Comtech Telecommunications(CMTL) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for Comtech Telecommunications Corp. and its subsidiaries, including balance sheets, statements of operations, statements of convertible preferred stock and stockholders' equity, and statements of cash flows for the periods ended April 30, 2022 and 2021. It also includes detailed notes explaining significant accounting policies, recent acquisitions, revenue recognition, fair value measurements, earnings per share, and other financial details Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Assets/Liabilities/Equity | April 30, 2022 ($) | July 31, 2021 ($) | | :------------------------ | :----------------- | :---------------- | | Assets: | | | | Total current assets | 275,465,000 | 287,496,000 | | Total assets | 983,637,000 | 993,111,000 | | Liabilities: | | | | Total current liabilities | 204,921,000 | 203,561,000 | | Non-current portion of long-term debt | 127,000,000 | 201,000,000 | | Total liabilities | 415,555,000 | 492,392,000 | | Equity: | | | | Convertible preferred stock | 103,522,000 | — | | Total stockholders' equity | 464,560,000 | 500,719,000 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :----- | :------------------------------------ | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Net sales | 122,116,000 | 139,376,000 | 359,256,000 | 435,886,000 | | Gross profit | 46,664,000 | 53,016,000 | 134,257,000 | 158,904,000 | | Operating (loss) income | (566,000) | 2,350,000 | (31,671,000) | (77,964,000) | | Net (loss) income | (25,000) | 792,000 | (27,883,000) | (80,843,000) | | Net (loss) income attributable to common stockholders | (1,680,000) | 792,000 | (36,417,000) | (80,843,000) | | Basic EPS | (0.06) | 0.03 | (1.37) | (3.12) | | Diluted EPS | (0.06) | 0.03 | (1.37) | (3.12) | Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity | Item | April 30, 2022 ($) | July 31, 2021 ($) | | :---------------------------------------------------------------------------------------------------- | :----------------- | :---------------- | | Series A Convertible Preferred Stock (issued 100,000 shares) | 103,522,000 | — | | Common Stock (issued 41,560,361 shares at April 30, 2022) | 4,156,000 | 4,128,000 | | Additional Paid-in Capital | 613,898,000 | 605,439,000 | | Retained Earnings | 288,355,000 | 333,001,000 | | Treasury Stock | (441,849,000) | (441,849,000) | | Total Stockholders' Equity | 464,560,000 | 500,719,000 | - The company issued 100,000 shares of Series A Convertible Preferred Stock at April 30, 2022, with a value of $103.5 million, which was not present at July 31, 2021[9] - Retained earnings decreased from $333.0 million at July 31, 2021, to $288.4 million at April 30, 2022[9] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :----------------- | :----------------------------------- | :----------------------------------- | | Net cash provided by (used in) operating activities | 8,421,000 | (56,582,000) | | Net cash used in investing activities | (14,420,000) | (7,606,000) | | Net cash provided by (used in) financing activities | 7,969,000 | 55,508,000 | | Net increase (decrease) in cash and cash equivalents | 1,970,000 | (8,680,000) | | Cash and cash equivalents at end of period | 32,831,000 | 39,198,000 | - Operating activities shifted from a net cash outflow of $56.6 million in 2021 to a net cash inflow of $8.4 million in 2022, primarily due to changes in working capital and the absence of the $70.0 million Gilat payment made in 2021[24][363] - Financing activities provided $8.0 million in 2022, significantly lower than $55.5 million in 2021, mainly due to $100.0 million proceeds from convertible preferred stock issuance offset by $74.0 million net payments of long-term debt in 2022, compared to $65.5 million net borrowings in 2021[24][365] Notes to Condensed Consolidated Financial Statements (1) General - COVID-19, Russia's military incursion into Ukraine, and global supply chain constraints have caused order/production delays, component shortages, increased pricing, lower factory utilization, and higher logistics costs, expected to continue into fiscal 2023[31] - Former CEO transition costs totaled $13.6 million, expensed in Q2 fiscal 2022, including $10.3 million for severance and benefits, and $7.4 million related to equity-classified stock-based awards amortization[32] (2) Acquisitions - Comtech acquired UHP Networks Inc. on March 2, 2021, for a final purchase price of $37.5 million, enhancing its Commercial Solutions segment with low-cost TDMA satellite modems[34][35] - The UHP acquisition included an $8.5 million contingent earn-out payment, which was fully accrued as sales milestones were met, and is expected to be settled in Q4 fiscal 2022[35][39] - Acquisition plan expenses for the nine months ended April 30, 2021, totaled $99.8 million, primarily due to $88.3 million related to the terminated Gilat merger litigation, including a $70.0 million cash payment[43] (3) Adoption of Accounting Standards and Updates - Comtech adopted FASB ASU No. 2019-12 (income taxes), 2020-01 (equity method interactions), 2020-06 (convertible instruments), and 2021-08 (contract assets/liabilities in business combinations) on August 1, 2021. None of these adoptions had a material impact on the condensed consolidated financial statements or disclosures[44][45][46][47] (4) Revenue Recognition - Revenue is recognized either 'over time' for long-term contracts (e.g., complex equipment design, services, Government Solutions segment) using a cost-to-cost measure, or 'point in time' for short-term contracts/purchase orders (e.g., satellite ground station technologies, high-power RF amplifiers) upon shipment or delivery[49][52][54] Revenue by Customer Type | Customer Type | Three months ended April 30, 2022 (%) | Three months ended April 30, 2021 (%) | Nine months ended April 30, 2022 (%) | Nine months ended April 30, 2021 (%) | | :-------------- | :------------------------------------ | :------------------------------------ | :----------------------------------- | :----------------------------------- | | U.S. government | 23.3 | 33.2 | 26.8 | 37.1 | | Domestic | 48.6 | 46.6 | 48.2 | 40.4 | | International | 28.1 | 20.2 | 25.0 | 22.5 | - Verizon accounted for 10.6% and 11.1% of consolidated net sales for the three and nine months ended April 30, 2022, respectively[61] - Remaining performance obligations (backlog) totaled $602.3 million as of April 30, 2022, with a substantial portion expected to be recognized as revenue within the next twenty-four months[68] (5) Fair Value Measurements and Financial Instruments - Cash and cash equivalents are valued using Level 1 inputs (quoted market prices). Other current financial assets and liabilities approximate fair value due to short-term maturities[69] - The Credit Facility's fair value approximates its carrying amount due to its variable interest rate. The UHP acquisition included a contingent earn-out payment accounted for as a contingent consideration liability at fair value[70][71] (6) Earnings Per Share - Basic EPS is based on weighted average common shares outstanding. Diluted EPS includes potential common stock from equity-classified stock-based awards, UHP acquisition escrow/earn-out, and convertible preferred stock, if dilutive[73] - Weighted average stock options, RSUs, restricted stock, performance shares, and common shares related to the UHP acquisition and Convertible Preferred Stock were excluded from diluted EPS for the three and nine months ended April 30, 2022, as their effect would have been anti-dilutive due to net loss[75][76][78][79] Earnings Per Share Details | Metric | Three months ended April 30, 2022 | Three months ended April 30, 2021 | Nine months ended April 30, 2022 | Nine months ended April 30, 2021 | | :---------------------------------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net (loss) income attributable to common stockholders ($) | (1,680,000) | 792,000 | (36,417,000) | (80,843,000) | | Weighted average common shares outstanding – basic | 26,528,000 | 25,911,000 | 26,582,000 | 25,875,000 | | Weighted average common and common equivalent shares outstanding – diluted | 26,528,000 | 26,266,000 | 26,582,000 | 25,875,000 | (7) Accounts Receivable Accounts Receivable Breakdown | Accounts Receivable Category | April 30, 2022 ($) | July 31, 2021 ($) | | :--------------------------- | :----------------- | :---------------- | | Receivables from commercial and international customers | 62,691,000 | 86,890,000 | | Unbilled receivables from commercial and international customers | 40,202,000 | 36,131,000 | | Receivables from the U.S. government and its agencies | 21,767,000 | 33,381,000 | | Unbilled receivables from the U.S. government and its agencies | 1,330,000 | 3,356,000 | | Total accounts receivable | 125,990,000 | 159,758,000 | | Less allowance for doubtful accounts | 1,899,000 | 1,648,000 | | Accounts receivable, net | 124,091,000 | 158,110,000 | - Net accounts receivable decreased by $34.0 million from July 31, 2021, to April 30, 2022[81] - As of April 30, 2022, the U.S. government and Verizon accounted for 18.3% and 16.9% of total accounts receivable, respectively[84] (8) Inventories Inventories Breakdown | Inventory Category | April 30, 2022 ($) | July 31, 2021 ($) | | :----------------- | :----------------- | :---------------- | | Raw materials and components | 72,005,000 | 62,249,000 | | Work-in-process and finished goods | 46,059,000 | 38,338,000 | | Total inventories | 118,064,000 | 100,587,000 | | Less reserve for excess and obsolete inventories | 22,821,000 | 20,229,000 | | Inventories, net | 95,243,000 | 80,358,000 | - Net inventories increased by $14.9 million from July 31, 2021, to April 30, 2022, driven by increases in raw materials and work-in-process/finished goods[85] (9) Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities | Accrued Expense Category | April 30, 2022 ($) | July 31, 2021 ($) | | :----------------------- | :----------------- | :---------------- | | Accrued wages and benefits | 26,758,000 | 26,367,000 | | Accrued warranty obligations | 10,832,000 | 17,600,000 | | Accrued contract costs | 16,045,000 | 12,750,000 | | Accrued acquisition-related costs | 9,000,000 | 9,222,000 | | Accrued commissions and royalties | 5,208,000 | 5,342,000 | | Accrued legal costs | 2,258,000 | 2,854,000 | | Other | 14,063,000 | 15,466,000 | | Total Accrued expenses and other current liabilities | 84,164,000 | 89,601,000 | - Accrued warranty obligations decreased by $6.8 million, primarily due to a $2.5 million benefit recorded in cost of sales for lower than expected claims on NG-911 technologies[86][90] - Accrued acquisition-related costs include $9.0 million of contingent earn-out consideration for the UHP acquisition as of April 30, 2022[87] (10) Credit Facility - The Credit Facility provides a senior secured loan of up to $550.0 million, including a $300.0 million revolving loan facility, and matures on October 31, 2023[92][93] - As of April 30, 2022, $127.0 million was outstanding under the Credit Facility, classified as non-current long-term debt[94] Credit Facility Interest Expense and Rate | Metric | Three months ended April 30, 2022 | Three months ended April 30, 2021 | Nine months ended April 30, 2022 | Nine months ended April 30, 2021 | | :---------------------------------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Interest expense related to Credit Facility ($) | 1,004,000 | 1,515,000 | 3,478,000 | 4,040,000 | | Blended interest rate (%) | 3.30 | 2.97 | 3.20 | 2.80 | - Comtech was in compliance with financial covenants as of April 30, 2022, with a Secured Leverage Ratio of 2.40x (max 3.75x) and an Interest Expense Coverage Ratio of 12.12x (min 3.25x)[101] (11) Leases - Comtech recognizes ROU assets and lease liabilities for leases over 12 months, using its incremental borrowing rate to calculate present value[106] Lease Expense | Lease Expense Category | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :--------------------- | :------------------------------------ | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Operating lease expense | 2,933,000 | 3,024,000 | 8,797,000 | 8,373,000 | | Total lease expense | 4,140,000 | 4,450,000 | 12,507,000 | 12,452,000 | Lease Liabilities and Terms | Lease Liability | April 30, 2022 ($) | | :---------------- | :----------------- | | Operating lease liabilities | 55,743,000 | | Finance lease liabilities | 5,000 | | Total lease liabilities | 55,748,000 | | Weighted-average remaining lease terms (years) - Operating | 8.84 | | Weighted-average remaining lease terms (years) - Finance | 0.81 | | Weighted-average discount rate - Operating | 3.43% | | Weighted-average discount rate - Finance | 6.68% | (12) Income Taxes - Total unrecognized tax benefits were $9.8 million at April 30, 2022, up from $9.2 million at July 31, 2021. A portion ($3.0 million) was recorded as non-current income taxes payable[114] - The company does not expect significant changes to total unrecognized tax benefits within the next twelve months[114] - U.S. federal income tax returns for fiscal 2019-2021 are subject to potential IRS audit; state returns prior to fiscal 2017 are not[115] (13) Stock-Based Compensation - As of April 30, 2022, 1,640,426 stock-based awards were outstanding, comprising stock options (541,985), performance shares (347,018), and RSUs/restricted stock/share units (751,423)[119] Stock-Based Compensation Expense | Expense Category | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :----------------- | :------------------------------------ | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Stock-based compensation expense | 1,071,000 | 1,204,000 | 3,975,000 | 3,190,000 | | Former CEO transition costs related to equity-classified stock-based awards | — | — | 7,388,000 | — | | Total stock-based compensation expense before income tax benefit | 1,071,000 | 1,204,000 | 11,363,000 | 3,190,000 | | Net stock-based compensation expense | 845,000 | 944,000 | 9,914,000 | 2,506,000 | - Unrecognized stock-based compensation of $10.1 million (net of forfeitures) is expected to be recognized over a weighted average period of 3.1 years[121] (14) Segment Information - Comtech operates through two reportable segments: Commercial Solutions (satellite ground station, public safety, location technologies) and Government Solutions (tactical satellite networks, troposcatter systems, high-power amplifiers)[138][139] - Adjusted EBITDA is the primary metric used by the CEO to measure segment performance and allocate resources, excluding various non-operating and non-recurring costs[140] Segment Performance Metrics | Metric | Commercial Solutions (3M ended April 30, 2022) ($) | Government Solutions (3M ended April 30, 2022) ($) | Unallocated (3M ended April 30, 2022) ($) | Total (3M ended April 30, 2022) ($) | | :----- | :------------------------------------------------- | :------------------------------------------------- | :---------------------------------------- | :---------------------------------- | | Net sales | 88,131,000 | 33,985,000 | — | 122,116,000 | | Operating income (loss) | 7,424,000 | (2,928,000) | (5,062,000) | (566,000) | | Adjusted EBITDA | 15,253,000 | (114,000) | (3,943,000) | 11,196,000 | | Metric | Commercial Solutions (9M ended April 30, 2022) ($) | Government Solutions (9M ended April 30, 2022) ($) | Unallocated (9M ended April 30, 2022) ($) | Total (9M ended April 30, 2022) ($) | | :----- | :------------------------------------------------- | :------------------------------------------------- | :---------------------------------------- | :---------------------------------- | | Net sales | 248,342,000 | 110,914,000 | — | 359,256,000 | | Operating income (loss) | 14,179,000 | (4,538,000) | (41,312,000) | (31,671,000) | | Adjusted EBITDA | 36,789,000 | 2,132,000 | (12,384,000) | 26,537,000 | - Unallocated expenses for the nine months ended April 30, 2022, included $11.2 million in proxy solicitation costs and $13.6 million in former CEO transition costs[148] (15) Goodwill Goodwill by Segment | Segment | July 31, 2021 ($) | April 30, 2022 ($) | | :-------- | :---------------- | :----------------- | | Commercial Solutions | 270,389,000 | 270,383,000 | | Government Solutions | 77,309,000 | 77,309,000 | | Total | 347,698,000 | 347,692,000 | - The annual goodwill impairment analysis on August 1, 2021, found that Commercial Solutions and Government Solutions reporting units had estimated fair values exceeding carrying values by at least 22.7% and 94.1%, respectively, indicating no impairment[156] - Future impairment risks exist due to potential deterioration of business conditions, customer spending declines, shifts in funding priorities, and significant fluctuations in common stock price (e.g., $13.60 as of April 30, 2022, down from $24.97 on August 1, 2021)[157][158][159] (16) Intangible Assets Intangible Assets Carrying Amounts | Intangible Asset Category | Weighted Average Amortization Period (Years) | Gross Carrying Amount (April 30, 2022) ($) | Accumulated Amortization (April 30, 2022) ($) | Net Carrying Amount (April 30, 2022) ($) | | :------------------------ | :------------------------------------------- | :----------------------------------------- | :-------------------------------------------- | :--------------------------------------- | | Customer relationships | 20.2 | 302,058,000 | 103,928,000 | 198,130,000 | | Technologies | 14.8 | 114,949,000 | 74,580,000 | 40,369,000 | | Trademarks and other | 16.7 | 32,926,000 | 18,773,000 | 14,153,000 | | Total | | 449,933,000 | 197,281,000 | 252,652,000 | - Net intangible assets with finite lives decreased from $268.7 million at July 31, 2021, to $252.7 million at April 30, 2022[162] Estimated Amortization Expense | Fiscal Year Ending July 31 | Estimated Amortization Expense ($) | | :------------------------- | :--------------------------------- | | 2022 | 21,396,000 | | 2023 | 21,781,000 | | 2024 | 21,154,000 | | 2025 | 21,041,000 | | 2026 | 19,888,000 | (17) Convertible Preferred Stock - Comtech issued 100,000 shares of Series A Convertible Preferred Stock for $100.0 million on October 19, 2021, with an option for investors to purchase an additional $25.0 million by March 31, 2023[167] - The preferred stock ranks senior to common stock for dividends and liquidation, carries a 6.5% cumulative quarterly dividend (paid-in-kind or cash), and includes a participating dividend feature[168] - A convertible preferred stock purchase option liability of $1.0 million was established, and a $1.0 million non-cash benefit was recorded for its remeasurement during the nine months ended April 30, 2022[173] (18) Stockholders' Equity - Comtech has a $100.0 million stock repurchase program authorized on September 29, 2020, with no time restrictions; no repurchases were made during the nine months ended April 30, 2022 or 2021[176] - Quarterly dividends of $0.10 per common share were declared on October 4, 2021, December 9, 2021, March 10, 2022, and June 9, 2022, with future dividends subject to financial covenants and Board/preferred stock holder approval[177] (19) Legal Proceedings and Other Matters - A putative class action related to the Convertible Preferred Stock issuance was fully resolved and dismissed on May 3, 2022, without material adverse effect[181] - Comtech faces other pending and threatened legal actions in the normal course of business, including indemnification claims, but believes their outcome will not have a material adverse effect on its financial condition or results of operations[182][183] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook. It covers key financial results for the three and nine months ended April 30, 2022 and 2021, discusses critical accounting policies, and addresses liquidity and capital resources. The analysis highlights the impact of global events like COVID-19 and the Russia-Ukraine conflict on operations and financial targets Cautionary Statement Regarding Forward-Looking Statements - The report contains forward-looking statements subject to risks and uncertainties, including those related to acquisitions, tactical shifts in the Government Solutions segment, contract timing and funding, international sales, technological changes, economic/political conditions (e.g., Russia-Ukraine conflict), and supply chain disruptions[186] Overview - Comtech is a global provider of next-generation 911 emergency systems and secure wireless communications for commercial and government customers[187] - The company operates in two segments: Commercial Solutions (satellite ground station, public safety, location technologies) and Government Solutions (tactical satellite networks, troposcatter systems, high-power amplifiers)[188][189] - Quarterly sales and operating results can fluctuate significantly due to short/long-term contracts, product mix, production efficiencies, warranty estimates, price competition, and economic conditions[190] Critical Accounting Policies - Key critical accounting policies include Revenue Recognition (over time vs. point in time), Impairment of Goodwill and Other Intangible Assets, Provision for Warranty Obligations, Accounting for Income Taxes, Research and Development Costs, Provisions for Excess and Obsolete Inventory, and Allowance for Doubtful Accounts[193][211][221][223][226][227][228] - Significant judgment and estimates are required in these areas, and actual outcomes differing from estimates could materially impact financial results[224][227][231] Business Outlook for Fiscal 2022 Fiscal 2022 Business Outlook and Targets | Metric | Q3 Fiscal 2022 | Fiscal 2022 Target (Revised) | Fiscal 2022 Target (Prior) | | :------------------------------------ | :------------- | :--------------------------- | :------------------------- | | Consolidated net sales ($) | 122.1 million | ~482.0 million | 520.0 million | | Adjusted EBITDA ($) | 11.2 million | ~38.0 million | 50.0 million | | GAAP net loss attributable to common stockholders ($) | 1.7 million | N/A | N/A | | GAAP EPS loss ($) | 0.06 | N/A | N/A | | Non-GAAP EPS income ($) | 0.06 | N/A | N/A | | New bookings ($) | 113.4 million | N/A | N/A | | Quarterly book-to-bill ratio | 0.93x | N/A | N/A | | Backlog ($) | 602.3 million | N/A | N/A | | Revenue visibility ($) | ~1.2 billion | N/A | N/A | | Cash flows used in operating activities ($) | 1.1 million | N/A | N/A | | Effective tax rate (%) | N/A | ~28.25% | 19.75% | - Comtech lowered its fiscal 2022 financial targets due to challenging business conditions, including the Russia-Ukraine conflict impacting sales pipelines, supply chain constraints, increased pricing, and higher operational costs[239][242][244] - The company is investing in new high-volume technology manufacturing facilities in Arizona and the UK, expected to be fully operational by early fiscal 2023, despite COVID-19 and supply chain delays[238] - Comtech donated COMET™ troposcatter systems to Ukraine and conducted in-field demonstrations for U.S. and NATO allies, positioning for future demand despite current shifts in defense spending priorities towards war-fighting equipment[240][241] Comparison of Results of Operations for the Three Months Ended April 30, 2022 and 2021 Net Sales Net Sales by Segment | Segment | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | Change ($) | Change (%) | | :----------------- | :------------------------------------ | :------------------------------------ | :--------- | :--------- | | Consolidated net sales | 122,116,000 | 139,376,000 | (17,260,000) | (12.4%) | | Commercial Solutions | 88,131,000 | 91,364,000 | (3,233,000) | (3.6%) | | Government Solutions | 33,985,000 | 48,012,000 | (14,027,000) | (29.2%) | - Commercial Solutions net sales decreased due to challenging business conditions, including COVID-19 impact on international markets and component shortages affecting satellite ground station products, and timing of non-recurring NG-911 services sales[249][250] - Government Solutions net sales significantly decreased due to lower sales of global field support services, advanced VSAT products to the U.S. Army, and nominal sales from the U.S. Marine Corps IDIQ contract, with no new sales expected to Ukraine in fiscal 2022[253][254] Gross Profit Gross Profit Analysis | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | Change ($) | Change (%) | | :----- | :------------------------------------ | :------------------------------------ | :--------- | :--------- | | Gross profit | 46,664,000 | 53,016,000 | (6,352,000) | (12.0%) | | Gross profit as % of net sales | 38.2% | 38.0% | 0.2 pp | | - Gross profit percentage increased slightly to 38.2% (from 38.0%), reflecting a more favorable product mix and lower warranty provision, partially offset by lower consolidated net sales and increased costs from new manufacturing centers and COVID-19/inflationary pressures[259] - Government Solutions' gross profit percentage decreased due to changes in product/service mix and incremental operating costs from COVID-19 impacts on the UK antenna facility[262] Selling, General and Administrative Expenses Selling, General and Administrative Expenses | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | Change ($) | Change (%) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :--------- | :--------- | | Selling, general and administrative expenses | 27,626,000 | 26,997,000 | 629,000 | 2.3% | | As % of consolidated net sales | 22.6% | 19.4% | 3.2 pp | | - The increase in SG&A as a percentage of net sales is primarily due to lower consolidated net sales, higher restructuring costs ($1.6 million vs. $0.6 million), higher labor costs, and increased marketing investments[266] Research and Development Expenses Research and Development Expenses | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | Change ($) | Change (%) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :--------- | :--------- | | Research and development expenses | 14,255,000 | 13,092,000 | 1,163,000 | 8.9% | | As % of consolidated net sales | 11.7% | 9.4% | 2.3 pp | | - R&D expenses increased by $1.2 million, with $0.9 million in strategic emerging technology costs for next-generation satellite technology in Q3 fiscal 2022[268][270] Amortization of Intangibles Amortization of Intangibles | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :------------------------ | :------------------------------------ | :------------------------------------ | | Amortization of intangibles | 5,349,000 | 5,310,000 | - Amortization expense for intangibles remained relatively stable at $5.3 million for both periods[273] Acquisition Plan Expenses Acquisition Plan Expenses | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :---------------------- | :------------------------------------ | :------------------------------------ | | Acquisition plan expenses | — | 5,267,000 | - No acquisition plan expenses were incurred in the three months ended April 30, 2022, compared to $5.3 million in the prior year, which related to the TDMA satellite networking technologies acquisition and GD NG-911 litigation[274] Operating Income (Loss) Operating Income (Loss) | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :------------------------ | :------------------------------------ | :------------------------------------ | | Operating (loss) income | (566,000) | 2,350,000 | - GAAP operating loss was ($0.6 million) in Q3 fiscal 2022, compared to operating income of $2.4 million in Q3 fiscal 2021, primarily due to lower consolidated net sales[275] - Excluding restructuring, strategic emerging technology, and COVID-19 costs, consolidated operating income would have been $2.1 million in Q3 fiscal 2022 (vs. $8.9 million in Q3 fiscal 2021, excluding acquisition plan, restructuring, COVID-19, and strategic emerging technology costs)[275] Interest Expense and Other Interest Expense | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :------------- | :------------------------------------ | :------------------------------------ | | Interest expense | 981,000 | 1,518,000 | - Interest expense decreased by $0.5 million, with an effective interest rate of approximately 3.3% in Q3 fiscal 2022[279] Interest (Income) and Other Interest (Income) and Other | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :------------------------ | :------------------------------------ | :------------------------------------ | | Interest (income) and other | (449,000) | (276,000) | - Interest (income) and other was nominal in both periods, as available cash is invested in low-yielding bank deposits and money market accounts[280] Change in Fair Value of Convertible Preferred Stock Purchase Option Liability Change in Fair Value of Convertible Preferred Stock Purchase Option Liability | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :---------------------------------------------------------------------------------------------------- | :------------------------------------ | :------------------------------------ | | Change in fair value of convertible preferred stock purchase option liability | (302,000) | — | - A ($0.3 million) non-cash benefit was recorded in Q3 fiscal 2022 from the remeasurement of the convertible preferred stock purchase option liability[282] Benefit from Income Taxes Benefit from Income Taxes | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | | (Benefit from) provision for income taxes | (771,000) | 316,000 | - A tax benefit of ($0.8 million) was recorded in Q3 fiscal 2022, compared to a tax expense of $0.3 million in Q3 fiscal 2021. The effective tax rate (excluding discrete items) increased to 28.25% from 11.5% due to expected product and geographical mix changes[283] Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income Attributable to Common Stockholders | Metric | Three months ended April 30, 2022 ($) | Three months ended April 30, 2021 ($) | | :------------------------------------------------ | :------------------------------------ | :------------------------------------ | | Net (loss) income attributable to common stockholders | (1,680,000) | 792,000 | - Consolidated net loss attributable to common stockholders was ($1.7 million) in Q3 fiscal 2022, a decrease from net income of $0.8 million in Q3 fiscal 2021[287] Adjusted EBITDA Adjusted EBITDA by Segment | Metric | Commercial Solutions (3M ended April 30, 2022) ($) | Government Solutions (3M ended April 30, 2022) ($) | Unallocated (3M ended April 30, 2022) ($) | Total (3M ended April 30, 2022) ($) | | :----- | :------------------------------------------------- | :------------------------------------------------- | :---------------------------------------- | :---------------------------------- | | Adjusted EBITDA | 15,253,000 | (114,000) | (3,943,000) | 11,196,000 | | Percentage of related net sales | 17.4% | NA | NA | 9.2% | - Consolidated Adjusted EBITDA decreased to $11.2 million (9.2% of net sales) in Q3 fiscal 2022 from $17.7 million (12.7% of net sales) in Q3 fiscal 2021, primarily due to lower consolidated net sales[289] - Commercial Solutions' Adjusted EBITDA slightly decreased due to lower net sales and higher R&D, offset by a higher gross profit percentage. Government Solutions' Adjusted EBITDA decreased due to lower net sales[290] Comparison of Results of Operations for the Nine Months Ended April 30, 2022 and 2021 Net Sales Net Sales by Segment | Segment | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | Change ($) | Change (%) | | :----------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | Consolidated net sales | 359,256,000 | 435,886,000 | (76,630,000) | (17.6%) | | Commercial Solutions | 248,342,000 | 260,991,000 | (12,649,000) | (4.9%) | | Government Solutions | 110,914,000 | 174,895,000 | (63,981,000) | (36.6%) | - Commercial Solutions net sales decreased due to timing of orders for satellite ground station technologies and challenging business conditions, but public safety and location technology solutions sales increased[304][305] - Government Solutions net sales significantly decreased due to lower sales of global field support services and advanced VSAT products to the U.S. Army, and the impact of the Russia-Ukraine conflict on orders[308][309] Gross Profit Gross Profit Analysis | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | Change ($) | Change (%) | | :----- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | Gross profit | 134,257,000 | 158,904,000 | (24,647,000) | (15.5%) | | Gross profit as % of net sales | 37.4% | 36.5% | 0.9 pp | | - Gross profit percentage increased to 37.4% (from 36.5%), reflecting a $2.5 million benefit from reduced warranty accrual in NG-911 and a favorable product mix, partially offset by lower consolidated net sales and increased costs[315] - Government Solutions' gross profit percentage decreased due to changes in product/service mix and incremental operating costs from COVID-19 impacts on the UK antenna facility[317] Selling, General and Administrative Expenses Selling, General and Administrative Expenses | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | Change ($) | Change (%) | | :------------------------------------ | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | Selling, general and administrative expenses | 85,695,000 | 83,999,000 | 1,696,000 | 2.0% | | As % of consolidated net sales | 23.9% | 19.3% | 4.6 pp | | - The increase in SG&A as a percentage of net sales is primarily due to lower consolidated net sales, higher restructuring costs ($4.0 million vs. $1.2 million), higher labor costs, and increased marketing investments[322] - SG&A includes $3.5 million in stock-based compensation, with $0.8 million related to the retirement of three Board members in December 2021[323] Research and Development Expenses Research and Development Expenses | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | Change ($) | Change (%) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | Research and development expenses | 39,384,000 | 37,391,000 | 1,993,000 | 5.3% | | As % of consolidated net sales | 11.0% | 8.6% | 2.4 pp | | - R&D expenses increased by $2.0 million, including $0.9 million in strategic emerging technology costs for next-generation satellite technology[324][326] Amortization of Intangibles Amortization of Intangibles | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :------------------------ | :----------------------------------- | :----------------------------------- | | Amortization of intangibles | 16,047,000 | 15,671,000 | - Amortization expense for intangibles remained relatively stable at $16.0 million for the nine months ended April 30, 2022[328] Proxy Solicitation Costs Proxy Solicitation Costs | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :---------------------- | :----------------------------------- | :----------------------------------- | | Proxy solicitation costs | 11,248,000 | — | - Comtech incurred $11.2 million in proxy solicitation costs during the nine months ended April 30, 2022, due to a settled proxy contest, with no similar costs in the prior year[330] Former CEO Transition Costs Former CEO Transition Costs | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :-------------------------- | :----------------------------------- | :----------------------------------- | | Former CEO transition costs | 13,554,000 | — | - Transition costs for the former CEO totaled $13.6 million, expensed in the nine months ended April 30, 2022, including severance and benefits[331] Acquisition Plan Expenses Acquisition Plan Expenses | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :---------------------- | :----------------------------------- | :----------------------------------- | | Acquisition plan expenses | — | 99,807,000 | - No acquisition plan expenses were incurred in the nine months ended April 30, 2022, compared to $99.8 million in the prior year, primarily related to the terminated Gilat merger litigation[332] Operating Income (Loss) Operating Income (Loss) | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :------------------------ | :----------------------------------- | :----------------------------------- | | Operating (loss) income | (31,671,000) | (77,964,000) | - GAAP operating loss was ($31.7 million) in the nine months ended April 30, 2022, an improvement from ($78.0 million) in the prior year, primarily due to the absence of large acquisition plan expenses[333] - Excluding specific non-recurring costs, consolidated operating loss was ($0.8 million) in the nine months ended April 30, 2022, compared to an operating income of $23.9 million in the prior year, mainly due to lower consolidated net sales[333] Interest Expense and Other Interest Expense | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :------------- | :----------------------------------- | :----------------------------------- | | Interest expense | 3,576,000 | 5,233,000 | - Interest expense decreased by $1.7 million, with an effective interest rate of approximately 3.2% in the nine months ended April 30, 2022. The prior year included $1.2 million of incremental interest from a terminated financing commitment[339] Interest (Income) and Other Interest (Income) and Other | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :------------------------ | :----------------------------------- | :----------------------------------- | | Interest (income) and other | (260,000) | (276,000) | - Interest (income) and other was nominal in both periods, reflecting low yields on cash and cash equivalents[340] Change in Fair Value of Convertible Preferred Stock Purchase Option Liability Change in Fair Value of Convertible Preferred Stock Purchase Option Liability | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :---------------------------------------------------------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Change in fair value of convertible preferred stock purchase option liability | (1,004,000) | — | - A ($1.0 million) non-cash benefit was recorded in the nine months ended April 30, 2022, from the remeasurement of the convertible preferred stock purchase option liability[341] Benefit from Income Taxes Benefit from Income Taxes | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :------------------------------------ | :----------------------------------- | :----------------------------------- | | (Benefit from) provision for income taxes | (6,100,000) | (2,078,000) | - A tax benefit of ($6.1 million) was recorded in the nine months ended April 30, 2022, compared to ($2.1 million) in the prior year. The effective tax rate (excluding discrete items) increased to 28.25% from 11.5% due to expected product and geographical mix changes[342] Net Loss Attributable to Common Stockholders Net Loss Attributable to Common Stockholders | Metric | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :------------------------------------------------ | :----------------------------------- | :----------------------------------- | | Net loss attributable to common stockholders | (36,417,000) | (80,843,000) | - Consolidated net loss attributable to common stockholders improved to ($36.4 million) in the nine months ended April 30, 2022, from ($80.8 million) in the prior year[346] Adjusted EBITDA Adjusted EBITDA by Segment | Metric | Commercial Solutions (9M ended April 30, 2022) ($) | Government Solutions (9M ended April 30, 2022) ($) | Unallocated (9M ended April 30, 2022) ($) | Total (9M ended April 30, 2022) ($) | | :----- | :------------------------------------------------- | :------------------------------------------------- | :---------------------------------------- | :---------------------------------- | | Adjusted EBITDA | 36,789,000 | 2,132,000 | (12,384,000) | 26,537,000 | | Percentage of related net sales | 14.8% | 1.9% | NA | 7.4% | - Consolidated Adjusted EBITDA decreased to $26.5 million (7.4% of net sales) in the nine months ended April 30, 2022, from $50.1 million (11.5% of net sales) in the prior year, primarily due to lower consolidated net sales[349] - Commercial Solutions' Adjusted EBITDA decreased due to lower net sales and higher R&D. Government Solutions' Adjusted EBITDA decreased due to lower net sales and lower gross profit percentage[350][351] Liquidity and Capital Resources Cash Flow Activities | Cash Flow Activity | Nine months ended April 30, 2022 ($) | Nine months ended April 30, 2021 ($) | | :----------------- | :----------------------------------- | :----------------------------------- | | Net cash provided by (used in) operating activities | 8,421,000 | (56,582,000) | | Net cash used in investing activities | (14,420,000) | (7,606,000) | | Net cash provided by (used in) financing activities | 7,969,000 | 55,508,000 | - Operating cash flow improved significantly, from a ($56.6 million) use in 2021 to an $8.4 million provision in 2022, largely due to the absence of the $70.0 million Gilat payment[363] - Investing activities used $14.4 million in 2022, primarily for capital expenditures to build cloud-based networks for NG-911 contracts and new high-volume manufacturing centers[364][367] - Financing activities provided $8.0 million in 2022, including $100.0 million from convertible preferred stock issuance, offset by $74.0 million in net debt payments and $8.4 million in common stock dividends[365] - Comtech expects to incur approximately $30.0 million in capital expenditures for fiscal 2022, with $14.4 million already paid[367] Recent Accounting Pronouncements - Comtech adopted FASB ASU No. 2019-12 (income taxes), 2020-01 (equity method interactions), 2020-06 (convertible instruments), and 2021-08 (contract assets/liabilities in business combinations) on August 1, 2021. None of these adoptions had a material impact on the condensed consolidated financial statements or disclosures[405][406][407][408] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily from changes in interest rates on its Credit Facility and cash investments. A hypothetical 10% change in interest rates would have a minor impact on interest expense and nominal impact on interest income - A hypothetical 10% change in interest rates would change interest expense by approximately $0.3 million over a one-year period, based on outstanding debt under the Credit Facility[410] - A hypothetical 10% change in interest rates would have a nominal impact on interest income over a one-year period, based on the $32.8 million cash and cash equivalents[411] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of April 30, 2022, providing reasonable assurance for timely and accurate financial reporting. No material changes in internal control over financial reporting occurred during the most recent fiscal quarter - Disclosure controls and procedures were evaluated and deemed effective as of April 30, 2022, providing reasonable assurance for timely and accurate financial reporting[412] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[413] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 19 of the Condensed Consolidated Financial Statements for details on legal proceedings and other related matters, including a recently settled class action and ongoing indemnification obligations - Information regarding legal proceedings is detailed in Note 19 of the Condensed Consolidated Financial Statements[418] Item 1A. Risk Factors This section outlines significant risks that could materially impact the company's business, financial condition, or results of operations. Key risks include ongoing supply chain constraints, inflationary pressures, and the adverse effects of the military conflict between Russia and Ukraine Supply Chain Constraints and Inflation - Global supply chain strain, particularly for satellite ground station and troposcatter components, has led to component shortages, increased lead times, higher prices, and adversely impacted revenue and gross margins[422][423][424] - Reliance on single-source suppliers for critical components (e.g., cooling fans, power supplies) exacerbates risks, with depleted stock and waiting lists for additional components[425] - The Russia-Ukraine conflict further intensified supply chain issues, wit