government$16,846,000 54,498,000 $71,344,000 $26,304,000 88,930,000 $115,234,000 
Domestic47,959,000 6,684,000 54,643,000 97,259,000 14,098,000 111,357,000 
Total United States64,805,000 61,182,000 125,987,000 123,563,000 103,028,000 226,591,000 
International23,020,000 12,285,000 35,305,000 46,064,000 23,855,000 69,919,000 
Total$87,825,000 73,467,000 $161,292,000 $169,627,000 126,883,000 $296,510,000 
Contract type
Firm fixed-price$87,144,000 38,074,000 $125,218,000 $168,132,000 70,730,000 $238,862,000 
Cost reimbursable681,000 35,393,000 36,074,000 1,495,000 56,153,000